9911796707
TMI Blog2018 (6) TMI 1639X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the year, the company had undertaken the following international transactions:- (i) Provision of IT-enabled services - Rs. 650,738,706/- (ii) Reimbursement of expenses to Associated Enterprise - Rs. 1,176,825/- 2.1 A reference was made to the Transfer Pricing Officer (TPO) by the Assessing Officer (AO). The TPO made an adjustment u/s. 92CA of the Act amounting to Rs. 9,23,05,730/- as under:- (i) Adjustment in respect of receivables - Rs. 4,49,57,277/- (ii) Adjustment in respect of IT enabled services - Rs. 4,73,48,453/- 2.2 Aggrieved, the assessee approached the Ld. DRP and raised various objections before it. However, the Ld. DRP upheld the comparables selected by the TPO by holding that the comparables selected by the TPO were justified. The Ld. DRP, however, directed the TPO to correct the arithmetical errors as claimed by the assessee after giving an opportunity to the assessee to establish its claim. 2.3 The final assessment order was passed in terms of the directions of the Ld. DRP in which the final list of comparables included 12 companies with an average Profit Level Indicator (PLI) of 27.38% and, accordingly, the adjustment with respect to IT enab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 4. The learned TPO/AO/DRP have erred in: a. Not accepting the use of multiple year data, as adopted by the appellant in its Transfer Pricing ('TP') documentation; and b. Determining the arm's length margins/prices using data pertaining only to financial Year ('FY') 2011-12 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements. 5. The learned AO/TPO/DRP have erred by rejecting certain functionally comparable companies identified by the appellant, by applying the following filters: a. rejecting companies with turnover lower than INR 1 crore b. rejecting companies with employee cost less than 25 per cent of the total cost c. rejecting companies with diminishing revenue d. rejecting companies with export turnover lower than 75 per cent of total turnover e. rejecting companies having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) 6. The learned AO/TPO/DRP have erred in selecting certain companies which are earning super normal profits as comparable to the Appellant. 7. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , BNR Udyog Limited, Eclerx Services Limited, Excel Infoways Limited and TCS e-Serv Ltd. The Ld. AR also submitted that the assessee was also praying for inclusion of R Systems International Limited (Segmental) which had been incorrectly rejected by the TPO/DRP. 3.2 The Ld. AR pleaded for exclusion of these companies as under:- (i) Infosys BPO Limited The Ld. AR submitted that this company was functionally dissimilar to the assessee company as this company was engaged in providing high-end integrated services. It was submitted that this company renders a wide array of BPO services in the nature of business platforms, customer service outsourcing, finance and accounting, human resources outsourcing, legal process outsourcing, sales and fulfilment sourcing and procurement outsourcing etc whereas the assessee provided only back office support services in the nature of IT enabled services and it was a captive service provider. It was further submitted that in the case of Infosys BPO Limited, service-wise segmental details were not available. The Ld. AR also submitted that this was an exceptional year of operation for Infosys BPO Limited as it had acquired 100% voting interest in P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be KPO service provider by the Hon'ble Delhi High Court in Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573. Reliance was also placed on the order of ITAT Delhi Bench in the case of Hays Business Solutions (P.) Ltd. (supra) wherein this company had been excluded. (iv) Excel Infoways Limited With respect to this company, it was submitted that this company was also functionally dissimilar as it was engaged in IT enabled BPO services and development of infrastructure facility. It was also submitted that this company failed the employee cost filter as well as it had purchased stock-in-trade of Rs. 7.48 crore during the assessment year under consideration. The Ld. AR also submitted that this was an exceptional year of operations for this company as this company had diversified into new areas such as construction, development of property/real estate and the revenue had decreased by more than 60% in the case of this company. Reliance was placed on the order of ITAT Delhi Bench in the case of Baxter India (P.) Ltd. (supra) wherein this company had been excluded. (v) TCS e Serv Ltd. With respect to TCS e Serv Ltd., it was submitted that this com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment to the assessee company. Ld. AR submitted that details of computation of the working capital adjustment had been submitted before the TPO and the TPO had rejected the same without pointing out any defect in the computation of the assessee. Our attention was drawn to pages 269 to 274 of the paper book wherein the computation of the working capital adjustment as submitted before the TPO was reproduced. The Ld. AR submitted that this ground was before the ITAT in earlier assessment years 2010-11 and 2011-12 also but due to a mistake apparent on record, this ground had not been adjudicated and Miscellaneous Application has been filed before the ITAT in this regard. Reliance was placed on the order of ITAT Delhi Bench in the case of Kadimi Tool Manufacturing Co. (P.) Ltd. v. Dy. CIT [2017] 87 taxmann.com 42 to support the assessee's contention that there was an error in considering outstanding receivables as a separate international transaction and also by considering the outstanding receivables as a loan extended to the AE and imputing interest on the same. Ld. AR