TMI Blog2022 (8) TMI 1309X X X X Extracts X X X X X X X X Extracts X X X X ..... vely for the business of the Company and therefore, eligible for deduction under section 37 of the Act. ESOP expense is nothing, but compensation paid to employees of the Company and accordingly, taxed in the hands of employees as Perquisites (Company submitted the sample Form 16 s of employees). Provision of section 37(1) of the Act inter alia provides that any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, not being in the nature of capital expenditure or personal expenses, shall be eligible for deduction in computation of total income . ESOP schemes for stock options enables in attracting and retaining the employees of the Company, resulting in better performance of the Company s business operations. The scheme is designed primarily to incentivise and for retaining the employees and thereby, earn more revenue by securing consistent and concentrated efforts of dedicated employees. The share-based compensation under the ESOP scheme is construed both by the employees and the Company as a part of employment remuneration package, which is an expenditure inextricably linked to the business of the Company. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing Study ('TP' study) maintained by the Appellant in the manner Prescribed under Section 92D of the Income Tax Act, 1961 ('the Act). d. The AO/TPO erred on facts and in law in conduct ing a fresh benchmarking analysis based on his own conjectures and surmises. The DRP erred in upholding the act ions of the AO/ TPO 3. Comparability analysis adopted by TPO for determination of arm's length prices of the transactions of provision of SWD and ITE services. a. That the TPO erred in applying arbitrary filters to arrive at fresh sets of companies as comparables to the Appellant, without establishing their functional comparability. The DRP erred in confirming the action of the TPO. b. That the TPO erred in selecting companies only if the data pertaining to financial year 2015-16 is available in the public database. The DRP erred in upholding the action of the TPO. c. That the TPO erred in arbitrarily rejecting companies merely on the ground that they have a different financial year ending (i.e. other than 31st March 2016) or the data which does not fall within 12-month period (i.e. 1St April 2015 to 31St March 2016) The DRP erred in confirming the same. d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivate Limited. Batchmaster Software Private Limited. DCIS Dot Corn Solutions India Private Limited. Sagarsoft (India) Ltd., [summation Technologies Private Limited. despite the functions performed. assets employed and risks assumed by the said companies are comparable to that of the Appellant. e. That without prejudice. the DRP erred in upholding the rejection of Sasken Communication Technologies Limited. and Agilisys IT Services India Private Limited on the above basis. despite the Appellant having selected the said companies in its TP study. f. That the TPO erred in computing the margin of Orion India Systems Private Limited. 5. Determination of arm's length price relating to IT Enabled Services a. That Infosys BPO Limited. SPI Technologies India Private Limited. and Eclerx Services Limited ought to be excluded from the list of comparables as the functions performed. assets employed and risks assumed by the said companies are entirely different and incomparable to that of the Appellant b. That Jindal Intellicom Limited, R Systems International Limited. Micro genetic Systems Limited, Ace BPO Services Private Limited, Informed Technologies India Private Limited a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the market value and the purchase price of shares is being taxed as perquisite in the hands of the employees under Section 192 of the Act which is evidenced by sample Form 16 furnished by the Appellant d The AO and DRP erred in law and on facts. in disregarding the sample debit note/invoices. Employee listing Sample Form 16, cost reimbursement agreement, sample RSU agreement and scheme document submitted during the DRP proceedings by the Appellant. e. That the AO erred in disallowing the ESOP expenses reimbursed by the Appellant to its parent entity on the erroneous basis that the (i) loss in the hands of the parent entity is notional in nature. (ii) the payment is fictitious in nature; and (iii) the payment is a colourable device adopted by the Appellant for avoidance of tax. The DRP erred in upholding the same. f. The AO and DRP has erred in law and on facts by placing reliance on the case laws decided on different context and not applicable to the facts of the Appellant. g. That the DRP erred in upholding the disallowance on the basis that the expenditure cannot be claimed by the Appellant as a deduction prior to the date of exercise of option by employee. h. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as against Rs. 1269,72,60,217/- computed in the final assessment order. 