TMI Blog2023 (3) TMI 1295X X X X Extracts X X X X X X X X Extracts X X X X ..... gned order and remit the matter back to the file of the AO/TPO to recompute assessee s margin as well as that of comparables by considering forex gain as an item of operating revenue. It would be pertinent to make it clear that our direction is restricted to consider forex gain from transactions of revenue nature only as part of operating revenue. If some part of forex gains is found to be relatable to transactions on capital account, then that part should be excluded from the operating revenue. Selection of comparable companies - Eclerx Services Limited, ICRA Techno Analytics Limited, Acropetal Technologies Limited - A close look at the business profile of the three comparable companies mentioned elsewhere shows that the services offered by these companies are in the nature of ITES only. In fact, we are unable to understand how single customer business (like that of the assessee) affects the functional similarity of the company. The assessee is having single customer business and so also TCS E-Serve Limited, Eclerx Services, which offers ITE services to city group. Similar is the case of ICRA Techno Analytics Limited and Acropetal Technologies Limited. Inclusion of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany was rejected by the TPO on the basis of turnover filter in show cause notice itself. Therefore, the DRP has directed to verify the turnover and decide the inclusion/exclusion of this company after affording reasonable opportunity of being heard to the assessee. We do not find any error or infirmity in such direction of the DRP and, we accordingly direct the TPO/Assessing Officer. We set aside the impugned order and remit the matter for determination of ALP of the international transaction of provision of ITE data conversion services to the file of the AO/TPO for fresh decision in accordance with our above observations/directions after affording adequate opportunity of being heard to the assessee. Interest on a delayed/Non-realization of export proceeds - HELD THAT:- TPO has taken normal credit period of 60 days and accordingly made addition on account of transfer pricing adjustment for the period in excess of 60 days. In our considered opinion, since the assessee has entered into an agreement with its AE for realization of invoices within the period of 150 days, therefore the interest amount of non-realization of invoices upto 150 days appears to have been factored in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermining the total income of the Appellant at INR 4,38,56,650/- as against returned income of INR 18,05,090/- and thereby made an upward adjustment of INR 4,20,51,556/-. Part I - Transfer Pricing Grounds 3. That on facts of the case and in law, the DRP/TPO/AO ignored the principle of natural justice by not dealing with the contentions of the Appellant with respect to the rectification application filed by the Appellant with the TPO/AO. 4. That on facts and in law, the DRP/TPO/AO have grossly erred by charging interest on credit period granted by the company under normal trade practices by: 4.1.1. Identifying outstanding receivables as a separate international transaction; 4.1.2. re-characterizing the nature of outstanding receivables as loan advanced to associated enterprises ( AEs ); 4.1.3 determining the Comparable Uncontrolled Price ( CUP ) method as the most appropriate method to determine the arm s length price of the international transaction; 4.1.4 applying 6 months LIBOR plus 250 basis points as an interest rate on the outstanding receivables. 5. That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant s own case. 12. That on facts of the case and in law, the DRP and TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. ' 13. That on the facts and in the circumstances of the case, the Ld. DRP/TPO/AO have erred by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies 3. In addition to the above, the assessee has also raised additional/ supplementary grounds of appeal which read as under: 4..1.5 Without prejudice not providing credit period of 150 days for receivables basis the inter-company agreement The Appellant also wishes to introduce the following ground after ground 13 as under: 13.1 The learned DRP/TPO/AO has erred in not considering Working capital adjustment while benchmarking international transaction of provision of IT enabled data services. The Appellant submits that the above additional ground raise issues which are fundamental&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve International Ltd. as comparable without considering the fact that it is a ITES/BPO Service providing company and the services regarding software testing, verification and validation of software which are termed as software development are basically covered under BPO services. 6. The Hon'ble DRP has erred in law to direct to exclude M/s Infosys BPO Ltd company on account relying on the judgement of Hon ble ITAT for providing non- Comparable services and on account of its large scale of operations without considering the fact that many comparables being selected by this office and assessee has argued against the Infosys BPO Ltd. only because of its high margin. 