TMI Blog2017 (8) TMI 1576X X X X Extracts X X X X X X X X Extracts X X X X ..... development of software, one of the reasons cited in the decision relied upon. While the TPO has held that the services rendered by the company to be BPO services without any analysis, we find that the assessee also has not demonstrated that the services rendered by the company fall in the high end KPO services as claimed and has relied on the decisions that has merely relied on the decisions that were rendered in the context of earlier years for excluding this company from the list of comparables. Therefore, in our view an examination is necessary in order to ascertain as to whether the conditions on the basis of which this company was excluded as a comparable in earlier years still prevail and are applicable to the assessment year under consideration. In this view of the matter, we deem it fit to remand the matter back to the file of the TPO for fresh consideration in the light of our observations above. BNR Udyog Ltd. (Seg) (Medical Transcription) - Since in the year under consideration, there are 3 segments, how much of the RPT expenses pertain to each of the segments requires examination and we find that this aspect has not been analyzed by either the TPO or the assessee. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and we therefore uphold the action of the AO in charging the assessee the said interest. The AO is, however, directed to re-compute the interest chargeable u/ss 234B and 234C of the Act while giving effect to this order. - IT(TP) A No. 591/Bang/2017 - - - Dated:- 2-8-2017 - MR JASON P BOAZ, ACCOUNTANT MEMBER AND MR Laliet Kumar, JUDICIAL MEMBER For The Appellant : Mr Mr L. Bharath, C.A For The Respondent : Ms. Neera Malhotra, CIT ORDER Jason P Boaz, Accountant Member This appeal by the assessee is directed against the final order of assessment dated 11/1/2017 for asst. year 2012-13 passed u/s 143(3) r.w.s 144C (13) of the Income-tax Act, 1961 (in short the Act ), in pursuance to the directions of the Dispute Resolution, Bangalore ( DRP ) dated 13/12/2016 issued u/s 144C(5) of the Act. 2. Briefly stated, the facts of the cases are as under:- 2.1 The assessee is an Indian company that provides content development and centralized accounting support services to its associated enterprises ( AE ). The assessee has classified its international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the provisions of the Act to the extent they are prejudicial to the Appellant, since the same were undertaken without appreciating the submissions of the Appellant. 2. The Ld, TPO erred in rejecting the arm s length price as determined by the Company in relation to interest receivable on loans provided to its Associated Enterprises ( AES ) without considering that even if the loans were granted without charging any interest, the same would comply with the arm s length standard. The Hon, DRP erred in confirming the order of the Ld. TPO in this regard. 3. The Hon. DRP erred in treating the interest payable on the bank overdraft as internal comparable for determining the arm s length nature of interest receivable on loans provided to the associated enterprises. 4. In respect of Grounds No, 2 and 3; the Hon. DRP erred in not following the ruling of the jurisdictional Income-tax Appellate Tribunal passed for the AY 2008-09 in the Appellant s own case which involved similar facts. 5. The Ld, TPO erred in rejecting the documentation maintained by the Appellant in respect of the accounting support: services segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SWD segment were at arms length. However, the TPO did not accept the assessee s comparability analysis with regard to the assesse s international transactions relate to the ITES segment. Therefore, the grounds 7 8 raised before us in this appeal relate to the comparable companies considered for the ITES segment. 7.2.2 In its TP study, the assessee had selected the following set of 7 comparables for its ITES segment:- Sr. Name of Company (M/s.) Margin 1 Accentia Technologies Ltd. 11.25% 2 Adlthya Birla Minacs Worldwide Ltd. 6.68% 3 Apollo Health Street Ltd. 11.96% 4 Excel Infoways Ltd. 24.82% 5 Firstsource Solutions Ltd. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sys BPO Ltd., (ii) TCS e-serve Ltd., (iii) BNR Udyog Ltd. The ld AR also submitted that the assessee seeks inclusion of the following company:- (i) Jindal Intellicom Ltd., The ld RA has put forth oral and written submissions, and cited certain judicial pronoucements, which have all been carefully perused and duly considered. EXCLUSION OF COMPARABLES SOUGHT FOR BY ASSESSEE 8. Infosys BPO Ltd., 8.1 This company was originally selected as a comparable by the assessee in its TP study. The TPO also selected this company as a comparable in the comparability analysis carried out by him. The assessee objected to the inclusion of this company as a comparable both before the TPO and subsequently before the DRP on grounds of it being functionally not comparable, having abnormally high margins etc. Both the TPO and the DRP rejected the assessee s contentions and upheld inclusion of this company in the final list of comparables. 8.2 Before us, the assessee has objected to the inclusion of this company i.e Infosys BPO Ltd., as the comparable, on the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent, being a market leader, enjoying tremendous brand value and good will, with huge economies of scale and wide geographical disposal of customers. The relevant portion of the order of the co-ordinate bench (Supra) at para 9 thereof is extracted hereunder:- 09. We have considered the rival submissions and gone through relevant materials The relevant portion of the order from the assesse s case in IT (TP)A no. 1845/Bang/2015 IT(TP)A.1777/Bang/2013 dt 10.11.2015 for ay 2009-10 is extracted as under : Accentia Technologies Ltd : . . (iii) As regards the functional dissimilarity, we note that Accentia Technologies Ltd is engaged in diversified activity of medical transcription, medical coding, billing, receivable management. Thus it is clear that the said company is engaged in the healthcare activity and providing