TMI Blog2022 (5) TMI 1535X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 143 (3) r.w.s 144C (13) of the Act, for Assessment Year 2015-16 on following grounds of appeal: I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. 1. The learned Assessing Officer ( learned AO ), learned Transfer Pricing Officer ( learned TPO ) and the Honourable Dispute Resolution Panel ( Hon'ble DRP ) grossly erred in adjusting the transfer price by INR 14,57,03,780/- with respect to the international transaction rendered by the Appellant under section 92CA of the Income-tax Act, 1961 ( the Act ). 2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the Transfer Pricing ( TP ) document maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the Act. 3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by adopting various filters for the purpose of determining the Arm's Length Price (`ALP') of the international transaction. 4. The learned AO/learned TPO/Hon'ble DRP erred in applying the core service income filte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Allsec Technologies Ltd. 5. Techprocess Payment Services Ltd. 6. Crystal Voxx Ltd. 7. Hartron Communications Ltd. 8. Caliber Point Business Solutions Ltd. 15. The learned AO/learned TPO erred in computing the weighted average operating profit on operating cost ( OP/OC ) of Cosmic Global Ltd. The learned AO/learned TPO ought to have not considered the OP/OC of Cosmic Global for the FY 2013-14 and FY 2012-13 while computing the weighted average OP/OC, as the company fails export turnover filter applied by the learned TPO, for the said years. 16. The learned AO/ learned TPO/ Hon'ble DRP has erred in not allowing appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independent comparable companies. 17. The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis- -vis the comparable companies. II. Corporate Tax 18. Levy of interest under section 234B of the Act a. The Learned AO has erred in levying interest under section 234B of the Act which is consequential to the addition made in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c ( OMS ) based out of USVI for provision of information technology enabled services ( ITeS ) to OMS. The significant functions performed by OMS and Ocwen India are described below. Business development functions Conceptualization and Performance of Services Human Resource Supervision and Quality function Marketing and advertising functions Price negotiations and customer liasoining Assets employed Risk Analysis 2.4 Ld.TPO observed that, the assessee entered into following international transaction: International Transactions as per 3CEB Particulars Received/Receivables Method IT enabled services 5333570492 TNMM Reimbursement of Expenses 111110286 Other Method Trade Receivables 545546697 TNMM Other receivables 101458765 Other Method Total 6091686240 2.5 The Ld.TPO noted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Percentile 17.49% Median 8.90% Average 12.25% 2.6 The Ld.TPO rejected the TP study carried out by the assessee and conducted his own analysis by adopting various filters and selected following 11 comparables with an average 3 years median at 23.26%. Sl.No. Company Name Average of 3 years (OP/OC) 1 Ace BPO Services Pvt. Ltd. 2.38% 2 Jindal Intellicom Ltd. 5.44% 3 Microgenetic Systems Ltd. 10.18% 4 Crossdomain Solutions Pvt. Ltd. 18.81% 5 Tech Mahindra BSPL 21.05% 6 BNR Udyog 23.26% 7 AGS Health Pvt. Ltd. 25.35% 8 Infosys BPO Ltd. 27.45% 9 SP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Before we undertake the compatibility analysis, it is sine qua non to understand the functions performed, assets owned and risk assumed by assessee under the segment. IT enabled services Functional Analysis Ocwen India has entered into a Services Agreement with Ocwen Mortgage Servicing, Inc. ( OMS ) based out of USVI for provision of information technology enabled services ( ITeS ) to OMS. The significant functions performed by OMS and Ocwen India are described below. Business development functions OMS plays a significant role in determining the business strategy of the group. It is responsible for business development and strategic functions like identifying business opportunities and developing the business plans. Ocwen India does not perform any strategic functions for/ on behalf of OMS. Ocwen India provides purely ITeS like voice based call centre services; data based services and other related back office support services to OMS. Conceptualization and Performance of Services OMS is responsible for identifying service requirements and assigning the same to Ocwen India. Ocwen India understands the scope of work and executes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ysis Risks are those business factors that may expose a company to the possibility of loss or damage. In other words, risk is the probability that a particular adverse event may occur during a stated period or may result from a particular challenge. The following section discusses the risk borne by Ocwen India vis-a-vis OMS. Market Risk Market risk arises when a company is subject to adverse sales conditions due to either increased competition in the marketplace, adverse demand conditions within the market, or the inability to develop markets, or position products to service targeted customers. Ocwen India renders services in the capacity of a captive service provider exclusively to OMS. As a result, it is not affected by factors such as nonavailability of markets for its services, fluctuation in demand and prices, etc. OMS contracts with the end customer for rendering services. Thus, the primary market