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TMI Blog2023 (4) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... g the addition of Rs. 4,09,29,957/- made by TPO u/s 92CA of the Act. 2. That the Ld. DRP has has erred in sustaining the filters applied by the TPO/ AO which are arbitrary and legally unjustified thereby rejecting certain comparable companies which were selected by the appellant company to benchmark the international transaction with AE. 3. That the Ld. DRP has erred both in facts and in law in accepting inappropriate comparables selected by the TPO/ AO, which in terms of F.A.R. are materially different with the appellant company. 4. That the Ld. DRP erred in law and on facts while sustaining the order of TPO/AO without making adjustment on account of differences in the risk profile of the appellant vis-à-vis the comparable companies. 5. That the Ld. DRP erred in law and on facts while sustaining the addition made by the TPO/ AO on account of working capital adjustment on receivables in U. S. dollars from the US holding company by the Philipines Branch of the assessee company, which in an independent PE liable to tax in Philipines. 6. The Ld. DRP has erred in law and on facts in sustaining the working capital adjustment made by the TPO/ AO by applying SBI Prime Len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Medical Transcription, Income from Coding, Billing and collection which are a low-end IT enabled service? 5. Whether, the DRP was justified in considering the Forex gain/loss as operating in nature for determination of ALP, when same has no relation with the business of the assessee? 6. Whether the DRP-2 was justified in directing the AO to re-compute the disallowance u/s 8D by excluding investment which do not yield any exempt income? 7. The appellant craves to be allowed to add any fresh ground of appeal and/or delete or amend any of the grounds of appeal." 3. A reference under section 92C(1) of the Act was made by the DCIT, Circle : 17(1) New Delhi [Assessing Officer] for determination of Arms Length Price in the international transactions undertaken by the assessee during the financial year 2010-11 relevant to assessment year 2011-12. Business profile of the assessee and the Group: 4. The assessee M/s. vCustomer Services India Pvt. Ltd. [for short vCustomer India] is a wholly owned subsidiary of vCustomer US. M/s. vCustomer India is primarily engaged in providing IT enabled services to its parent company vCustomer US. The assessee has the expertise in providing proces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nabled services was bench marked by the TPO taking the Arms Length Price at a margin of 58.77% and proposed adjustment under section 92CA at Rs.6,91,43,062/-. Draft assessment order was passed on 20.03.2015 proposing the said adjustment under section 92CA of the Act and also disallowance under section 14A read with Rule 8D at Rs.14,94,534/-. The assessee submitted its objections before the DRP and the DRP by order darted 30.11.2015 directed the Assessing Officer to exclude Accentia Technologies Ltd. and Eclerx Services Ltd. from the list of the comparables selected by the TPO and the rest of the comparables sustained by the TPO was selected by the DRP. 8. Before us the ld. Counsel for the assessee submits that the assessee is agitating in its appeal for inclusion and exclusion of the following comparables from the final set of comparables. (A) For inclusion : (i) CGVAk Software Limited (ii) Informed Technologies India Ltd. (iii) R. Systems International - BPO services (B) For exclusion : (i) ICRA Techno Analytics Limited. (ii) Infosys B.P.O. Ltd. (iii) TCS E-Serve Ltd. (iv) Acropetal Technologies Ltd. (Seg) 9. The Revenue in its appeal is challenging the directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on this issue are rejected. CG VAk Software Limited : 14. Coming to assessee's appeal, the inclusion of CG VAk Software and Exports Limited in the final set of comparables the ld. Counsel for the assessee submits that the Tribunal in assessee's own case for the assessment year 2010-11 by order dated 4.11.2015 in ITA. No. 1066/Del/2015 has accepted for inclusion of this company as comparable. The ld. Counsel for the assessee further submits that the decision of the Tribunal was also upheld by the Hon'ble Delhi High Court vide its order dated 27.05.2016 in ITA. 340/2016. The ld. Counsel submits that these orders are placed at page Nos. 442-443 and 455 in Volume 2 of the paper book. The ld. Counsel further submits that the reason for exclusion of this company is the same this year also. The ld. Counsel submits that the TPO excluded this company on the ground of low turnover as the sales of BPO segment are less than Rs.1 crore. 15. The ld. DR placed reliance on the order of the DRP/TPO. 16. We observe that the facts for assessment year 2010-11 are identical to the facts for the year under consideration i.e. Assessment Year 2011-12 and the Tribunal in Assessment Year 2010-11 direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the TPO, we observe that Informed Technologies India Ltd. was rejected by the TPO for the reason that as per the annual report of the company income from data processing and BPO services was shown at Rs.1.75 crores out of total income of the company at Rs.4.08 crores. The TPO observed that out of the total income of Rs.4.08 crores the other income is Rs.2.32 crores and hence its main income is from other income and, therefore, it failed service income filter and, therefore, not considered as comparable. The TPO also observed that the company has rental income of Rs.2.08 crores and the expenses corresponding the same are not ascertainable. 