TMI Blog2018 (4) TMI 1755X X X X Extracts X X X X X X X X Extracts X X X X ..... come which is also included in die total income in me return of income filed in India) - HELD THAT:- The facts in this regard are that in its return of income filed under the Act for the AY 2012-13, the Assessee for the instant assessment year, Assessee has claimed FTC of ₹ 13,94,950/- (relevant details at pages 867 and 894 of the paperbook). However, in the draft assessment order passed by the AO, he allowed FTC only to the extent of ₹ 9,83,255/- without giving any explanation for the short-grant of FTC. Although the Assessee objected to the same before the DRP, it refused to interfere with this issue on the premise that doing so would be beyond the scope of its powers. Consequently, in the impugned final assessment order, FTC was only allowed to the extent of ₹ 9,83,255/- as against the sum of ₹ 13,94,950/- that was claimed by the. Assessee in its return of income. We are of the view that it would meet the ends of justice if a direction is given to the AO to verify the claim of the Assessee and allow tax credit in accordance with law. - IT(TP) A Nos. 586 (Bang) Of 2015 And 183 (Bang) Of 2017 - - - Dated:- 11-4-2018 - N.C. Vasudevan, Judicial Member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its TP study selected 16 comparable companies whose arithmetic mean of OP/TC was arrived at 13%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 16 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 4 out of the 16 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 6 other companies as comparable companies with the Assessee. Thus a final set of 10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows: Comparables selected by the TPO and their arithmetic mean: SI. No. Name of the Company NCP Margins as per TPO Order (WC-Unadj) (%) NCP Margins as per TPO Order (WC-adj) (%) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,62,86,639/- 6. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., ₹ 24,62,86,639/- was added to the total income by the AO in his draft assessment order dated 11.3.2014 as addition on account of shortfall being adjustment u/s.92CA of the Act. 7. The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP in its directions dated 3.12.2014 rejected the objections of the Assessee and confirmed the addition on account of shortfall being adjustment u/s.92CA of the Act. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts. However, at the time of hearing of the appeal, the learned counsel for the Assessee submitted that if 5 out of the 10 comparables chosen by the TPO viz., (i) Infosys Ltd., (ii) Kals Informations Systems Ltd., (iii) Persistent Systems Ltd., (iv) Tata Elxsi Ltd.; and (v) Persistent System and solutions Ltd., are exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nity India Technologies (P.) Ltd. v. ITO [2015] 58 taxmann.com 167/154 ITD 293 (Delhi - Trib.), which was confirmed by the Delhi High Court. The Hon'ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. The Tribunal further held that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and Infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance, systems integration as well as products for banking industry. (2) KALS Information Systems Ltd.: In Paragraphs 21 to 23 of its order the Tribunal held that this company was software product company and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 of its order the Tribunal held that this company is in software development and products and no segmental details were Assessee available and therefore it was not possible to ascertain the profit margin in the software development service segment. 10. Respectfully following the decision of the Tribunal we hold that the aforesaid 5 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins of the? In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP has endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. If the above 5 comparable companies are excluded the arithmetic mean of the remaining comparables would be as follows: SI. No. Name of the Company Mark up on costs-unadj (in %) Mark up on costs-WC -adj (in %) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 comparable companies whose arithmetic mean of OP/TC was arrived at 14%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 15 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Ann's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 3 out of the 15 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 6 other companies as comparable companies with the Assessee. Thus a final set of 9 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows: Comparables selected by TPO and their arithmetic mean: SI. No. Name of the Company Markup WC Unadj. (%) WC adjusted (%) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO before the Disputes Resolution Panel (DRP). The DRP in its directions dated 3.12.2014 rejected the objections of the Assessee and confirmed the addition on account of shortfall being adjustment u/s. 92CA of the Act. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts. However, at the time of hearing of the appeal, the learned counsel for the Assessee submitted that if 3 out of the 9 comparables chosen by the TPO viz., (i) Accentia Technologies Ltd., (ii) ICRA online Ltd., and (iii) Infosys BPO Ltd., are excluded and if the arithmetic mean of the profit margin of the remaining 6 companies when compared with the price charged by the Assessee, then the price charge by the Assessee would be at Arm's length. 