TMI Blog2019 (8) TMI 1664X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s. 133(6) of the Act, The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO.Respectfully following the decision, we remand this comparable to the file of the TPO/AO for fresh adjudication on the above lines. Infosys BPO Ltd. is functionally not comparable with captive service provider. Thus we direct this company to be excluded from the list of comparables. TCS e-Serve Ltd. company is into high-end KPO services and an assessee rendering low end BPO services cannot be compared with it. Further, this company has been excluded due to absence of segmental information - we direct Ld. TPO to exclude this company from the list of comparables. BNR Udyog Ltd. (segmental) - Assessee is challenging functional dissimilarity of this company with that of assessee as it is into medical transcription - We have our reservation to consider medical transcription services to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es outstanding in relation to transaction with AE - HELD THAT:- This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. [ 2016 (7) TMI 760 - ITAT KOLKATA ] held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92B of the Act. We also perused decision relied upon by Ld. Counsel. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld. Counsel. Alternatively as argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. As relying on Orange Business Services India Solutions Pvt. Ltd. [ 2018 (2) TMI 1151 - ITAT DELHI ] we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing companies from the list of comparable companies. Universal Print Systems Ltd. Infosys BPO Ltd. TCS E-Serve Ltd. BNR Udyog Ltd. Excel Infoways Ltd. 4.7 The learned AO/learned TPO/Hon'ble CIT(A) has grossly erred in rejecting companies that ought to have been included as comparables: ICRA Online Ltd. Tech Process Solutions Ltd. Cameo Corporate Services Ltd. Crystal Voxx Ltd. Informed Technologies India Ltd. 4.8 The learned CIT(A) while aptly confirming the functional similarity of Accentia Technologies Ltd. with the Appellant, erred in: stating that if the comparable company gets excluded by higher Appellate authorities in the Appellant's appeal for A.Y. 2011-12 on the ground of functional dissimilarity, the same would apply to the year under consideration and would thereby require exclusion of the comparable in A.Y. 2012-13. not considering the fact that transfer pricing requires examining the profile of the comparable companies year on year basis and that the ruling of one Assessment year cannot automatically apply to another Assessment Year, 4.9 The learned AO/learned TPO/Hon'ble CIT(A) has erred in al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 2. Brief facts of the case are as under: Assessee filed its return of income on 30/11/12 declaring total income of ₹ 18,86,56,470/-. The case was selected for scrutiny and notice under section 143(2) was served upon assessee in response to which representative of assessee appeared before Ld. AO and filed requisite details as called for. Ld. AO observed that assessee is engaged in the business of Software Development and Information Technology Enabled Services and that assessee entered into international transaction with its associated enterprise. A reference was accordingly made to Ld. TPO under section 92CA of the Act. Upon receipt of reference, Ld. TPO called upon assessee to file economic details of international transaction entered into by assessee in Form-3CEB. Ld. TPO observed that assessee had following international transaction: International Transaction Val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36.30% 5. Jindal Intellicom Ltd. -0.05% 6. Microgenetic Systems Ltd. 19.61% 7. TCS E-Service Ltd. 63.69% 8. BNR Udyog Ltd. 41.58% 9. Excel Infoways Ltd. 29.79% 10. E4E Healthcare Services Pvt. Ltd. 19.85% AVERAGE 28.11% He thus proposed an adjustment of ₹ 2,74,17,877/- under ITeS. 2.3. Ld. TPO further computed interest on receivables exceeding 6 months at 16.85% and proposed adjustment being interest chargeable at ₹ 39,72,148/-. Thus total adjustment proposed by Ld. TPO was as under ITES ₹ 2,74,17,877/- Interest chargeable ₹ 39,72,148/- Total adjustment ₹ 3,13,90,025/- 3. Aggrieved by proposed adjustment, assessee preferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icles, case of its equipments, computers and accessories and electrical fittings etc. Risks assumed Assessee provides services on a cost plus model and is not affected by factors such as non availability of markets of for rendering services, reliability of customers, fluctuations in demand etc. The primary risk market lies with the AE, as it is responsible for providing final services to end customer. Assessee is though responsible for quality of services to be delivered to its AE and has to meet specifications laid down by AE in the work order, however AE bears final responsibility of quality of services towards the client. Thus, it has been submitted that assessee do not even bear any service risk. Thus assessee has been characterised under this segment as a contract service provider rendering routine back office services and bearing minimal risk with assured returns from its AE. Based upon the above FAR analysis of assessee, we shall consider comparables alleged by assessee for exclusion/inclusion. Comparables sought to be excluded: 1. Universal Print Systems Ltd. (segmental) (BPO) Assessee sought to exclude this comparable for the reason that, it fails empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP/TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP/TC of this company will be only 51.80%. The Assessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.63% of the total revenue from operations of this company as per its annual report. The Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue filter is applied at the segmental level there can be no objection by the Assessee. She relied on the order of the DRP/TPQ. 51. The requirements of Rule 10B(1)(2) (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows: 10B. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:-- (a) to (d) (e) transactional-margin method, by which, (i) the net profit margin realised by the enterprise from an international 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 (if) arising in comparable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the net profit realized from a comparable uncontrolled transaction . Therefore comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Prepress BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hi ITAT in the case of Baxter India Pvt. Ltd. Vs. ACIT ITA No. 6158/Del/2016 for A.Y. 2012-13 in the case of a company rendering ITES such as the Assessee, vide order dated 24.8.2017 Paragraph 23 held that Infosys BPO is not comparable with a company rendering ITES for the following reasons:- 23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Further it was also submitted that the Infosys BPQ Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd.. We find the submissions of the ld. