TMI Blog2020 (8) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion of domestic sales. TPA - Comparable selection - Re-characterised the business of the assessee as KPO service provider and has considered companies engaged in the business of providing KPO service in the final set of comparable companies - HELD THAT:- We have carefully considered the outsource service agreement dated 20.02.2010 entered into between the appellant with its AE. We find that the scope of work carried out by the appellant is merely data processing/ data feeding - We further find that in A.Y 2011-12, the Tribunal in assessee s own case has held that the appellant is not a KPO. Considering the past and the future history of the appellant, we hold that the assessee is an ITES company, therefore, comparable companies which pertain to KPO service provider are directed to be excluded. Comparable selection - Considering the appellant as ITES service provider companies functionally dissimilar with that of assessee need to e deselected from final list. TPO has adopted RPT filter @ 25% - RPT filter in excess of 25% company should be excluded from final set of comparables. Infosys BPO Ltd. need to be excluded as comparable Eclerx Services Ltd. a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate method with PLI OP/OC. 6. The assessee computed its PLI at 19.05% whereas the same was computed at 13.61% by the TPO. 7. While computing the operating margin of the appellant company, the TPO excluded the following: i. FOREX Fluctuation ii. Domestic Revenue iii. Prior period expenses 8. The first grievance of the assessee relates to the re-computation of operating margin by the TPO. Before us, the Counsel for the assessee vehemently stated that in so far as the FOREX Fluctuation is concerned, the Tribunal in assessee s own case for A.Y. 2011-12 in ITA No.6078/Del/2012 has held that profit/ loss arising from FOREX Fluctuation is in the nature of operating income. Copy of the order was supplied. 9. Per contra, the DR strongly supported the findings of the lower authorities. It is the say of the DR that the FOREX gains/ loss on receivable is arising on account of change in FOREX rate at the time of realization after booking the sales at a different FOREX rate. This does not have any bearing on the transaction which is already been undertaken and therefore cannot affect the arm s length price of the transaction. The DR further stated that the assessee may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile working out the profit margin of the appellant. 12. In so far as, prior period expenses are concerned. The Counsel drew our attention to the decision of the Co-ordinate Bench in the case of Tupperware India Pvt. Ltd. in ITA No.2140/Del/2011 wherein the Tribunal has held that prior period expenses are not to be considered as part of operating expenses for the purpose of calculating the operating margin. 13. Per contra, The DR supported the findings of the lower authorities. We have given a thoughtful consideration to the order of the authorities below. In our considered view prior period expenses which are charged to the P L account relates to a period prior to the year under consideration. Therefore, to determine the correct operating profit for the year under consideration, the same should not be considered as part of the operating expenses for the year. A similar view was taken by the Co-ordinate Bench in the case of Tupperware India Pvt. Ltd. (supra). The relevant findings of the Co-ordinate Bench read as under: Table 2: Particulars F.Y. 2003-04 Sales 564,764,554 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... items should be excluded while calculating the PLI. The decisions of the Hon'ble ITAT in case of Sony India and Honeywell Automation India Ltd. quoted above also supports the same view. 14. In the light of the aforesaid observation of the Co-ordinate Bench, we direct the AO/TPO not to consider prior period expenses as part of operating expenses. 15. In so far as domestic revenue is concerned. In our considered view, the same cannot be taken into account for computing the operating profit as under the TP adjustments. The transactions and revenue related to the associated enterprises are considered to determine the arm s length price of a transaction. In our considered view, if the domestic sale were to be taken into consideration, the bench marking analyses for determining the ALP of a transaction would be skewed. We accordingly confirmed the exclusion of domestic sales. 16. Proceeding further with the other grievance of the assessee, we find that the TPO has re-characterised the business of the assessee as KPO service provider and has considered companies engaged in the business of providing KPO service in the final set of comparable companies. We have carefully con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lvement of advance skills; the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management, etc. We further find that Co-ordinate Bench of the Tribunal in assessee s own case for A.Y. 2010-11 has held the characterization of the nature of service rendered by the assessee to be high-end ITES services . We further find that the DRP while deciding the issue for A.Y. 2013-14 has rejected the TPO s contentions of considering the assessee as the KPO service provider and held assessee to be a routine ITES company. Before us, Learned DR has supported the re-characterization made by the TPO and submitted that though the business of the assessee would have been characterized as ITES in earlier and subsequent year but in view of the principle of res judicata being not applicable to income tax proceedings and each assessment year being distinct and different, the order of TPO needs to be upheld. We are aware of the principles that res judicata principle is not applicable to the income tax matters but at