TMI Blog2017 (11) TMI 1838X X X X Extracts X X X X X X X X Extracts X X X X ..... missions in this regard, which shall be duly considered before taking a decision in the matter TCS E-Serve Ltd., ('TCS') - examination is necessary to decide whether the conditions/reasons on the basis of which his company was excluded in the earlier year are applicable to the fact situation prevailing in the asst. year under consideration; especially in the context of the finding rendered by the DRP that the assessee in the case on hand was performing various activities that constitute a mix of both high end and low end services. In this view of the matter, we deem it appropriate to remand the matter to the file of the TPO for examination to evaluate the functional profile of the assessee and then decide the comparability. BNR Udyog Ltd., ('BNR) - According to the assessee, this company carried out both Medical transcription and medical billing and coding and thus performed KPO services also. In our view, this aspect requires examination, particularly in the light of the finding of the DRP that the assessee also performed a mix of high end and low end services. In this view of the matter, we deem it appropriate to remand the matter of comparability of this compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /factual evidence to controvert the observations of the DRP. In this factual view of the matter, we uphold the decision of the TPO in rejecting this company as a comparable to the assessee in the case on hand. Jindal Intellicom Ltd., - ('Jindal') - procedure adopted by the DRP is not proper. This company, 'Jindal', was selected as a comparable by the TPO, which was accepted by the assessee. If the DRP felt that this company had been wrongly selected by the TPO, the least the DRP ought to have done was to have afforded an opportunity to both the assessee and the TPO to explain their stand, in the light of DRP's observations, instead of suo moto excluding this company from the set of comparables. In the fitness of things, the assessee and TPO should be afforded adequate opportunity of being heard in the matter. In this view of the matter, we remand the issue of the comparability of this company 'Jindal' to the file of the DRP to determine the issue afresh after affording both the TPO and the assessee adequate opportunity of being heard in the matter, which shall be duly considered Adjustment towards notional interest on AE Debtors in excess of 6 mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working/computation of the risk adjustment sought being filed by the assessee, the claim of risk adjustment is only an academic exercise and therefore we are not inclined to grant any such hypothetical adjustment. In this factual matrix of the matter, as discussed above, we dismiss this claim raised by the assessee for grant of risk adjustment Working capital adjustment - HELD THAT:- From the details before us, it is not clear whether the negative working capital has been arrived at based on wrong computation. Before us also, the assessee has not filed any details in this regard. In this factual nature of the case, as discussed above, we remand the issue of computation of working capital adjustment to the file of the of the TPO, with a direction to grant working capital adjustment, as per law, keeping in mind the judicial pronouncement of case of Adeptec (India) Pvt. Ltd. [ 2015 (6) TMI 288 - ITAT HYDERABAD] on the issue of negative working capital. Charging of interest u/s. 234B and 234C - assessee denies itself liable to be charged interest u/s. 234B and 234C - HELD THAT:- The changing of interest in consequential and mandatory and the AO has no discretion in the matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80,713/- After receipt of the TPO's order u/s. 92CA of the Act, the AO passed the draft order of assessment for asst. year 2012-13 dated 25/2/2016 incorporating the aforesaid TP adjustments as proposed by the TPO (Supra). 2.2 Aggrieved by the draft order of assessment dated 25/2/2016 for asst. year 2012-13, the assessee filed its objections thereto before the DRP which disposed off issuing directions u/s. 144C(5) of the Act, vide order dated 23/11/2016. Pursuant thereto, the AO passed the final order of assessment u/s. 143(3) r.w.s. 92CA r.w.s. 144C(5) (13) of the Act vide order dated 26/12/2016, wherein the assessee's income was determined at ₹ 6,56,04,314/-. Book Profits under Section 115JB of the Act were computed at ₹ 1,36,44,581/-. 3. Aggrieved by the order of assessment for asst. year 2012-13 passed u/s. 143(3) r.w.s. 92CA r.w.s. 144C(5) (13) of the Act dated 26/12/2016, the assessee has preferred this appeal, wherein it has raised the following grounds : 1. The Order dated December 26, 2016 passed by the learned AO is not in accordance with the law and is contrary to the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yog Limited (Seg) (Medical Transcription); and Infosys BPO Limited 4.4 Honourable DRP have erred in law and on facts by upholding the approach of the learned AO/TPO in rejecting functionally comparable companies selected in the Transfer Pricing Documentation of the Appellant and the comparable companies sought for inclusion by the Appellant at the time of proceedings before the learned TPO. Caliber Point Business Solutions Limited; Cosmic Global Limited; Datamatics Financial Services Limited; and ICRA Techno Analytics Limited. 