TMI Blog2018 (12) TMI 1852X X X X Extracts X X X X X X X X Extracts X X X X ..... rity - HELD THAT:- The taxpayer during the year under assessment entered into international transactions qua provision of Information Technology Enabled Services (ITES) in the form of provisions of services in the nature of payroll processes, account processes, etc. thus companies functionally dissimilar with that of assessee need to be deselected. - ITA No.845/Del./2016, CO No.95/Del/2016 (in ITA No.845/Del./2016) - - - Dated:- 20-12-2018 - HON BLE VICE PRESIDENT, SHRI G.D. AGRAWAL AND SHRI KULDIP SINGH, JUDICIAL MEMBER For the Appellant : Shri Ajay Vohra, Senior Advocate , Shri Neeraj Jain, Advcoate , Shri Romit Katyal, CA , Shri Sahil Sharma, CA , For the Respondent : Shri Sanjay I. Bara, CIT DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : The aforesaid appeal filed by the assessee and cross objections filed by the Revenue are being disposed off by way of consolidated order to avoid repetition of discussion. 2. The Appellant, M/s. Timex Group India Limited, (hereinafter referred to as the taxpayer ) by filing the present appeal sought to set aside the impugned order dated 31.12.2015 passed by the AO in consonance with the orders passed by the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,36,589 4 Minimum Guarantee 4,41,44,493 5 Sales promotion 2,10,25,281 Total 11,25,29,382 3.3 Without prejudice, the DRP/TPO erred on facts and in law in applying markup of 42.19%, being gross profit margin of the comparable companies, on the alleged excess AMP expenditure incurred by the appellant, while computing the value of compensation to be received by the appellant on account of promotion of 'Timex' brand. Provision of back office support services 4. That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to ₹ 40,66,466 in relation to the transaction of provision of back office support services undertaken by the appellant. 4.1 That the TPO erred on facts and in law in comparing the appellant, providing routine back office support services, with the following functionally different companies for the purpose of benchmarking analysis: i. Accentia Technologies Ltd. ii. Acropetal Technologies Limited(Seg) iii. Eclerx Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 22 of the Income Tax (Appellate Tribunal) Rules, 1963, the following grounds may kindly be considered as a cross objection: (i) That in the facts and circumstances of the case the Ld. DRP erred in rejecting the Bright Line Test Method adopted by the Transfer Pricing Officer for determining the values of ALP. (ii) That the revenue reserves the right to amend, modify, add to or withdraw the above grounds of cross objection. 4. Briefly stated the facts necessary for adjudication of the controversy at hand are : The Timex Group India Ltd., a subsidiary of Timex Group Luxury Watches B.V. is into designing, manufacturing and marketing innovative timepieces and jewellery. Timex Group companies include the Timex Business Unit (Timex, Timex Ironman, Opex, TX, Nautica, Marc Ecko); Timex Group Luxury Watches (Valentino, Salvatore, Ferragamo); Sequel (Guess) and Vertime (Versace, Versus). The Time Group s brand portfolio include global brands like Timex, TX, Versace, Versus, Valentino, Guess, Vincent Berard, Guess Collection, Ferragamo, Ecko, Nautica and Opex. 5. During the year under assessment, the taxpayer entered into international transactions as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. So, the ld. TPO by taking into account the Prime Lending Rate (PLR) of State Bank of India (SBI) and ultimately added mark-up at 12.26%. Consequently, the ld. TPO computed the ALP of reimbursement on the basis of percentage AMP to sales by applying the bright line limit as under :- Advertisement, marketing and sales promotion (A) 24,86,90,000 Total Expenditure on AMP (B) 24,86,90,000 Sales of assessee (C) 175,68,00,000 AMP% of assessee [D = B/C*100] 14.16% Arm s length level of AMP% (E) 1.81% Arm s length level of AMP expenses [F=C*E%] 3,17,98,080 Amount spent in excess of bright line and on creation of marketing intangible [G=B-F] 21,68,91,920 Mark-up @ 12.26% 2,65,90,949 The amount by which the assessee company should have been reimbursed by AE [I = G+H] 24,34,82,869 9. However, in compliance to the directions issued by the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpayer in India, it being operated as a full-fledged manufacturer and full risk bearing distributor. It is also not in dispute that the TPO has applied bright line method for determining the existence of international transaction in order to compute the ALP of such