TMI Blog2019 (2) TMI 1915X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the working capital adjustment on the basis of advances received from AEs in the absence of debtors and inventory in the case of the assessee for calculating the cost of working capital built in the profit margin - Based on the discussions in the body of the TP order, the assessee had raised objections before the DRP, which had issued directions that no such restriction shall be made on the working capital adjustment and it shall be granted as per actuals. As the working capital adjustment has been granted at actuals i.e., (-)1.40%, without making any restriction as contended by Revenue in the grounds of appeal, ground Nos. 4 and 5 raised on this issue are infructuous as they require no adjudication and are accordingly dismissed as infructuous. Exclusion of M/s. Acropetal Technologies Ltd., (Acropetal) - DRP has not adjudicated on the functional comparability of Acropetal vis- -vis the assessee in the case on hand. Instead, the DRP has rendered a finding that the services rendered by Acropetal are predominantly on-site services and applied the on-site filter. The DRP further directed that Acropetal needs to be excluded from the set of comparables as its employee cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed either by the TPO or the assessee. Since we have taken the stand that if any new filter is applied, it should be applied uniformly on the entire set of comparable companies, we deem it appropriate to remand the issue of comparablity of this company, Sundaram Business Services Ltd., back to the file of the TPO with a direction that the 75% export earning filter, applied, suo moto, by the DRP, be applied on the entire set of comparable companies. Exclusion of Infosys BPO Ltd., (Infosys) on grounds of functional dissimilarity, the application of new filters by the DRP will have no bearing on its exclusion or inclusion as it would continue to remain excluded on grounds of functional comparability. Therefore, we find there is no need to remand the comparability of this company to the file of the TPO, as sought for by the learned DR. Consequently, ground of Revenue s appeal is dismissed. Exclusion of Eclerx Services Ltd. - No infirmity in the order of the DRP and the direction of the DRP to exclude Eclerx Services Ltd., from the set of comparables is upheld, since this company Eclerx is excluded on grounds of functional dissimilarity, the application of new filters by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 144C of the Income Tax Act, 1961 (in short the Act ) pursuant to the directions issued by the Dispute Resolution Panel-1, Bangalore (DRP) u/s 144C(5) of the Act on 11.12.2014. The assessee has also filed Cross Objections (CO) in respect of Revenue s appeal. 2. Briefly stated, the facts of the case are as under: 2.1 The assessee company; a subsidiary of Indecomm Global Services (Mauritius) Pvt. Ltd., provides business process outsourcing (BPO) services in the healthcare, insurance, banking and financial services verticals. These services have been characterized by the assessee as being in the nature of Information Technology Enabled Services (ITES). 2.2 For Assessment Year 2010-11, the year under consideration in these appeals, the assessee filed its return of income on 08.10.2010 declaring a loss of ₹ 30,09,405/- after claiming deduction of ₹ 2,31,68,912/- under section 10A of the Act. The return was processed u/s 143(1) of the Act and the case was taken up for scrutiny for this year. A reference under section 92CA of the Act was made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) for determination of the arms length price (ALP) of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er by placing reliance on the decision of Hon'ble High Court of Karnataka. In the case of M/s Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case, as per the directions of the Dispute Resolution Panel, whether working capital adjustment can be made on the basis of advance received from AEs in absence of debtors and inventory in the case of assessee for calculating the cost of working capital built in the profit margin. 5. On the facts and in the circumstances of the case the Dispute Resolution Panel is not justified in directing the TPO to adjust the profit margin of the assessee for the entire amount of advances received from AE on the ground that there is time value for money. 6. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the TPO/AO to exclude the comparable M/s Acropetal Technologies Ltd., by applying new filter i.e Employee Cost filter in ITES Segment, without appreciating the fact that the direction actually amounts to setting aside of the draft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement which was not relevant for the year under consideration. 3. The learned AO, TPO and the Hon'ble DRP ought to have appreciated the fact that the Appellant provide ITeS services to its AEs under a contractual arrangement for an assured markup on the costs. 4. The learned AO, TPO and the Hon'ble DRP erred in disregarding the economic analysis performed by the Appellant in the Transfer Pricing ('TP') documentation justifying the arm's length nature of the international transactions with the AEs. 5. The learned AO, TPO and the Honble DRP erred in rejecting the TP documentation maintained by the Appellant on invoking provisions of sub-section (3) of 92C of the Act contending that the information or data used in the computation of the arm's length price is not reliable or correct. 6. The learned AO, TPO and the Hon'ble DRP have erred in rejecting the need for use of multiple year data of the companies selected as comparable in determination of arm's length price. 