13. That in the final assessment order the AO erroneously adopted the TP adjustment at Rs. 339.44,00.000/- against Rs 310,47,31.000/- as computed in the order passed by the TPO giving effect to the DRP's directions. 14. Initiation of penalty proceedings a. That the AO erred in initiating penalty proceedings under Section 271(1)(c). The Appellant craves leave to add to or alter, by deletion, substitution or otherwise. the above grounds of appeal, at any time before or during the hearing of the appeal. 15. Rel ief a. The Appellant prays that the appeal may be allowed and the impugned final assessment order be set aside . 2. Ground Nos.1 to 3 are general in nature which do not require any adjudication. 3. In Ground No.4(a) the assessee pressed exclusion of following comparables:- i. L T Infotech Ltd. ii. Persistent Systems Ltd. iii. Infobeans Technologies Ltd. iv. Infosys Ltd. i. L T Infotech Ltd. 3.1 Ld. A.R. submitted that L T Infotech Ltd. is engaged in diversified business activities and thereby functionally dissimilar. According to the Ld. A.R., L T Infotech Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. The Hon'ble ITAT has upheld the application of this filter by the TPO in its order in the case of M/s. Supporisoft India Pvt. Ltd for AY 2005-G6 in IT (TP)A 1372/B/11 20/2012 dated 28.03.2013 following its own decision in the case of M/s. Actis Advertisers Pvt. Ltd vide ITA No.5277/De1/2011 dated 12.10.2012. On perusal of the Annual Report of Persistent, we observe that the company has RPT in excess of 25% of the sales. The calculation of the same has been provided below for your ease of reference: R PT to Sales ratio for FY 2014-15 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore operations. The further observations of the TPO that the reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significantly increasing the employee cost and other costs. 65. The next objection of the Assessee is with regard to Assets employed. The companies, which predominantly generate revenues from onsite activity, do not have significant assets as most of the work is carried on the site of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly. 36. It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in the case of Capegemini as quoted in para 16 in para 14 of the TPO s order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case. 37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this company is sought to be excluded viz., that it is a product company and there is no segmental data between product and services segment, presence of onsite activity and the impact of extra-ordinary event of acquisition during the relevant previous year. Therefore, this company is directed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit loss account not available. Commands substantial brand value. 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R D have all been brushed aside. In our view, the difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee. 8. We notice that M/s. Infobeans Technologies Ltd. have been directed to be excluded by the coordinate bench in the case of Metric Stream Infotech (India) Pvt. Ltd. with the following observations: 14.3. Infobeans Technologies Ltd., Ld.AR submitted that this comparable was selected by authorities below as it passes all filters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2016-17, the coordinate bench of Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA Nos.227 228/Hyd/2021 dated 3.2.22 held as under:- 4.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. We find substance in the submissions of the ld. AR and on going through the financial statements of Larsen Toubro Infotech Ltd., in particular at page Nos. 1249 of paper book - Volume - 3 disclosure under the Companies Act, 2013, we observe that the company information system resource centre Pvt. Ltd. (ISRC) was amalgamated with the company with effect from September, 21, 2015 and the appointed for the scheme was October, 17 2014, which reads as under: Pursuant to the Scheme of Amalgamation sanctioned by the Hon'ble High Court of Bombay vide its order dated September 04, 2015, Information Systems Resource Centre Pvt. Ltd. (ISRC) was amalgamated with the Company with effect from September 21, 2015. The appointed date for the Scheme was October 17, 2014. Consequently, the entire business, assets, liabilities, duties and obligations of ISRC have been transferred to and vested in the Company with e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2016-17 (He referred Annual Report Compilation Pages: 1443, 1713) he requested to exclude this company from the list of comparable companies. The comparable has been rejected by the Tribunal in AY 2014-2015 as well in appellant s own case (EIT Services India Private Limited ITAT Order ITA No.3399/Bang/2018). 4.3 Further, in the case of Sandisk India Device Design Centre Pvt Ltd [TS-464-ITAT-2022(Bang)-TP], AY 2016-2017 at Page 24 of the Order the Bangalore Tribunal has directed the Ld. TPO to exclude Persistent Systems Ltd from the final list of comparable under the IT Segment. 