transaction. It is also not in dispute that the ld. TPO has proceeded on the premise that the taxpayer by incurring nonroutine marketing (AMP) activities has not only enhanced the brand value of its AE in India but has also developed marketing intangible for the AE which enhanced sale and provided benefits to the AE. It is also not in dispute that the TPO has added markup of 12.26% on the ground that the taxpayer has significantly assumed greater risk than the ALP. 16. Pursuant to the show-cause notice dated 05.01.2015 issued by the ld. TPO, the assessee has conducted fresh search to select the comparables. Accordingly, the taxpayer has selected 4 comparables viz. (i) HMT International Ltd.; (ii) KDDL Ltd.; (iii) Kamla Retail Ltd.; and (iv) Titan Industries Ltd. 17. The ld. TPO out of the 4 comparables rejected HMT International Ltd. and Titan Industries Ltd. as comparables chosen by the taxpayer and finally sele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions involving AMP can be computed. 23. It is further contended by the ld. AR for the taxpayer that quantitative adjustment made by the TPO on account of AMP expenses is not permissible within the framework of Chapter-X as has been held by the Hon ble Delhi High Court in Maruti Suzuki India Ltd. v. CIT ITA No.110/2014 710/2015). Hon ble High Court has categorically held that none of the substantive or procedural provisions of Chapter-X permits adjustment on account of AMP expenses. 24. The taxpayer has contested before ld. DRP that incurring of AMP expenses are not international transactions and BLT method has no statutory basis to infer the existence of international transactions qua AMP expenses, however, the ld. DRP has proceeded to hold inter alia that incurring of AMP expenses is an international transaction and directed to exclude the routine selling and distribution expenses and directed the TPO to use the cost plus method and further directed to apply the markup on excess AMP expenses as per sub-clause (ii) of Rule 10B(1)(c). 25. However, we are of the considered view that following the decision rendered by Hon ble Delhi High Court in Maruti Suzuki India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sustainable in the eyes of law. At the same time, we cannot ignore the submission made by the learned DR that the matter is pending before Hon'ble Apex Court and the decision of Hon'ble Apex Court would be binding upon all the authorities. In view of the above, we set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal position as of now and discussed above in this order, the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. However, if the above decisions of Hon'ble Jurisdictional High Court which is under consideration before the Hon'ble Apex Court is modified or reversed by the Hon'ble Apex Court, then the Assessing Officer would pass the order afresh considering the decision of Hon'ble Apex Court. In those circumstances, he will also allow opportunity of being heard to the assessee. GROUNDS NO.4 TO 4.8 29. The taxpayer during the year under assessment entered into international transactions qua provision of Information Technology Enabled Services (ITES) in the form of provisions of services in the nature of payroll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of Information Technology Support Services (ITSS) involving payroll processing, account processing, etc. services as software development services, as KPO services. So, ITES consisting of payroll processing, account processing, etc. cannot be treated as KPO services. It is contended by the ld. AR for the taxpayer that as against the directions issued by the DRP that all the comparables to be taken for benchmarking the international transactions should be of BPO services, but the ld. TPO has chosen all the companies as comparables which are into KPO services. So, we would discuss the aforesaid comparables challenged by the taxpayer one by one to examine their suitability vis- -vis the taxpayer. ACCENTIA TECHNOLOGIES LTD. (ACCENTIA) 34. After DRP s order, ld. TPO has introduced Accentia having OP/TC of 29.18% as a comparable which the taxpayer has challenged for exclusion on the ground that Accentia is engaged in providing KPO services as well as software services to its AE and it also owns various software products, namely, (i) instakare, (ii) instaweb, (iii) instaPMS, (iv) instaScribe etc.. 35. We have perused the annual report of Accentia, relevant information is av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected Accentia as a comparable even against the directions issued by the ld. DRP that company engaged in KPO services is not to be