TMI Blog2019 (9) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... its entire revenue is from BPO services only. Therefore, factual findings of the DRP that it falls income of less than 75% of the total operating revenue filter is not correct. Therefore, we remand this issue of comparability of this company to the TPO for reconsideration of the issue by considering only the operating revenue. As regards inclusion of Ace BPO Services Ltd is concerned, it is the case of the assessee that this company satisfies all the filters applied by the TPO and therefore, is functionally comparable to the assessee company. He pointed out that the TPO and the DRP have rejected this company on the ground that no information as to the RPT filter has been reported in its Annual Report and therefore, complete information is not available. The learned Counsel for the assessee has drawn our attention to page 507 and 508 of the paperbook wherein details of the RPT transactions are given. Having regard to the fact that the details with regard to the RPT transaction of the company have been given, we are of the opinion that the findings of the DRP TPO are factually incorrect. Therefore, we remand the comparability of this company also to the AO/TPO for reconsidera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Para 5 of his order recorded the assessee s submissions as under: 5. Examination of TP study conducted by taxpayer: In the TP documentation, the taxpayer has benchmarked the transactions under three segments namely; software distribution, software development (including related IT services) and shared services (ITES). As per the taxpayer analysis, the PLI of the taxpayer is higher than the comparable companies results for the transactions pertaining to software development and software distribution segments. No adjustment has been proposed to the transactions pertaining to software distribution and software development segments as the same meets the arm s length price . 4. As regards the ITeS segment, the TPO observed that the assessee has shortlisted 7 companies as comparable to the assessee, whose arithmetic mean PLI (OP/OC) was 11.13% as against the assessee s PLI of 11.01% and therefore, the assessee treated this transaction to be at Arms Length. 5. The TPO analysed the transactions and observed that the transaction of Software Development Services was at ALP because the margin of the assessee was higher than the average margin of the comparables and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fice 5 Companies with foreign exchange earning 25% This is an appropriate filter 6 Select companies having RPT 25% This is an appropriate filter 7 Companies with similar nature of operations This is an appropriate filter As per the provisions of section 92C(3) r.w.s. 92CA where during the course of any proceeding, the TPO, on the basis of material or information or documents in the possession is of the opinion that the information or data used in computation of the arm s length price is not reliable or correct, the TPO may proceed to determine the arm s length price in relation to the international transactions in accordance with Sec. 92C(1) and 92C(2) on the basis of such material or information or document available with him. After rejecting the filters applied by the taxpayer, the TPO has used the following filters or criteria, which lead towards selecting proper comparables functionally similar to that of the taxpayer, apart from the above filters or criteria accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the assessee: S.No Name of the company OR OC OP OP/OC 1 Acropetal Technologies Ltd (Seg.) 34839744 28061362 6778382 24.17 2 Microgenetics Ltd 19211589 16513486 2698103 16.34 3 Infosys BPO Ltd 18313654987 14136657182 4176997805 29.55 4 Microland Ltd 2423900000 2231500000 192400000 8.62 5 Capgemini Business Services (India) Ltd 5181918537 4087308886 1094609651 26.78 6 E4e Healthcare Business Services P Ltd 1091819827 9311 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, we have noticed that the payment terms is 60 days from the end of the relevant quarter an in some agreements it is 90 days from the end of the relevant quarter etc. We have considered the due date as 60 days from the end of the relevant quarter as an uniform due date for the sale of consistency. In view of the above, interest is charged @ 14.45% on the receivables received beyond the due date for the invoices raised during the year under consideration . 12. He accordingly determined the ALP interest on the receivables at ₹ 5,59,43,523/-. 13. In accordance with the TP order, the draft assessment order dated 5.12.2016 was passed, against which the assessee preferred its objections before the DRP, which granted partial relief to the assessee by directing the TPO to exclude Acropetal Technologies Ltd from the final list of comparables; and to exclude Capegemini Business Services if it fails RPT Filter after cross-verification of the same; and to exclude Infosys BPO if it fails Export Revenue filter. 