7. The learned AO, TPO and the Hon'ble DRP have erred in rejecting the application of upper turnover filter for selection/ rejection of companies as com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s against the original claim of ₹ 52,24,877. 17. Levy of interest under section 234D The learned AO has erred in levying interest under section 234D of ₹ 642,630 which is consequential in nature to the adjustments ma de to returned income. 3.2.2 The assessee has also raised the following additional grounds of appeal vide letter dated 27.04.2017 Transfer Pricing-Additional Ground of Appeal It is most humbly prayed to the I lon'ble Tribunal to permit the Appellant to raise the following additional ground of appeal in continuation to the existing ground of appeal and be read as Ground No. 10.1, Ground No. 11.1, Ground No. 15 Ground No. 16. Ground No. 10.1: Wrong Computation of net margin on cost of Jeevan Scientific Technology Limited ( Jeevan Scientific ) The Appellant submits that the learned TPO/DRP has erred in wrongly computing the net margin on cost of Jeevan Scientific. Reason for filing Additional Ground of Appeal The Appellant humbly submits that though a ground for rejection of Jeevan Scientific has been taken in the Form - 36B, the Appellant is filing a without prejudice argument of wrong computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nline as it is functionally dissimilar company. Reason for filing Additional Ground of Appeal The Appellant humbly submits that the ld. DRP has rejected ICRA Online as its fails export earning filter criteria. However, the ld. DRP has erred in not adjudicating on the functional dissimilarity reason of ICRA Online which is contradictory to the Appellant's functional profile. Accordingly, the Appellant humbly requests the Hon'ble Bench members to reject ICRA Online as it is functionally dissimilar. 3.2.3 The assessee further filed the following additional grounds vide letter dated 18.09.2017: Transfer Pricing-Additional Ground of Appeal It is most humbly prayed to the Hon'ble Tribunal to permit the Appellant to raise the following additional ground of appeal in continuation to the existing ground of appeal and be read as Ground No. 8.1. Ground No. 8.1: Accentia Technologies Limited ( Accentia ) ought to be rejected from the list of comparable set proposed by the Learned Transfer Pricing Officer ( Ld. TPO ) The Appellant submits that the Learned Assessing Officer ( Ld. AO )/Learned TPO ( Ld. TPO )/Learned Dispute Resolution Pane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transactions are at arms length. 4.3 The TPO analysed the assessee s TP study report and rejected the same for the reasons given in his TP order u/s 92CA of the Act. The TPO then conducted his own comparability search process adopting various criteria/filters and selected the following 10 companies as the final set of comparable companies to the assessee: Sl. No. Name PLI 1. Accentia Technologies Ltd 43.06% 2. Acropetal Technologies Ltd (Seg.) 22.27% 3. E-Clerx Services Ltd 55.97% 4. Fortune Infotech Ltd 22.80% 5. Icra Online Ltd(Seg) 43.39% 6. Informed Technologies India Ltd 26.15% 7. Infosys Bpo 31.23% 8. Cosmic Global Ltd 14.97% 9. Sundaram Business Services Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional grounds have been raised specifically mentioning the companies that are to be included/excluded, for the sake of clarity. 6.1.1 As regards the exclusion of Accentia Technologies Ltd., raised as additional ground No. 8.1, it was submitted that the assessee has sought exclusion of this company before the authorities below and since this company was not specifically mentioned for exclusion in Form 36, the additional ground has been raised seeking exclusion of this company. 6.1.2 As regards additional ground No.10.1 regarding Jeevan Scientific Technologies Ltd., it is submitted that ground No.10 has been raised in Form 36 seeking its exclusion and the additional ground is on the wrong computation of its margin. 6.1.3 As regards the exclusion of ICRA Online Ltd., raised in additional ground No. 16, it was submitted that the DRP had excluded this company on grounds of Export earning filter, which has been challenged by Revenue in its appeal and this additional ground has been raised that the DRP did not adjudicate on the functional comparability of this company. 6.1.4 As regards the inclusion of R Systems International Ltd., raised in additional ground No.11.1, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49 ITR 98 (Kar); which proposition has been upheld by the Hon ble Apex Court in the case of CIT Vs. HCL Technologies Ltd., (2018) 404 ITR 719 (SC). The only grievance of Revenue in the grounds raised was that the decision of the Hon ble Karnataka High Court in the case of Tata Elxsi Ltd., (supra) had not attained finality and an SLP by the Department is pending before the Hon ble Apex Court. Now, in view of the decision of the Hon ble Apex Court in HCL Technologies Ltd., (supra), this issue is no longer res integra and therefore we find no reason to interfere in the decision of the DRP on this issue. Consequently, grounds 2 and 3 of Revenue s appeal are dismissed. 9. Ground Nos. 4 and 5 Working Capital Adjustment 9.1 In these grounds (supra), Revenue assails the decision of the DRP in restricting the working capital adjustment on the basis of advances received from AEs in the absence of debtors and inventory in the case of the assessee for calculating the cost of working capital built in the profit margin. 