selected as comparable. So, in these circumstances, we order to exclude ccentia being not a valid comparable. ACROPETAL TECHNOLOGIES LTD. (SEG.) (ACROPETAL) 38. TPO has selected Acropetal (segment) which is challenged by the taxpayer on the ground that it is engaged in provision of providing high-end services in hospital management system, electronic medical records, PACS, diagnostics and workflow management. Perusal of annual report of Acropetal, relevant portion available at page 95 of the annual report paper book, shows that within ITES segment, Acropetal is engaged in health care by providing high end services viz. hospital management system, electronic medical records, PACS, diagnostics and workflow management. So, providing high end health care services require application of specialized knowledge and skill, which otherwise cannot be compared with routine ITES provider. 39. Hon ble Delhi High Court in Rampgreen Solutions P. Ltd. vs. CIT (2015) 377 ITR 533 (Delhi) defined the Knowledge Process Outsourcing (KPO) as a high value added ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Solutions P. Ltd. vs. CIT (supra) is applicable to the facts and circumstances of the case in which Eclerx has been specifically ordered to be excluded as a comparable vis- -vis routine ITES services provider on the ground that Eclerx is into Knowledge Process Outsourcing (KPO) services. So, in these circumstances, we find Eclerx is not a valid comparable, hence ordered to be excluded from the final set of comparables. ICRA TECHNO ANALYTICS LTD. (ICRA) 44. The taxpayer sought exclusion of Icra by again relying upon Rampgreen Solutions P. Ltd. vs. CIT (supra) on the ground that it is engaged in the provision of business intelligence and analytic services. Annual report of Icra, available at page 319 of the paper book, explains the services being rendered by it are as under :- The company is engaged in the software development consultancy, engineering services, web development hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing. 45. So, when Icra is into providing software development and high end analytic services, the same cannot be taken as a comparable for benchmarking the international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovider. So, keeping in view the turnover of Infosys BPO which is ₹ 1129.11 crores against ₹ 2.60 crores of the taxpayer and Infosys BPO is having a huge brand value with considerable R D activities, it cannot be a valid comparable vis- -vis taxpayer. 49. In the similar set of facts, Infosys BPO has been ordered to be excluded by the coordinate Bench of the Tribunal in Hyundai Motors Engineering India Pvt. Ltd. vs. ITO (ITA No.1850/Hyd/2012) and Capital IQ information Systems (India) Pvt. Ltd. (ITA No.124/Hyd/2014). 50. In view of what has been discussed above, we find that Infosys BPO is not a valid comparable vis- -vis taxpayer, hence ordered to be excluded. TCS E-SERVE LIMITED (TCS E-SERVE) 51. The taxpayer sought exclusion of TCS E-serve again on the ground that it is into providing Knowledge Process Outsourcing (KPO) services. When we examine the TCS E-serve overview in the annual report, available at page 550 of the annual report paper book, it shows that it is providing a broad range of services that cater to process management requirements for delivery of wide range of financial products and enterprise support function which include financial informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cesses, collections, risk management, and analytics, and has created a lot of applications which are in the nature of intellectual property in terms of reconciliation software, fund transfers, etc. The company also undertakes software testing and validation activities. Possession of intellectual property rights has to be factored if such a company is to be taken as comparable. This cannot be done unless there is appropriate data. Further, from the TP study we observe that, this company is a wholly owned subsidiary of TCS E serve International Ltd. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post acquisition. Hence we are of the opinion that this company cannot be taken as a comparable. We therefore direct to exclude this comparable. 56. In view of what has been discussed above, we are of the considered view that TCS E-serve being into high end KPO services and is also exploiting brand TATA cannot be a valid comparable vis- -vis taxpayer which is a routine ITES provider. So, we ordered to exclude the same. 57. In view of our findings, groun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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