4.5 Honourable DRP has erred in law and on facts by rejecting Jindal Intellicom Ltd. from the set of the companies selected by the learned TPO in the Transfer Pricing Order on its own accord, even though the Appellant did not seek exclusion of Jindal lntellicom Ltd. 5. Information gathered under section 133(6) of the Act is inappropriate for the purposes of disturbing the Transfer Pricing Documentation undertaken by the Appellant 5.1 Honourable DRP have erred in law and on facts by upholding the approach of the learned AO/TPO of gathering information from various compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as compared to comparable companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments to the margins of the comparable companies. 8.2 Honourable DRP have erred in law and on facts by concluding that the arithmetic mean margin of the comparable companies takes care of the adjustments on account of risk differences and thereby upholding the approach of the learned AO/TPO of not granting risk adjustment. 8.3 Honourable DRP erred in law and on facts by ignoring that e4e BS operates as a captive service provider for its AE and therefore there is no need for undertaking negative working capital adjustment when taxpayer does not carry any working capital risk and is funded entirely by its AE, placing reliance on the decision of Hon'ble Hyderabad Tribunal in the case of Adaptec (India) P. Ltd. (ITA No.206/Hyd/2014). 8.4 Honourable DRP erred in law and on facts by upholding the approach of the learned AO/TPO in discounting the Prime lending rate ( PLR ) for computing the working capital adjustment as the same is not in accordance with the guidelines provided by the Organization for Economic Development Manual adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on a number of assumptions and surmises as indicated below, to which the Appellant objects since the same neither represent facts nor is in line with the position in law and commercial practices. 10. Other transfer pricing related grounds 10.1 Honorable DRP and the learned AO/TPO have erred, in law and on facts in holding that the transactions between the Appellant and its AE were not at an ALP as defined under section 92F(ii) of the Act and upholding the adjustment to the ALP made by the learned TPO. 10.2 Honorable DRP and the learned AO/TPO have failed to appreciate the Appellant's commercial judgment about the application of arm's length principle which is tied to the business realities. 10.3 Honorable DRP and the learned AO/TPO have erred in law and on facts, in making several observations and findings which are based on incorrect interpretation of law and contrary to facts of the case. CONSEQUENTIAL GROUND 11. The Learned AO has erred, in law and on facts, in making an interest under section 234B and 234 C of the Act. 4.Grounds at S. Nos.: 1, 2, 3, 5 and 10 being general and generic in nature and havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.08 4 Infosys BPO Ltd. 36.30 5 Jindal Intellicom Ltd. - 0.05 6 Microgenetic Systems Ltd. 19.61 7 TCSE - Serve Ltd. 63.69 8 BNR Udyog Ltd. (Seg.)(Medical Transc) 41.58 9 Excel INfoways Ltd. (Seg.) 29.79 10 e4e Healthcare Services Pvt. Ltd. 19.85 Average PLI 28.11 % 5.4 The TPO then computed the arms length price ('ALP') of the ITES of the assessee's transactions with its AE's as under:- Operating Cost ₹ 8,23,79,455 Arm's Length Mean Margin on Cost 28.11% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) TCS E-Serve Ltd., (3) BNR Udyog Ltd., (seg) and (4) Infosys BPO Ltd. 6.2 The Companies sought to be included are:- (1) Caliber Point Business Solutions Ltd., (2) Cosmic Global Ltd., (3) Datamatics Financial Services Ltd., and (4) ICRA Techno Analytics Ltd., We shall now proceed to examine the comparability of the above mentioned companies. 7. Accentia Technologies Ltd., ('Accentia') 7.1 This company was selected as a comparable by the TPO, overruling the objections of the assessee to its inclusion on grounds of it being functionally different from the assessee and on account of owning of IPR's. Before us, the ld AR submitted that the assessee seeks exclusion of this company from the final set of comparables on the grounds that this company 'Accentia' is functionally different from the assessee in the case on hand, as it earns revenue from medical transcription business, billings and collections, coding activities etc. It is further submitted that this company, 'Accentia', is a diversified KPO and has the presence of brands, owns IPR's and has goodwil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the finding that the assessee provided a mix of ITES and KPO services. In factual matrix of this case as discussed above, we deem it appropriate to remand the issue of determining the functional profits of the assessee back to the file of the TPO for a fresh analysis, to evaluate the finding rendered by the DRP that the services rendered by the assessee are a mix of high end and low end services and also to evaluate the change in the functional profile of the assessee, if any, over the years and to then decide the comparability. Needless to add, the TPO shall provide the assessee adequate opportunity of being heard and make submissions in this regard, which shall be duly considered before taking a decision in the matter. We hold and direct accordingly. 