TMI Blog2023 (3) TMI 1220X X X X Extracts X X X X X X X X Extracts X X X X ..... of compar ables as functionally dissimilar. CES Limited be excluded from the list of comparables as it is providing both BPO and KPO services, cannot therefore be held as comparable. Charging of interest u/s 234A 234B - As submitted assessee filed return of income within the time stipulated in section 139(1) of the Act and as such there was no delay in filing the return of income - HELD THAT:- The levy of interest u/s 234A of the Act is bad in law. In our opinion, this requires to be verified at the end of the AO if the return has been filed within the due date prescribed u/s 139(1) of the Act, there cannot be any levy of interest u/s 234A of the Act. With regard to levy of interest u/s234B of the Act, which is consequential and mandatory in nature and to be computed accordingly. - IT(TP)A No.186/Bang/2022 - - - Dated:- 5-1-2023 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER For the Appellant : Shri Nageswar Rao, A.R. For the Respondent : Sri Sreenivas T. Bidari, D.R. ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by the assessee is directed against final assessment order passed u/s 143(3) r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble companies (i.e., companies having different accounting year other than March 31 or companies whose financial statements were for a period other than 12 months); The learned TPO/ learned AO have erred, in law and in facts, by rejecting the filter adopted by the Appellant for rejecting companies owning significant intellectual property or developing proprietary products; 10. The learned TPO/ learned AO have erred, in law and in facts, by rejecting the filter adopted by the Appellant for rejecting companies who have reported extra ordinary events like mergers and acquisitions, in its financial statements; 11. The learned TPO/learned AO have erred in law and in facts, by accepting/rejecting certain companies based on unreasonable comparability criteria; 12. The learned TPO/ learned AO have erred, in law and in facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables. 13. The learned TPO/ learned AO have erred, in law and in facts, 'by not making an adjustments to account the difference in working capital of the Appellant vis-a-vis the cornparables. Grounds specifical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the grounds of appeal and other grounds are not pressed. Accordingly, we confine to the adjudication of ground Nos.14, 16, 18 19 only. Other grounds are dismissed as not pressed. IT Enabled Services Segment: 3. At the time of hearing, the assessee confined for exclusion of following 3 comparables in ground No.14 on the basis of turnover filter. Accordingly, other comparables are not considered for adjudication. Sl.No. Name of the company Turnover (in Crores) 1 Infosys BPM Services Pvt. Ltd. 2940 2 SPI Technologies India Pvt. Ltd. 344.39 3 Tech Mahindra Business Services Ltd. 707.60 Software Development Service Segment: 4. At the time of hearing, the assessee is confined his arguments in ground no.16 with reference to following 8 comparables: Sl.No. Name of the company Turnover (Rs. In crores) 1 L T Infotech Limited 6182.90 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bangalore Bench of the Tribunal in the case of Autodesk India (P) Ltd. v DCIT, Circle 11(1), Bangalore (supra) has held as follows:- 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a nonjurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 5.1 In view of the above, taking a consistent view applying the turnover filter, we direct the AO/TPO to exclude above 3 comparables in ITeS segment and 9 comparables in software development segment as the turnover of the above companies are over Rs.200 crores. Ordered accordingly. 5.2 The assessee wants exclusion of following comparables on the basis of functionality since the assessee is engaged in the provision of IT development services and IT Enabled services to its AEs. The company is to build competency and provide world class, high quality IT solutions and services with a special focus on next generation Laboratory Information, Man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly qualified/skilled also goes up steeply and, therefore, the margins are not much affected. In fact, no evidence has been produced before NFAC to show that margins in the high end segments of ITES services is high compared to low end services. Therefore, NFAC was unable to accept the argument advanced by learned AR that the comparables belonging to high end segments such as KPO etc. should be excluded from the comparability list on this ground alone. In fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. In view of the above, NFAC concluded that ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s action of selection of four of the comparables and accepted the assessee s contention in rejection of two the comparables. 12. Now in appeal before us, the submission of the learned counsel of the assessee is that assessee's functions are that of ITES which has been duly accepted by the revenue as well as by the ITAT in earlier years. Hence, the recharacterisation of the assessee's functions as knowledge process outsourcing is not sustainable. We are in full agreement with this contention. Furthermore, we find that the ld. CIT(A) has clearly contradicted himself by stating both that assessee is not a KPO and at the same time accepting the comparables selected by the Transfer Pricing Officer from the database for knowledge process outsourcing companies. 13. As regards the rejection of four companies, it is the submission of learned counsel of the assessee that the functions of Eclerx Services Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) has been held to be not comparable to the assessee by the ITAT for the assessment year 2007 08. In this regard, we find that ITAT in the aforesaid order has observed as under: 32. As noted earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations had partly disagreed with certain grounds as had been averred by the Ld. A.R to facilitate exclusion of the aforesaid comparable, however as observed by us hereinabove that the aforesaid comparable viz. Coral Hub Limited (earlier known as Vishal Information Technology Limited) had a business model where services are outsourced, as ' against the business model of the assessee where services are rendered by employing own employees and using one's own infrastructure, on the basis of which we are of the considered view that it can safely be concluded that the said comparable was functionally different, and as such was liable to be excluded from the final list of comparables. That our aforesaid view stands fortified by the aforesaid order passed by the Tribunal while disposing of the appeal of the assesses own appeal for A.Y. 2005-06, as well as the judgment of the Hon'ble High Court of Delhi in the case of : Rampgreen Solutions (P.) Ltd. (supra). Thus as there has been no material shift in the facts