the same time it is also a settled law that there ought to be uniformity in treatment and consistency when fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts exclusion by holding that the services provided by it in the nature of high end services coming within the category of Knowledge Process Outsourcing (KPO) and it cannot be compared with a low end service provider. We further find that Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has held that a company engaged in the KPO services cannot be a appropriate comparable for the purpose of benchmarking international transaction of BPO services. In view of these facts, we are of the view that the aforesaid company needs to be excluded as a comparable company and accordingly direct its exclusion. ii. BNR Udyog Ltd. 22. The Counsel for the assessee at the very outset stated that though the TPO has adopted RPT filter @ 25% but did not consider the exclusion of this company which has RPT of 47.95%. The Counsel furnished the computation of RPT to sales. A perusal of the computation filed by the Counsel show that the RPT/ sales ratio of this company comes to 47.95%. We accordingly direct the AO/ TPO to examine the computation of RPT/ sales and if found in excess of 25% this company should be excluded from final set of comparables. iii. Infosys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given a huge amount to TCS towards brand equity. Further there was no segmental bifurcation between the transaction processing and technical services. The assets employed by TCS E-Serve along with huge intangibles in the form of brand value were found to have a definite considerable effect on its PLI. These factors vitiated its comparability under the FAR analysis with the tested company, which could be a capital service provider without much intangible and risks. 25. In this context it requires to be noted that the ITAT also referred to the decision of this Court CIT v. Agnity India Technologies Private Limited (2013) 36 Taxmann.com 289. 26. The Court may also note that the Karnataka High Court has in PCIT v. Softbrands (2018) 406 ITR 513 (Kar) noted as under: 48. The Tribunal of course is expected to act fairly, reasonably and rationally and should scrupulously avoid perversity in their Orders. It should reflect due application of mind when they assign reasons for returning the particular findings. 49. For instance, while dealing with comparables of filters, if unequals like software giant Infosys or Wipro are compared to a newly established small size Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not, in terms of the law explained in the above decisions, either a sole or a reliable yardstick to determine the apposite choice of comparables. 29. For all of the aforementioned reasons, the Court finds merit in the contention of the Assessee that both the impugned comparables viz., TCS E- Serve Limited and TCS E-Serve International Limited ought to be excluded from the list of comparables for the purposes of determining the ALP of the international transactions involving the Assessee and its AEs. Conclusion 30. For the aforementioned reasons, the question framed is answered in the negative i.e. in favour of the Assessee and against the Revenue. The impugned order of the ITAT as well as the corresponding orders of the DRP and TPO on the issue are hereby set aside. The appeal is allowed in the above terms but in the circumstances no order as to costs. iv. Eclerx Services Ltd. 26. The Counsel stated that this company has been rejected by the Tribunal in assessee s own case in A.Y. 2011-12 in ITA No.6078/Del/2015 on the ground that this company is a KPO service provider. The relevant findings of the Co-ordinate Bench read as under: 47. With respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value: that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld. 31. With our utmost respect to the decision of the Co-ordinate Bench, the higher wisdom of the Hon ble Jurisdictional High Court should prevail. We, therefore, respectfully following the findings of the Hon ble Jurisdictional High Court (supra), direct for the exclusion for this company from the final set of comparables. 32. In the light of the afore mentioned findings, we hold accordingly. 33. The last grievance relates to the charge of interest u/s 234C of the Act. We direct the AO/ TPO to charge interest u/s 234C of the Act on the returned income of the assessee as per the provision of law. 34. In the result, appeal of the assessee in ITA No.1178/Del/2017 is allowed. ITA No.4607/Del/2017 for A.Y. 2013-14 35. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off, if they constituted a part of block of assets. The claim of the assessee may be allowed otherwise not. 41. Pursuant to the direction of DRP, the AO once again examined the claim and the assessee was asked to furnish the details once again. It was explained that the assessee has received an insurance claim of ₹ 23,428/- against the damaged computer and the value of computer is included in the block of assets. The AO was of the opinion that since the assessee has received the claim of ₹ 23,428/- against the damaged computer from the insurance company and has offered this receipt as profit and the difference of ₹ 1,977/- has been added back by the assessee itself in the computation of income. It is evident that the assessee has already deducted the cost of ₹ 21,451/- while computing the profit on sale of fixed assets. Accordingly, the AO disallowed the claim of deduction of ₹ 21,451/-. 42. Before us, the Counsel for the assessee stated that even if the assets have been written off the assessee is still entitled for the claim of depreciation on the block of assets. We have carefully perused the assessment order, we do not find anywhe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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