TMI Blog2022 (11) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... from the list of comparables. Datamatics Business Solutions Limited - As contented segmental financials are not available and also TPO has not considered the correct percentage of export revenue in the earlier 3 assessment years and also margin of last 2 assessment years cannot be considered in view of the export revenue filter. In our opinion, these facts are required to be examined by the AO/TPO. Accordingly, we remit this issue to the file of AO/TPO for reconsideration of this comparable and include this comparable i.e. Datamatics Business Solutions Limited in the list of comparables if it satisfies the export revenue filter. Infosys BPO Limited company is functionally dissimilar and use robotics automation and diversified activities. Therefore, we direct the AO/TPO to exclude this company as comparable for determining ALP. Incorrect disallowance with respect to expenditure on ESOP under section 37 - HELD THAT:- In assessee s group case, namely, EIT Services India Pvt. Ltd. v. DCIT ( 2022 (8) TMI 1309 - ITAT BANGALORE ), had held that the ESOP expenditure is to be allowed as a deduction u/s 37 of the I.T.Act. The Tribunal had followed the judgment of the Hon ble juris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le companies. 1.7. The learned AO/learned TPO/Hon'ble DRP erred in law and facts by not applying the upper limit for the sales turnover filter. The learned TPO/ Hon'ble DRP erred in law and facts by not appreciating the fact that since lower limit on the turnover filter has been accepted by both Appellant and learned TPO, similar filter should also be applied on the upper limit on turnover while carrying out the comparability analysis. 1.8. The learned AO/learned TPO/Hon'ble DRP in law and facts in modifying persitent loss filter applied by the Appellant in TP documentation and thereby rejecting comparable companies having losses in 2 out of 3 years as against 3 out of 3 years as applied by the Appellant. 1.9. The learned AO/learned TPO/Hon'ble DRP erred in laws and in facts in the computation of Related Party Transaction ( RPT ) filter by taking only RPT Incdme/Total Income or RPT Expenditure/Total Expenditure instead of taking the total value of RPT transactions (RPT income + RPT Expenditure) in the numerator and sales in the denominator. 1.10. The learned AO/learned TPO/Hon'ble DRP erred in computing the operating profit to operating c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned TPO/ Hon'ble DRP have grossly erred in rejecting following companies that ought to have been accepted as comparable: Cosmic Global Limited; Allsec Technologies Limited; BNR Udyog Limited; Bhilwara Infotechnology Limited; R Systems International Limited; ISN Global Solutions Private Limited; and E-Zest Solutions Limited; 1,17, The learned TPO has erred in stating that E-Zest Solutions Limited fails the export revenue filter and therefore did not include the comparable in the final set, when E-Zest Solutions Limited actually passes the said export revenue filter for FY 2016-17, FY 2015-16 and FY 2014-15. 1.18. The learned TPO and Hon'ble DRP have erred in rejecting companies sought for 'inclusion' by the Appellant by stating the reason that such comparable companies are not appearing the learned TPO's matrix. In this regard, such reason for rejection is incorrect in light of the recent Bangalore Tribunal ruling in the case of Prism Industries [TS-73-ITAT-2022(Bang)-TP] dated February 17, 2022 which held that Hon'ble DRP was not justified in not considering the inclusion of comparables me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. Further, the Learned AO and Honorable DRP have considered the ESOP cross charge by the Ultimate holding company as fictional and notional in nature which is totally misplaced. 2.7. The Honorable DRP has erred in law and on facts by placing reliance on the case laws decided in different context and not applicable to the facts of the Appellant. 2.8. The Honorable DRP has erred in law and on facts by stating that the ESOP is uncertain by not appreciating the fact that the ESOP expenses are actual expenses claimed by the Appellant, based on actual invoices issued and actual payments made. Non-Applicability of section 195 of the Act 2.9. The learned AO has erred in law and on facts by disregarding that the ESOP expense is liable to TDS under section 192 of the Act as perquisite in the hands of the employees and appropriate taxes are deducted and remitted by the Appellant, which is evidenced by sample Form 16 copies furnished before the honorable AO and DRP. 2.10. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act shall be applicable on the remittance of reimbursement towards ESOP without taking c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation also forms a part of disclosure in Annexures to Tax Audit Report in Form 3CD for AY 2017-18. 3.3. In light of the above, the Centralized Processing Centre (CPC) erred in making an addition in the Intimation under section 143(1) of the Act, in respect of the above depreciation claimed by the appellant. 3.4. The learned AO has erred in not granting an opportunity of being heard to the appellant and has made an addition in the assessment order merely on the basis of intimation order issued by CPC when the said addition was not proposed in the draft order. 