prayed that suitable directions may be given to the lower authorities to allow the benefit of working capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal dissimilarity between the two companies is sufficient to accept the asseessee's plea for exclusion of this company from the final set of comparables. We also find that BPO Infosys Ltd. was directed to be excluded by ITAT Delhi Bench in the case of Baxter India (P.) Ltd. (supra) which also provided captive IT Enabled Services to its AE. The year under consideration before the ITAT in the case of Baxter India (P.) Ltd. (supra) was also AY 2012-13. The relevant observations are contained in Para 23 of the said order and the same are being reproduced for a ready reference: "23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Further it was also submitted that the Infosys BPO Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd. We find the submissions of the Id. counsel for the assessee before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observations of the co-ordinate Bench in assessee's own case for AY 11-12 are as under: "12. We have carefully considered the rival contentions and perused the annual accounts of the Accentia Technologies Limited submitted at pages No. 1 to 108 of the paper book. As per page no. 42 of the annual report the nature of services performed by this company are functions of medical transcription. 'Medical transcription' services are IT enabled services that require specialized skills in utilizing information technology in converting the voice data of the doctors who are located anywhere across the globe, consisting of patient history "and medical advices into electronic documents. Such confidential information is converted in to a written text document by medical transcription. This written text may be printed and hand placed in the patient's record, archived and/or retained only as an electronic medical record. The medical transcription can be performed in a hospital via remote transmission to the hospital or directly to the actual providers of services i.e. doctors etc. Medical transcription is still the primary mechanism for physician to clearly communicate with other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services etc which are of routine administrative nature, we find that functions of the assessee company are not at all comparable with the medical transcription function of the comparable company. But same cannot be said with respect to the medical coding and medical billing activities of the comparable company which are almost similar to the support functions performed by the assessee. However, in absence of segmental information available in case of comparable company with respect to the medical transcription business and medical coding and medical billing, it deserves to be rejected. It is apparent that financial results of the comparable company include profits of medical transcription business as well as medical coding and billing activities. As the functions of the medical transcription are not at all comparable with the functions performed by the company as already stated by us above, the above comparable company is required to be excluded on account of functional dissimilarity and non availability of segmental results, with the assessee. In view of this, we direct the Ld. Transfer pricing officer to exclude the Accentia technologies from the comparability analysis." 5.2.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S industry and therefore the judgment of the coordinate bench cited by the Ld. authorized representative appropriately applies to the facts of this case also. In the above decision, it has been held that the e- Clerx services Ltd. is a knowledge process outsourcing company providing data analytics and data process solutions to global clients. It is further held that it is a KPO company and is quite different from the assessee providing only IT enabled services. Therefore, respectfully following the decision of the coordinate bench we direct the Ld. transfer pricing officer/assessing officer to exclude the above comparable from the comparability analysis.' 5.3.1 In view of the above and respectfully following the order of the co-ordinate Bench in assessee's own case, we direct the AO/TPO to exclude this company from the final set of comparables. 5.4 Excel Infoways Limited With respect to this company, it has been submitted that this company was also functionally dissimilar as it was engaged in IT enabled BPO services and development of infrastructure facility. It has also been submitted that this company fails the employee cost filter as well as the diminishing revenue fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration. Further, the above company has super normal profits. We further find the submissions of the assessee that Excel Infoways Ltd. has super normal profits during the current year has not been controverted by the Revenue. We find the Mumbai Bench of the Tribunal the case of Willis Processing Services (India) Pvt. Ltd. (supra) has upheld the order of the DRP rejecting Excel Infoways Ltd. as comparable company on the ground that the company has a super normal profit of 203.80% and low employee cost 10.02%. We, therefore, find merit in the submissions of the Id. counsel for the assessee that Excel Infoways Ltd. should be excluded from the list of comparable on account of super normal profit of the said company in the preceding year." 5.4.1. Respectfully following the order of the co-ordinate Bench, on identical facts, we direct the AO/TPO to exclude Excel Infoways Ltd from the final set of comparables. 