TMI Blog2022 (1) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... AKA HIGH COURT] Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd.[ 2017 (6) TMI 1087 - BOMBAY HIGH COURT] It is ordered accordingly. - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER Appellant by : Shri Nageswar Rao, Advocate Respondent by : Shri Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. O R D E R Per Chandra Poojari, Accountant Member This appeal by the assessee is directed against the final assessment order of the Assessing Officer, National Faceless Assessment Centre (NFAC), Delhi, dated 29.06.2021 for the assessment year 2016-17 on the following grounds:- That on the facts and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO / DRP erred, in law and facts, by exercising his powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes; 11. Learned AO / TPO / DRP erred, in law and facts, by accepting/ rejecting the following companies based on unreasonable comparability criteria: a) Accepting the following companies that should not be considered as comparable to the Appellant, on one or more grounds: i. Infosys BPM Limited ii. SPI Technologies India Private Limited iii. Eclerx Services Limited b) Rejecting the following comparable companies selected by the Appellant in its TP documentation: i. ACE Software Exports Limited ii. Sundaram Business Services Limited iii. Informed Technologies India Limited, Allsec Technologies Limited iv. Cosmic Global Limited v. R Systems International Limited vi. Jindal Intellicom Private Limited c) Rejecting the following comparable companies additionally proposed by the Appellant: i. Cyfuture India Private Limited ii. ACE BPO Services Private Limited iii. Microgenetic System Limited Although some of the companies were chosen/ not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the aforesaid grounds of appeal at any 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. 2. The assessee has filed petition raising the following additional grounds explaining that the DRP has directed to include Hartron Communications Limited (Seg.) and exclude Capgemini Solutions Ltd. in the final set of comparables if it passes all the filters as applied by the TPO in the order u/s. 92CA dated 28.10.2019. However, the TPO in the said order has rejected the company for inclusion on the ground that it fails core function filter i.e., income from comparable service to sale ratio is less than 75% for AYs 2013-14, 2014-15 2015-16 disregarding that only segmental details were considered for comparability purpose. The AO/TPO has not given effect to the directions of DRP to exclude Capgemini Solutions Ltd. as it is not a part of search matrix as adopted by the TPO. Accordingly, these issues have arisen pursuant to the order of the TPO. Therefore, it is prayed that these grounds may be admitted for adjudication in the interest of justice. Reliance is placed on the following decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses to AE 2,65,95,152 Other Method Reimbursement of expenses by AE 5421424 Other Method 7. The financials as submitted in TP study of assessee are as under: PARTICULAR ITeS Segment (Amount in INR) Revenue from Operation 175,51,00,100 Forex Income 1,44,41,370 Operating Income 176,95,41,470 Employee Benefit 102,81,64,577 Other Expenses 47,97,19,587 Depredation and Amortization Expenses 6,11,63,395 Less: Interest Expenses 17,85,576 Total Operating Cost 156,72,61,983 Operating Profit 20,22,79,487 OP/OC 12.91% 8. The TPO worked out the financials as under:- PARTICULAR ITeS Segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the services fall under the broad industry segment ITES. In this regard the DRP relied on the Bangalore Tribunal decision in the case of GE India Technology Centre Private limited Vs. DDIT (ITA No. 789/Bang/2010 ITA Nos 487 925/13ang/2011 and other decisions wherein it was observed that TNMM requires only broad comparability. 14. The contention of the assessee that Infosys BPO has various Revenue Models and its revenues are generated principally on time and material basis, transaction basis and fixed price contracts and therefore, it should not be compared with the assessee, the DRP observed that as the assessed failed to demonstrate as to how the different methods of billing would affect the Functional comparability or impact the profitability. Unless the same is demonstrated with credible evidence, it remains a theoretical argument without any backing with facts and figures and hence rejected it. 15. The assessee pointed out that this company has reported an amount of Rs. 136 crore as 'cost of Technical sub-contractors' which constitutes about 4.45% of total revenue of the company during the year. The DRP observed that the annual report mentions that these sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties and perused the material on record. This comparable has been considered as not comparable in Swiss Re Global Business Solutions India P. Ltd. for AY 2014-15 in IT(TP)A No. 3181/Bang/2018 dated 21.5.2020 wherein it was observed as under:- We have perused submissions advanced by both sides in light of records placed before us. We note that this company is providing services in various areas of sourcing and procurement, customer services, 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. 21. In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which otherwise. is functionally comparable. 26. The DRP further observed that it was consistently held that high profit margin as such cannot be reason for exclusion when it is otherwise functionally comparable. Accordingly, there is no need to reject a functionally comparable company on account of having super profits. 27. The Assessee submitted that Eclerx suffers business concentration risk unlike the Assessee, who operates as a risk-free entity. The DRP observed that as far as the limited risk in the case of captive service providers is concerned, if this argument is accepted then it cannot be compared to any company as most of the companies will be independent companies. Rather it should be compared to independent companies only as the price received for the services by them will be determined by market forces, which is not the case of the assessee. The assessee itself can be characterized as a contract service provider, which means that it operates on a cost plus model. Therefore, this argument was also rejected. 28. Thus, the DRP upheld the rejection of this company as a comparable. 29. We have heard both the parties on the issue. This company has also been co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejection of two comparables on the ground of declining revenue and losses. In view of these decisions, the DRP did not find any infirmity in the TPO's approach in adopting this criteria for comparable analysis, as the above these companies have been making persistent losses for two out of three years. 32. The ld. AR submitted that these companies did not incur continuous loss in the last 3 preceding years and the assessee earned profit in one of the 3 immediate preceding years. Being so, it is to be considered as comparable. 33. In our opinion, if a company is making profit in any one of the 3 immediate preceding years, then it should be considered as a comparable. Accordingly, this issue is remitted to the AO/TPO to consider the financials of these companies and decide the issue of comparability of Sundaram Business Services Ltd., and Ace Software Exports Ltd. accordingly. 34. With regard to inclusion of Hartron Communications Ltd., according to the assessee, the TPO has not followed the directions of the DRP. We find no merit in this argument of the ld. AR. During the course of DRP proceedings the assessee has submitted that the company has earned profits for F.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, 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 submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted 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. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 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 been correctly determined. 23.7. We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law. 36. Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018. 37. Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly. 38. The other grounds of appeal were not pressed and dismissed accordingly. 39. In the result, the appea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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