TMI Blog2018 (6) TMI 1639X X X X Extracts X X X X X X X X Extracts X X X X ..... al transcription service i.e. Accentia Technologies Ltd. with the assessee company in assessee's own case BT e-Serv (India) (P.) Ltd. v. ITO [ 2017 (11) TMI 64 - ITAT DELHI] by holding that the functions of medical transcription are not at all comparable to the functional profile of the assessee company. Eclerx Services Limited was functionally different from the assessee company as this company was engaged in Knowledge Process Outsourcing (KPO) services and was engaged in providing financial services like trade processing, reference data services like web content management and merchandising execution, web analytics, social media etc Excel Infoways Limited ompany 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 filter. TCS e- Serv Ltd. 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 services, analytics and insights as well as support services for both data and voice p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed subsequent to the directions of the Ld. Dispute Resolution Panel-I, New Delhi for assessment year 2012-13. 2. The facts in brief are that the assessee company was in the business of providing IT, ITes, Back office Support and other related services to group companies located outside India. The assessee company also had a unit registered in the Special Economic Zone which is operational since 1.4.2008. The return of income was filed declaring income of ₹ 21,650/- after claiming deduction u/s. 10AA of the Income-tax Act, 1961 (hereinafter called 'the Act') amounting to ₹ 10,28,80,615/- by the assessee company. During the year, the company had undertaken the following international transactions:- (i) Provision of IT-enabled services - ₹ 650,738,706/- (ii) Reimbursement of expenses to Associated Enterprise - ₹ 1,176,825/- 2.1 A reference was made to the Transfer Pricing Officer (TPO) by the Assessing Officer (AO). The TPO made an ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances of the case and in law, 1. The transfer pricing adjustment of INR 9,23,05,730 made by the learned AO based on the order of learned TPO and confirmed by the learned DRP is defective in law inter alia for the reason that: (a) the order of the learned TPO is defective in law in as much as based on an invalid reference made by the learned AO without complying with the statutory requirements; (b) Chapter X of the Act containing transfer pricing provisions are special provisions relating to avoidance of tax while the learned AO/TPO in their respective orders have not substantiated that the applicant has indulged in avoidance of tax. 2. The learned AO/TPO/DRP have erred by not accepting the economic Analysis undertaken by the appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ( the Rules ). 3. The learned AO/TPO/DRP have erred in making an adjustment under Section 92CA(3)of the Income-tax Act, 1961 ( Act ) without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of Section 92C(3) of the Act. 4. The learned TPO/AO/DRP have erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise and imputing interest on the same, thereby making an adjustment of INR 4,49,57,277 to the returned income of the appellant. 13. The learned AO/TPO have erred in not appreciating the directions of the DRP wherein the DRP has directed the TPO to grant credit of the interest charged by the appellant on outstanding receivables from its AEs in subsequent years pertaining to the assessment year under consideration. 14. The CUP analysis undertaken by the TPO and upheld by DRP is flawed and does not represent an uncontrolled transaction. 15. The learned AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3. The Ld. AR submitted that in the final set of comparables, the following 12 companies had been selected:- 1. Calibre Point Business Solutions Limited 2. e4e Healthcare Limited 3. Informed Technologies India Limited 4. Infosys BPO Limited 5. Jindal Intellicom Limited 6. Microgenetics Systems Limited 7. Accentia Technologies Ltd. 8. Acropetal Technologies Ltd. 9. BNR Udyog Limited 10. Eclerx Services Limited 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any had a substantial Related Party Transaction (RPT), and, therefore, it failed the RPT filter at entity-wide basis. It was submitted that RPT was 48.82% in the case of this company. It was further submitted that RPT filter has to be applied at entity level and not at segmental level which had been erroneously done. It was also submitted that this company was functionally dissimilar to the assessee company as this company was providing medical transcription service. It was also submitted that on similar ground, Accentia Technologies Ltd. had been excluded by the ITAT in assessee's own case for assessment years 2010-11 and 2011-12. With reference to RPT to be applied at the entity level, reliance was placed on the order of ITAT Bangalore Bench in the case of e4e Business Solutions v. ITO [2017] 87 taxmann.com 254. The Ld. AR also submitted that this company had shown an exceptional growth of 2164% in the present year and, therefore, it was liable to be excluded on this ground also. (iii) Eclerx Services Limited The Ld. AR submitted that this company was functionally different from the assessee company as this company was engaged in Knowledge Process Outsourcin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the orders of the ITAT Delhi Bench in the case of Hays Business Solutions (P.) Ltd. (supra) and Baxter India Pvt. Ltd. (supra). 