TMI Blog2020 (5) TMI 512X X X X Extracts X X X X X X X X Extracts X X X X ..... .TPO, as against average of multiple year data used by assessee transfer pricing document. This in our view is in accordance with the rules specified. We, therefore, do not find any infirmity in analysis carried out by Ld.TPO by using relevant year data. Valid filter for assessing comparability - Assessee before us has turnover of ₹ 98.25 crores so, turnover filter of ₹ 9 crores on lower side to ₹ 980 crores on upper side, should be considered provided the functional similarities stands satisfied. We note that companies that have been pointed out by assessee is very large company that has turnover more than ₹ 1000 crores. Assessee has been categorised to be a captive service provider having turnover of 98.25 crores. Further it is noted that assessee do not own any intangibles whereas, the company alleged for exclusion by assessee by applying turnover filter owns huge brand, holding invaluable intangibles and are engaged in diversified activities. We therefore are of opinion that turnover is a valid filter for assessing comparability. Functionality - Companies functionally not comparable with a BPO service provider like that of assessee need to be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute Resolution Panel (hereinafter referred to as the Hon'ble '_I DRV). Bangalore dated 23 August 2018 under section 144C(5) of the Act inter-alia on the following grounds cta are without prejudice to each other: That on the facts and circumstances of the case and in law: 1. Impugned order of Ld.AO pursuant to directions of Ld. DRP, erred in assessing the total income at INR 32.6034,282, as against returned income of INR 15,70,57,200; 2 Ld.AO DRP and TPO erred in making addition of INR 16,89,77,082 to total income of Appellant on pretext that price charged was lower than arm's length price determined for Information Technology Enabled Services ( ITeS ) rendered by Appellant to its AE(s), 3 Impugned final assessment order passed by Ld.AO is invalid being not in conformity with section 144C (13) of the Act 4 L.d.AO DRP and TPO erred, in law and in facts, by not accepting economic analysis undertaken by Appellant in accordance with the provisions of the Act read with the Rules, and in conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dal Intellicom ) iv. R Systems International Limited ( R Systems ) v. Datamatics Financial Services Limited ( Datamatics ) c) Ld.AO, DRP and TPO erred, by rejecting the following comparable companies that were a part of the search undertaken by Id. TPO even though such companies are functionally comparable to the Appellant. i. Harton Communications Limited ( Hartron ) d) Ld.AO DRP and TPO erred, by rejecting ACE Software Exports Limited ( ACE Software ) even though the company is functionally comparable to the Appellant, on ground that it was additionally proposed to be included by the Appellant during TP Assessment proceeding. Although some of the companies were chosen/ not chosen as comparables in the transfer pricing study, r :ase upon consideration of more details being available in public domain or subsequent decisions ay of such companies if found to be not comparable for any reasons, appellant craves leave to urge am sane at the time of hearing. 10. Without prejudice to and in addition to above Ld.AO, DRP and TPO should have excluded Infosys BPO, Eclerx and MPS from comparison considering that income was earned by these companies by differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld.AO has erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act. Appellant submits that each of above grounds is independent and without prejudice to one another. Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at y time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law. Brief facts of the case are as under: 2. Assessee is a company and filed its return of income for year under consideration on 28/11/15 declaring income of ₹ 18,12,97,820/-. The case was selected for scrutiny and notice under section 143(2) was issued to assessee. Notices under section 142 (1) was also issued to assessee in response to which representative of assessee appeared before Ld.AO and filed required details as called for. Ld.AO observed that assessee had international transaction with associated enterprises which exceeded ₹ 15 crore and accordingly this matter was referred to Ld.TPO. Ld.TPO upon receipt of reference, called upon assessee to file economic details of international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been declared sick or had persistent negative net worth This is an appropriate filter 4 Companies that have turnover less than 1 crore This is an appropriate filter 5 Companies having different functions as compared to the assessee company A subjective filter. To be seen on a 6 Companies that do not have significant case to case (less than 25 percent) foreign exchange earnings Inappropriate filter. The TPO has applied more 7 Companies thathadsubstantial (in appropriate filter. excess of 25%) transactions with related parties This is an appropriate filter 8 Companies that have persistent operating losses This is an appropriate filter 9 Companies that have exceptional years of operations Inappropriate filter. The TPO has 10 Companies that are duplicated in the applied more databases with different names or merged to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain companies selected by assessee in TP study: Companies for which current year data was available; Comparables having different accounting year (other than March 31 or companies whose financial statements were for a period other than 12 months); Companies having a turnover less than INR 1 crore; Companies having revenue from IT enabled services less than 75% of the total operating revenues as a comparability criterion; Companies having related party transactions greater than 25% of the total revenues as a comparability criterion; Companies having export service income less than 75% of sales as a comparability criterion; Companies with employee cost less than 25% of turnover were excluded; Companies that are functionally different from the Appellant . 10. Assessee during the Transfer Pricing assessment proposed to additional comparables being, Harton Communications Ltd and Tech Mahindra Business Services Ltd., as additional companies, which were subsequently rejected by Ld.TPO. Final list of comparables selected by Ld.TPO are as under: 11. The margin computed by Ld.TPO was 37.79% and thereby proposing adjustment being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... multiple year data could be used only from assessment year 2015-16 and therefore Ld.TPO was right in rejecting the transfer pricing analysis submitted by assessee. He submitted that assessee though objected for rejection of average of multiple year data, during Transfer Pricing assessment proceedings, the Ld.TPO had called upon assessee to file its response in respect of use of single year data, as per Rule 10B(4). He submitted that assessee in response to the notice, suggested new comparables for relevant assessment years, and therefore no prejudice is caused to assessee. 