4.4 The company has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 4.5 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of SWD/IT Segment. 4.6 The Ld. D.R. relied on the order of lower authorities. 4.7 We have heard the rival submissions and perused the materials available on record. In the case of ADP Pvt. Ltd. in the assessment year 2016-17, cited (supra) the coordinate bench of Hyderabad has considered this company as not compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems Ltd. cannot be considered as a comparable and to be excluded from the list of comparables. iii. Infobeans Technologies Ltd. 5. The Ld. A.R. submitted that Infobeans is functionally dissimilar as it is engaged in providing custom developed services to offshore clients. The company is engaged in providing software engineering services primarily in Custom application development (CAD), Content Management Systems (CMS), Enterprise Mobility (EM), big data analytics (BDA). 5.1 It is submitted by Ld. A.R. that the Segmental information of the company is not available and the company is into diversified activities. lnfobeans has been providing business IT services (comprising application development and maintenance, Big Data, UX UI, Automation engineering services, including product engineering and lifecycle solutions, and business process management); in the Verticals of Storage Virtualization, Media Publishing, HR Payroll and e commerce. 5.2 The company has been rejected in Appellant's own case for AY 2015-16 [ITA No.2498/Bang/2019 and since the company has the same functional profile in AY 2015-16 and AY 2016-17 (He referred Annual Report Compilation Pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable. Nihilent Ltd. 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis- -vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis- -vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as gone through the orders of revenue authorities. The co-ordinate bench of this Tribunal in ADP (P.) Ltd. (supra), directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: 21. Having regard to the rival contentions and the material on record, we find that the Co-ordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below: 18. We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of export of goods was also mentioned in notes and also in the Profit and Loss Account, where revenue from sale of software was declared. The segmental details of two ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Segment. 6.3 The company has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 6.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of SWD/IT Segment. 6.5 Ld. D.R. relied on the order of Ld. DRP. 6.6 We have heard the rival submissions and perused the materials available on record. This comparable has been considered as not comparable in the case of ADP Pvt. Ltd. by the coordinate bench of Hyderabad cited (supra), wherein held as under:- 9.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench in assessee's own case in ADP (P.) Ltd. (supra), directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: '25. Having regard to the rival contentions and the material on record, we find that in a number of decisions including the assessee's own case, Infosys Ltd has been held to be not comparable with any other software development company such as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. iii. DCIS Dot.com Solutions Pvt. Ltd. iv. Sagar Soft India Ltd. v. Ace Software Export Ltd. vi. Sasken Communication Technology Ltd. (i) Isummation Technologies Ltd. 7.1 Ld. A.R. submitted that Isummation is primarily engaged in Software development services, which is evident from page 18 of the Annual Report and the company qualifies the quantitative filters applied by the learned TPO and hence Isummation ought to be considered as a comparable for the software development services rendered by the Appellant. 7.2 The TPO at Page 49 of the TP Order held that the data is not available in the public domain and therefore the Comparable was rejected to be included. However, the data is available in the public domain and therefore the comparable should be included in the final list of comparables (He referred page 2020 of the paper book). 7.3 Further, the comparable has been accepted by the Ld. DRP in AY 2017-18 in Appellant's own case. 7.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of SWD/IT Segment. 7.5 Ld. D.R. relied on the order of Ld. DRP 7.6. We have heard the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Annual Report compilation) makes it evident that the company is engaged in rendering software services. Below is the extract for ready reference: 8.2 Further, the Ld. A.R. submitted that Batchmaster is primarily engaged in Software development services and not in sale of products. From Note 15 of the Annual Report of the company (He referred page 154 of the Annual Report compilation) it is evident that the company is primarily into sale of software development services and not sale of products. 