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2022 (3) TMI 1533

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..... e of his powers under section 263 of the Act, on perusal of the records of assessment noticed that as early as 08.07.2016, the AO made a reference to the Transfer Pricing Officer (TPO) u/s.92CA of the Act, for determination of Arm's Length Price (ALP) in respect of an international transaction of rendering back-office services by the assessee to its Associated Enterprise (AE). The approval for reference to the TPO was accorded by the Office of the CIT on 18.07.2016 and ultimate reference under section 92CA of the Act was made on 19.07.2016. Even before the AO could receive an order section 92CA from the TPO, the Order of Assessment was passed on 27.12.2016 accepting the income returned by the assessee. The CIT also noticed that consequent to the reference under section 92CA of the Act by the AO to the TPO dated 19.07.2016, the TPO passed an order dated 31.10.2017 wherein he suggested an addition of Rs.14,73,25,254/- to the total income of the assessee on account of determination of ALP. According to the CIT, since the AO passed an Order of Assessment even before an order of reference to the TPO under section 92CA was pending was erroneous and prejudicial to the interest of the Reve .....

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..... sessee has filed appeal before the Tribunal which is ITA No.2042/Bang/2019 through Mr. Suresh Muthukrishna, CA on 23.9.2019. The present appeal has been filed on 05.01.2022. It is no doubt true that the advice of the erstwhile CA and the client's action or inaction on the basis of the advice of an erstwhile Counsel can afford the reasonable ground for condoning delay, but in the present facts and circumstances, the subsequent Counsel Mr. Suresh Muthukrishna, CA, was approached by the assessee after the draft assessment order dated 31.08.2018 was passed. In fact, he filed the objections against the draft assessment order before the DRP and the DRP gave its directions on 26.07.2019. Pursuant to the directions of the DRP, the AO passed the final order of assessment dated 26.07.2019 against which the Assessee has filed appeal before the Tribunal which is ITA No.2042/Bang/2019 through Mr. Suresh Muthukrishna, CA on 23.09.2019. Therefore, the earliest point of time at which Mr. Suresh Muthukrishna, CA, could have applied his mind is the period between 26.02.2018 and 28.05.2019. The present appeal has however been filed as already stated only on 05.01.2022. There is therefore lack of expl .....

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..... ; Earning before Interest, Depreciation, Exceptional Items and Tax- III =(I-II)   27,28,441.00 3,38,76,877.00 2,28,06,756.00 5,94,12,074.00 Less: Financial costs- IV Turnover 11,59,903.00 38,75,263.00 87,52,027.00 1,37,87,193.00             Earning before Depreciational, Exceptional Items & Tax- V=( III-IV)   15,68,538.00 3,00,01,614.00 1,40,54,729.00 4,56,24,881.00 Less:Deprection and amortisation- VI Turnover 14,73,935.00 49,75,271.00 34,44,340.00 98,93,546.00             Earning before Exceptional Items & Tax- VII=(V-VI)    94,603.00 2,50,26,343.00 1,06,10,389.00 3,57,31,335.00 Less: Exeptional items- VIII Actual 11,69,690.00     11,69,690.00             Earning before Taxes- XI=(VII-VIII)   - 10,75,087.00 2,50,26,343.00 1,06,10,389.00 3,45,61,645.00             Operting Profit - A - (IX+IV)   84,816.00 2,89,01,606.00 1,93,62,416.00 4,83,48,838.00             Operating Cost - B - (II+VI)   4,17,17,305.00 .....

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..... ea for exclusion of the aforesaid companies from the list of comparable companies is concerned, learned Counsel for the assessee has filed before us a copy of the decision of the ITAT, Bengaluru Bench, rendered in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT 115 taxmann.com 293. The aforesaid decision which also relates to Assessment Year 2014-15 and which was rendered in the context of a company providing ITeS such as the assessee and in whose case also the very same comparable companies that were chosen in the case of the assessee in this appeal was chosen as a comparable company, the Tribunal directed to be excluded Infosys BPO Ltd., Eclerx Services Ltd., and Crossdomain Solutions Pvt. Ltd., as comparable companies for the following reasons: On exclusion of Infosys BPO Ltd., the Tribunal held as follows: "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 .....