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPQ Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 017) 85 Taxmann.com 285 (Delhi-Trib) PCIT vs. BC Management Services Pvt. Ltd. reported in TS-948-HC-2017 (Del)-TP It is observed that this comparable has been excluded by this Tribunal. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Pvt. Ltd., vs. ACIT reported in (2019) 101 taxman.com 292, by observing as under: 11.3 We have heard rival submissions and perused material on record. The issue of comparability of this company was considered by the co-ordinate bench of Tribunal in the case of XL Health Corpn. India (P.) Ltd. (supra). The relevant findings of the Tribunal are as under: ... We have heard the rival submissions and perused the material on record. From the perusal of the Annual Report of this entity placed at page Nos. 583 to 678 of paper book, at page No. 604 it is stated as under. 2. COMPANY OVERVIEW Your Company, along with its subsidiary companies - TCS e-Serve International Limited and TCS e-Serve America Inc., is primarily engaged in the business of providing Business Process Services (BPO) for its customers in Banking, Financial Services and Insurance domain. The Company's operations include d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is into medical transcription. We have our reservation to consider medical transcription services to be one of KPO services. In our considered opinion medical transcription services is basically back-office services provided by graduates who are trained for short period of 6 months to one year. These are short crash courses undertaken by graduates who are trained to understand and speak English. There is no value addition in the services rendered by people in medical transcription. To our understanding, basically these people who carry out medical transcription services are trained to understand language spoken by doctors, outside India to whom medical reports of patience are sent for expert opinion. Medical transcriptionist simply reproduces opinion expressed by Doctor, which is then communicated to the patients. It is observed from annual report placed at page 223 of paper book (Index to Annual Reports) that this company has segmental information of medical transcription and revenue earned under this segment is ₹ 147.40 Lacs. It is also been observed that various other decisions by co-ordinate Benches of this tribunal has remanded this comparable back to Ld. TPO, for p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . She placed reliance upon decision of this Tribunal in case of Mobily Infotech India (P) Ltd. vs. DCIT reported in (2018) 97 taxman.com 2 in support. 9. We have perused submissions advanced by both sides in light of records placed before us. Annual report of this company is placed at page 273 of paper book (Index for Annual Reports). In the Significant Accounting Policies reported at page 308 of paper book, it is observed that these companies operating businesses are organized and managed separately, according to nature of business and services provided with each segment, representing different strategic business unit. Note 15 at page 312 to refers to revenues from operations under the head information technology/BPO related services separately. It is observed that the function performed by this company as reported at page 285 reveals that it is engaged in business of providing customer care services and handling client business relations on their behalf by maintaining relation with customers and also providing services by assisting in managing the workflow and updating the records. It is observed that this Tribunal in case of Zyme Solutions Pvt. Ltd., vs. ACIT vide order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. Vs. ITO ITA No. 6690/Del/2016 for A.Y. 2012-13 order dated 19.6.2018 considered the comparability of this company and came to the conclusion in paragraph 5.4 of its order that there was abnormal volatility of revenue of this company from 2009-10 to 2014-15 and therefore this company should not be regarded as comparable company. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid company from the list of comparable companies chosen by the TPO. It is observed from order passed by Ld. TPO at page 10 that assessee objected this company that employee cost filter being more than 25% has not been examined by Ld. TPO. It is observed that in decision of coordinate bench of Delhi Tribunal in case of Baxter India Pvt. Ltd. vs. ACIT reported in (2017) 85 Taxmann.com 285 this comparable failing employee cost filter has been analyzed as under: Further, from the order of the TPO we find he has obtained the employee cost and the sale for the ITES segment by exercise of his powers u/s. 133(6) wherein the said company has allocated entire employee cost to IT - BPO segment with no allocation to Infra Activity segment which accounts to 49% of Excel's to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds placed before us. It is observed that this comparable has been not disputed for functional dissimilarity by DRP. However, observation that segmental information are not available needs to be verified. We are therefore of considered opinion that, this comparable needs to be set-aside to Ld. TPO for verification afresh. Needless to say that assessee shall be granted proper opportunity as per law to represent its case. Accordingly we set aside this comparable back to Ld. TPO Accordingly grounds 4-4.10 stands allowed as indicated above. Ground 5-5.7 is in respect of interest on receivables outstanding amounting to ₹ 36,33,20,298/- in relation to transaction with AE. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld. Counsel submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. Ld. TPO computed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....'. 12. Ld. CIT DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers Assessment Year under consideration and hence under/nonpayment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis- -vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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