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TMI Blog2019 (8) TMI 1465X X X X Extracts X X X X X X X X Extracts X X X X ..... Nature of Transaction Amount (Rs.) Hyundai Auto Ever Corporation Purchase of computer 27,55,345/- Hyundai Auto Ever Corporation Purchase of Computer Software 47,69,485/- Hyundai Motor Company Provision of IT Enables Services 79,00,95,090/- Kia Motor Corporation Provision of IT Enables Services 32,22,89,270/- Hyundai Motor Company Reimbursement of expenses 10,67,59,106/- Hyundai Auto Ever Corporation Reimbursement of expenses 1,23,60,053/- Hyundai Motor Company Trade receivables 14,73,24,712/- Kia Motor Corporation Trade Receivables 4,24,66,790/- Hyundai Auto Ever Corporation Payables 29,61,156/- 3. Therefore, he made a reference to the TPO for determination of the Arms' Length Price (ALP) LP u/s 92CA of the Act. The TPO observed that the assessee is engaged in the business of rendering support services in relation to Computer Aided Designing (CAD). 4. He observed that the assessee has reported profit margin on cost at 10.22%.In order to determine whether the above transactions were at ALP, the TPO categorised the international transactions under IT enabled services and observed that the assessee has adopted 8 companies as comparables for benchmark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been incurred on the working capital of the comparable companies; and if so (iii) how the cost of such working capital has had an impact on the margins of the comparable companies. 6. In accordance with the TP order, the draft assessment order was proposed against which, the assessee preferred its objections before the DRP seeking inclusion of certain companies (which have been rejected by the TPO) as comparable and exclusion of Eclerx Services Limited and certain other companies from the final list of comparables and also sought the working capital adjustment. The DRP rejected the assessee's objections on the comparability of (i) Infosys BPO Limited (ii) Eclerx Services Limited (iii) MPS Limited. As regards the companies to be included such as (i) Allsec Technologies Limited (ii) Jindal Intelicom Limited (iii) Harton Communications Ltd (iv) Tech Mahindra Business Services Limited (v) Sundaram Business Services Limited (vi) Microland Limited and (vii) Tricom Infotech Solutions Ltd, DRP did not accede to the assessee's request. DRP also did not agree for the working capital adjustment sought for by the assessee and therefore, assessee is in appeal before us by raising t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and in the circumstances of the case and in contrary to law, the Ld. TPO erred by not rejecting Infosys as comparable, as exclusion of Infosys BPO as comparable has been upheld by various ITAT orders. 3. eClerx Services Limited 3.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx Services Limited ('eClerx') as a comparable company to the Assessee though it is functionally different. 3.2. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it fails peculiar economic circumstances filter applied by the Ld. TPO. 3.3. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it operates under different business model. 3.4. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it has earned super normal profits. 3.5. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es engaged in Information Technology Enabled services as a comparables, without appreciating that the said companies were functionally comparable to the Appellant: Allsec Technologies Limited Informed Technologies Limited Jindal Intellicom Limited Harton Communications Limited Cheers Interactive India Private Limited Sundaram Business Services Limited Tricom Infotech Solutions Ltd. Incorrect computation of margin of comparable companies selected by Ld. TPO. 9. Without prejudice to the above grounds on rejection of functionally dissimilar comparable companies, on the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred by incorrectly computing the margin of following comparable companies: Infosys BPO Microland Limited Incorrect rejection of Appellant's Transfer Pricing study I Incorrect benchmarking analysis by TPO 10. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding I confirming the action of the Ld. TPO in rejecting the transfer pricing analysis I study prepared by the Appellant, without appreciating that none of the conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not allowing Depreciation Adjustment in accordance with the provisions of Rule l0B of the Income-tax Rules, 1962 to account for differences due to accelerated depreciation as charged by the Appellant against the different depreciation methodology and rates as applied by comparable companies. Working Capital Adjustment 15. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not ~ allowing Working Capital Adjustment in accordance with the provisions of Rule 10B of the Income-tax Rules, 1962 to account for differences between the international transactions undertaken by the Appellant, being a captive unit, and those undertaken by the alleged comparables. Risk Adjustment 16. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not allowing risk adjustment in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13, the ITAT has held this company to be comparable to E-Clerx Ltd which is a KPO. He submitted that again in the AY 2013-14 and 2014-15 the assessee has been held as ITeS by the TPO as well as the DRP. Therefore, he submitted that it is necessary to go into the actual nature of work carried on by the assessee to hold whether the assessee is an ITeS company or a KPO. He submitted that the assessee's business falls within the ambit of Rule 10TA(e) of the Act and not under 10TA (g) of the Rules. He tried to distinguish the ITeS service from KPO service by submitting that the KPO requires Domain Expertise, Advance Analytical Skills, Technical Skill, in depth knowledge, judgment and interpretation. He submitted that for rendering these services, the manpower plays a key role. He submitted that in the automobile industry, persons having 10 years and above experience with technical qualifications come within the category of technical skill, whereas majority of the assessees' manpower i.e. the 80% are B.Tech or fresh graduates while employees with masters degree were 7% and Master (ME/M.Tech.) degree were 8% and others are only 2%. Thus, he submitted that the assessees manpower do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k end operations like computer aided engineering and computer aided design etc. He submitted that this sentence is not included in inter-company agreement with AE. He has also drawn our attention to the ITAT orders in the assessee's own case for the earlier AYs wherein for the AY 2008-09 to 2010-11, the assessee has been held to be ITeS and E-Clerx Ltd has been directed to be excluded on account of functional dissimilarity and an extra ordinary event. He submitted that only for the AY 2011-12 and 2012-13 the assessee has been held to be comparable with E-Clerx Ltd which is a KPO. He therefore, tried to distinguish the said decisions from the facts of the case for the AY before us. As far as the comparability of E-Clerx Ltd is concerned, he submitted that financials of E-Clerx Ltd are not reliable as segmental details are not available. He submitted that E Clerx Ltd is rendering both ITeS and KPO services and the TPO has taken the entity level results as no segmental results are available. He also submitted that the business model of the E Clerx Ltd is different as it outsources most of its work. Therefore, he sought exclusion of this company from the final list of comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of functions performed by Hyundai India and its AEs under IT Enabled Services Functions Hyundai India AEs IT Enabled Services Identifying the customer No Yes Identifying the need for research services No Yes Conceptualizing basic design No Yes Negotiation of contractual terms with customers No Yes Imparting training No Yes Recruitment of manpower - Technical Yes No Rendering and delivering CAD/CAE related engineering design services Yes No Supervision and quality review of the services Yes No Connectivity-Server transmitting data will be located at Hyundai Group & KMC Korea No Yes Summary of risks assumed by Hyundai India and its AE's under IT Enabled Service Risks Hyundai India AEs Market Risk No Yes Service liability risk NO Yes Customer credit risk No Yes Foreign Exchange risk Yes Yes Technology risk No Yes Manpower risk Yes Yes Legal & statutory risk Yes Yes 17. As far as E-Clerx Ltd is concerned, according to its Annual Report, it performs the following services: 18. Financial Services eClerfx enables financial institutions to balance these priorities by partnering with them to increase control, exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceptional item and tax 14,002 31.6 12,274 33.4 Dividend income - - 83 02 Profit before tax 14,002 31.6 12,357 33.6 Tax expense 3,808 8.6 3,241 8.8 Profit after tax and exceptional item 10,194 