14. The DRP, however, rejected the assessee s request for inclusion of the companies selected by it. 15. As regards the ALP adjustment on trade receivables, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss outsourcing, Back office, Software Development, Tech Solutions and Medical Billing services without any segmental data. 2.3. Without prejudice to above ground of appeal, the Ld. TPO and the Ld. AO erred in not following the directions of the Hon'ble DR? in considering the correct margin of Hartron Communications Limited. 3. Microgenetics Systems Limited 3.1 On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DR? further erred in upholding / confirming the action of the Ld. TPO in selecting Microgenetics Systems Limited as a comparable. 3.2 On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DR? further erred in upholding/confirming the action of the Ld. TPO in selecting Microgenetics Systems Limited as a comparable, without appreciating that the said company is engaged in the business of providing back-office services to health sector which are in the nature of medical transcription services. 3.3 On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DR? further erred in upholding/confirming th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clauses (a) to (d) of Section 92C(3) of the Act were satisfied. 7. On the facts and in the circumstances of the case and in law, the Ld. AO, Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in classifying the Appellant as being engaged in providing a mix of high end and low end services without appreciating that the Appellant was a captive service provider, providing shared services (i.e. low end services) to its Associated Enterprises and consequently all KPO companies / companies providing high end services (whether selected by the Appellant or the TPO) ought to have been rejected. 8. On the facts and in the circumstances of the case and in law, Ld. TPO erred in and the Hon'ble DRP further erred in upholding/confirming the action of the Ld. TPO in conducting a fresh benchmarking which was erroneous and liable to be rejected since the Ld. TPO: i. Used lower turnover filter without the application of an upper turnover filter, thereby disregarding the importance of turnover in the benchmarking of comparables ii. Selected certain companies wherein peculiar economic circumstances / extra-or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, as a separate and distinct international transaction and further erred in confirming a transfer pricing adjustment in the nature of interest on receivables amounting to ₹ 25,164,907. 11.3 On the facts and in the circumstances of the case and in law, the Ld. AO erred in not considering the fact that the working capital adjustment evaluates the outstanding receivable in a controlled scenario vis-a.-vis uncontrolled scenario and that differential impact of working capital of the Appellant vis-a-vis its comparables has already been factored in the pricing! profitability of the Appellant. And hence, levying interest on receivables amounts to double adjustment. Without prejudice to the fact that no arm's length determination and consequential transfer pricing adjustment is warranted on outstanding receivables, the Appellant would like to raise the following grounds against the computation methodology of the Ld. AO: 11.4 On the facts and in the circumstances of the case and in law, the Ld. AO erred in applying the credit period available to the Appellant, as per the intercompany agreement, as benchmark for computing the transfer pricing adjustment since cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils peculiar circumstances filter. Without prejudice to this ground, he submitted that the TPO has erred in not computing the correct margin of Hartron Communications i.e. 19.41%. In support of his contention that the said company should be excluded from the final list of comparables, the learned Counsel for the assessee relied upon the decision of the Coordinate Bench of the Tribunal in the case of S P Capital IQ India (P) Ltd vs. Dy. CIT, reported in (2019) 55 CCH 0449 HydTrib. 19. The learned DR, on the other hand, supported the orders of the authorities below and submitted that Hartron Communications is also engaged in ITeS and that it passes all the filters applied by the TPO. It was held that as per page No.20 of the Annual Report of Hartron Communications Ltd, which gives segmental revenue break up, revenue of office back up operations is ₹ 1084.083 lakhs and the said segment falls under ITeS. He also relied upon the orders of the TPO DRP. The learned DR further submitted that the assessee also is into rendering high end BPO services. He submitted that as seen from its profile, assessee is also rendering high end BPO services like Hartron Communications Ltd and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esults have taken by the TPO and therefore, the said results cannot be said to be not comparable with the assessee as the revenue from both the companies is from ITeS services only. As regards the argument that it has