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TMI Blog2022 (1) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... d for Information Technology Enabled Services ('ITeS') rendered by Appellant to its AE(s); 3. Learned AO / TPO / DRP erred, in law and facts, by not accepting economic analysis undertaken by Appellant in accordance with the provisions of the Act read with the Rules, and in conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transactions and holding that the Appellant's international transactions are not at arm's length; 4. Learned AO / TPO / DRP have erred, in law and facts, by rejecting certain comparable companies following different accounting year (i.e. companies following accounting year other than March 31); 5. Learned AO / TPO / DRP have erred in law and facts, by applying employee cost greater than 25% of the total operating cost as a comparability criterion; 6. Learned AO / TPO / DRP have erred, in law and facts, in application of filter i.e. by rejecting companies whose export services income is less than 75% of turnover for the purpose of selection of comparable companies; 7 Learned AO / TPO / DRP have erred in law and facts, by applying only the lower turnover filter of less than I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies considered in the TP order; 13. Learned AO / TPO / DRP erred, in law and facts, by not making suitable adjustment to account for differences in working capital position of the Appellant vis-à-vis the comparables; 14. Learned AO / TPO / DRP erred, in law and facts, by not making suitable adjustments on account of differences in the risk profile of the Appellant vis-6-vis the comparables, while conducting comparability analysis; 15. Learned AO / TPO / DRP have erred, in law and facts, by recharacterizing certain trade receivables as unsecured loans, not appropriately considering the nature and characteristics of the transaction and computing notional interest on such trade receivables; 16. Learned AO / TPO / DRP have erred, in law and facts, by not appreciating that the working capital adjustment undertaken by the Appellant in its Transfer Pricing documentation would take into consideration impact of credit period extended to the customers, and therefore, a separate analysis would not be required in respect of trade receivables; 17. Without prejudice to our ground of appeal no.14 and 15 above, Learned DRP has erred, in law and facts, by arbitrarily directing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation. 4. The assessee company renders contract IT enabled back office services to the Swiss Re Group entities across the globe. It provides IT enabled back office services such as contract administration, claims administration and technical reinsurance accounting support (for property and casualty reinsurance and life & health reinsurance). The assessee has also entered into agreements with Swiss Re companies for rendering remote data processing in the field of reinsurance. The functions performed by the taxpayer and its AE in relation the back office support services provided by the taxpayer to the AE are Strategic Management functions, Administrative Services , Contracting with customers, Specification/requirement analysis, Project Management and Performance/ Quality control uses the routine tangible assets for its business operations. The assessee does not own any non-routine intangibles such as trade secrets, patents, trademarks, etc. On the other hand, the AE, being the entrepreneurial entity, performs the necessary R&D function and owns intangible of products developed. 5. The FAR analysis serves as a foundation to characterize entities for the purpose of inter-company tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent business model, brand profits, various revenue models, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several clients and span across multiple industry segments. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas. 12. The DRP was of the view that just because the company is providing cloud based services over various mainframe computers, the company would not be functionally different as claimed by the assessee and rejected this plea of the assessee. 13. Regarding the plea of the assessee that this company is into high end ITES service provider, and hence not comparable, the DRP held that under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o information in the annual report to indicate that the company has undertaken any major R&D initiatives & own intangibles. Therefore, the presence of intangible in the form of goodwill, which is also insignificant, as the value is only Rs.19 crore compared to the revenue from operations of Rs.3050 crores do not have any impact on the profits of the company. Hence, these pleas were rejected by the DRP. 18. The assessee's contention that this comparable has incurred significant selling and marketing expense was also not accepted by the DRP, since from the perusal of the annual report, the DRP noted that the expenses on this count is only 4.56% of the total expenditure and which is not at all significant to affect the profitability of the comparable. 19. Thus, in view of the discussions held above, all the grounds raised by the assessee were rejected and the action of the AO/TPO was upheld by the DRP. 20. We have heard both the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uisition was made by the company's overseas subsidiary eClerx Investments (UK) Ltd. Therefore, there is no merit of the objection, as the stand alone financials of this company are considered for comparability. 25. The assessee also raised the objection that there is increase in revenue, but according to the DRP, it has failed to bring on record any evidence to suggest that this abnormal inorganic growth has impacted the profit margin of the company. It is observed that the profit margin of this company has been consistently at the same level during the last few years. The ALP margin is determined with reference the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. The DRP was of the opinion that it will not be proper to reject a comparable only on account of inorganic growth of top line, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany cannot be considered as good comparable for the purpose of determining ALP. The ITAT, Hyderabad in the case of Brigade Global Services Private Limited vs. ITO held that in case there is continuous loss year by year, in such a situation, that company's data cannot be considered as comparable. In the case of Sony 'India Private Limited, the Hon'ble ITAT in regard to the comparable Godrej Ltd noted that the huge losses suffered by the company over a period of several years would be a significant factor to justify exclusion of the said company as comparable. The ITAT, Delhi in the case of CRM Services India Private Limited (2011-T11-86-ITAT-Del- TP), observed that companies incurring losses year after year cannot be a valid comparable as their capital base has been completely eroded. In the case of Exxon Mobil Company India Pvt. Ltd. (2011-III-68-ITAT-Mum-TP) the ITAT Mumbai upheld the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital subsumes sundry creditors and therefore separate addition is not called for. 23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, held that no interest could have been charged as it cannot 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 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scussed 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 this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law: "(c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?" 23.6. Ld.CIT.DR submitted 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 lig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions." 23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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