TMI Blog2019 (7) TMI 1584X X X X Extracts X X X X X X X X Extracts X X X X ..... countant Member And Pavan Kumar Gadale, Judicial Member K.R. Vasudevan, Adv. for the Appellant. Pradeep Kumar and K. Devarathna Kumar CIT-DR for the Respondent. ORDER Jason P Boaz, This appeal by the assessee is directed against the final order of assessment passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short 'the Act') vide order dated 18.09.2018; pursuant to the directions issued by the Dispute Resolution Panel - 2, Bangalore (DRP) under section 144C(5) of the Act on 31.08.2018. The relevant Assessment Year is 2014-15. 2. Briefly stated, the facts of the case are as under:- 2.1 The assessee is a company engaged in providing Information Technology Enabled Services (ITES) to its Associated Enterprises (AEs) such as pay roll processing, cashiering, document imaging, loan accounting, Investor reporting and Internet based customer services. In the year under consideration, the assessee has classified its international transactions as ITES and had conducted its comparability analysis by applying TNMM as the Most Appropriate Method (MAM). 2.2 For Assessment Year 2014-15, the assessee filed its return of income on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transaction. 4. The learned AO/learned TPO/Hon'ble DRP erred in not considering the previous two years financial data of the comparable companies while determining the ALP. 5. The learned AO/learned TPO/Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials. 6. The learned AO/leamed TPO/Hon'ble DRP erred in applying the service income filter of 75% to sales, leading to a narrower set of comparable companies. 7. The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of 75% instead of 25% of the total sales, leading to a narrower set of comparable companies. 8. The learned AO/learned TPO/Hon'ble DRP erred in collating the information that are not publicly available using powers under section 133(6) of the Act. 9. The learned AO/learned TPO/Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Profit Level Indication (PLI) and selected the following set of nine comparable companies: Sl. No. Name of the Company WT. AVG. (M/s.) (%) 1. Allsec Technologies Ltd. -5.11 2. Caliber Point Business Solutions Ltd. 6.98 3. Cosmic Global Ltd. 30.24 4. Informed Techenologics India Ltd. 5.93 5. Sundaram Business Services Ltd. -3.88 6 Techprocess Solutions Ltd. 2.91 7. Acc BPO Services Pvt. Ltd. -0.52 8. c4c Healthcare Business services Pvt. Ltd. 17.08 9. Microgenetics Systems Ltd. 18.54 Arithmetic mean 8.02 As the assessee's margin at 17.67% was higher than that of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned DR for Revenue was heard in the matter. 5. Ground Nos.1 to 9, 13 and 14 5.1 At the outset, the learned AR of the assessee submitted that the assessee is only pressing (i) ground No. 10; pertaining to exclusion of certain comparable companies from the list of comparables; (ii) ground No.11 pertaining to the inclusion of certain comparable companies and (iii) ground No.12 in respect of working capital adjustment. It is submitted that all other grounds i.e., ground Nos.1 to 9, 13 and 14 (supra) are not pressed. In these circumstances, ground Nos.1 to 9, 13 and 14 (supra) are rendered infructuous and accordingly dismissed as not pressed. 6. Ground No.10 - Comparable companies sought to be excluded by the assessee 6.1 In this ground (supra), the learned AR for the assessee seeks exclusion of the following two companies from the TPO's final set of comparables:- (1) Infosys BPO Ltd., and (2) Microland Ltd., 6.2 The learned AR submitted that the assessee is not pressing for the exclusion of the following two companies from the final list of comparables:- (1) BNR Udyog Ltd., and (2) Cross Domain Solutions Pvt. Ltd., 7. Infosys BPO Ltd., ('In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from a perusal of the Annual Report at page 14 thereof, under the head 'Managements Discussion and Analysis', it has been stated that this company provides services to both horizontal and vertical focus areas. The Horizontal focus areas are Sourcing and Procurement (S P), Customer Services (CS), Finance and Accounting (F A), Legal Process Outsourcing (LPO), Sales and Fulfillment (S F), Analytics (AT), Business Platform (BP), Business Transformation Services (BTS), Human Resources Outsourcing (HRO) and Technology Solution Optimization (TSO). The Vertical focus areas of services are Financial Services Insurance (FSI) Manufacturing (MFG), Energy, Utilities Communication Services (ECS) and Retail, Consumer Packaged Foods, Logistics Life Services (RCL). From the above, it is clear that 'Infosys' offers a gamut of different and diversified services which cannot be compared with routine back office services provided by the assessee. In fact, it is mentioned at page 14 of the Annual Report that the company 'Infosys' provides business process management services which are different from routine back office services. It is also seen that this company enjoy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be compared to the functions performed by the assessee, which are routine back-end processing services. It was further submitted that the TPO, in the order for Assessment Year 2015-16, has rejected this company 'Microland' as a comparable on the ground that the IT Infrastructure segment of this company is not comparable to the ITES segment of the assessee as the ITES segment is less than 10% of Microland's total business. The learned AR also submitted that without prejudice to the assessee's contention that this company, 'Microland' is not functionally comparable to the assessee, even if 'Microland' has to be considered as a comparable, then only its ITES segment needs to be considered for comparability analysis. 8.3 Per contra, the learned DR for Revenue supported the orders of the authorities below. 