TMI Blog2023 (4) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Thus following the decisions MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD. [ 2015 (3) TMI 1226 - DELHI HIGH COURT] and M/S MERCER CONSULTING (INDIA) PVT. LTD. GURGAON [ 2016 (8) TMI 1163 - PUNJAB AND HARYANA HIGH COURT] we direct the AO/TPO to include R Systems International Ltd. - BPO services as comparable company in the final set of comparables. ICRA Techno Analytics Ltd.on the ground that as functionally not comparable to the assessee company - The Bangalore Bench of the Tribunal in the case of Cerner Healthcare Solutions (P.) Ltd. [ 2017 (1) TMI 1491 - ITAT BANGALORE] held that when ICRA Techno Analytics Ltd. is engaged in diversified activities of software development and consultancy, engineering services, web development and hosting and substantially diversified itself into domain of business analysis and business process outsourcing then the same cannot be regarded as functionally comparable with that of the assessee, who is rendering software development services to its AE. Thus, following the decision of the Bangalore Bench of the Tribunal we direct the TPO/AO to exclude ICRA Techno Analytics Ltd. from the final list of comparables. Infosys B.P.O. Ltd. - As in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 after providing adequate opportunity of being heard to the assessee. The TPO shall decide the issue in accordance with law. Working capital adjustment - HELD THAT:- 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 income of Philippines PE branch for determining the working capital adjustment, we restore this issue to the file of the AO/TPO to examine afresh in the light of the submissions of the assessee that Philippines PE branch had closed down on 31.03.2010 and no transactions were carried out during the year and, therefore, could not be included to determine the working capital adjustment as there were no transactions and has no relationship with business of the assessee during the year. Disallowance u/s 14A read with Rule 8D - AO applying Rule 8D(2)(iii) made disallowance and while doing so considered even the mutual funds where the dividend is not exempt - HELD THAT:- As contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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- -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 Lending Rate of 11.75% per annum instead of prevailing bank rate applicable to US Currency. Addition u/s 14A of the act. 7. That the Ld. DRP has erred both in facts and in law in sustaining the addition u/s 14A read with Rule 8D made by the AO without in absence of any finding that appellant had incurred the impugned expenditure for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting 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 process driven quality centric Business Process Outsourcing [BPO] services, contract centre and technology enabled services through its state of art facilities located in two cities in India, namely, New Delhi and Pune. The following international transactions have been entered into by the assessee with its Associated Enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accentia Technologies Ltd. 59.83 2. e4e Healthcare Business Services Pvt. Ltd. 44.45 3. Eclerx Services Ltd. 89.28 4. ICRA Techno Analytics Limited Infosys BPO Ltd. 56.72 5. Infosys B.P.O. Ltd. 52.27 6. Jindal Intellicom Ltd. 47.47 7. Microgenetic Systems Ltd. 31.52 8. TCS E-Serve Ltd. 102.70 9. Acropetal Technologies Ltd. (Seg) 44.72 Average 58.77 7. Accordingly the Arms Length Price of the international transactions related to IT enabled 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accentia Technologies Ltd. Functionally similar KPO Soflware - product comply Excluded in its own case by Hon'ble ITAT for AY 2010-11. Functionally similar to e4e Healthcare Services Pvt. Ltd. Which has been taken as comparable by assessee. Following Hon ble ITAT decision in assessee's own case, the panel directs the FPO/AO to delete this comparable 2. Eclerix Services Ltd. Functionally dissimilar -leading KPO providing data analytics, data management and process improvement solutions Hon'ble Delhi high court has excluded this comparable in assessee's own case for AY 2008-09. Functionally similar Following Hon ble Delhi HC decision in assessee's own case, the panel directs the TPO/AO to delete this comparable. 