3.5. Without prejudice to the above, the learned AO erred in not considering the rectification application filed by the Appellant on the said adjustment. 4. Disallowance of employees' contribution to welfare fund as per intimation under section 143(1) of the Act INR 6,05,333 4.1. The learned AO erred in disallowing employees' contribution to welfare fund [amounting to INR 6,05,333 and deposited by the Appellant before the due date of filing the return of income] under section 36(1)(va) read with section 43B of the Act. 4.2. The learned AO erred in not following the binding decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Tax cost by the Assessee upto 31st March 2016 The ld. A.R. submitted that the Assessee used to do the accounting for expenses inclusive of Service Tax. Thus, the Service Tax amount used to get accounted as regular operating expenses. He stated an example of accounting as below: Rental Invoice amount XYZ as below: Monthly Rent Payable =INR 100,000 Service Tax 12.36% = INR 1,236 INR101,236 Accounting in Books of Appellant as below: Entry 1 Debit Rent Expenses INR 101,236 Credit Payable to XYZ INR 101,236 Entry 2 Debit Payable to XYZ INR 101,236 Credit Bank Account INR 101,236 3. 2 Treatment of Service Tax cost in the billing by the Assessee - The ld. A.R. submitted that the Assessee is a captive service provider entity which provide services to its group affiliates outside India on cost plus basis. For the purposes of billing all costs accounted in books are considered. As the Service Tax is being accounted as expenditure (as explained in the example above) the same is included as operating cost in billing by the assessee to its group affiliates. He stated that if we go with above example in point 1 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee towards receipt of Service Tax refund which was disclosed in FS as Other Income . 3.8 Treatment of Service Tax Refund receipt by the assessee in billing The ld. A.R. stated that as explained in para 3.2 above, the assessee used to bill the Service Tax amount alongwith relevant expenses to its affiliates on cost plus basis. On receipt of refund, the cost base for billing had to be reduced by crediting the relevant expenses. As these refund receipts were for specific period and not for individual input services, the receipt was credited to P L as Other Income . In essence, the effect was to reverse the service tax amount debited to relevant expense accounts in earlier periods which was already billed to affiliates on cost plus basis. 3.9 He stated that as the Service Tax amount when debited to P L as part of relevant expenses was considered as Operating Expenses while determining the cost base for cost plus billing by the assessee, the receipt of same being credited to P L has to be considered Operating Income to ensure consistency in treatment for transfer pricing purposes. 3.10 The ld. A.R. submitted that the assessee has followed a consistent approach o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the current year. The income received as refund on account of excess taxes paid in previous years cannot be part of operating income of the current year. Such amount paid back can be considered as income from other sources. Further, Ld. D.R. stated that the assessee has disclosed the main revenue from IT enabled services at Rs.99,217 lakhs from exports and Rs.8168 lakhs as other income. The Ld. D.R. further submitted that the assessee in its submissions stated that the service tax refund of Rs.4736 lakhs has been shown under other income in the audited financial statements for the F.Y. 2016-17. Therefore, the service tax refund content has not been disclosed as operating revenue by the assessee itself in its financials. This shows that such income is not operating income of the current year as the income has no direct relation with the current year earning machinery of the assessee. Therefore, Ld. D.R. stated that the TPO has correctly treated service tax refund as non-operating income. Accordingly, objection is disposed of . 4.1 The ld. D.R. further submitted that the other item of remeasurement loss on defined benefit plans has been disclosed below the profit line in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parables would also be having similar service tax refund is also admitted by the assessee in para 2.4 of its written submissions filed during hearing on 10.11.2022. 4.5 He stated that the operating income/revenue of the assessee is only that which it receives from its AE on cost plus basis and not anything else. Service tax refund is not the operating income for the year under consideration but relates to some other years. Merely because it has been received during the year, it does not become operating income of the year under consideration as it is neither connected with any revenue of the year under consideration nor is it related to any expenditure of the year under consideration. So the same needs to be treated as non-operating in nature. 