specific services of medical transcription, medical coding, medical billing etc, We note that these activities are quite different from the service of contact centre provided by the assessee to its AE which is purely in the nature of call ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under 12. This company is listed at SI No, 2 of the comparables chosen by the TPO. As for as this company is concerned, the objection of the assessee is that this company is not functionally comparable. The assessee is a BPO company that provides market analytics and data management services. To provide market analytics solutions, the assessee gives strategies that impact on client revenue including data based marketing strategies for customer acquisition, devising customer retention strategies and excluding loss mitigation strategies through cutting edge forecasting fools. The data management services provided by the assessee include routine business data reporting and management, website management, market/rig data analysis and top line reporting As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen front segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08} that it derives income from engineering design services and software development services, It is also pertinent to point out that before the TPO, the assessee raised an objection that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 co-ordinate 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 Departmental Representative supported the orders of the TPO In including this company as a comparable to the assessee, 6.7.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 8.4.2 In our view, as the facts of the case for the year under consideration, as brought out from the relevant portions of the Annual Report of this company are similar for this year also, we respectfully following the aforesaid decision of the co-ordinate bench in the case of e4e Business Solutions India (P.) Ltd., (Supra) hold that his company i.e Infosys BPO Ltd., is functionally dissimilar from the assessee in the case on hand and direct the AO/TPO to exclude this company from the final set of comparables. We hold and direct accordingly. 9. TCS E-Serve Ltd., 9.1 This company was selected by the TPO and included in the final set of comparables, in spite of the objections of the assessee that this company is functionally different. Before us, the assessee seeks exclusion of this company on the grounds that this company provides Knowledge Process Outsourcing ( KPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the assessee which are characterized as ITES services. The company is also having huge sales turnover as compared to the assessee. The company is also part of TATA group, which has impacted its profitability. In the circumstances, the company is functionally dissimilar to the assessee and cannot be compared with the assessee. The said company has also been excluded by the Tribunal as a comparable to ITES companies in the case of Goldman Sachs (India) Securities Private limited (supra). The relevant part of the decision is extracted as under: 4.2.b In the case of Capitia India Pvt. Ltd. (supra) the Tribunal had held that TCS was not a valid comparable for IT-e services in following manner (i) M/s TCS e-Serve:- From the perusal of its Annual reports, it is seen that, this company is engaged in the business of providing ITES services and BPO services primarily to Citi Group entities globally. It operations comprised of transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. No separate segmental details are available. On a careful reading of the decision of coordinate Bench in Techbook International (P.) Ltd. (supra) it is clear that Schedule O - Notes to Accounts in respect to carried out by Company and relevant segmental details were never brought to the attention of the Bench. We find that in the absence of availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of Transaction, processing services . Thus the entity level figures render this company as unfit for comparison. Following the above reasons also taken note in the case of TCS e-Service international Limited, we order for the elimination of this company from the final set of comparables. Subsequently in the case of Equant Solutions India Pvt Ltd also this company has been held to be un-comparable on the following reasoning: We have also considered the rival contention for exclusion of TCS e-service Ltd. it is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany was excluded as a comparable in earlier years still prevail and are applicable to the assessment year under consideration. In this view of the matter, we deem it fit to remand the matter back to the file of the TPO for fresh consideration in the light of our observations above. Needless to add that the assessee shall be afforded adequate opportunity of being heard and to file details/submissions in this regard which shall be considered while deciding the issue de-novo. It is accordingly ordered. 10. BNR Udyog Ltd. (Seg) (Medical Transcription) 10.1 This company was selected and included in the final set of comparables by the TPO overruling the objections that this company i.e BNR Udyog Ltd, was functionally not comparable to the assessee and failed both the service revenue filter and RPT filter which is in excess of 45%. The DRP also rejected the assessee s contentions that this company be excluded from the list of comparables. Before us, the ld AR for the assessee reiterated that this company is to be excluded from the final list of comparables as it was not functionally comparable to the assessee in the case on hand and also the related party T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, we deem it appropriate and proper to remand the matter of comparability of this company M/s BNR Udyog Ltd., to the file of the TPO for determination of the issue afresh in line with our observation above. Needless to add, the assessee shall be afforded adequate opportunity of being heard in the matter and to file submissions/details in this regard which shall be duly considered by the TPO before deciding the issue. We hold and direct accordingly. INCLUSION OF COMPARABLE SOUGHT FOR BY ASSESSEE 11. Jindal Intellicom Ltd. 11.1 This company was selected and included by the TPO in the final set of comparables. The assessee neither objected to the inclusion of this company in the list of comparables before the TPO nor filed any objection to its inclusion before the DRP. It appears, however, that the DRP suo moto excluded this company from the set of comparables. The assessee is in appeal before us against the exclusion of this company from the list of comparables. 