evidenced abnormal revenue pattern, we agree with this argument of the assessee, because as reported by the said company, it is into BPO services and has shown increase to the tune of 483.72% over the last year. In the case of S P Capital IQ India P Ltd (Supra), the Coordinate Bench of the Tribunal (to which both of us are signatories) for the very same A.Y i.e. 2013-14, has held that this company has to be excluded on account of exceptional year of performance. For the sake of clarity and ready reference, the relevant paras are reproduced hereunder: 8. As regards, Hartron Communications Ltd is concerned, the argument of the assessee is that it is functionally different because it includes both ITES as well as other services like software services and the segmental results/information is not available. He also submitted that it is an exceptional year of operation with an increase in revenue from BPO business to the tune of 483.72% over the last year and there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, from the data published by the assessee, this year is an exceptional year of operation. The financial results of Hartron Communications Ltd cannot be considered for the preceding and succeeding financial years is as under: F.Y 2009-10 (-) 22.07% F.Y 2010-11 (-) 97.56% F.Y 2011-12 (-) 37.15% F.Y 2012-13 25.05% F.Y 2013-14 (-) 2.52% F.Y 2014-15 (-) 26.02% Therefore, it can be seen that this year has been an exceptional year for the said company. Therefore, we are of the opinion that Hartron Communication Ltd cannot be considered as a comparable company to the assessee. In this view of the matter, without commenting on the other objections of the assessee, against this company, we direct the AO/TPO to exclude this company from the final list of comparables only for the ground of exceptional performance during the relevant year . 21. Respectfully following the same, we direct that Hartron Communications Ltd be excluded on account of exceptional year of performance i.e. peculiar circumstances filter. 22. As regards the comparability of Microgenetics Systems Ltd is concerned, the learned Counsel for the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outsourcing of the medical transcription activity. 11. Having regard to the rival contentions and the material on record, and after going through the P L A/c of the comparable Microgenetics Systems Ltd and particularly Schedule-F thereof placed in Paper Book filed by the assessee relating to production expenses, we find that during the relevant previous year the assessee has incurred ₹ 22,03,823 towards medical transcription charges. Though, it is not 23% of the expenses incurred by the assessee as observed by the DRP, the payments were for outsourcing of the activity and hence is involved in a different functional model as compared to the assessee. In view of the same, we do not find any reason to interfere with the direction of the DRP. Thus, assessee's ground of appeal No.5 is rejected . 24. We find that Microgenetics Systems Ltd has not changed its activities in the A.Y 2013-14. Therefore, respectfully following the decision of the Coordinate Bench in similar set of facts, this company is directed to be excluded from the final list of comparables. Thus, the assessee s grounds for exclusion of Microgenetics Systems Ltd are allowed. 25. As regards inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indings of the DRP that it falls income of less than 75% of the total operating revenue filter is not correct. Therefore, we remand this issue of comparability of this company to the TPO for reconsideration of the issue by considering only the operating revenue. 30 As regards inclusion of Ace BPO Services Ltd is concerned, it is the case of the assessee that this company satisfies all the filters applied by the TPO and therefore, is functionally comparable to the assessee company. He pointed out that the TPO and the DRP have rejected this company on the ground that no information as to the RPT filter has been reported in its Annual Report and therefore, complete information is not available. The learned Counsel for the assessee has drawn our attention to page 507 and 508 of the paperbook wherein details of the RPT transactions are given. 31. The learned DR was also heard who relied upon the orders of the authorities below. 