8.3 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of SWD/IT Segment. 8.4 Ld. D.R. relied on the order of the Ld. DRP 8.5 We have heard the rival submissions and perused the materials available on record. The main contention of the Ld. A.R. is that Batchmaster Software Pvt. Ltd. is engaged in software development services and not sale of products. However, the Ld. A.R. was not able to distinguish between software development services and sale of products. As rightly observed by the Ld. TPO, Batchmaster Software Pvt. Ltd. is engaged in sale of products and engaged in software development service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that Sagarsoft has an IT service income to sales percentage of 100% and hence passes the aforesaid filter and must be accepted as a comparable company. 9.8 The Ld. A.R. further submitted that Sagarsoft is engaged in software development services. The relevant extract from the annual report is provided at page 2017 of the paper book which makes it evident that the company is engaged in rendering software services. The Appellant also submits that the company qualifies the quantitative filters applied by the learned TPO. (He referred page 2017 of the paper book) 9.9 Further, the comparable has been accepted by the Ld. DRP in AY 2017-18 in Appellant's own case. (He referred Page 63 of the Case Law Compilation). 9.10 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of SWD/IT Segment. 9.11 Ld. D.R. relied on the order of Ld. DRP 9.12 We have heard the rival submissions and perused the materials available on record. It was the contention of Ld. A.R. that in the year 2017-18, the Ld. DPR itself included this comparable while determining the ALP in that assessment year. In our opinion, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther, the Appellant submits that the segmental profit and loss account of the company is available in the standalone financials and the same can be considered for computing the mark-up for the software development segment. (He referred page 103 of the Annual Report). 11.2 The comparable has been accepted as comparable by the DRP in AY 2015-2016. 11.3 Futher, Sasken Communication has been included in the judgement of Infor (India) Private Limited [TS-499-ITAT-2021(HYD)- TP] AY 2016-2017 (Page 11 of the Order). Below is the relevant extract from the ITAT Order: 5. The assessee s 4th substantive ground (having subgrounds (i) to (xiii) challenges correctness of learned lower authorities action rejecting its comparables. Both the parties are ad idem during the course of hearing that this tribunal s co-ordinate bench s order(s) for AY.2014-15 and 2015-16 (supra) have already included M/s.Evoke Technologies Private Limited and M/s.Sasken Communication Technologies Limtied; respectively. The assessee s ground Nos.4(i) and 4(iv) are accepted therefore. 11.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and lack of segmental data, different 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 (P.) Ltd. v. Dy. DIT [2013] 30 taxman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parability. Further, there is no 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 SwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 (Bang. - Trib.) wherein i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different with that of the assessee, this company ought to be rejected as a comparable company. He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the co-ordinate bench excluded this company as comparable. 16.2 The ld. DR, on the other hand, submitted that presence of outsourcing cost/subcontracting cost does not affect functional comparability. Further, it reduces the operating margin of the company, which is beneficial to the assessee. He, therefore, submitted that the TPO/DRP has rightly included this company as comparable. 16.3 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) has excluded this company as comparable by observing as under: '38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 2010-11 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: 6. The TPO has selected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also. 11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ructured data for electronic publishing and providing end-to-end project management services. 14.1 SPI Technologies India Private Limited has been excluded in the case of Entercoms Solutions Private Limited [TS-548-ITAT- 2021(PUN)-TP] Page 10 of the order AY 2015-2016. Below is the relevant extract from the order for ready reference: 10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the Assessee in ITes segment. 