20. The ld. Counsel, however, submitted that the TPO has excluded this company on the ground of low turnover which appears to be not correct. The TPO observed that the assessee has used filter of the ratio of service income to total income filter at atleast 75%. The TPO observed that the service income filter which was set by the assessee failed because as per the annual report the other income is more than the service income and not on account of low turnover. Thus the decisions relied on by the ld. Counsel for the assessee has no applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d because it seemingly had a negative growth graph. 14. The Revenue is in appeal before this Court questioning the admissibility of the above mentioned comparables while computing Arm's Length Price regarding the IT Support services after the TPO and AO rejected the above mentioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT(A) after considering the Assessee's submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by TPO because the company had different financial year ending on December, 2006, whereas Assessee's financial year ended on March, 2006. There is nothing shown to the court that supports the revenue's argument that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included in the list of comparables selected for benchmarking the international transaction. Therefore, the ITAT has held that if the comparable is functionally same as that of tested party then same cannot be rejected merely on the ground that data for entire financial y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is available for two segments i.e, services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting. No segmental information for BPO services. (Pg. 279-280/FS-1) " 27. The ld. Counsel further submits that this company has been excluded by the Bangalore bench of the Tribunal in the case of Cerner Healthcare Solutions (P.) Ltd. Vs. ITO [(2017) 79 taxmann.com 64 (Bangalore - Trib.) for assessment year 2010-11 for the reason that ICRA Techno Analytics Ltd. was into diversified activities, software development, consultancy and engineering services, web development and hosting and subsequently diversified into business analysis and business processing outsourcing and, therefore, it is not functionally comparable with that of the assessee. The ld. Counsel further submits that similar view has been taken by the Bangalore Bench of the Tribunal in the case of Applied Material India (P.) Ltd. [73 taxmann.com 160]. 28. The ld. DR supports the order of the DRP/TPO. 29. Heard rival submissions perused the orders of the authorities below. From the perusal of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition during the assessment year under consideration and, therefore, the facts are entirely different. 33. Heard rival submissions perused the orders of the authorities below. The Tribunal in assessee's own case for assessment year 2010-11 excluded Infosys B.P.O. Ltd., observing as under:- "34. Infosys BPO: In the case of Techbook International Pvt. Ltd. (supra)/ the Tribunal has excluded this company from the list of comparables/by observing as under: 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 Mcf.amish 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." Respectfully following the Tribunal's decision in the case of Techbook International Pvt. Ltd. (supra), this company is excluded from the list of comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and reached a conclusion that these two companies are valid comparables for the back office support transactions. He submitted that there is no change of functions of these two companies from earlier years. So also the functions of the assessee. He, therefore, urged to uphold the action of the Id. DRP for this year. 86. In reply, it is the argument of the Id. AR that the order for AY 2010-11 was pronounced on 5.1.2018 and the assessee is carrying the matter in appeal to higher forums. However, he brought to our notice that a Coordinate Bench of this Tribunal in BC Management Services (P.) Ltd. v. Dy. CIT, ITA 6134/Del/2015 and batch by order dated 25.5.2017 held that : "18. We have heard the rival submissions perused the relevant findings given in the impugned orders as well as the material placed on record. One of the main points of distinction which is quite ostensible is that the "TCS E serve" is a subsidiary of Tata consultancy services Ltd, which is one of the leading and gentle company in the world and has an inherent element of very high brand value associated with it. Such a high brand value definitely has an impact on the pricing policy, niche market, contractual terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that the Tribunal did not find that TCS e-Serve is functionally dissimilar to the BC Management services (P) Ltd. (supra). In spite of the same, the Tribunal recorded that the employee cost base at more than 64 times and the turnover at more than 67 times as compared to the assessee therein suggests that the assets employed by the TCS e-serves along with huge intangibles in the form of brand value impacted the PLI and vitiated the comparability under FAR analysis. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value; that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court cannot be termed as unreasonable. The rationale for exclusion is, therefore, upheld. 