13. Further we have also perused the orders of the Tribunal and the Hon ble Delhi High Court wherein these two comparables have been excluded. Thus, we do not see any infirmity in the directions of the DRP for exclusion of Accentia Technologies Ltd. and Eclerx Services Ltd. from the final set of compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of high or low turnover and high or low profit of the clause or that it follows different financial year. Reliance was placed on the following decisions:- (i) Chryscapital Investment Advisors (India) P. Ltd. Vs. DCIT [(2015) 376 ITR183 (Del.)] (ii) CIT Vs. Mckinsey Knowledge Centre India Pvt. Ltd. [ITA. No. 217/2014 dated 27.03.2015 (D.H.C.)] (iii) Cadence Design Systems (I) (P.) Ltd. Vs. ACIT [(2018) 93 taxmann.com 227 (Delhi Trib.)] 18. On the other hand, the ld. DR referring to page Nos. 6 and 32 of the TPO s order submits that Informed Technologies India Ltd., was rejected as comparable for the reason that the company has rental income of Rs.2.08 crores out of its total income of Rs.4.08 crores and the company in its annual report reported income from data processing and BPO services income at Rs.1.75 crores. Therefore, the ld. DR submits that the TPO rejected this company as comparable for the reason that the main income is of income from other sources and it fails service income filter. The ld. DR submits that the contention of the assessee that this comparable has been rejected on low turnover is not correct. 19. Heard rival submissions perused t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders of the authorities below. The TPO rejected this company as comparable on the ground that this company has different financial year ending. The TPO also observed that the financial data of this company is available for a period of 12 months ending December, 2010 and since the data is not available for the period ending March, 2011, he concluded that this company is not comparable company. 24. In the case of CIT Vs. Mckinsey Knowledge Centre India Pvt. Ltd. (supra) the Hon ble Delhi High Court held as under:- 13. So far as the Arms Length Price (ALP) determination and the Transfer Pricing upward adjustments, are concerned, in its TP documentation, the assessee determined Transactional Net Margin Method (TNMM) as the most appropriate method to determine the ALP of the international transaction pertaining to the provision of IT support services. The TPO in the order accepted only 7 out of the 11 comparable companies and rejected the rest based on reasons that one of them, Fortune Infotech Ltd. ( FIL ) had a different financial year ending, the other two - Kirloskar Computer Services Ltd ( KCSL ) and Mercury Outsourcing Management Ltd. ( MOML ) had a turnover of less than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y has diversified activities of software development engineering services. Therefore, it is submitted that ICRA Techno Analytics Ltd. is functionally different. The ld. Counsel further submits that there is no significant information for BPO services. The ld. Counsel further submitted as under:- Functionally different. This is functionally different company Notes to accounts annual report for year ended 31.03.2011 states: BACK GROUND: The Company was incorporated on July 27, 1992 as Computer Exchange Private Limited (CEPL) and subsequently became wholly owned subsidiary of ICRA Limited August 25. 2005 and was renamed as ICRA Techno Analytics Limited (ICTEAS). The company is engaged in the software development consultancy..engineering services, web development hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing. (Pg 231/91) Revenue recognition. In the note detailing of the revenue recognition which also form a part of its annual report it has been stated that its revenue stream consisted of software development consultancy, engineering services, web development and hosting. Thus ICRA Techno Analytics h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngineering services, web development and hosting and substantially diversified itself into domain of business analysis and business process outsourcing then the same cannot be regarded as functionally comparable with that of the assessee, who is rendering software development services to its AE. Thus, following the decision of the Bangalore Bench of the Tribunal we direct the TPO/AO to exclude ICRA Techno Analytics Ltd. from the final list of comparables. Infosys B.P.O. Ltd. : 31. The ld. Counsel submits that the TPO included this company in the final list of comparables for the reason that this company is functionally comparable to the assessee. The ld. Counsel submits that there is material difference in functions, assets and risks between the assessee and this company. The ld. Counsel further submits that in assessee s own case this company was excluded by the Tribunal for assessment year 2010-11 vide order dated 14.11.2015 and this order of the Tribunal was also affirmed by the Hon ble Delhi High Court vide order dated 27.05.2016 which is placed at page No. 455 of Volume 2 of the paper book. 32. On the other hand, the ld. DR submits that Infosys B.P.O. Ltd. was exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess outsourcing, sales and fulfillment, sourcing and procurement outsourcing etc. And also having goodwill of Rs. 227 crores; whereas TCS e services providing technical services in the nature of software testing, verification and validation of software at the time of implementation and data centre management activities. Ld. AR submitted that both these companies are having significantly large scale operations. 