4.6 He further stated that the assessee has itself claimed that it is charging the AE on cost plus basis. This service tax was treated as cost in earlier years and profit margin on the same was earned by the assessee in such year. So its profits got enhanced during that year and it got the benefit of such enhanced profit in its TP study for that year. Now in the year under consideration, it has received the refund and thus its cost is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to service tax payment or gets reduced due to service tax refund (as corresponding expenditure gets increased or reduced), that only is its operating income on cost plus basis. 5. We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that the payment of service tax has been considered as a part of operating expenses and on refund of the same by the authorities to be considered as operating income. In this regard, the ld. A.R. placed reliance on the following two judgements: a) Order of the Delhi Bench of Tribunal in the case of Sony India (P) Ltd. v. Deputy Commissioner of Income-tax (114 ITD 448) (Delhi) b) Order of the Bangalore Bench of the Tribunal in the case of Logical Private Limited v. ACIT (36 taxmann.com 374)(Blr.) 5.1 On the other hand, ld. D.R. made a contention that the payment of service tax is not relating to the ITES segment and that part of the cost cannot be considered as a part of the Operating expenses. Similarly, refund of the service tax cannot be considered as part of the Operating income of the assessee. The reliance placed by the assessee on various judgements misplaced. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in the year end Receivable or Payable position. Besides, the 'Payable' and 'Receivable' position stated in the Balance Sheet may not exactly reflect as to whether it arises from transaction relating to Revenue Account or Capital Account as there is no uniformity in the accounting or reporting requirements, and an intermixing is generally possible. The cost ascribable to the working capital would be different to different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible, as the differences in working capital requirements itself is based on various assumptions. Besides, ld. DRP noted that the assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumstances, he argued that revenue is inclined to uphold the TPO's reasoning and reject the assessee's claim for working capital adjustment. Against this assessee is in appeal before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f) ..... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely: (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments. 13. In Paragraph 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epting the calculation given by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and nontrade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT(A) also plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO s working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 173 192 of the Assessee s paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1)( e) (iii) of the Rules, the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quire any adjudication. Hence, this ground is dismissed. 12. Next ground No.1.15 is reproduced below: Comparable companies Information Technology Enabled Services ( ITES ) 1.15 The learned AO/learned TPO/Hon ble DRP have grossly erred in not rejecting the following companies: - Microland Limited; - Datamatics Business Solutions Limited; Vitae International Accounting Services Private Limited; Manipal Digital Systems Private Limited; - CES Ltd; - SPI Technologies India Private Limited; - Inteq BPO Services Private Limited; and - Infosys BPO Limited. 12.1 Out of the above, assessee wants exclusion of following 4 comparables only and no argument put with regard to the other comparables. Hence, other comparables were not considered for adjudication and accordingly dismissed. i. Microland Limited ii. Manipal Digital Systems Private Limited iii. Datamatics Business Solutions Limited iv. Infosys BPO Limited. Microland Limited: 12.1.1 The contention of the ld. A.R. is that it is not functionally comparable to the assessee s case. However, ld. DRP observed that the TPO has mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal business activity of the company is given as IT enabled services which contributes 100% turnover of the company. On perusal of the breakup of the revenue given at page 41 of annual report, the revenue earned from IT enabled services is Rs. 23.63 out of total revenue of Rs.24.34 crores, which comes to around 97.08%. He submitted that 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, he 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the annual report of the company, it is also in end-to-end content services across the value chain. From the website and annual report, it is clearly evident that the company is also engaged in web development, mobile application development. The company also provides publishing editorial composition services, which includes creating layout artwork for advertisements and brochures, typesetting services and proof reading. As per revenue from operations, it includes Revenue from web development and other services (INR 2.18 Cr) and income from e-book Distribution (INR 69 lakhs), without providing the segmental revenue and profitability with respect to ITES segment. Advertising and sales promotion expenses at 6.50%, 7.19% 8.78% of total expenditure in FY 2016-17, FY 2015-16 FY 2014-15 respectively. 