8. TCS E-Serve Ltd., ('TCS') 8.1 This company was selected by the TPO and included in the final set of comparables, overruling the assessee's objections to its inclusion on the grounds of functional difference, abnormally high margin, etc. Before us, the assessee seeks exclusion of this company, 'TCS' on the grounds that it is functionally different; as it is a KPO whose operations include delive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of which his company was excluded in the earlier year are applicable to the fact situation prevailing in the asst. year under consideration; especially in the context of the finding rendered by the DRP that the assessee in the case on hand was performing various activities that constitute a mix of both high end and low end services. In this view of the matter, we deem it appropriate to remand the matter to the file of the TPO for examination to evaluate the functional profile of the assessee and then decide the comparability. Needless to add, the TPO shall afford the assessee adequate opportunity of being heard and make submissions in this regard, which shall be duly considered before a decision is reached in the matter. It is accordingly ordered. 9. BNR Udyog Ltd., ('BNR) 9.1 This company was selected as a comparable by the TPO, overruling the assessee's objections that this company, 'BNR', is functionally not comparable to the assessee, fails the RPT filter, the foreign exchange filter and service income filter applied by the TPO. Both the TPO/DRP have rejected the assessee's contentions for exclusion of this company from the list of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the RPT pertains to each of the segments requires examination. This has not been analyzed either by the TPO or by the assessee. While it is clear that benchmarking is done only for the Medical transcription segment, then the RPT pertaining to that segment alone should be considered. However, the extent of the RPT pertaining to the Medical transcription segment has not been determined, either by the assessee or the TPO. 9.4.3 Apart from this, the assessee has sought exclusion of this company, 'BNR' from the list of comparables on the ground that it fails the service income filter applied by the TPO, which we find has not been examined by the DRP. 9.4.4 The assessee has also sought exclusion of this company, 'BNR', from the set of comparables on the grounds of being functionally not comparable to the assessee. According to the assessee, this company carried out both Medical transcription and medical billing and coding and thus performed KPO services also. In our view, this aspect requires examination, particularly in the light of the finding of the DRP that the assessee also performed a mix of high end and low end services. In this view of the matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfosys BPO Ltd. 6.7.1 As far as this company, chosen by the TPO as comparable, is concerned, the learned Authorised Representative for the assessee submitted that this company, being a wholly owned subsidiary of Infosys Technologies Ltd. would enjoy a premium in the market, due to brand value and goodwill of the parent company, whereas the assessee is a low end provider of BPO/ITES support services. It is submitted that Infosys BPO Ltd. incurred huge selling and marketing expenses and is not only a market leader but also has huge, breadth in terms of economies of scale with diversity and worldwide geographical dispersion of customers. It is submitted that in view of these factors, Infosys BPO Ltd. is functionally dissimilar and different from the assessee in the case on hand. In support of its proposition for excluding this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the set of comparables. 6.7.2 Per contra, the learned Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES/BPO support services, this company i.e. Infosys BPO Ltd. is to be excluded from the list of comparables to the assessee in the case on hand. We hold and direct the TPO accordingly. Thus, the assessee has made out a case in its favour from the above decisions. Following them, the TPO is directed to exclude Accentia Technologies Ltd, Acropetal Technologies Ltd Infosys BPO Ltd from the list comparables and the assessee's corresponding appeal grounds are allowed.' 10.3.2 As the facts of the case in the year under consideration are broadly the same as in the earlier years, as has been brought out from a perusal of the relevant portions of the Annual Report of this company, 'Infosys', and following the aforesaid decision of the coordinate bench of this Tribunal in the assessee's own case for the earlier asst. year 2011-12 (Supra), we hold that this company shall be excluded from the set of comparables. We hold and direct accordingly. 11. Caliber Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the TPO in rejecting this company as a comparable. 12. Cosmic Global Ltd., ('Cosmic') 12.1 This company was selected as comparable by the assessee in its TP study. On examination of its comparability, the TPO rejected/excluded this company as a comparable on the ground that this company fails the employee cost filter. On appeal, the DRP in its directions was of the view that the application of employee cost filter is a valid filter and accordingly upheld the decision of the TPO to reject this company as a comparable. Before us, the assessee submitted that the TPO did not apply this filter at all but still the TPO rejected this company by invoking the employee cost filter. It was also submitted that the DRP has upheld this filter, even while both the assessee and the TPO have not applied this filter. In view of the above, the ld AR sought inclusion of this company 'Cosmic', in the list of comparables. 12.2 Per contra, the ld DR for Revenue supported the orders of the authorities below in rejecting 'Cosmic' as a comparable. 