84. Ld. TPO rejected these contentions and held that these two companies are engaged in providing ITES services and, therefore, are good comparables. He further held that holding of intangible has no effects on the profits. Ld. DRP held that these companies are functionally similar, high turnover has no correlation to high profits and when they are functionally similar large scale operation is no ground to reject the same. In respect of TCS e-services, he held that the contention of the assessee that its transactions with Citi Bank group are not shown in the Notes to Accounts cannot be accepted because once there is change in the ownership of the erstwhile company, the Citi group of companies cannot be held to be related to TCS e services. 85. Ld. DR brought to our n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the margins of such varied segments it becomes quite difficult to put such company in the comparability basket so as to benchmark and correct profit margin. It is, therefore, clear that because of the employee cost base of TCS e services at 64 times and turnover at 67 times compared to the assessee in such case, suggest that the assets employed by TCS e-serve with huge intangible in the form of brand value, definitely has a huge effect in PLI and vitiates the comparability under FAR analysis with a company which is a captive service provider without much tangibles and risks. It is further pointed out that the operations of TCS e-serve broadly comprise of transaction processing and technical services including software testing, verification and validation, for which no segmental bifurcation is available, in the absence of which margins of various segments would be difficult to be compared. Ld. AR submitted that these observations are applicable to the case of the assessee also on all fours. He further submitted that these observations of the Tribunal are upheld by the Hon'ble jurisdictional High Court in Principal CIT v. B.C. Management Services (P) Ltd. [2018] 89 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old that. Infosys BPO Limited and TCS E-Serve Limited are not good comparables to the assessee and both these companies deserve to be deleted from the list of comparables from bench marking the international transactions. 36. We observe that Infosys B.P.O. Ltd. was excluded by the Tribunal and the High Court in assessee s own case for the earlier assessment year for the reason that there was extraordinary event happened as there was acquisition in the case of Infosys B.P.O. Ltd., during the assessment year 2010-11. During the assessment year under consideration i.e. assessment year 2011-12 it was not brought to our notice that any extraordinary event has happened. It was also not brought to our attention as to how there are material differences in functions, assets and risks. However, in the case of Cadence Design Systems (I) (P.) Ltd. Vs. ACIT (supra) the Tribunal excluded Infosys B.P.O. Ltd. for the assessment year 2011- 12 holding that it is not as good comparable accepting the submissions of the assessee that Infosys B.P.O. Ltd. is having significantly large operations and is providing high-end integrated services for business platforms, customer service, outsourcing servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncomparable to the assessee company, which is routine contract centre service. (b) Brand Value. Tata Consultancy Service holds 96.26% share holding in the company During the year under consideration, this company has made payment of Rs. 2.60 crore towards use of Tata brand for royalty. (Pg.524/FS II) (c) Intangible assets. This company is having huge assets base of Rs. 380.29 crore which includes software license of Rs. 33.76 crore. During the year under consideration it made addition of Rs. 75.62crore which include 9.78 crore for software. It also uses the advantage of liveraging global clients of TCS Ltd. It cannot be compared with the assessee company' which has no significant intangibles. (Pg. 515/FS-II) (d) Extraordinary economic event. As per Annual Report of the company there is amalgamation with CitiCorp Credit Services India Ltd. Relevant extracts of the AR as under: 1) The Company allotted 1,600,000 (previous year: 1,600,000) equity shares of Rs. 10 each as fully paid up pursuant to the scheme of amalgamation with Citicorp Credit Services India Limited without payment being received in cash. (Pg. 481/FS-II) Excluded in 1) The Tribunal in assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see s own case wherein the Tribunal restored the matter back to the file of the AO/TPO observing as under:- 27. TCS e-Serve Ltd.: Ld. counsel referred to para 10 of Tribunal's decision in the case of Techbook International Pvt. Ltd. (supra) and pointed out that this comparable was directed not to be excluded, inter alia, observing that unlike TCS e-Serve International Ltd., this company was not providing any technical service involving software testing, verification and validation of software etc. It was further observed that since the functional profile of this company on a boarder basis was not different from that of the assessee, both being involved in rendering ITES, this company was to be retained as comparable. 