12.1.9 Further, the Tribunal in the case of Iron Mountain Services Ltd. in IT(TP)A No.307/Bang/2022 dated 20.9.2022 has held as under:- 16. The next company the assessee seeks to exclude is Manipal Digital Systems Pvt. Ltd. In this regard, it was submitted that this company is engaged in provision of multiple high-end services including KPO activity like Design Services, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and included Manipal Digital Systems Private Limited in the final set of comparables companies. That again the prime observation of the Ld. DRP in this regard was that more than 90% of the total revenue of the operation of the company comes from ITes. 11. At the time of hearing, the Ld. Counsel for the assessee took us through the annual report of the company at Volume II, Page 1279 onwards, Page 1302 having notes of accounts. The Ld. Counsel vehemently submitted that on perusal of the annual report, notes of accounts, nothing can be stated whether at all this company i.e. Manipal Digital Systems Private Limited is engaged in the business of call center or not. The realm of ITes involves various activities and on general principle the Revenue cannot say that since majority of the earning of the said company comes from ITes, it is comparable company with that of the assessee company. 12. Placing strong reliance on the decision of the Honble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT, ITA No.102/2015 dated 10.08.2015 copy of which is placed before us, the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovider. 33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP. 13. The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein cannot be doubted. These are all multinational companies and certain amount of honesty has to be attributed to them since all are functioning as per relevant rules and laws. With these observations and respectfully, following the judgment of the Hon ble Delhi High Court (supra.) we direct the AO/TPO to exclude this company i.e. Manipal Digital Systems Private Limited from the final set of comparables with that of the assessee company. 17. Learned DR submitted that the aforesaid decision was in relation to Assessment Year 2016-17 whereas the case of the assessee in this appeal is in reference to Assessment Year 2017-18. Learned Counsel for the assessee submitted that the functional profile of the comparable company as well as the assessee remains the same for both Assessment Years 2016-17 and 2017-18 and therefore the decisions cited above are applicable to Assessment Year 2017-18 also. 18. We have given a careful consideration to the rival submissions and are of the view that it would be just and appropriate to set aside the question of comparability of Manipal Digital Systems Pvt. Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. Accordingly, ld. DR objected the plea of the assessee. Therefore, he stated that the company is functionally similar to the assessee as it is being predominantly into ITES company. 12.1.13 The ld. DR further stated that as regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As regards, the export revenue as given in Note No. 18, the revenue is around Rs.50.43 crores as on 31.03.2017 as against total revenue of Rs.62.70 crores, which comes to 80.43%. As the company is functionally similar and satisfies the filters adopted by the TPO including export revenue filter of more than 75%, the company is considered as comparable. Therefore, he stated that the action of the TPO considering the company is upheld by the Ld. DRP. 12.1.14 The ld. D.R. further stated that at the outset, it is pertinent to note, that the assessee has challenged the selection of some compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the prayer of the tax payer for exclusion of the said comparable cannot be ousted on the ground that it was not objected to in the previous assessment year. Whether 5 particular comparable is accepted or rejected in a previous assessment year consciously or inadvertently by the assessee or the authorities is not the basis on which the issues can be decided. As and when challenge is posed of the inclusion or exclusion of a comparable the challenge has to be considered on the basis of facts and evidence on record for that year. It is after the facts and evidences are taken into consideration that the relevance of applying a precedent would come into play. In the facts of the present case, we find that the revenues from the software development segment of this comparable constituted 96% and this finding of fact has not been assailed by the assessee. 12.1.16 Therefore, the ld. DR submitted that inclusion or exclusion of a comparable has to be necessarily justified on the basis of facts available on record, the FAR analysis and the information in the annual reports submitted for each year and not on the basis of judicial precedent. 