87. It is, therefore, clear now that in spite of a close functional similarity between the assessee and the TCS Eserve, in view of the close connection between TVS e-serve and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt outsourcing etc. and also having goodwill of Rs.2.27 crores. We observe that all these factors have not been examined by the TPO while including this company as comparable. Therefore, we restore this comparable to the file of the AO/TPO to re-examine in detail keeping in view the decisions of the Tribnunal in assessee's own case and the Delhi Bench in the case of Cadence Design Systems (I) (P.) Ltd. Vs. ACIT (supra) and decide in accordance with law for the purpose of exclusion/inclusion in the final set of comparables. TCS e-Serve Ltd. : 37. The ld. Counsel for the assessee submits that this company was included by the TPO observing that this company is functionally comparable to assessee. The ld. Counsel submits that there are material differences in functions, assets and risks. 38. The ld. Counsel for the assessee further submitted as under:- "(iv) TCS e Serve Ltd. (A R. 437-551/FS-II) (a) Functionally different. It is engaged in the business of providing high end technology services such as software testing, verification and validation of the software. Annual Report Schedule o notes forming part of the financial report states as under: "1. Background and principal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and validation. But no segmental details are available. This issue was restored to AO to examine the contention of the assessee. (Pg. 419 at 440/ Vol 2) However, for A.Y. 2011-12, coordinate benches have clearly excluded it as incomparable in following cases:- i) Orange Business Services India Solutions (P.) Ltd. [2016] 71 taxmann.com 206 (Delhi - Trib.) (pg. 579 at 586 of Vol-III). [ASSESSMENT YEAR 2011-12] (Copy of order is at pg. 579 at 586/Vol.-III) Exevo India (P.) Ltd. [2016] 72 taxmann.com 339 (Delhi - Trib.) [ASSESSMENT ii) YEAR 2011-12] In the case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2016] 71 taxmann.com 206 (Delhi - Trib.) the Tribunal observed that selected company is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and validation. It also developed a software such as transport management software, therefore, functionally this company is dissimilar to the assessee-company. Thus, selected company has to be excluded from the final list of comparable. [Para 13] iii) Its exclusion is also upheld in Cadence Design (Para 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he segmental information it has been observed that the company was engaged in business process outsourcing (transaction processing) services to the Banking & financial services industry (BFSI), which was considered as a single segment. He, therefore, pointed out that the segmental information was also identical to TCS e- Serve International Ltd. and, thus, no separate segmental information in regard to technical services carried out by the comparable, was given. He pointed out that on the same reasoning, as in TCS e-Serve International Ltd., this should also be excluded. 30. Having heard both the parties, we find that in the case of Techbook International Pvt. Ltd. (supra), the Tribunal has declined to exclude this comparable, inter alia, on the ground that this company was not providing any technical service involving software testing, verification and validation of software. We find that the Tribunal has observed as under: "10.3.2. We have heard the rival submissions and perused the relevant material on record. A copy of the Annual report of this company is available on page 466 of the paper book. The company's overview has been discussed on page 467 of the paper book, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Delhi High Court in CIT Vs. Agnity India Technologies (P.) Ltd. (2013) 219 Tasman 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, Sat yam Computer Service Ltd., L&T Infotech Ltd. and Infosys Technologies. The DRP excluded Sat yam Computer only. The Tribunal eluded 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 including its giantncss in terms of sales, nature of work and other factors. Thus it follows that L&T Infotech Ltd., which is otherwise a vast company with much higher turnover, finally found the status of a comparable with a captive company providing ITES to its AE alone. 10.3.4. Coming back to the facts of our case, we find that since TCS e-Serve Ltd. is functionally comparable with the assessee company on an overall basis and no special rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design, health-care enterprise solutions and IT infrastructure solutions. Annual Report of the company at pg. 8 states as under: It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. (Pg. 643/FS-III) Ld. TPO has selected 'Engineering Design Service' (KPO) segment, which is materially different from routine BPO cum call centre like the assessee company. (Seg. Pg. 688/FS-11.) (b). Healthcare. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural healthcare, engineering design and enterprise solutions. (Pg. 644/FS-III)" 43. The ld. Counsel further submits that this company has been excluded by the Hyderabad Bench of the Tribunal in the case of S & P Capital IQ (India) (P.) Ltd. Vs. DCIT [(2016) 72 taxmann.com 326 (Hyd.)] for assessment year 2011-12. It is submitted that the Bangalore Bench of the Tribunal also excluded this comparable in the case of Swiss Re Shared Services (India) (P.) Ltd. Vs. ACIT [(2016) 76 taxmann.com 22 (Bangalore - Trib.) for assessment year 2011-12. 44. On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Delhi High Court in the judgment of Rampgreen Solutions (P) Ltd. (supra), Acropetal Technologies Ltd, could be taken as a good comparable. 