12.3.1 We have heard the rival contentions and perused and carefully considered the material on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected by the assessee as a comparable in its TP study. The TPO however rejected this company on the ground of no available data. The DRP has upheld the rejection of this company on the ground that it is engaged in various functions, but no segmental information is available in the Annual Report of this company 'ICRA'. 14.2 We have heard the rival contentions and perused and carefully considered the material on record. Before us, the ld AR for the assessee reiterated that this company 'ICRA' is functionally comparable to the assessee in the case on hand, but could not adduce any material/factual evidence to controvert the observations of the DRP. In this factual view of the matter, we uphold the decision of the TPO in rejecting this company as a comparable to the assessee in the case on hand. 15. Jindal Intellicom Ltd., - ('Jindal') 15.1 This company was selected as a comparable by the TPO to which the assessee had no objection. The DRP, however, excluded this company from the set of comparables. 15.2.1 We have heard the rival contention and perused the material on record. The assessee is in appeal before us against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the beginning of the year was ₹ 35,81,53,026/-. In these circumstances, the TPO concluded that the realization during the year was only ₹ 1.25 crores. Since all the receivables are from the parent company, the TPO considered the receivables outstanding for more than 6 months as being in the nature of loan and made a TP adjustment toward notional interest payable on loan. The TPO also observed that if the interest had been charged by the assessee on its AE's for the outstanding balance, it would have been included in the profit of the assessee company and as such will have a bearing on its profits. For benchmarking the rate of interest, the TPO adopted the average PLR at 13.85% as the applicable interest rate and worked out the TP adjustment at ₹ 4,78,66,316/-. 16.3 The DRP upheld the principle of charging interest on the outstanding receivables, but, however, modified the charging of interest, issuing the following directions in this regard:- (i) The interest chargeable on the outstanding receivables is to be computed after allowing a credit period of 90 days and the interest is to be pegged with SBI rates for short term fixed deposits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. According to the ld AR, the above definition implies that there should be a 'real transaction' between two AE's ; i.e. a transaction involving actual exchange of goods/services to constitute an 'international transaction' and it does not cover any hypothetical transaction that has not taken place between two AE's. This concept of 'Real Income' has been applied in certain decisions of the Tribunal on the issue of charging of interest on receivables outstanding from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the above finding was rendered in the factual context that there has been no agreement for charging interest on delay payment. We find that the decision cited by the ld DR ie., Professional Access Software Development Pvt. Ltd., (Supra) has also been rendered in the context of the facts of that particular case. In these circumstances, we deem it appropriate to remand this issue back to the file of the TPO/AO for examination as to whether there was any agreement for charging interest on late payments or not and to do a proper comparability analysis, if the adjustment is required to be made after affording the assessee adequate opportunity of being heard in the matter and to file details/submissions in his regard as well as in respect of the alternate ground of benchmarking transactions with LIBOR. 17. Ground No.6 (6.1 to 6.4) Treatment of Foreign Exchange gain/loss 17.1 In this ground, the assessee contends that the AO/TPO and DRP have erred in not following the decision of the coordinate bench in the assessee's own case for asst. year 2009-10 (IT(TP)A No. 1845/Bang/2013), wherein it was held that any loss/gain arising out of foreign exchange fluctuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we find that while the assessee has raised this issue before the DRP, and the DRP has rejected the assessee's claims on the ground that the details of miscellaneous income were not furnished and therefore the assessee was not able to demonstrate that these were earned in the normal course of business. No details in respect of miscellaneous income have been filed by the assessee before us also in order to support is claim that miscellaneous income formed part of the operational income. In the absence of any details being filed by the assessee to prove its claim with material evidence, we are of the view that the assessee's contention/claim has been rightly rejected and we therefore uphold the decision of the authorities below. Consequently, ground no: 7 of the assessee's appeal is dismissed. 19. Ground No: 8(8.1 to 8.4) : Risk Adjustment and Working capital adjustment RISK ADJUSTMENT 19.1 In this ground (Supra), the assessee assails the decisions of the TPO/DRP in not allowing the assessee risk adjustment. According to the assessee it is a captive service provider to its AE with low risk, whereas the comparable companies are full-fledged entr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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