12.1.17 We have heard the rival submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 2016-17, in the assessee s own case in IT(TP)A No.212/Bang/2021 dated 27.9.2022, the Tribunal has considered this company as not comparable wherein held as under: 10. As mentioned earlier, the limited submission of the assessee before the Tribunal as per ground 1.12 is seeking exclusion of three companies from the list of comparable companies, namely, (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited. We find in the case of assessee s group company namely EIT Services India Pvt. Ltd. v. DCIT (supra), the above three companies were excluded from the list of comparables on account of functional dissimilarities. We find that profile of the assessee in the instant case and that of the assessee in case of EIT services India Pvt. Ltd. are identical. Moreover, the assessment year is the same. The relevant finding of the Tribunal in the case of EIT Services India Pvt. Ltd. v. DCIT (supra) reads as follows (For exclusion of (i) Infosys BPO Limited, (ii) SPI Technologies India Pvt. Ltd. and (iii) Eclerx Services Limited) :- 13. Further, the assessee wants exclusion of following comparables in IT enabled servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-contractors are used for operational activities. This is a common practice in almost all the companies to give a small portion of the work to some other subcontractors for a variety of reasons. This may allow the company to focus on its core activities. Sometimes it may be to meet the mismat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions 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 above order of the Tribunal, we are inclined to hold that this company should be excluded from the list of comparables. 13.3 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 Hyde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 objection was that the said company renders vide array of services and has high brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld.DR that D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd., [2013] 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS EServe Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Entercoms Solut ions Pvt . Ltd. in assessment year 2015-16 in ITA No.1826/Pune/2019 dated 25.10.2021 wherein held as under:- 8. We find the Hon ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax Vs. PTC Software (I) (P) Ltd. (2019) 101 taxmann.com 117 (Bombay) has held that in case the assessee rendering ITES services to AE, a company in whose case extraordinary event of amalgamation took place during relevant year, could not be accepted as comparable and was decided in favour of the assessee. Similarly in the case of Pr. Commissioner of Income Tax Vs. J.P Morgan India (P) Ltd. (2019) 102 taxmann.com 335 (Bombay) , the Hon ble Jurisdictional High Court on the same issue has held as follows: (iv) Mr. Percy Pardiwalla, learned senior counsel appearing on behalf of the respondent invited our attention to the final decision of this Court in Pr. CIT v. Aptara Technology (P.) Ltd. [2018] 92 taxmann.com 240 and Pr. CIT v. PTC Software (I) (P.) Ltd. [2019] 101 taxmann.com 117 (Bom.). In both the above decisions this Court has taken a view that merger/amalgamation is an extra ordinary event and would have an impact /effect on the financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. Dy. CIT [2017] 88 taxmann.com 115 (Pune - Trib.), wherein for assessment year 201011 itself, the said concern Accentia Technologies Ltd. was excluded being high end KPO service provider. Further, the Tribunal in BNY Mellon International Operations (India) (P.) Ltd. (supra) have noted the extraordinary event of acquisition and also amalgamation of another concern and held that the said concern could not be selected as comparable. The relevant findings of Tribunal are in paras 12 and 13, which read as under: '12. The next concern against which the assessee has raised objections is Accentia Technologies Ltd. on the ground of extraordinary events during the year under consideration. The said concern had acquired IQ group of companies in the United Kingdom and there was amalgamation of Asscent Infoserve Pvt. Ltd. with the said concern and because of these extraordinary events, the margins of said companies should not be included in the final set of comparables. The Pune Bench of Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (2016) 72 taxmann.com 352 (Pune - Trib) and Cummins Turbo Technologies Ltd. v. DCIT (2017) 79 taxmann.com 260 (Pune - Trib) has held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar situation following the decision of the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited v. DCIT, (2013) 32 taxmann.com 21 (Hyd.). 15. We have considered the submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable. 15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d therefore, such an entity cannot be considered strictly as either BPO or KPO. In view of the above, ITeS service's cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. The DRP noted that the functional profile of this company was similar to the assessee. 23. Regarding the amalgamation of wholly owned subsidiary Agilyst Consulting Pvt. Limited has taken place with effect from 1-4-2015, the DR observed that the assessee has not demonstrated any increase in profits due to this amalgamation. Therefore, this amalgamation has no impact on comparability. Accordingly, the plea was rejected. 