7. The Hon ble DRP has erred in law and on facts by directing to apply LIBOR instead of PLR and calculate the interest on the receivable which stayed outstanding for more than 60 days without considering the fact the interest rate cannot be depended upon the currency of receivable amount but it should be calculated by considering the cost of funds. 8. That the appellant craves to leave, add, alter and amend any of the grounds of appeal on or before hearing. 9. That the order of the DRP being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worked out a transfer pricing adjustment of Rs. 21,38,93,273/-. 10. The assessee raised objections before the DRP and was successful in getting certain comparables excluded against which the revenue is in appeal. However, the assessee was unsuccessful before the DRP in respect of the exclusion of certain comparables against which it is in appeal. 11. At the very outset, the ld. counsel for the assessee, referring to Ground No. 11 strongly pleaded that foreign exchange fluctuation gain should have been considered as operating revenue of the assessee as well as that of the comparables. 12. We are of the considered view that in light of the business profile of the assessee, this contention raised on behalf of the assessee about inclusion of foreign exchange gains in operating revenue finds merit. Apparently, it seems that foreign exchange gain earned by the assessee is in relation to the revenue earned from its AE in connection with provision of ITES. We find that foreign exchange gain directly results from consideration received from rendering ITES to AE and therefore, we fail to understand how such foreign exchange fluctuation gain should be considered as non-operating. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment by pointing out differences between it and the comparables. Risk adjustment can be allowed provided the assessee places on record some appropriate material to demonstrate that the risks undertaken by the comparable companies were relatively more than it, warranting downward adjustment in their profit rates. Further, the variation in such risks, if any, should be capable of quantification on some reasonable and logical basis. 7.3. The ld. AR stated before us that the assessee was not having any risk at all inasmuch as its services were to be compensated by the AE with an appropriate mark-up in comparison with the full-fledged risk bearing comparable companies. We are not inclined to accept such a generalized and bald statement. The mere fact that the assessee is a captive unit rendering ITES to its AE alone, does not per se make it a no-risk entity. There are several risks attached to such entities dealing with a single customer. If such lone customer, on whom the enterprise s entire survival depends, closes down its business either voluntarily or due to reasons beyond his control, the possibility of realization of debts for the services already rendered, becomes a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnologies Limited. 18. The assessee also seeks inclusion of : a. CG Vak Software and Exports Ltd, and b. Calibre solutions point Limited. 19. We will first deal with the companies which have been included by the TPO in the final set of comparables and the assessee claims them to be incomparable. 20. The common objection in respect of three comparables objected by the assessee is that all are functionally different and are functionally not comparable. It is further stated that all the three companies namely, Eclerx Services Limited, ICRA Techno Analytics Limited, Acropetal Technologies Limited are engaged in diversified services including software services, consultancy, engineering services etc. It is also pointed out that Eclerx is a KPO entity, which offers financial services also. 21. We have given thoughtful consideration to the orders of the authorities below and have duly considered the objections of the assessee. A close look at the business profile of the three comparable companies mentioned elsewhere shows that the services offered by these companies are in the nature of ITES only. In fact, we are unable to understand how single customer business ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so far as inclusion of Calibre Business Point Business Solutions is concerned, we find that the Coordinate Bench had an occasion to consider three comparables together, namely, R System International Ltd, Jindal Intelicom Private Limited and Calibre Business Point Business Solutions. The relevant findings of the coordinate bench read as under: 12.1.2. After considering the rival submissions and perusing the relevant material, it is noticed that the assessee company is having financial year ending covering the period 1.4.2009 to 31.3.2010. In that view of the matter, a valid comparison can be made only if the comparable companies too have the same financial year. In this regard, we consider it appropriate to note the relevant part of sub-rule (4) of Rule 10B which provides that: the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction had been entered into. It is obvious from the language of sub-rule (4) that the comparability of an uncontrolled transaction can be analyzed only with the data relating to the financial year in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables sought by the revenue in its appeal which are related to Infosys BPO Limited, Acentia Technologies Limited, TCS E-Serve Limited. 