5.5. TCS e- Serv Ltd. With respect to TCS e Serv Ltd., it has been submitted that this company is also functionally dissimilar to the assessee company as this company provides KPO services to banking and financial services industry in the form of core business processing service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive vehemently contested the arguments of the Ld. authorized representative and submitted that above comparable is functionally carrying on the same activities and therefore has rightly been included by the Ld. transfer pricing officer for comparability analysis. 42. We have carefully considered the rival contention and also perused the orders of the lower authorities with respect to this comparable. We also perused the direction given by the Ld. dispute resolution panel for assessment year 2010 - 11 in case of the assessee dated 30-11- 2014 at page No. 26 of the direction with respect to this comparable. It has been held by the Ld. dispute resolution panel in case of the assessee that the comparable companies is involved in both high end services including transaction processing, technical services involved software testing, verification and validation of software at the time of implementation and management activities and also low and services. Therefore it can be seen that such a high-end service which require personnel with those set of technical expertise cannot be compared to the simple back-office support and procurement support services provided by the taxpayer. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion that once a comparable is found functionally similar and further authentic and reliable financial data are available relevant to the accounting period of the appellant then merely the comparable has different financial year, it cannot be excluded. In view of this we direct the assessee to produce this information and demonstrate before ld TPO that relevant, authentic and reliable information with respect to the comparable is available in public domain and the ld Transfer Pricing Officer to verify the same, if found appropriate, to include the above comparable." 5.6.1. On similar facts, we direct the assessee to produce the relevant information before the TPO and also direct the TPO to verify the same and if found appropriate, include R Systems Ltd in the final list of comparables. 5.7. Coming the ground nos. 10, 11, 12 and 13 which are related to denial of working capital adjustment to the assessee company, it has been submitted that details of computation of the working capital adjustment had been submitted before the TPO and the TPO had rejected the same without pointing out any defect in the computation of the assessee. Our attention has been drawn to pages 269 to 274 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a circumstance, it is our considered opinion that the TPO/AO should consider the claim of the assessee with regard to working capital adjustment afresh after duly examining the computation as submitted by the assessee and after giving due opportunity to the assessee. 5.8. The assessee has also raised grounds against the action of the TPO in making transfer pricing adjustment on account of interest on receivables. Although, the Ld. AR has placed vehement reliance on the order of Delhi Bench of the ITAT in the case of Kadimi Tool Manufacturing Co. (P.) Ltd. (supra) to support the assessee's contention that there was an error in considering outstanding receivables as a separate international transaction and also by considering the outstanding receivables as a loan extended to the AE and imputing interest on the same, we note that the Ld. AR has not pointed out before this Bench that the issue had been held against the assessee in assessee's own case BT e-Serv (India) (P.) Ltd. (supra) for AY 10-11 by the ITAT Delhi Bench in ITA No. 565/Del/2015. Although the Ld. AR had been placing extensive reliance on the order of the co-ordinate Bench of the ITAT in assessee's own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee to its foreign AE., hence it is an international transaction as per explanation to section 92 B of the act. He therefore, submitted that TP adjustment on that account is required to be made in view of the decision of Special Bench of ITAT in case of Instrumentation Corporation Ltd Vs. ADIT (TS-467-ITAT-2016-Kol-TP). He further submitted that Master Circular of the RBI does not determine whether there is an international transaction or not. He submitted that Id Transfer Pricing Officer as well as the Ld DRP has given detail reasons for the same. With respect to the decision of the Hon'ble High Courts he referred that in case of Ameriprise there was a specific clause in the agreement of credit period up to 60 days and in case of Bechtel there is a agreed period of 60 days whereas in the case of the assessee there is no such period stated by the assessee. He therefore, submitted that in such event the assessee has kept the outstanding amounts for more than 300 days under many cases. He vehemently referred to page No. 111 of the order of the Id. Transfer Pricing Officer. He further submitted that whether the assessee is a debt free company or debt laden company, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an 'international transaction'. The natural corollary would be of imputing interest on such 'capital financing', if same is not charged at arm's length. Therefore, we reject the contention of the assessee that outstanding receivable is not an 'international transaction' and therefore, hence, according to us, interest on it requires to be imputed. Now the next question arises is that if outstanding receivables are within the terms of agreement of rendering of services than it may be argued that interest on such outstanding is already covered in the sale price of the goods. Naturally such is not the case of the assessee before us as some of the outstanding are for more than 300 days. Decision relied upon by the Ld AR in the case of Ameriprice and Bechtel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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