24. With regard to acquisition resulting in inorganic growth, the DRP noted that the company has acquired entire shareholding of CLX Europe SPA, Italy, as on 22nd April 2015 and this acquisition was made by the company's overseas subsidiary e-Clerx Investments (UK) Ltd. Therefore, there is no merit of the objection, as the standalone financials of this company are considered for comparability. 25. The assessee also raised the objection that there is incre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce upon decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573/377 ITR 533 Hon'ble Court had held that once a company falls into the category of high-end KPO, it cannot be functionally comparable with a BPO service provider like that of assessee. Applying this reissue in the present case, we direct Ld.AO to eliminate this comparable from final list. 30. In view of the above order of the Tribunal, we are inclined to direct that Eclerx Services Ltd. be excluded from the list of comparables. 15.2 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. 15.3 In view of the above-mentioned reasons, the Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 15.4. Ld. D.R. relied on the order of Ld. DRP 15.5 We have heard the rival submissions and perused the materials available on record. This company is not considered as comparable in the case of ADP Pvt. Ltd. cited (supra) in assessment year 2016-17, wherein they excluded the comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 objection was that the said company renders vide array of services and has high brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld.DR that DRP was not correct in excluding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparability 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 Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies P. Ltd., (2013) 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS E-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS e- Serve Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing, the ld. A.R. pressed only following 4 comparables for inclusion: a. Bhilwara Infotechnology Limited; b. R Systems International Limited; c. ISN Global Solutions Private Limited; and d. E-Zest Solutions Limited; 13.2 The other comparables are not pressed. Accordingly, dismissed as not pressed. Bhilwara Infotechnology Limited R Systems International Limited: 13.3 The ld. DR submitted that the Ld. DRP given findings that the above companies do not figure in the search matrix of the TPO. The ld. DRP has already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted by the TPO. Based on the fresh search, the TPO has identified the comparables. The assessee can only ask those companies out of the TPO's search matrix which have been wrongly rejected by the TPO. As these companies do not figure in the TPO's search matrix, ld. DRP opined in his report that the functionality is not required to be seen at all, as it amounts to cherry picking. 13.4 We have heard the rival submissions and perused the materials available on record. The ld AR submitted that this comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices amounting to Rs.81.46 crores as per the information statement of profit and loss account given at page nos. 123-125 of the annual report. The company reported that it is exclusively engaged in the business of IT enabled services. This is the context of on segment reporting and is considered to constitute a single primary segment. As it is part of search matrix of the TPO and functionally similar to the assessee, the TPO is directed to include the comparable for the comparability analysis under ITES segment if it satisfies the filters adopted by the TPO. 13.9 However, the AO/TPO has not included E-Zest Solutions Ltd. in the list of comparables while determining the ALP. However, we direct the AO/TPO to pass the above order in conformity with the order of the Ld. DRP as recorded in para 13.8 above. This ground of appeal of the assessee is allowed. Corporate Tax Issues (Grounds 2.1 to 2.15): 14. The assessee has raised following grounds of appeal: B. Corporate Tax 2. Incorrect disallowance with respect to expenditure on ESOP under section 37 of the Act INR 7,29,00,000 2.1. The Learned AO and Honorable DRP have erred in law and on facts, in disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd on facts by disregarding that the ESOP expense is liable to TDS under section 192 of the Act as perquisite in the hands of the employees and appropriate taxes are deducted and remitted by the Appellant, which is evidenced by sample Form 16 copies furnished before the honorable AO and DRP. 2.10. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act shall be applicable on the remittance of reimbursement towards ESOP without taking cognizance of the fact that there was no income element arising to the recipient from such remittances. 2.11. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act have not been complied with and consequently reimbursement towards ESOP shall suffer disallowance under section 40(a)(i) of the Act, without evaluating the fact that the provisions of section 195 of the Act are not applicable to such remittances. 