23.0 9,116 24.8 23. The function-wise classification of the Consolidated Statement of Profit and Loss is as follows: Year ended March 31 2014 % 2013 % Income from software services and products 50,133 100.0 40,352 100.0 Software development expenses 30,804 61.4 24,179 59.9 Gross profit 19,329 38.6 16,173 40.1 Selling and marketing expenses 2,625 5.2 2,034 5.0 General and administration expenses 3,323 6.7 2,606 6.5 5,948 11.9 4,640 11.5 Operating profit before depreciation 13,381 26.7 11,533 28.6 Depreciation and amortization 1,317 2.6 1,099 2.7 Operating profit 12,064 24.1 10,434 25.9 Other Income 2,664 5.3 2,365 5.9 Profit before tax 14,728 29.4 12,799 31.8 Tax Expense 4,072 8.1 3,370 8.4 Profit for the period before minority interests 10,656 21.3 9,429 23.4 Less: Minority expenses - - - - Profit for the period 10,656 21.3 9,429 23.4 Break-up of Revenue as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value-add, IT-enabled service provider for publishing activities including e-Pub and be a leader in this area. This strategic intent is to play a major part in preparing India's skills, abilities and cost-advantages and to contribute to India's domination of IT-enabled services in the coming years. 27. Statement of P&L for the year ended 31.03.2014 Particulars Note No For the year ended 31-Mar-2014 (INR in lakhs) For the year ended 31-Mar 2013 (INR in lakhs) Revenue from operations (Net) 21 18,829.21 16,399.59 Other Income 22 666.60 497.80 Total Revenue 19,495.81 16,897.39 Expenses Changes in inventories of work-in-process 23 106.76 35.40 Employee benefits expense 24 7,806.54 7,712.43 Finance costs 25 38.43 58.77 Depreciation and amortization expense 11 505.22 736.17 Other expenses 26 4,444.28 4,360.01 Total expenses 12,901.23 12,902.78 Profit before tax 6,594.58 3,994.61 Tax Expense Current tax 2,240.45 1,221.99 Less: MAT credit - (294.14) Excess: provision for tax relating to prior years - (47.63) Net current tax expense &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that these decisions cannot exactly be binding on this Tribunal for the relevant AY, where the AO/TPO have considered the assessee as an ITeS service provider and not as a KPO. Further, as pointed out by the ld Counsel for the assessee, The TPO has himself has not taken E-Clerx Ltd as a comparable for the AY 2013-14. Therefore, we direct the TPO/AO to exclude this company from the final list of comparables to the assessee. 33. Further, as regards Infosys BPO Ltd, we find that it is also a product development company as seen from its expenses towards products and also income from sale of products. Further, we also find that this company is having Intellectual Property Rights and a brand value. Therefore, we hold this company to be not comparable to the assessee and direct the TPO/AO to exclude this company from the final list of comparables. 34. As regards MPS Ltd, though we find that it has huge Plant & Machinery and has incurred huge expenses towards Repairs and Maintenance, we also find that it has described itself as an ITeS service provider, and that its outsourcing cost is Rs. 10.78 crores only. Therefore, it is functionally similar to the assessee and therefore, can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have rejected the adjustment to the assessee. In support of his contention that the working capital adjustment is required to be given, he has placed reliance upon the decision of the Coordinate Bench in the case of Kenexa Technologies (P.) Ltd. (cited Supra). The Coordinate Bench in the said decision at Paras 27 and 28 of its order has held as under: "27. With respect to ground No. 2.4, with regard to grant of working capital adjustment, we rely on the decision of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT, ITA No. 120/PN/2011, dated 4.1.2012, wherein it has been held as follows: "We have so far analysed Rule 10B(1)(e) on one side and other sub-rules in the context of TNMM and we have analysed the need for elimination of the difference, if any, in the comparable uncontrolled transactions which materially affect the profit margin in the open market." 28. Hence in the instant case, we are of the opinion that appropriate working capital adjustment is required to the margins of comparable uncontrolled transactions to generate credible comparable data on transactional net margins since the TNMM is applied. Hence, we set aside this issue to the TPO with a direction to al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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