risk lies with OMS who is responsible for providing the final deliverables to its customers. Ocwen India provides services only to OMS and is assured of a fixed return on its operating cost irrespective of the market conditions. Service Liability Ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Contract Risk Contract risk arises when a company fails to perform its services that do not adhere to the standards. terms and conditions agreed with its customers. OMS enters into contract with customers directly. The services provided by Ocwen India are to OMS and any costs incurred by Ocwen India are reimbursed by OMS with a mark-up. Hence, OMS bears the contract risk while rendering services. Ocwen India does not bear any contract risk. Characterisation The functional analysis serves as a foundation to characterise entities for the purposes of inter-company transfer pricing. Based on the facts as presented in the above analysis of functions performed. risks borne and assets used, it is appropriate to characterise Ocwen India as a contract service provider that assumes minimal risks associated with the business of providing IT enabled services Based on the above characterisation, we shall undertake the comparability analysis in respect of the comparables sought for exclusion / inclusion by the assessee. 11. The Ld.AR submitted that, Infosys BPO was excluded in assessee s own case for assessment year 2014-15 in ITA No. 3068/B/2018, by order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the authorities below. 7.4.1 We have considered the rival contentions / submissions and perused the material on record; including the judicial decisions cited. We find from a perusal of the Annual Report at page 14 thereof, under the head 'Managements Discussion and Analysis', it has been stated that this company provides services to both horizontal and vertical focus areas. The Horizontal focus areas are sourcing and procurement (S P), Customer Services (CS), Finance and Accounting (F A), Legal Process Outsourcing (LPO), Sales and Fulfillment (S F), Analytics (AT), Business Platform (BP), Business Transformation Services (BTS), Human Resources Outsourcing (HRO) and Technology Solution Optimization (TSO). The Vertical focus areas of services are Financial Services Insurance (FSI) Manufacturing (MFG), Energy, Utilities Communication Services (ECS) and Retail, Consumer Packaged Foods, Logistics Life Services (RCL). From the above, it is clear that 'Infosys' offers a gamut of different and diversified services which cannot be compared with routine back office services provided by the assessee. In fact, it is mentioned at page 14 of the Annual Repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with law. 13. Crystal Voxx Ltd.: The assessee has sought for inclusion of this comparable. 13.1 It is submitted that Coordinate Bench of this Tribunal in assessee s own case (supra) directed this comparable to be included by observing as under: 11. Crystal Voxx Ltd., ('Crystal') 11.1 This company, 'Crystal' was proposed by the assessee before TPO as an additional comparable to be included in the final set of comparables. The TPO, however, rejected the assessee's proposal on the ground that this company had not reported any earnings from export of services and therefore it is not possible to determine as to whether 'Crystal' has exports / foreign earnings more than 75% of total sales / turnover. The DRP concurred with the finding of the TPO; observing that while it is stated that income from foreign currency is Rs.3,23,08,386/-, it is not clear whether this relates to export of services as this information is not available and therefore this company 'Crystal' is rejected. 11.2 Before us, it was contended that this company 'Crystal' is functionally comparable to the assessee in the case on hand as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss making company and has incurred losses in BPO segment in two years, out of preceding 3 years. Ld.AR submitted that relevant segmental detail only was to be considered, whereas, Ld.TPO considered revenue earned by this comparable on entity level. It has been submitted that, this crucial objection raised by assessee, has not been considered by authorities below. In support of, Ld.AR placing reliance on decision of Pune Tribunal in case of Yazaki India Pvt Ltd vs DCIT in ITA No.621/Pun/2014 for assessment year 2009-10 by order dated 11/07/2019. On the contrary Ld.CIT.DR placed reliance on observations of authorities below. We have perused submissions advanced by both sides in light of records placed before us. It is observed that this comparable has not been verified by Ld.AO/TPO having regards to the submissions made by assessee. We therefore, direct Ld.AO/TPO to verify this comparable in the light of observations by Pune Tribunal in case of Yazaki India Pvt Ltd vs DCIT (supra). Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Accordingly this comparable is set aside to Ld.AO/TPO. 14.2 Respectfully f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an. unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the 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 inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the aim's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially affect the 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 teinis 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an excact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT(A) regarding absence of segmental details available 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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