involved in the case of the assessee for the year under consideration, as observed by us hereinabove, we are thus of the considered view that as the business model of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63 crores out of total revenue of Rs.24.34 crores which comes to around 97.08%. The other activities like pre-media work, e-distribution contributes around Rs.0.70 crores which is a minor revenue. The assessee, based on the website information, argued that the company is into diversified activities that can be classified as KPO services as per the definition of safe harbour rules. At the outset, the CIT(A) noted that the information put in website cannot be given complete credence, as they are mere forward looking information and statements with the motive of advertisement and other promotional gains. The functional aspect has to be determined by the information in the annual report which is based on audited financial statements and management reports, for qualitative analysis of comparability. The fact that the company is into ITES segment is corroborated by the corporate information given at page 45 of the annual report where it is lucidly stated that the main business of the company is to provide information technology enabled services that means pre-press activities mainly to overseas as well as domestic customers . Therefore, the ld. CIT(A), NFAC observed that the pleas raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, the ld. CIT(A) observed that the assessee has wrongly mentioned about new share holding pattern of the company instead of the above information reported in the annual report. In fact, there are no material changes affecting the financial position of the company. Further, the assessee also could not point to any information to show, that on account of such acquisition, merger or change in the share holding pattern materially affected the profit margin of this company. Thus, the ld. CIT(A) was of the view that there are no material changes affecting the financial position of the company as per the information in the annual report. Hence, the plea raised by the assessee was rejected by the ld. CIT(A). 9. We have heard the rival submissions and perused the materials available on record. Similar issue was considered by this Tribunal in IT(TP)A No.174/Bang/2022 dated 16.11.2022 for the AY 2017-18 in the case of M/s. Global E-Business Operations Pvt. Ltd. wherein it was held as under: 12.1.8 We have heard the rival submissions and perused the materials available on record. As per the annual report of the company, it is also in end-to-end content services across the value cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided by the assessee was from website and it cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the contention of the assessee was rejected and the company was taken as comparable company. 10. That before the Ld. DRP, objections have been raised by the assessee which are at running Page No.34 of the appeal memo and therein, apart from reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions performed by the company. The Ld. DRP vide Para (c) of Page No.67 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider. 33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing through the order of the TPO, findings of the Ld. DRP and the various judicial pronouncements placed on record, first of all the Revenue has selected Manipal Digital Systems Private Limited as comparable to that of the assessee company based on the earning of the company from ITes. However, there is no segmental specification provided neither by the TPO nor by the Ld. DRP for the reason of such inclusion of this company in the final set of comparable companies with that of the assessee company. In the decision of the Hon ble Delhi High Court (supra.), it is very much clear in the wide spectrum of ITes if two companies are to be comparable one has to look into the characteristic of service or business provided under ITes by them. This exercise was not done by the Department in this case. We also opine that as per Indian Council for Advertising, the online advertising has to be published on true and honest disclosure basis and therefore, when proper documentation of activities are not physically available, in such scenario, referring the website for information is correct option and the information therein cannot be doubted. These are all multi-national companies and certain amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices-BPO/KPO (pg. No. 42 of AR). As per the details of business segment given at page 112 of the annual report, the revenue derived from IT enabled services out of the total revenue of 67.1 crores is 56.8 crores which comes to 84.64% of the total revenue. This clearly shows that the companies operations predominantly relate to IT enabled services, through it has minor IT services segment (10.29 crores - 15.33%). The assessee's argument that the comparable is into different activities is based on the website information. It is seen that the assessee has raised pleas against functional comparability of the company, with reference to certain information said to be available in the company's website. At the outset, we note that the information put in website cannot be given complete credence, as they are mere forward looking information and statements with the motive of advertisement and other promotional gains. Further, the information in website are dynamic and cannot be related to a particular period. There is no way to verify whether the said information has any relevance for the year under scrutiny or it totally related to subsequent current year developments. There is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 29.7.2022 for the AY 2016-17 wherein held as under: 8.1 This comparable was also chosen by the TPO. The assessee s objection that this company was engaged in rendering KPO services as well was not approved by the TPO, who went with its inclusion. 8.2 The Annual report of this company shows that it is engaged in both the IT and IT enabled services. As the company has segmental accounts, the TPO has considered only IT enabled services segment for the purposes of comparability. However, what is important to note in the instant context is that the assessee is rendering only translation services etc., which fall within the overall domain of the BPO services. As against this, CES Limited is engaged in providing both BPO and KPO services as has been reported by it to the Registrar of companies in the requisite form. The Pune Benches of the Tribunal in Credence Resource Management Pvt. Ltd. Vs. ACIT (ITA No.133/PUN/2021) vide its order dated 18- 06-2021 has noted that CES Limited is rendering both BPO and KPO services, discussing this issue at page 19 of the order. In view of the fact that the assessee is engaged in rendering only BPO services, CES Limited providing both BPO a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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