14.2 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 14.3 Ld. D.R. relied on the order of Ld. DRP. 14.4 We have heard the rival submissions and perused the materials available on record. This company has been considered as not a comparable in the case of Enterco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I) (P.) Ltd.'s case (supra) and it is being followed. (v) In view of the above, as the proposed question is covered by the decision of this Court, no substantial question of law arises. Thus, not entertained. 9. That even the Pune Bench of the Tribunal in the case of Brintons Carpets Asia (P) Ltd. Vs. Deputy Commissioner of Income Tax, ITA No.1312 1349/PN/2015 dated 29th March, 2019 observed that the assessee before the Tribunal had first claimed that Accentia Technologies Ltd. cannot be selected in the final list of comparables as during the year under consideration, there was an extraordinary event of amalgamation. Thereafter, the Tribunal has analyzed how and what extraordinary event took place in that case and in such scenario, the company cannot be considered as comparable one and the relevant extracts in this regard are as follows: 13. .The learned Authorized Representative for the assessee has pointed out that though the CIT (A) says that there is no such amalgamation but his finding is totally incorrect. In this regard, reliance was placed on the ratio laid down by Pune Bench of Tribunal in Dover India (P.) Ltd. v. Dy. CIT [2017] 88 taxmann.com 115 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re than Rs. 50 crores for the year under consideration which did not meet with turnover filter applied by the assessee. On this point, it was pointed out that the assessee had selected sales/turnover filter of 1-50 crores i.e. any concerns having a turnover exceeding Rs. 50 crores were excluded. Thirdly, it was pointed out that the activities of the said concern were not comparable to the activities of the assessee. 14. The TPO has noted the aforesaid objections of the assessee in para 18.1 of his order and has rejected the same by merely noticing that 75% of the revenue/income of the said concern is from ITES and therefore it is to be considered as a comparable. Before us, the Ld. Representative for the assessee has reiterated the submissions put forth before the TPO in order to justify exclusion of the said concern from the list of comparables. In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. v. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderaba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r ITeS segment. iv. Eclerx Services Ltd. Ld. A.R. submitted that the company offers solutions in the nature of Knowledge Process Outsourcing (KPO) Services. The Appellant submits that the nature of the high end KPO services demanding presence of different skillsets performed by the Company cannot be compared to the low end ITES functions performed by the Appellant. 15.1 Further, Eclerx Services Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (Refer Page 163 of the Case Law Compilation, Para 22-30). Below is the relevant extract from the order for ready reference: 22. Regarding exclusion of Eclerx Services Ltd., the assessee argued that this company is a KPO company and hence, it is not a good comparable. The DRP observed that there is a thin line of difference between BPO and KPO services. KPO is termed as an upward shift of the BPO industry in the value. chain. Thus, BPO trying to upgrade itself as KPO is likely to render both BPO as well as KPO services in the process of evolution and therefore, such an entity cannot be considered strictly as either BPO or KPO. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considered as not comparable in assessee's own case for A.Y. 2014-15 in IT(TP)A No. 3181/Bang/2018 dated 21-5-2020 wherein it was observed as under :- It is noted that this company is involved in high-end KPO services whereas assessee is providing IT enabled services by rendering remote data processing in the field of reinsurance. In our opinion functions performed by this company is not similar to that of assessee even though assessee before us also carries out certain services on contract basis. Ld. AR has placed reliance upon decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-ordinate bench excluded this company as comparable. 17.3 The ld. DR, on the other hand submitted that this company is engaged in rendering ITeS, therefore, functionally comparable to assessee. He submitted that amalgamation has no impact on the profits of the company. He, therefore, submitted that TPO/DRP has rightly included this company as comparable to assessee company. 