32. Having regard to the fact that the details with regard to the RPT transaction of the company have been given, we are of the opinion that the findings of the DRP TPO are factually incorrect. Therefore, we remand the comparability of this company als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.No Filters used y the taxpayer Remarks of the TPO 1 Use of multiple year data This is not an appropriate filter 2 Companies for which sufficient financial or descriptive information is not available to undertake analysis are rejected This is an appropriate filter 3 Companies that have been declared sick or have persistent negative net worth are rejected This is an appropriate filter 4 Companies having financials for at least 2 out of 3 years This is not an appropriate filter 5 Companies that have substantial (excess of 25%) transactions with related parties are rejected/ This is an appropriate filter 6 Companies that have exceptional years of operations This is not an appropriate filter 7 Selection of companies engaged in distribution of software products This is an appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sankhya Infotech Ltd (Seg.) 4.73% Fails forex filter 7 Ajel Ltd 10.16% Fails forex filter 8 DCM Ltd (Seg.) 0.13% Fails forex filter 9 Prism Informatics Ltd 7.28% Fails forex filter 10 Spry Resources India P Ltd 27.33% Information not available Arithmetic mean 11.02% 39. Thereafter, the TPO conducted fresh analysis and selected 13 companies as comparables including the two companies selected by the assessee and accepted by the TPO. The assessee objected to the companies selected by the TPO. However, the TPO rejected the assessee s objections and selected the following 12 companies as final comparables: S.No Company name OR OC Operating profit OP/OC % 1 SQS India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software development services of the assessee s international transactions. 41. Further, with regard to ITES segment, the TPO rejected the assessee s TP study and adopting the following filters, he conducted fresh search for comparables: i) Companies whose data is not available for the financial year 2013-14 were excluded. ii) Companies whose revenue from IT Enabled service is less than ₹ 1.cr. are excluded. iii) Companies whose revenue from IT enabled service is less than 75% of the total operating revenues are excluded. iv) Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded. v) Companies which have export sales less than 25% of the sales were excluded. vi) Companies who have diminishing revenues/persistent losses for the last three years upto and including financial year 2013- 14 were excluded. vii) Companies having different financial year ending (i.e. no March 31, 2013) or data of the company does not fall within 12 month period i.e. 01-04-2013 to 31.03-2014 were rejected. viii) Companies that are functionally different from the taxpayer were exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td 23470000000 18120000000 53500000000 29.53 3 Microland Ltd 3447100000 2870900000 5762000000 20.07 4 Eclerx Services Ltd 7152910000 4189020000 2963890000 70.75 5 B N R Udyog Ltd 14259000 11421000 2838000 24.85 6 Crossdomain Solutions P Ltd 746275406 616399666 129875740 21.07 7 MPS Ltd 1882921000 1275935000 606986000 47.57 Average 33.13 44. Thus, he arrived at the average margin of the comparables at 33.13% as again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f INR 2023 crores compared to the assessee having turnover of ₹ 26.25 crores only. Further, it is submitted that it has a brand value and it employs substantial portion of its fixed assets in intangible assets. He submitted that the comparability of the said company had come up for consideration in the assessee s own case for the earlier A.Y 2011-12 and also in 2013-14. In A.Y 2011-12, the Tribunal had directed its exclusion while in 2013- 14, the DRP itself had directed its exclusion and the Revenue has not filed any appeal as against the same. He placed reliance upon the decision of the Hon'ble Delhi High Court in the case of Aginity India Ltd wherein the said company has been directed to be excluded. 52. The learned DR, on the other hand, relied upon the orders of the authorities below. He also submitted that the assessee is also into diversified activities and until and unless it proves that the existence of brand or high turnover has an impact on its operating margin, Infosys BPO Services Ltd, should not be excluded. 53. Having regard to the rival contentions and the material on record, we find that this company is into diversified activities and it also has br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, we direct exclusion of this company also from the final list of comparables. 59. As regards Microgenetics Systems Ltd is concerned, we have already considered the comparability of this company with the assessee in the earlier A.Y 2013-14 and we have directed its exclusion on the ground of its outsourcing activities. For the same reasons given, this company is directed to be excluded. 60. As regards Microland Ltd is concerned, the case of the assessee is that it is into business of rendering hybrid IT Infrastructure and it also undertakes R D activities and has achieved abnormal growth of 149% during the current A.Y. Without prejudice to the above, the assessee also submitted that the correct margin of this company should be considered. 61. The learned DR, however, submitted that this company was taken up by the assessee itself as comparable before the TPO and further that in the earlier A.Y 2013-14 this company has been accepted as a comparable. Therefore, he submitted that it should be retained as a comparable. 