9.2 Before us, it was submitted that though the TPO, in the body of the TP order, has discussed about restricting the working capital adjustment to 0.23%, in the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee submitted that Acropetal is not functionally comparable to the assessee and ought to be excluded from the set of comparables, on this ground. It is submitted that Acropetal has been held to be not comparable to a captive service provider of ITES in several decisions of ITAT, Bangalore Benches and placed reliance on the decision of a Co-ordinate Bench of this Tribunal in the case of DCIT Vs. Tesco Hindustan Service Centre Pvt. Ltd., in IT(TP)A Nos.191 and 596/Bang/2015 dated 25.01.2017 also for Assessment Year 2010-11, which is the year under consideration in this appeal. 10.5.1 We have considered the rival contentions on this issue and carefully perused the material on record; including the judicial pronouncements cited. From the details on record, we find that the assessee has objected to the inclusion of Acropetal in the set of comparables on the ground that it is not functionally comparable to the assessee; both before the TPO and the DRP. However, it is seen that the DRP has not adjudicated on the functional comparability of Acropetal vis- -vis the assessee in the case on hand. Instead, the DRP has rendered a finding that the services rendered by Acropetal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts to setting aside the draft order of assessment; which is not tenable in law. It was submitted that introducing a new filter amounts to changing the entire comparability analysis, which is not within the scope of the powers of the DRP. 11.2.1 The assessee on its part submitted that ICRA anyhow ought to be excluded from the set of comparables on the grounds of functional comparability. 11.3.1 We have considered the rival contentions and carefully perused the material on record. We find that the assessee has objected to the inclusion of ICRA on the ground that it is not functionally comparable to the assessee; both before the TPO as well as the DRP. The DRP, however, has not adjudicated on its functional comparability of ICRA , but instead proceeded to render a finding that this company requires to be excluded by applying 75% export earning filter. In this regard, it is seen that the TPO applied the filter of 25% of export earnings. The DRP order however states that In the preceding paras, it has been held by us that 75% export earning filter needs to be applied consistently for the ITES segment also as against the 25% export earning filter applied by the TPO. But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns that this company Sundaram requires to be included in the set of comaparables, reliance was placed on the decision of the Co-ordinate Bench in the case of ITO Vs. Interwoven Software Services (India) Pvt. Ltd., in IT(TP)A No.461/Bang/2015, wherein in similar circumstances, at para 23 thereof, it was held that this company, Sundaram Business Services Ltd., should be reinstated as a comparable. 11.4.3 We have considered the rival contentions and carefully perused the material on record. This company, Sundaram , was selected as a comparable by the TPO and the assessee had accepted the same without any objection. We find that the DRP suo moto examined the comparability of this company and directed its exclusion from the set of comprables on the ground that it fails the 75% export earning filter, a new filter introduced by the DRP, which was not applied either by the TPO or the assessee. The DRP order, in this regard, states that It has already been held in the preceding paras that 75% export earning filter has to be consistently applied for ITES segment also . We, however, find that there is no such discussion or decision rendered by DRP, as claimed. In the absence of any suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll comparable to the assessee. In support of his contention, the learned AR placed reliance on the decision of the Coordinate Bench of this Tribunal in the case of DCIT Vs. Tesco Hindustan Services Centre Pvt. Ltd., in IT(TP)A No.191 and 569/Bang/2015 dated 25.01.2017. 12.4.1 We have considered the rival contentions and carefully perused the material on record; including the judicial pronouncements cited. The DRP has rendered a clear finding that this company Infosys cannot be considered as functionally comparable and have given their detailed reasoning for arriving at the decision, including reliance on various judicial pronouncements. Further, as submitted by the learned AR of the assessee, the Co-ordinate Bench of this Tribunal in the case of DCIT Vs. Tesco Hindustan Service Centre Pvt. Ltd., (supra) has held that this company cannot be compared with a company rendering ITES. The relevant portion of the order at para 15.4 thereof is extracted hereunder: 15.4 We have heard the rival submissions and perused and carefully considered the material on record. We -find that the assessee has brought on record sufficient evidence to establish that this company is functionally d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, like employee cost filter, on-site filter, etc., the entire issue of comparability of all comparable companies may be remanded back to the file of the TPO for fresh consideration; in the light of new filters introduced by the DRP. 13.3 The learned AR of the assessee submitted that this company, Eclerx is not comparable to the assessee, as the functions performed by this company are not similar to the functions of the assessee in the case on hand; which only renders BPO services. In support of this contention, the learned AR placed reliance on the decision of the Coordinate Bench of this Tribunal in the case of DCIT Vs. Tesco Hindustan Service Centre Pvt. Ltd., (supra). 