15. It needs to be clarified that Infosys BPO Ltd., was a comparable chosen by the Assessee in his Transfer Pricing Study (TP Study). However before the DRP the Assessee has objected to inclusion of this company as a comparable at page-58 of its obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to its AE and the TPO had chosen same comparable companies. In me aforesaid decision the Tribunal held on the comparability of the 3 companies which the Assessee seeks to exclude as follows: (1) In paragraphs 6 7 of its order excluded ICRA Online Ltd., and Infosys BPO Ltd., as a comparable company by following the decisions of the ITAT Bangalore and Hyderabad rendered in the case of Symphony Marketing Solutions India (P.) Ltd. v. ITO [2013] 38 taxmann.com 55 (Bang.) and Market Tools Research (P.) Ltd. v. Asstt. CIT [2013] 32 taxmann.com 358/[2014] 150 ITD 296 (Hyd.). In the aforesaid decisions, the Tribunal excluded ICRA Online Ltd,, for the reason that 75% of the revenue was not from exports. Infosys BPO Ltd., was excluded for the reason it had brand value which had impact on its pricing and margins. (2) In paragaraphs 8 9 of its order, the tribunal excluded Accential Technologies Ltd., as a comparable company by following decision of ITAT Bangalore Bench in the case of ISG Novasoft Technologies Ltd. In ITA No.l85/Bang/2015 for AY 2010-11, wherein it was held that due to mergers and acquisitions in this company during the relevant previous year there was an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... + 5% of the Appellant's margin 20.25 - 5% of the Appellant's margin 8.80 Thus, since the arithmetical mean of the working capital adjusted margins of the above 6 comparables (18.70%) is within +/- 5% of the NCP margin of the Appellant (14.52%), the TP adjustment made by the TPO insofar as it relates to the ITE Services provided by the Assessee to its AEs in FY 2009-10 is liable to be deleted. Therefore, the other grounds raised in the Assessee's memorandum of appeal insofar as it relates to the ITE Services provided to its AEs in FY 2009-10 are not adjudicated at this stage. However, the Assessee is at liberty to urge the said grounds m any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. 18. In Gr. No. 18, the Assesses has prayed for a direction that the credit for Taxes deducted at sources has not been properly allowed by the AO. In this regard it was submitted that for AY 2010-11, the Assessee was entitled to a total credit of TDS of a sum of ₹ 1,18,40,477/-, as per its Form No.26AS for the said assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 12.63%. The Assessee in its TP study selected 14 comparable companies whose arithmetic mean of OP/TC was arrived at 13.08%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 14 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 1 (Mindtree Ltd.) out of the 14 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 9 other companies as comparable companies with the Assessee. Thus a final set of 10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment selected by TPO was as follows: SI. No. Name of the Company Markup on Total Costs (WC-unadj) (in %) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shortfall being adjustment u/s. 92CA ₹ 50,47,78,165 24. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., ₹ 50,47,78,165/- was added to the total income by the AO in his draft assessment order dated 29.2.2016 as addition on account of shortfall being adjustment u/s. 92CA of the Act. 25. The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP in its directions dated 15.9.2016 directed the AO (i) to exclude 1CRA Techno Analytics Ltd, and Datamatics Global Services Ltd. from die list of comparable companies as they agreed with the Assessee that these two companies are not functionally comparable to the Assessee, (ii) rejected the Assessee's claim for exclusion of the following four companies viz., (a) Genesys International Corpn. Ltd., (b) Infosys Ltd., (c) Larsen and Toubro Infotech Ltd., and (d) Persistent Systems Ltd. The Assessee had contended before DRP that these 4 companies are not comparable to the Assessee. (iii) directed TPO to recompute the margins of the Assessee and the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen 16 comparable companies out of which 6 companies chosen by the TPO in the case of the Assessee for the purpose of comparability were the same. His submission was that .the decision rendered by the Tribunal in the case of Agilis Information Technologies India (P.) Ltd. (supra) would be equally applicable to the Assessee in the present case also. The learned DR. submitted that the DRP in its directions has merely accepted with the reasoning of the IPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP. 29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd. (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of me Assessee and that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for the purpose of comparison with the profit margins. In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP bas endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. 31. The learned DR. next submitted that Genesys International Corporation Ltd., should be excluded from the list of comparable companies. The comparability of this company with the Assessee has been discussed by the TPO in page-11 of his order. The Assessee objected to inclusion of this company in the list of comparable companies for the reason that this company is functionally different and owns intangible assets which are peculiar only when the Assessee owns software products. The objections of the Assessee are contained in its letter dated 22.12.2015 addressed to the TPO and in annexure-B to the said letter. The relevant portion of the objection is at pages 711-713 of the Assessee's paper book. According to the Assessee this company is engaged in providing Geograph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the order of the DRP/TPO. 35. We have given a careful consideration to the rival submissions. It is clear from the material brought to the notice of the TPO by the Assessee that this: company renders mapping and geospatial services. In rendering such services it develops software. But that does not mean that this company is in the business of software development. The business profile of this company as per the annual report does not show that this company is into software development service. The only line of business that this company carries on is rendering GIS based services and this is clear from the annual report which specifies that since the company carries on only one line of business viz., GIS based services there is no need to give any segmental results. In the circumstances, we are of the view that there is no basis for the TPO to conclude that this company is predominantly into software-development services. The presence of