20.3. We have perused submissions advanced by both sides in light of records placed before us. Various arguments were raised by both sides in support of their contentions. 20.4. It has been noted that Rule 10B(4) casts obligation on assessee to conduct comparability analysis using data for relevant financial year. Proviso to Rule 10 B (4) would apply only in a situation where, Tata relating to relevant financial year reveals facts which could influence determining transfer price. Further rule 10 B (5) gives an option of using either of the method with the proviso that at the time of determination of ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been dealt with by this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT in (2018) 96 taxmann.com 263 for assessment year 2005-06 . This Tribunal reviewed gamut of case laws to consider, whether companies having turnover should be regarded as comparable with a company having turnover less than ₹ 200 crore. 21.4. Most of the decisions of this Tribunal are in favour of opting for limit at lower-end of 1/10 and upper side of 10 times of turnover of comparables under consideration of TP benchmarking. Considering the fact that, present year under consideration is 2015-16, turnover limit of companies for being tested under this filter should be lower side turnover of 1/10 to turnover of 10 times would be appropriate. Thus, in our view also, testing comparable with 10 times below and 10 times above the turnover of the assessee, appears appropriate. Only restriction is that such comparables also should be functionally comparable with assessee. In our view, turnover filter would vary from company to company depending on functional comparability. 21.5. This view originates from decision of coordinate bench of this Tribunal in case of ACIT Vs. M/s McAfee Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MPS Ltd. B. Assessee is seeking inclusion of; Harton communications Ltd 22.1. Before we undertake comparability analysis, it is sine qua non to understand functions performed, assets employed and risks assumed by assessee under this segment. I. Functions: Operation 1: Business Application Support ('BAS'), Claims Processing Support, L H Underwriting support, Economic research, Life Experience Analysis, Corporate Actuarial, CATPerils India, Actuarial Services Special Line, RLM Global Support, Operation 2: Technical Accounting for P C reinsurance, Technical Accounting for L H reinsurance, Finance Coc. During the year assessee provided following back-office support to its associated enterprise: Administrative service functions: Assessee provides assistance in day-to-day management of organisation like finance, human resource, Information Systems. Assessee is in fact responsible for arranging necessary resources and is responsible for managing its own cash flow, accounts payable, accounts receivable. Project management: Assessee jointly with its associated enterprise undertake project management. Though the project is managed locall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finance and accounting legal process outsourcing, sales and fulfilment, analytics, business platforms, business transformation services, human resource outsourcing and technology solution optimisation. It is noted that this comparable also provides services in financial services and insurance, manufacturing, energy utilities communications and services and retail, consumer packaged foods, logistics and life services. Further in the annual report it has been mentioned that this comparable provides services that are different from routine back office services. This noting itself makes this comparable not functionally similar with that of assessee. Accordingly we direct this comparable to be excluded from finalist. b) Microland Ltd This company was selected by Ld.TPO despite various objections raised by assessee. Ld.AR submitted that this comparable money is functionally not similar with that of assessee, as it is involved in providing cloud computing related services and provides high end ITES services. Ld.AR also submitted that this company is engaged in infrastructure management services also. Further it has been submitted that Ld.TPO considered this comparable at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es on contract basis. Ld.AR has placed reliance upon decision of Hon able Delhi High Court in case of Rampgreen Solutions Ltd. vs.CIT, reported in [2015] 60 taxmann.com 355 Hon ble court had held that once a company falls into the category of high-end KPO, it cannot be functionally comparable with a BPO service provider like that of assessee. Applying this reissue in the present case, we direct Ld.AO to eliminate this comparable from final list. d) Crossdomain Solutions Pvt.Ltd. Ld.AR submitted that this comparable was considered by Ld.TPO. It has been submitted that Ld.TPO used information in under section 133 (6) which was not made available to assessee. Ld. CIT DR submitted that the details collected under 133 (6) was provided to assessee in soft copy for its comments. Ld.AR as rejoinder submitted that CD was provided to assessee however the information was contrary to the details available in public domain. He submitted that assessee had requested for cross examination of the person who had provided the information under section 133 (6) that was denied by Ld. TPO. He thus submitted that due process of law has not been followed by Ld.TPO. Considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that of assessee. Assessee is directed to provide all relevant details/information regarding this comparable to Ld.AO/TPO. Ld.AO/TPO shall then verify all details filed by assessee and then decide upon the comparability based upon FAR analysis with assesssee. Needless to say that, proper opportunity of being heard shall be granted to assessee in accordance with law. Accordingly this comparable is set aside to Ld.AO/TPO. B. Alleged for inclusion a) Hartron Communications Ltd: It has been submitted that, Ld.TPO/DRP rejected this comparable, as it was persistent loss making company and has incurred losses in BPO segment in two years, out of preceding 3 years. Ld.AR submitted that relevant segmental detail only was to be considered, whereas, Ld.TPO considered revenue earned by this comparable on entity level. It has been submitted that, this crucial objection raised by assessee, has not been considered by authorities below. In support of, Ld.AR placing reliance on decision of Pune Tribunal in case of Yazaki India Pvt Ltd vs DCIT in ITA No.621/Pun/2014 for assessment year 2009-10 by order dated 11/07/2019. On the contrary Ld.CIT.DR placed reliance on observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. (2017) 398 ITR 66 (Del) , held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon able Delhi High Court vide order dated 21/07/16 in ITA No. 379/2016 , also upheld by Hon ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 23.4. On the contrary Ld.CIT.DR submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises? 23.6. Ld.CIT.DR submitted that, while answering above question, Hon ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. In so far as charging of rate of interest is concerned, he relied on decision of the Hon ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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