26. The coordinate bench has dealt with these comparables in Assessment Year 2010 11 as under: Infosys BPO Limited 10.5.1. The TPO included this company in the list of comparables. The assessee s objections against its inclusion were overturned. 10.5.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, which is available on page 449 onwards of the paper book, that there was acquisition by this company of McCamish Systems LLC. Such information is available on page 456 of the paper book. Acquisition of McCamish Systems LLC during the year, being an extraordinary financial event, renders it incomparable. Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables. i) TCS e-Serve Ltd. 10.3.1. The TPO proposed to treat this company as comparable. The assessee objected to its inclusion by contending that it was providing financial information processing and customer contact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this company. This argument, therefore, fails. 10.3.3. In so far as the objection of the ld. AR about the high profit/high turnover of this company is concerned, we find that the Hon ble Delhi High Court in ChrysCapital Investment Advisors (India) P. Ltd. Vs. DCIT has held , vide its judgment dated 27.4.2015, that high profit or high turnover is not a criteria to exclude an otherwise comparable company. It is further noticed that the Hon ble Delhi High Court in CIT Vs. Agnity India Technologies (P.) Ltd. (2013 ) 219 Taxman 26 (Del) examined the comparability of Infosys Technologies from the angle of its inclusion or otherwise in the list of comparable of Agnity India Technologies, a captive unit providing ITES to its AE alone. In that case, the TPO treated three companies as comparable, namely, Satyam Computer Service Ltd., L T Infotech Ltd. and Infosys Technologies. The DRP excluded Satyam Computer only. The Tribunal excluded only Infosys Technologies Ltd., by impliedly retaining L T Infotech Ltd. as a good comparable. On appeal by the Revenue, the Honourable High Court upheld the Tribunal order excluding Infosys on the strength of certain relevant distinguishing features ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the final list of comparables. 27. Respectfully following the findings of the coordinate bench [supra] in respect of this comparable, we direct accordingly. 28. The revenue has also sought exclusion of Cosmic Global Limited and Informed Technologies India Ltd. 29. In so far as Cosmic Global Limited is concerned, we find that this Tribunal in earlier years i.e. Assessment Years 2009 10 and 2010 11 has held that export earnings filter need not be applied which has been followed by the DRP and, therefore we do not find any merit in exclusion of these comparables and it will remain in the final set of comparables 30. In so far as Informed Technologies India Limited is concerned, it is contended that the turnover of this company is more than Rs. 1 crore and, therefore, passes turnover filter applied by the Assessing Officer whereas the TPO has rejected because this company does not pass turnover filter. It appears that this company was rejected by the TPO on the basis of turnover filter in show cause notice itself. Therefore, the DRP has directed to verify the turnover and decide the inclusion/exclusion of this company after affording reasonable opportunity of being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest and hence there cannot be any question of notional/hypothetical income as determined by the AO/TPO. 37. This contention of the assessee does not find any favour from us. In our considered opinion, Chapter X of the Act has been enshrined to determine the income from an international transaction at ALP, being in the same manner as is determined between two independent parties, which means that if income is not charged or under charged by an Indian entity from its foreign AE, which ought to have been properly charged if the transaction had been between two independent parties, then such under charged or uncharged income needs to be brought to tax by determining ALP of the international transaction giving rise to such income. 38. Our view is fortified by the fact that Finance Act 2012 has inserted Explanation to Section 92B with retrospective effect from 1.4.2002. This retrospective amendment covers the assessment year under consideration. Therefore, apart from any long-term/short-term lending or borrowing, etc or any type of advance payments or deferred payments any other debt arising during the course of business has been expressly recognized as an international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X
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