17.4 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the co-ordinate bench in assessee's own case for AY 2014-15 cited supra has excluded this company as comparable by observing as under: 38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 2010-11 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: 6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS e-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also. 11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company viz. Eclerx Services Ltd. from the list of comparables. Informed Technologies Ltd. 16. Assessee wants inclusion of Informed Technologies India Ltd. Ld. A.R. submitted that the Ld. TPO has alleged that the business of the company is not purely in ITES service and that the company is engaged in the diversified business (page 16 of TP order). However, upon perusal of the Annual report of Informed, it is seen that the Company is into business process outsourcing services, content development and data management techniques and caters to the securities and financial research industry. These services would classify under the nature of ITeS and therefore it is submitted that Informed is engaged in providing ITeS and is comparable to the Assessee. (He referred page 2062 of the paper book). Also, the comparable qualifies all the quantitative filters applied by the learned TPO. 16.1 Further, Informed Technology has been included in the case of Ocwen Financial Solutions (P.) Ltd. [2019] 108 taxmann.com 306 (Bangalore - Trib.) AY 2014-2015 (He referred Page 178-179 of the Case Law Compilation, Para 10). The company has the same functional profile in AY 2014-15 and AY 2016- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee in the case on hand; which is rendering back office ITES. From a perusal of the profit and loss account at page 30 of the Annual Report of 'Informed' it is seen that the total revenue is shown as Rs. 3,81,38,665/-and 'other income' of Rs. 1,22,85,303/-. As can be seen from Schedule 19 on page 40 of the Annual Report, the 'other income' comprises of non-operating income, interest, dividend, sale of current investments and miscellaneous income and evidently these incomes cannot be considered as operating income. The percentage of 67.7% worked out by the TPO is after considering these other income as service income; which is factually incorrect. It is evident from a perusal of the profit and loss account of 'Informed' that the service income is Rs. 2,58,53,362/- which is entirely the revenue from operations and therefore in our considered view, the service income filter of 75% of service income to be from ITES as applied by the TPO, is satisfied in this case. In view of this factual finding rendered in the matter, we hold that this company 'Informed Technologies Ltd.,' satisfies the service income filter and is therefore to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities below. 10.4.1 We have considered the rival submissions and carefully perused the material on record. On a perusal of the Annual Report of this company 'Informed', it is seen that at page 12 thereof it is stated that this company is engaged in and operating as an ITES provider. A perusal of the TPO's order also indicates that the TPO has not disputed that this company is functionally comparable to the assessee in the case on hand; which is rendering back office ITES. From a perusal of the profit and loss account at page 30 of the Annual Report of 'Informed' it is seen that the total revenue is shown as Rs. 3,81,38,665/-and 'other income' of Rs. 1,22,85,303/-. As can be seen from Schedule 19 on page 40 of the Annual Report, the 'other income' comprises of non-operating income, interest, dividend, sale of current investments and miscellaneous income and evidently these incomes cannot be considered as operating income. The percentage of 67.7% worked out by the TPO is after considering these other income as service income; which is factually incorrect. It is evident from a perusal of the profit and loss account of 'Informed' that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whether 'Crystal' has exports/foreign earnings more than 75% of total sales/turnover. The DRP concurred with the finding of the TPO; observing that while it is stated that income from foreign currency is Rs. 3,23,08,386/-, it is not clear whether this relates to export of services as this information is not available and therefore this company 'Crystal' is rejected. 11.2 Before us, it was contended that this company 'Crystal' is functionally comparable to the assessee in the case on hand as it is operating as a BPO Company which is a ITES provider. According to the learned AR, it is very evident from a perusal of the Annual Report of this company 'Crystal' that the income in foreign currency amounting to Rs. 3,23,08,386/- is out of export of services. In support of this contention, the learned AR took us through the relevant pages of the Annual Report of this company, 'Crystal', which is placed at pages 474 to 497 of the paper book. 11.3 Per contra, the learned DR for Revenue supported the orders of the authorities below in not including this company, Crystal Voxx Ltd., in the final set of comparables. 