62. Having regard to the rival contentions and the material on record, we find that this company is into R D activities and has achieved abnormal growth dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Technologies Ltd, E-Zest Solutions Ltd, Goldstone Technologies Ltd and Sankhya Infotech Ltd. Therefore, the grounds of appeal for inclusion of these companies in the final list of comparables are rejected. Now only two companies remain for inclusion. They are Maveric Systems Ltd and Evoke Technologies Ltd. As far as Maveric Systems Ltd is concerned, the TPO and DRP have rejected this company on the ground that it incurred significant R D expenses (6% of its turnover). The learned Counsel for the assessee argued that this company satisfies all the filters adopted by the TPO and hence is functionally comparable to the assessee. 71. The learned DR, on the other hand, relied on the orders of the authorities below as well as the Annual Report of Maveric Systems Ltd, wherein, it is reported that 6% of the turnover has been spent towards R D. 72. Having regard to the rival contentions and the material on record, we are satisfied that though this company is functionally similar, it fails the R D filter of less than 3% of the turnover and hence cannot be taken as a comparable to the assessee. 73. As regards Evoke Technologies is concerned, the contentions of the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Solutions India (P.) Ltd. v.Deputy Commissioner of Income Tax, we direct the exclusion of these three companies from the final list of comparables. For the sake of ready reference, the relevant paras are reproduced hereunder: 29. We have considered rival submissions and perused materials on record. The primary and fundamental reason on the basis of which assessee seeks rejection of the aforesaid comparable is, it is also engaged in the development of product and segmental details are not available. Notably, in case of LSI Technologies India (P.) Ltd. (supra), the Co-ordinate Bench while examining the comparability of the aforesaid company to a software development service provider, has rejected this company as a comparable considering the fact that it is engaged in product development and product design services. The same view has been reiterated by the Tribunal in the other decisions cited by the learned Authorised Representative. Since, many of these decisions pertain to the impugned assessment year, respectfully following the aforesaid decisions of the Tribunal, we direct the Assessing Officer to exclude this company from the list of comparables. 35. We have considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing software development services only to its AEs. It is also submitted that it does not have segmental information for products and services and that it has earned abnormal profits during the year under consideration i.e. 42.08%. Without prejudice to these arguments, it is also submitted that the TPO has erred in not computing the correct margin of Infobeans Technologies Ltd i.e. 41.85%. 81. The learned DR, however, supported the orders of the authorities below and submitted that there is no error in the computation of margin of the company and that it passes all filters and hence cannot be rejected merely due to high margin. He also drew our attention to the DRPs finding that the entire revenue derived by this company was from software services only and that there are no products as contended by the assessee. 82. The learned Counsel for the assessee however, placed reliance upon the decision of the Pune Bench of the Tribunal in the case of PubMatic India Ltd vs. ACIT (2018) 91 Taxmann.com 356 wherein this company was directed to be excluded. 83. Having regard to the rival contentions and the material on record, we find that the assessee is relying upon the Annual Report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in software development and ITeS services and products, as reportable as per AS17. Further, at page 897, there is an inventory in the balance sheet and at page 899 there is classification of inventories. However, we do not find any revenue from sale of products. Therefore, it cannot be accepted that this company is into product development. The other objection of the assessee is that it has abnormal profit of 79.76% during the relevant A.Y and therefore, it has witnessed super normal profit of 38% on a year on year basis. This objection of the assessee is acceptable because, in the other cases of Infosys Ltd, L T Infotech Ltd and Mindtree Ltd, we have held that not only high turnover but even where the comparables have earned super normal profit, they also ahve to be excluded. Respectfully following the same, we direct the TPO to exclude this company from the final list of comparables. Thus, the assessee s grounds of appeal on exclusion of the companies are partly allowed. 86. The common grounds of appeal for the A.Ys 2013-14 and 2014-15 are against the ALP adjustment of interest on trade receivables. Though the learned Counsel for the assessee has relied upon the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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