2.12. The learned AO has erred in law and on facts by relying on decision of Danfoss Industries P Ltd (2004) 268 ITR 1 pronounced by the Hon'ble Authority for Advance Ruling ( AAR ). The transaction covered by the said decision is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputed by TPO before the AO passes the assessment order. If the intention of the legislature was that the operating margins of the assessee should be enhanced on the basis of disallowance or additions made by the AO then it could have specified that a preliminary draft assessment order will first be passed by the AO after making disallowances or additions and thereafter the TP study would be carried out to determine ALP by the TPO which can then be added to income of the assessee and then AO would pass the final draft assessment order. The DRP has correctly placed reliance on the decision on the case of Cushman and Wakefield (India) (P) Ltd (Para 2.12.3 of DRP order page 47-48). The same is reiterated. 14.3 The ld DR further stated that the assessee is getting remunerated on cost plus basis. So its operating cost is what it has declared to its AE for purposes of remuneration on above basis. So ESOP expenditure is part of such expense claimed by it as part of its operating cost and it has got remunerated on cost plus basis on the same from the AE. Any change in the expenditure or income by the AO will thus not alter the operating cost or operating revenue of the assessee, which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al statement, the assessee had two types of share based compensation scheme operational, namely, Employee Stock Purchase Plan (ESPP) and Employee Stock Incentive Plan (ESIP) (hereinafter referred to as ESOP Scheme). It was stated that the shares were issued below market price and the discounted value was treated as perquisite u/s 17(2) of the I.T.Act in the hands of the employees and assessee had deducted appropriate TDS u/s 192 of the I.T.Act. It was stated that to the extent of discount, the holding company had cross charged the assessee. It was stated that it is in respect of cross charges incurred towards options exercised and shares purchased by employees of the assessee, the same was claimed as deduction u/s 37 of the I.T.Act. The A.O., however, held that ESOP expenditure booked by the assessee and reimbursed to the holding company is a fictitious expenditure and notional in nature. Though the A.O. had mentioned about the violation of the provisions of section 195(1) of the I.T.Act and consequent disallowance u/s 40(a)(i) of the I.T.Act, the A.O. held that the assessee has not satisfied conditions specified u/s 37 of the I.T.Act for claiming such expenditure. The objections f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in ITA No.248/Bang/2010, A.Y. 2004-05 and other connected appeals, by order dated 16.07.2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is necessary for the Assessee to retain a health work force. Business expediency required that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. This will be no ground to deny the deduction of a legitimate business expenditure to the Assessee as laid down by the Hon ble Supreme Court in the case of Sassoon J.David (supra). 21. The reference by the CIT(A) to the provisions of Sec.40A(2)(b) of the Act is again without any basis. The price of the shares of NNAS is arrived at by applying the average market price for the period 3rd October, - 17the October, 2005 in the Copenhagen Stock Exchange. The price so arrived at and the price at which shares are issued to the employees of the Assessee is the benefit which the employees get under the ESOP. The Assessee or its parent company can never influence the stock market prices on a particular date. There is no evidence or even a suggestion made by the CIT(A) in his order. There is no basis to apply the provisions of Sec.40A(2)(b) of the Act. 22. With regard to the decision of the ITAT in the case of Accenture (supra), we find that the facts of the case of Accenture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rroneous. 23. With regard to the observations of the CIT(Appeals) that the ESOP actually benefits only the parent company, we are of the view that the expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act. The decision of the Hon ble Supreme Court in the case of Sassoon J. David Co. (P) Ltd. (supra) and the Hon ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in this regard. 24. We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. 25. For the reasons given above, we direct the expenditure be allowed as deduction. 4.1. Further, the Tribunal in the case of Global e-Business Operations (P) Ltd. in IT(TP)A No.212/Bang/2021 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, dismissing the appeal, that the deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of account, which had been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For assessment year 2009-10 onwards the Assessing Officer had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the assessment year 200405. The expenses were deductible. 21. In view of the above judgement of Hon ble Karnataka High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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