3.3 The Ld. AR also submitted that the assessee was praying for inclusion of R Systems International Limited (Segmental) which had been excluded erroneously as a comparable on the ground that it had a different financial year ending. Ld. AR submitted that ITAT, in assessee's own case for assessment years 2010-11 and 2011-12, had directed the TPO to verify whether the annual results for April 2011 to March 2012 can be computed and accordingly include in the final set of comparables. It was submitted that the assessee had filed a rectification application before the TPO seeking rectification of the alleged contention of the assessee that R Systems had a different financial ending. Ld. AR submitted that the results for financial year 2011-12 can be compiled based on quarterly results. Reliance was placed on the judgment of Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd. in ITA No. 217/214 for the proposition that a different financial year ending is not an appropriate filter. Reliance was placed on the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to demonstrate that there was difference in the levels of working capital employed by it vis-a-vis the comparables and, further, the claim of working capital adjustment is not a matter of right. The Ld. CIT DR also referred to OECD guidelines and submitted that no adjustment can be allowed in absence of reliable data and since the assessee had failed to provide the date, the assessee's claim for working capital adjustment cannot be accepted. 5. We have heard the rival submissions and have also perused the material on record. We first take up the comparables selected by the TPO and sought to be excluded by the assessee: 5.1 Infosys BPO Limited It is the assessee's contention that this company was functionally dissimilar to the assessee company as this company was engaged in providing high-end integrated services. It has been submitted and demonstrated from the annual report of BPO Infosys Ltd that this company is rendering 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 outso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that Infosys BPO Ltd. should not be included in the list of comparables. We accordingly direct the Assessing Officer/TPO to exclude Infosys BPO Ltd. from the list of comparables for the purpose of computing the average margin. 5.1.1 Respectfully following the order of the co-ordinate Bench, on identical facts, we direct the AO/TPO to exclude BPO Infosys Ltd. from the final set of comparables. BNR Udyog Limited Apart from assesse's objections regarding BNR Udyog Ltd. having substantial RPT and application of the RPT filter at the segmental level by the TPO, it is also the assessee's contention that that this company was functionally dissimilar to the assessee company as this company was providing medical transcription service. We find that, undisputedly, BNR Udyog Ltd. is carrying out medical transcription, medical billing and coding whereas the assessee is a captive service provider. ITAT Delhi Bench had the occasion to consider the comparability of another company providing me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further mentioned that as the margin from medical coding is on a higher side compared to medical transcription, medical coding is also known as insurance coding because it is assigning codes to diagnose and procedures which help in financial reimbursement from insurance companies and other government organizations, consulting firm, software companies etc. The next service area of the above company is medical billing which is a medical practice management and the doctor's key to getting paid and it maintains patient's financial accounts for collecting money. On looking at the income stream of the assessee on perusal of the profit and loss accounts, it is apparent that its earnings are from medical transcription, billing and collection and coding. On looking at the functional profile of medical transcription which is required to be carried out by well-trained persons who must be knowledgeable in the field of pharmacology. Further the comparable company has considered all the 3 segments as one segment. On perusal of pages No. 78 of the annual report of the company it is noted that w.e.f. 1st April 2008 the company which is engaged in the similar line of business has been amal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case BT e-Serv (India) (P.) Ltd. (supra) for Assessment Year 11-12 in ITA No. 99/Del/2016 with the following observations: '38. We have carefully considered the rival contentions and also perused the orders of the lower authorities with respect to his comparable. With respect to this comparable co-ordinate bench in ITA No. 2010/Del/2014 for assessment year 2009 -10 in case of Ameriprise India private limited (who is also an ITES company) was excluded this comparable holding as under.:- 14.2 After considering the rival submission and perusing the relevant material on record, we find that it is a knowledge process outsourcing (KPO) company providing data analytics and data process solutions to global clients. This company provides end to end support through trade life cycle including trade confirmation and settlements etc. it also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability services. From the above narration of the nature of business carried on by e-Clerx Services Ltd, it is manifest that the same being a KPO company is quite different from the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the order of the TPO at para 7.5 (page 24 - 25 of the TPO order) where the TPO has observed that the department has applied consistent diminishing revenue/loss making filter wherein the companies with losses/diminishing revenue for the last three years upto and including the financial year 2010-11 were rejected as comparables. The department has excluded such companies with consistent losses/diminishing revenue in an environment where Indian economy is growing at consistent rate. Having held so, the Assessing Officer included Excel Infoways Ltd. as a comparable without considering the fact that the said company does not pass the diminishing revenue filter. From the submissions of the assessee before the TPO (at page 232 of Volume - 1 of the Paper Book) we find the details of the