8.4.1 We have considered the rival contentions/submissions put forth and perused the material on record. This company, 'Microland' was selected as a comparable by the TPO. In his order, the TPO has stated that this company 'Microland' is currently organized in business segments, comprising of infrastructure management services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the year under consideration. We also observe that the TPO himself has reached the same conclusion in the subsequent Assessment Year 2015-16; that the Infrastructure segment services segment is not comparable to ITES. 8.4.4 At page 97 of the Annual Report of 'Microland' for the year under consideration, the segmental details of the two business segments are provided from which it is seen that out of the total revenue of ₹ 34,471 lakhs, the revenue from ITES segment is ₹ 1959 lakhs; which is 5.68% of the total revenue. As we have concluded that the infrastructure services segment is a different business segment not comparable to ITES rendered; this company, 'Microland' fails the filter adopted by the TPO that companies whose service income is less than 75% of total operating revenue are to be excluded. In view of the facts and circumstances of the case, as discussed above, and in view of the above factual findings, we hold that Microland Ltd., should be excluded from the final set of comparables in the case on hand. 9. Ground No.11 - Companies sought to be included by the assessee in the final set of comparables 9.1 In this ground (supra), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the rival submissions and carefully perused the material on record. On a perusal of the Annual Report of this company 'Informed', it is seen that at page 12 thereof it is stated that this company is engaged in and operating as an ITES provider. A perusal of the TPO's order also indicates that the TPO has not disputed that this company is functionally comparable to the assessee in the case on hand; which is rendering back office ITES. From a perusal of the profit and loss account at page 30 of the Annual Report of 'Informed' it is seen that the total revenue is shown as ₹ 3,81,38,665/-and 'other income' of ₹ 1,22,85,303/-. As can be seen from Schedule 19 on page 40 of the Annual Report, the 'other income' comprises of non-operating income, interest, dividend, sale of current investments and miscellaneous income and evidently these incomes cannot be considered as operating income. The percentage of 67.7% worked out by the TPO is after considering these other income as service income; which is factually incorrect. It is evident from a perusal of the profit and loss account of 'Informed' that the service income is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, namely BPO Activity . At note 6, the income in foreign currency is shown as ₹ 3,23,08,386/-. In the Director's Report, at page 480 of the paper book, the foreign exchange earnings is given as ₹ 3,23,08,386/-. In the factual matrix of the matter, as laid out above, we are of the considered opinion that the reason ascribed by the TPO and DRP for exclusion of this company, 'Crystal' is factually incorrect. Taking into consideration that the company 'Crystal' is otherwise comparable to the assessee in the case on hand as it is operating as a BPO company which is a provider of ITES, we direct that this company, Crystal Voxx Ltd., be included as a comparable company in the final set of comparables in the case on hand. The AO/TPO are accordingly directed. 12. Jindal Intellicom Ltd., ('Jindal') 12.1 This company, 'Jindal' was proposed by the assessee before the TPO as an additional comparable for inclusion in the final set of comparables. The TPO, however, rejected the assessee's proposal on the grounds that this company 'Jindal' is engaged in providing services of a call centre in the overseas and domestic market; ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the segmental data of domestic and international segments of operation are given; thereby rendering the observations of the TPO is factually incorrect. 12.4.2 As far as the functional comparability of this company, 'Jindal' is concerned, we find that the Co-ordinate Bench of this Tribunal, in the case of CGI Information Systems Management Consultants (P.) Ltd. (supra) has held that this company should be included in the set of comparables for companies rendering ITES and in this regard at para 56 thereof has held as under:- 56. The same reasoning given for including Informed Technologies India Ltd., would apply for including Jindal Intellicom Ltd., also. This company was selected by the Assessee in its TP study and accepted by the TPO as being comparable to it (pages 16-17 of the TP order). Since it passed all the filters applied by the TPO. as subsequently upheld by the DRP, it was rightly included in the list of comparables. In the proceedings before the DRP, the Assessee did not object to its inclusion in the list of comparables. However, despite the above, the DRP on its own directed its exclusion on the premise that since it catered only to customers in US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Assessment Years and the immediately subsequent Assessment Year 2015-16 and respectfully following the decision of the Co-ordinate Bench of this Tribunal in the case of CGI Information Systems Management Consultants (P.) Ltd. (supra), we direct the AO/TPO to include this company 'Jindal Intellicom Ltd.,' in the final set of comparables. 13. Ground No.12 - Working Capital Adjustment 13.1 In this ground (supra), the assessee contends that the TPO/DRP have erred in not allowing appropriate adjustments towards working capital differential existing between the assessee vis- -vis the independent comparable companies. 13.2 In his order, the TPO, after a detailed discussion, held that no working capital adjustment will be allowed. The gist of the reasons adduced by the TPO in his order are as under:- (i) Average working capital will not show the actual working capital employed during the year; (ii) Segmental working capital is not discussed in the Annual Reports. (iii) Cost of capital is different for different companies. The DRP concurred with the reasoning/views given by the TPO and confirmed the action of the TPO in not allowing any working capital adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... domestic 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 (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic 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 length price in relation to the international transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially effect the condition being examined in the methodology (e.g price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rare (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year, (ii) Segmental working capital is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these derails are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable lo a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X
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