23. We have perused the orders and heard the rival contentions. There is no dispute that M/s. Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Services that were being rendered by Acropetal Technologies Ltd, appears at page 8 of its annual report. It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural healthcare, engineering design and enterprise solutions. In our opinion, the type of services that was being provided by Acropetal Technologies Ltd, was not at all comparable with the type of services that the assessee was providing. It is also mentioned in the annual report of the said company that it was pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the adjustment on account of risk in view of the following decisions:- (i) HyundaI Rotem Company ITA. No. 510/Del/2016 dated 22.11.2017 (Del); (ii) Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT ITA. No. 2584/PUN/2012 order dated 10.02.2017 (Pune); (iii) Sony India Pvt. Ltd. cited as 114 ITD 448 (Del); (iv) ITO Vs. M/s. Supportsoft India Pvt. Ltd. in IT (TP) A. No. 1372/Bang/2011 order dated 28.03.2013 (Bang) (see at pg. 53-63/WS) (v) St-Ericsson India P. Ltd. dated 3.07.2018 ITA. No. 609/Del/2015 [A.Y. 2010-11] (Para 17-21 of order annexed at pg. 48A-52/WS). 48. On the other hand, the ld. DR submits that risk adjustment is not allowed automatically and It has to be looked into each and every comparable. 49. On hearing both the sides, we are of the view that this issue has to go back to the file of the ld. AO/TPO to decide afresh keeping in view the judgements of various benches as referred to above after providing adequate opportunity of being heard to the assessee. The TPO shall decide the issue in accordance with law. 50. Coming to ground Nos. 5 and 6 in respect of working capital adjustment, the ld. Counsel submits that DRP/TPO have applied prime lending r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een held that interest has to be determined as per US currency and not as per the prime lending rate as applied by the TPO. We observe that the Tribunal set aside the impugned order and remit the matter to the file of TPO for fresh adjudication on account of TP adjustment, observing as under:- "56. Ground nos. 13 & 14: These grounds relate to adjustments made on account of working capital adjustment by ld. TPO. Ld. TPO had made the working capital adjustment by using the OECD methodology given in Annexure to Chapter 3 of OECD guidelines on transfer pricing and applied SBI Prime Lending Rate as on 30th June of the relevant financial year, as the interest rate. He computed the working capital adjustment as under: "a) Compute the average of opening and closing balance of inventories, trade debtors/ receivables, trade creditors/ payable of both the tested party and the comparables on revenue account. b) Work out the net working capital ratio (in pecentage) after dividing the net working capital by operating cost/ sales of such denominator (as is used in the PLI) both for the tested party and the comparables. c) Determine the difference between the tested party's rate with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of business. Ground is allowed for statistical purposes." 55. This decision of the Tribunal has been affirmed by the High Court by rejecting the appeal of the Revenue, observing as under:- "4. As regards the other issue concerning foreign exchange fluctuation loss being considered as part of the operative expenses, the issue stands covered against the Revenue and in favour of the Assessee by the decision of the Supreme Court in Commissioner of Income-tax v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC). Likewise, the issue concerning the rate of interest for capital adjustment is covered against the Revenue and in favour of the Assessee in terms of the decision of this Court in Cotton Natural (P) Ltd. v. CIT (2015) 276 CTR 445. Consequently, no substantial question of law arises in respect of these issues as well." 56. Considering the rival submissions, we hold that since the issue has been decided in the case of the assessee by the Tribunal and the High Court, we direct the TPO/AO to re-compute the working capital adjustment keeping in view the directions of the Tribunal and the High Court in assessee's own case. However, in so far as including the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perusing the orders of the Assessing Officer as well as the DRP, we find that the Assessing Officer applying Rule 8D(2)(iii) made disallowance at Rs.14,94,534/- and while doing so considered even the mutual funds where the dividend is not exempt. The assessee contended before the DRP that investments in mutual funds from which it had earned dividend income of Rs.5,53,170/- and capital gains of Rs.52,24,832/-. The capital gains arising out of mutual funds are taxable and on the exempt dividend income assessee had not incurred any expenditure for earning such income. The contention of the assessee has been dealt with by the DRP by directing the Assessing Officer to exclude those investments which do not yield exempt income to exclude for the purpose of computing disallowance under Rule 8D(2)(iii) and restrict the disallowance only to the dividend income earned. We do not see any infirmity in the order passed by the DRP. Therefore, the grounds raised by the assessee as well as the Revenue on this issue are rejected. 61. The only ground remained for adjudication in the appeal of the Revenue is whether the DRP was justified in considering the forex gain/loss operating in nature for de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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