11.2 According to the ld AR of the assessee, this company is an international call centre for rendering voice and data services and is functionally compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the matter on this issue, as emerge from the record, are that during the year under consideration, the assessee had received interest of ₹ 98,46,288/- from its AE s on loans advanced to group entities in USA and Singapore during the Financial Year 2005-06 for their capital investment and business development. Similarly, the assessee had advanced loans to its group entity in Australia during the financial year 2006-07. The assessee charged interest @ 10% per assessee on these loans and accordingly had received interest of ₹ 98,46,288/- in the year under consideration. On examination, thereof, he TPO did not accept the rate of interest on these loans @ 10% , and held that the opportunity cost of deploying the said loan money in the local market for comparable periods is to be applied for the bench marking analysis. In that view of the matter, the TPO analyzed the Bond rates and applied the Bond rate applicable for BB rates bonds as the appropriate rate for the assessee and determined the applicable rate @ 14.47%. Therefore, instead of the 10% rate applied by the assessee, the TPO held 14.47% to be the applicable rate of interest applicable to the loans adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UP rate as the ALP. 12.5.2 In our considered view, the contention of the assessee that the said transactions of advancing loans to AE s is at arms length even without charging of interest on the loans is not acceptable. We find that the reliance placed by the assessee on the decision of the ITAT, Mumbai Bench, in the case of Evonik Degussa India (P.) Ltd. (Supra) is misplaced as that decision has been rendered in the context of interest imputed on debt receivables and not on loans. Further, since the assessee itself has charged interest @ 10% p.a on the said loans advanced to its AE s, the argument put forth that an interest is to be charged there on is a hypothetical contention and has no relevance. 12.5.3 We also find that the distinction sought to be made by the DRP from the decision of the co-ordinate bench of this Tribunal in the assessee s own case for asst. year 2008-09 (Supra) is not correct. The DRP had stated that the finance cost incurred by the assessee was not before the Tribunal and hence issued directions that the bank overdraft interest rate/charge may be adopted. However, we find from a perusal of the said order of the co-ordinate benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % has already been set out in the earlier part of this order and is not being repeated. The contention of the Assessee in this regard finds support from the following rulings of the Tribunal VVF Ltd. v. DCIT (supra), M/S. Siva Industries Holdings Ltd. v. ACIT (Supra), DCIT v. Tech Mahindra Ltd. (supra) and M/S. Four Soft Ltd. v. DCIT (supra). The Mumbai Tribunal in the ease of Tech Mahindra (supra) held that the arm s length price in case of interest on extended credit period granted to an Associated Enterprise shall be determined on the basis of USD LIBOR and not on any other currency denominated loan rate. The Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal) in case of Tech Mahindra Limited (the taxpayer) for Assessment Year (AY) 2004-05, held that the arm s length price in case of interest on extended credit period allowed to an Associated Enterprise (AE) based in USA shall be determined on the basis of USD London Inter Bank Offer Rate (LIBOR) instead of applying the rate of interest pertaining to EURO denominated loan charged to AE based in Germany since the AE was based in USA. The facts of the case were that the Assessee in that case was a joint venture betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The aforesaid ruling was followed by the Chennai Bench of ITAT in the case of M/S. Siva Industries Holdings Ltd. (supra), wherein the Tribunal held as follows: We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0% optional convertible preferential shares. Thus it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company it is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction, if this is so, then the domestic prime lending rate would have no applicability end the international rate fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, on international loan and not for the domestic loan. Hence, the comparable in respect of foreign currency loan in the international market, is to be LIBOR based which is internationally recognized and adopted, in the present case, it is not disputed by the Revenue that the interest rate charged by the assessee in the international transactions was much higher than the LIBOR rates. It is also not in dispute before us that the decisions rendered by the Chennai Bench of the Tribunal in the case of Siva Industries Holdings Ltd. (supra) has not been overruled or any other contrary decision has been taken, on the issue by any Benches of the Tribunal. In such circumstances, we are of the view that the stand taken by the AO for rejecting the plea of the assessee referred to above is unsustainable. In view of the above conclusions, we are of the view that the interest charged in the loan transaction in question has to be held to be as at arm s length. We hold accordingly and allow the appeal of the assessee. 12.5.4 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the assessee s own case for asst. year 2008-09 in Indegence Life Systems (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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