intangible assets is indicative of the fact that this company is not in software development services business. The TPO has overlooked this aspect and proceeded on the basis that the presence of intangible assets would not be significant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 12.39%. The Assessee in its TP study selected 7 comparable companies whose arithmetic mean of OP/TC was arrived at 11.48%, Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 7 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 2 out of the 7 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 8 other companies as comparable companies with the Assessee. Thus a final set of 10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows: Comparables selected by TPO and their arithmetic mean: SI. No. Name of the Company Markup on Total Cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Received ₹ 127,78,91,238/- Shortfall being adjustment u/s. 92CA ₹ 20,44,28,488/- 39. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., ₹ 20,44,28,488/- was added to the total income by the AO in his drat assessment order dated 29.2.2016 as addition on account of shortfall being adjustment u/s. 92CA of the Act 40. The Assessee filed objections before the DRP against the addition made on account of adjustment to ALP. The DRP gave the following directions: (i) The DRP accepted the Assessee's contentions that Accentia Technologies Ltd. is not comparable to its ITE service segment and accordingly, directed its exclusion from the list of comparables. (ii) The DRP, however, rejected the Assessee's contentions that Universal Print Systems Ltd., Infosys BPO Ltd., TCS E-Serve Ltd, BNR Udyog Ltd., and Excel infoways Ltd. are not comparable to it and consequently upheld their inclusion in the list of comparables. (iii) The DRP also suo motu excluded Informed Technologies India Ltd. and Jindal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the stand of the Assessee that the DRP cannot suo motu exclude or include a comparable company which the parties do not want to include or exclude. 44. The learned counsel for the Assessee submitted before us that 3 out of the 5 companies which the Assessee seeks to exclude from the list of comparable companies viz., Infosys BPO Ltd. TCS B-service Ltd. and Excel Infoway Ltd., were considered for exclusion by the Tribunal in the case of a similar Assessee such as the Assessee engaged in providing ITES in the case of Baxter (I) (P.) Ltd. v. A.CIT [2017] 85 taxmann.com 285 (Delhi - Trib.). The learned DR relied on the order of the DRP/TPO. 45. We have considered the rival submissions. In the case of Baxter (I) (P.) Ltd., (supra) the Delhi ITAT Bench considered comparability of the aforesaid three companies with a company engaged in providing ITBS such as the Assessee. The functional profile of the Assessee and the Assessee in the case of Baxter (I) (P.) Ltd. (supra) are identical inasmuch as 7 out of the 10 companies chosen by the TPO in the case of the Assessee were chosen as comparable in the case of Baxter (I) (P.) Ltd. (supra). The Tribunal held on the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per its annual report. The Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue. 48. The TPO at page-20 of his order has dealt with the above objections by observing as follows: (a) Pre-Press BPO unit provides ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (if) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Pre-press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised by the Assessee in this regard about lack of information about allied services performed by die pre-press ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55. The next submission of the learned counsel for the Assessee was for inclusion of two companies viz., (i) Informed Technologies India Ltd., and (ii) Jindal Intellicom Ltd., in the final list of comparable companies. In this regard it was argued that both these companies were held to be comparable companies by the TPO and the Assessee did not object before the DRP to inclusion of these two companies as comparable companies. The DRP suo motu excluded these two companies from the list of comparable companies vide paragraphs 6.18 6.19 of its directions. On a perusal of the Order of the DRP it is clear that the DRP did not put the Assessee on notice as to its proposed action of excluding these two companies from the list of comparable companies. As far as the company Informed Technologies India Ltd., is concerned, it was excluded by the DRP for the reason that this company had advanced certain interest-free sums in prior financial years, which came to be written off by the company in FY 2011-12. According to the DRP the action on the part of the management of this company was prejudicial to die company and therefore this company would fail the comparability criteria consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse market conditions and therefore Jindal Intellicom Ltd., was liable to be excluded from the list of comparable companies. The DRP did not put the Assessee on notice as to its proposed action of excluding this company. We find that the Assessee does not merely provide services to its AE in Netherlands. It also provides ITE services to its AE's in UK, Finland, Germany, Sweden, Belgium, Denmark, Norway and USA. A perusal of its Form 3CEB for the instant assessment year which is produced at pages 1035-1046 of the paper book, shows that it provided services to AE's at USA also. Therefore, the entire basis for its exclusion is wholly misconceived and erroneous and, accordingly, its suo motu exclusion by the DRP is not proper. The functions performed by this company are comparable to the services provided by the Assessee and have not been disputed whatsoever by the DRP. That apart, Jindal has been selected by the TPO as a comparable to the Assessee for the assessment years 2008-09, 2011-12 and 2013-14 and its inclusion for those assessment years has not been objected to by the Assessee either. Moreover, it is consistently figuring in the list of comparables in companies providi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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