11.4 We have considered th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystal' is functionally comparable to the assessee in the case on hand as it is operating as a BPO Company which is a ITES provider. According to the learned AR, it is very evident from a perusal of the Annual Report of this company 'Crystal' that the income in foreign currency amounting to Rs. 3,23,08,386/- is out of export of services. In support of this contention, the learned AR took us through the relevant pages of the Annual Report of this company, 'Crystal', which is placed at pages 474 to 497 of the paper book. 11.3 Per contra, the learned DR for Revenue supported the orders of the authorities below in not including this company, Crystal Voxx Ltd., in the final set of comparables. 11.4 We have considered the rival contentions/submissions and perused the material on record. We have carefully perused the Annual Report of this company, 'Crystal'. At Note 3 of the Notes forming part of the accounts, at page 491 of the paper book, it is stated that the operations of the company predominantly relate to a single segment, namely BPO Activity . At note 6, the income in foreign currency is shown as Rs. 3,23,08,386/-. In the Director's Report, at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h? B. In respect of ESOP cross-charges incurred by the assessee company, furnish a detailed note on modus operandi of ESOP calculation and vesting period option exercised by the employees and whether section 195 is applicable 20.4 In response, the Appellant had furnished its response vide submission dated 9 December 2019, explaining the reasons why TDS provisions under section 195 were not applicable on the subject cross-charges, which are on cost-to-cost basis. 20.5 However, in the draft assessment order the Learned AO proceeded to adjust the ESOP expenses of INR 28,72,00,000 under section 37 of the Act (without providing the Company any opportunity to explain allowability of expenditure), while the Learned AO also noted his observation on non-deduction of TDS under Section 195 of Act in the Draft Assessment order. a) AO ruling Draft Assessment Order: 20.6 The Learned AO contented the following: The Appellant, at the time of reimbursing the ESOP expenses to Ultimate Holding Company has not deducted TDS on the crosscharge expenses which is violative of the provisions of Section 195(1) of the Act. Consequently, the Learned AO stated that the provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Indian Mollasses Co. Pvt Ltd vs CIT 37 ITR 66; - CIT vs Nainital Bank Ltd 62 ITR 638 20.13 After considering the above points, DRP agreed with the conclusion drawn by the Learned AO and rejected the objections raised by the Appellant against the proposed adjustment. c) Appellant s Arguments: 20.14 In connection with the above adjustment made by the Learned AO, the Company places its reliance on the decision of the jurisdictional Honourable Karnataka High Court in the case of CIT, LTU Vs Biocon Limited (121 taxmann.com 351) (Karnataka HC), which, has inter alia held that ESOP expenses are deductible under section 37 of the Act. 20.15 ESOP cross-charges represents the actual expenditure incurred by the Company in respect of its employees, who form part of the Company s business and are involved in carrying on day-today business operations/management. The Company also submitted the documents such as cross charge invoices, employee listing and Form 16 issued to the employees. Hence, the expense is a genuine expense and the question of these expenses being a colourable device does not arise. The Learned AO has also not alleged that the expenses are not genuine expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - The cross charges from the Ultimate Holding Company represent the cost of these shares as incurred by the Ultimate Holding Company in respect of shares granted to employees of IT(TP)A No.210/Bang/2021 EIT Services India Pvt. Ltd., Bangalore Page 63 of 66 EITS and exercised by them. Accordingly, the subject cross charges and the remittances against the same does not contain any element of income, which is taxable in the hands of the Ultimate Holding Company as the same is cross-charged on cost-to-cost basis. - Provisions of section 195 of the Act inter alia provides for deduction of TDS only in respect of any sum of which is chargeable to tax under the Act. In the absence of any income element in the subject remittance, there is no sum chargeable to tax to Ultimate Holding Company and hence the provisions of Section 195 of the Act would not apply. - The above principle has been upheld by various Courts including the Hon ble Supreme Court in the case of GE India Technology Cen.(P.). Ltd vs CIT [2010] 327 ITR 456 (SC). While the AO has considered the decision of GE India Technology Cen. (P.). Ltd in the FAO but without examining the facts of the case, has proceeded to concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to securities offered by the company at a pre-determined price. In an employees stock option plan a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees. The expression expenditure also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of capital. Held, di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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