28. Ld. counsel referred to page 503 of the PB, wherein the annual report of this company is contained and pointed out that both the background and principal activity of this company were identical as that in the case of TCS e-Serve International Ltd., reproduced earlier, which was as under: TCS e-Serve Limited is engaged in the business of providing information Technology- Enabled Services (ITES) Business Processing Outsourcing (BPO) services, primarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rolled price method. The TNMM approves comparability on the basis of broader overall similarity. When we consider the nature of services provided by this company, being the ITES, which is similar to that of those rendered by the assessee, again the ITES, we cannot order its exclusion simply for the reason that the verticals of ITES are somewhat different. If one goes to make a comparison in the way suggested by the id. AR under the TNMM, then it will be very difficult, if not impossible, to find out a ditto comparable. A company which satisfies the broader parameters of comparability in the overall same segment, cannot be excluded Due to somewhat different nature of such overall activity. An examination of the cornparables chosen by the assessee, which have been accepted by the TPO, also satisfy only the Lest of overall similarity and not the peculiar similarity, as has been now contrastly contended for the exclusion 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 Chrys Capital Investment Advisors (India) P. Ltd. Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght of the observations of the Tribunal in assessee s own case for assessment year 2010-11 and also keeping in view various decisions and contentions raised by the assessee on functionality, brand value, intangible assets, extraordinary economic events pointed out in the assessment year under consideration as stated above and decide for the purpose of exclusion/ inclusion from the final set of comparables. Acropetal Technologies Ltd. (Seg) : 42. The ld. Counsel for the assessee submits that the TPO included this company as comparable holding that this company has engineering design, service, information technology services, health care segments and the engineering design segment is considered as comparable. The ld. Counsel submits that there are material differences in functions, assets and risks acquisition, health care and the primary services of the company was health care services and significant R D activities as against IT enabled services of the assessee company. The ld. Counsel further submitted as under:- (a) Acquisition: client base expansion is also the core focus area of our acquisitions. In line with this strategic focus, we acquired Line Beyond Inc. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design services done by Acropetal Technologies Ltd, as a comparable segment with ITES services of the assessee. Ld. AR pointed out that engineering design services rendered by M/s. Acropetal was entirely different from the type of services done by the assessee. Further according to him Hyderabad bench of the Tribunal in the case of Excellence Data Research (P.) Ltd. v. ITO [2014] 66 SOT 15/49 taxmann.com 409 (Hyd. - Trib.) had held that Acropetal Technologies Ltd, was not a good comparable in the BPO segment. As per the Ld. AR M/s. Excellence Data Research P. Ltd, was rendering back office data creation, content development and support services which were not comparable to what assessee was doing. Though the decision of the Hyderabad Bench was for A. Y. 2009-10, as per the Ld. AR, M/s. Acropetal Technologies Ltd, was doing the very same business during the relevant previous year also and therefore it could be considered as a good precedent. 22. Per contra, Ld. DR submitted that TPO had considered the argument of the assessee that BPO and KPO had to be distinguished. According to him, Acropetal Technologies Ltd, was giving engineering design services and the assessee was renderi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it provides engineering design services, which was considered as high end, by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company. 24. Considering all these, we are constrained to take a view that engineering design services segment of M/s. Acropetal Technologies Ltd, (seg), cannot be considered as a proper comparable for the TP study of the assessee. 