operating margin of the company from financial years 2009-10 to 201-15 are as under :- Particulars Financial Years 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 services, analytics and insights as well as support services for both data and voice processes. It has also been submitted that service wise segmental details were not available in the case of this company. It has also been submitted that this company was excluded by the ITAT in assessee's own case for assessment year 2011-12 and had also been excluded by the Ld. DRP in assessment year 2010-11 on account of it being functionally dissimilar to the assessee company. We find that the averment of the Ld. AR with respect to the exclusion of this company from the final set of comparables in assessee's own case is correct. ITAT Delhi Bench in assessee's own case BT e-Serv (India) (P.) Ltd. (Supra) for AY 11-12 in ITA No. 99/Del/2016 has directed exclusion of TCS -serve. The relevant observations of the co-ordinate Bench are contained in Paras 40, 41 and 42 which are being reproduced as under: 40. Now we come to the next comparable contested by the assessee by the name of TCS e-serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Therefore, the Ld. dispute resolution panel directed the Ld. transfer pricing officer to exclude the above company from the list of comparable for that year. Before us the Ld. departmental representative could not point out that how the finding of the Ld. dispute resolution panel given in assessment year 2010- 2011 are not pertinent with respect to the functional profile of the assessee as well as the comparable company for this year. In view of this we direct the Ld. transfer pricing officer/assessing officer to exclude the above comparable for the similar reasons given by the Ld. dispute resolution panel for this year also. 5.5.1. On identical facts and respectfully following the order of the co-ordinate Bench in assessee's own case as above mentioned, we direct the AO/TPO to TCS e-serve from the final list of comparables. 5.6. The assessee has also prayed for inclusion of one comparable i.e. R Systems Ltd which, although selected by the assessee, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een 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 the paper book wherein the computation of the working capital adjustment as submitted before the TPO was reproduced. Reliance has also been placed on the order of ITAT Delhi Bench in the case of Kadimi Tool Mafg. Co. (P.) Ltd. (supra) to support the 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. It is seen that ITAT Delhi Bench in assessee's own case BT e-Serv (India) (P.) Ltd. (supra) for AY 10-11 in ITA No. 565/Del/2015 had rejected the assessee's claim for working capital adjustment with the following observations: 15. With respect to the risk adjustment as well as the working capital adjustment to the operating margin of the appellant as well as the comparable companies the ld Authorised Representative vehemently argued t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch 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 case BT e-Serv (India) (P.) Ltd. (supra) for Assessment Years 10-11 and 11-12 in ITA Nos. 565/Del/2015 and 99/Del/2016 respectively while pleading for similar relief with respect to the comparables, the issue of interest on receivables was not argued at all and a plea was made to restore the issue to the TPO/AO with appropriate directions conveniently side-stepping the fact that this issue had been decided against the assessee in AY 10-11 in the very same order on which the Ld. AR had placed extensive reliance. However, we also note that the Ld. CIT DR also had not pointed out that this issue was covered against the assessee. While dismissing the assessee's grounds, the ITAT Delhi Bench, in its order for AY 10-11 (supra) has made the following observations: 19. The Grounds No. 10 to 13 are with respect to adjustment made by the Ld. Transfer Pricing Officer against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not at all a criterion for imputing interest on outstanding. 22. We have carefully considered the rival contentions. The service agreement dated 01st August 2009 is placed at Page Nos. 294 to 311 of paper book. The service fees are governed by clause 4 of the agreement. According to clause No. 4.9 subsequent to confirmation of the invoices it is provided that the paying party will pay the invoice amount to the invoicing party in accordance with the BT group policy for the settlement of intra-group transaction. Schedule 1 of that agreement is with respect to the services, Schedule -2 is with respect to BTGS transfer pricing policy. According to para No. 3.4 of that policy the service fee for the provision and receipt of services are calculated in the order that BT, BT Ltd and OPCO receive an arm's length return for the services provided and rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 are distinguishable on the facts as they had credit period as per agreement but in case of assessee it is not so. The arguments that master circular of RBI does not prescribe any conditions for repatriation of exports proceeds for SEZ, it cannot be said that for determining ALP of export receivable, which becomes capital financing, if outstanding is beyond agreed or reasonable time limit, does not have any impact on the benchmarking of the same, as the purposes of RBI policy and Income Tax Act are on different footings. However, even if the agreement does not specify the term of the payment even then assessee must be given benefit of credit period which is accepted business practice in the trade. Before the Id Transfer Pricing Officer as well as before the Id DRP the assessee could not establish what is the accepted business practice in its trade ab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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