13.4.1 We have considered the rival contentions and carefully perused the material on record; including the judicial pronouncements cited. The DRP has rendered a clear finding that the functions performed by Exlerx are not similar to that of assessee in the case on hand and therefore cannot be as comparable and has given its detailed reasoning for arriving at this decision; including placing reliance on certain judicial pronouncements. We find that, as pointed out by the learned AR of the assessee, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ol over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services P Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entitles cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP. 14.2 As discussed by the Special Bench in the case of Maersk Global Centres (India) (P.) Ltd. (supra), this company provides data analysis, operating management, audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibles and that there have been extraordinary events; such as amalgamations/acquisitions impacting the margin earned. In support of the assessee s contentions for exclusion of Accentia , the learned AR of the assessee placed reliance on the decision of the Co-ordinate Bench of this Tribunal in the case of DCIT Vs. Tesco Hindustan Service Centre Pvt. Ltd., (supra). 16.3 Per contra, the learned DR for Revenue placed reliance on the TPO s order, wherein it has been held that this company Accentia is engaged in providing ITES only and is not into software products or licencing activities. 16.4.1 We have considered the rival contentions and submissions and perused the material on record; including the judicial pronouncement cited. We find that a Co-ordinate Bench of this Tribunal in the case of DCIT Vs. Tesco Hindustan Service Centre Pvt. Ltd., (supra) has held that this company, Accentia is not functionally comparable to an assessee rendering ITES and in this regard at para 13 of its order, the Co-ordinate Bench held as under: 13. As regards Accentia Technologies Ltd. and ICRA Online Ltd. this Tribunal in the assessee's own case for Assessment Year 2008-09 has exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w in selecting this company, Jeevan as a comparable even though it fails the filter of employee cost of less than 25% of sales. In the additional ground, the assessee submits that without prejudice to ground No. 10 seeking rejection/exclusion of Jeevan from the set of comparables, the TPO/DRP have wrongly computed the net margin on cost. 18.2.1 The assessee contends that in this company, Jeevan the employee cost to total sales is only 20.87% and therefore it fails the employee cost filter of 25% of sales applied by the TPO. The DRP, however, has held that the employee cost is more than 25% and rejected the assessee s contentions. Before, us, the assessee reiterated that the employee cost is only 20.87% of sales and therefore fails the employee cost filter of 25% of sales. It is also contended that the margin of this company Jeevan has been wrongly computed. 18.3 We have considered the rival submissions and carefully perused the material on record. The assessee s contentions are that Jeevan fails the employee cost filter of 25% applied by DRP. The issue of applying the employee cost filter at 25% of sales, suo moto, by the DRP has been discussed earlier in this order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing the decision of the Hon ble Punjab and Haryana High Court in the case of Mercer Consulting Pvt. Ltd., (supra), we also deem it appropriate to follow the principle that if data, relating to the financial year in which the international transaction has been entered into, is directly available from the annual accounts of that company, then the company ought be examined / considered for comparability. We, accordingly, remand the matter of comparability of R Systems International Ltd., back to the file of the AO to examine / decide the same in the light of the decision of the Hon ble Punjab and Haryana High Court (supra). We hold and direct accordingly. 20. Additional Ground No.10 -1) Sundaram Business Services Ltd., 2) ICRA Online Ltd., 20.1 These additional grounds (supra) have been raised seeking (i) inclusion of Sundaram Business Services Ltd., in the list of comparables and (ii) exclusion of ICRA Online Ltd., from the list of comparables. The comparability of both these companies has been examined and considered by us in the earlier portion of this order while disposing off Revenue s appeal in ground No. 7 at paras 11 to 11.4.3. CORPORATE TAX 21. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds: 1. On facts and circumstances of the case and in law, the respondent wishes to rely upon the directions (dated 11 December, 2014) passed under section 144C (5) of the Income-tax Act, 1961 by the Hon'ble Dispute Resolution Panel ( DRP ) and grounds of appeal filed in Form 35A before the DRP which was disregarded by the Learned Assessing officer ( Ld. AO )/ Learned Transfer Pricing Officer ( Ld. TPO ) while filing an appeal before the Hon'ble DRP. 2. On facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in objecting to the rejection of Acropetal Technologies Limited ( Acropetal ) on the basis of the employee cost filter without providing any supporting analysis. 3. Subject to the above, in the case of Acropetal, the Hon'ble DRP has erred in not adjudicating on the other ground pertaining to functional non-comparability of Acropetal apart from the employee cost filter, raised by the Assessee. 4. On facts and circumstances of the case and in law, the Ld. AO / Ld. TPO erred in objecting to the exclusion of Infosys BPO Limited ( Infosys ) by the Hon'ble DRP, on the grounds that the company satisfies all the qualitative and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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