46. This decision applies to the facts of the assessee s case as there is no dispute that Acropetal Technologies Ltd. is having engineering design service segment, which was compared to that of the assessee. The type of services that was being provided by Acropetal Technologies Ltd. was not comparable with the type of services that the assessee is providing. Acropetal Technologies Ltd. was providing high-end services in the engineering design services and whereas the assessee is providing ITES services to its AE. In view of the above, we direct the AO/ TPO to exclude Acropetal Technologies Ltd. from the final set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onship with business of assessee at all during this year. 52. The ld. Counsel further submits that in any case the issue is covered in favour of the assessee in its own case for assessment year 2010-11 by ITAT order dated 4.01.2015 in ITA. No. 1066/Del/2015. The ld. Counsel submits that the Tribunal held that interest has to be determined as per US currency and not as per prime lending rate as applied by the TPO, following the judgement in the case of CIT Vs. Cotton Naturals (I) (P.) Ltd. [276 CTR 445], the Tribunal directed the TPO to re-compute the working capital adjustment on the basis of interest as per US currency. This decision of the Tribnunal has been confirmed by the Hon ble Delhi High Court by dismissing the appeal of the Revenue observing that the issue consisting the rate of interest for working capital adjustment is covered against the Revenue and in favour of the assessee in terms of decision of this court in CIT Vs. Cotton Naturals (I) (P.) Ltd. (supra). Therefore, it is the submission of the ld. Counsel that TPO was obliged to re-compute working capital on the basis of interest as per US currency. 53. On the other hand, the ld. DR submits that the decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans/deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. the rate of interest. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian rupees would not be the relevant MP comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR, which is applicable to loans in Indian rupee. The PLR, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR is not applicable to loans to be repaid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. Cotton Natureals (I) (P) Ltd. Vs. CIT (2015) 169 TTJ (Del) 685 (P) Ltd. VS. CIT (2015) 169 TTJ (Del) 685 affirmed. 58. Therefore, interest has to be determined as per US currency and not as per the prime lendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds and earned dividend income of Rs.5,53,170/- under section 10(34) of the Act as exempt income. 58. The Assessing Officer also did not accept the contention of the assessee that it had not incurred any expenditure for making investments and earning dividend income and the Assessing Officer applied Rule 8D(2)(iii) and disallowed Rs.14,94,534/- being 0.5% of average value of investment, as income attributable for earning dividend income. The DRP considering the submissions of the assessee held that the main contention of the assessee is that the investments in mutual funds investment from which dividend earned is not exempt and should not be considered for computation under Rule 8D and accordingly directed the Assessing Officer to re-compute the disallowance under Rule 8D by excluding investments which do not yield any exempt income and disallowance should be restricted to the dividend income declared by the assessee. Against the directions of the DRP, both the assessee as well as the Revenue are in appeal. 59. The ld. Counsel for the assessee submits that DRP has erred in sustaining the disallowance under Rule 14A read with Rule 8D in absence of any finding that the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bour Rule for coming to the conclusion that forex gain/ loss was not to be treated as operating income/ loss for current assessment year because the Safe Harbour Rules, in any case, were applicable from 18-9-2013 and prior to that the said Rules could not be applied. That apart, it is not disputed that in the case of assessee forex gain/ loss was related to sale price of export, which was in US dollar. Therefore, the entire receipts were on revenue account. This issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of Woodward Governor's (supra), wherein it has been held that forex gain/loss in the revenue account is a trading receipt, or, as the case may be, business expenditure, allowable u/s 37(1) of the Act. We, accordingly, direct that the forex gain/ loss be treated as operating income/ loss both in the case of tested party as well as comparable and the PLI should be determined accordingly. Ground No. 12 is allowed accordingly. 65. This decision of the Tribunal has been affirmed by the Hon ble High Court by order dated 27.05.2016 dismissing the appeal of the Revenue holding that no substantial question of law arises and while holding s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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