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..... his company form the final list of comparables. E-Clerx Services Ltd., was excluded for the following reasons: (ii) E-Clerx Services Limited has a margin of 70.26% and engaged in both rendering KPO and BPO services and no segmental information is available and the company has acquired entire share holding of Agilyst Inc. The company was excluded for the Assessment Year 2014- 15 in the case of Hyundai Motor India Engineering (P.) Ltd. v. ACIT [2019] 109 taxmann.com 429 (Hyd - Trib) at para 32 which read as under: "32. Thus, on a comparison of the functions of the and other companies reproduced above. we find that E-Clerx Ltd is not only into ITeS services, but is also rendering KPO services and therefore, it cannot be compared to the assessee. In the decisions of the ITAT where it has been held to be a comparable to the assessee. we find that ITAT has held that the services provided by the assesses company and E-Clerx Ltd are similar and that the extra-ordinary event of winding up of the subsidiary company has not been proved to have any bearing on the assessee's profits and that super normal profit may not be a basis for exclusion of this company. However, we find that .....

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..... rocesses and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours. With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000." "Crossdomain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn-around-time for business critical processes." As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. 19. We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this comp .....

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..... in the nature of KPO ^Knowledge Process Outsourcing). 8. It is an agreed position between the parties that the entity at Sl. no.(v) above was a subject matter of consideration by this Court in the Revenue's appeal being Pr. CIT v. Aptara Technology (P.) Ltd. [2018] 92 taxmann.com 240. In the aforesaid case, this Court recorded the fact that M/s Crossdomain Solutions Ltd. was engaged in distinct activities such as payroll activity. 'Knowledge Process Outsourcing'(KPO) service, development of products and routine IT services. Thus, it was found not comparable with an entity which was rendering E-learning services, In the present case also the Respondent provides BPO services which is not with KPO services." Further the learned Authorised Representative substantiated his argument with Annual Report of comparable and we consider it proper to direct the TPO to exclude the comparable from the list of comparables for determination of ALP" 12. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid 3 companies from the list of comparable companies. 13. Learned Counsel for the assessee also submitted that the TPO while determining the ALP has .....

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..... Private Limited [ITA No. 1182 of 2014], had to deal with the following question of law suggested by the revenue:- 6.1 Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was correct in directing the AO to restrict the determination of the ALP to transactions with the AE rather than on the entire turnover of the Company. 6.2 Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct while issuing the above directions without appreciating the observations of the DRP that there was no segmental audit of the transactions of AE and non AE and therefore there was no method whereby the AO could come to a fair determination of ALP by only restricting to transactions with AE." The Hon'ble Bombay High Court on the above questions of law held as follows:- "5. With the assistance of the learned counsel for respective parties, we have considered the submissions and the judgment of the Tribunal. The Tribunal in para 7 of its order has observed as under:- "7. We have heard both the parties and their contention have carefully been considered. So far it relates to grievance of the assessee that the TP ad .....

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..... d by the CIT(A) for doing so was as follows:- "10.0 While examining the working of ALP in the case of appellant, it was observed that the TPO has reduced the adjustment proportionately by holding that only 8.46% of revenue of the appellant is from AE. She accordingly adopted 8.46% of the operating revenue and 8.46% of the Operating cost for purpose of the determination of ALP. However, this method is not the correct approach as the ALP determination should have been based on the entire operating revenue and entire operating cost. Since this change in method would have amounted to enhancement of the income of the appellant, so opportunity of being heard was given to the appellant vide order sheet entry dated 11.08.2017, as to why the proportionate reduction done by the TPO should not be disregarded. The appellant sought time to file written submissions and the same was allowed. The appellant filed written submissions vide letter dt 29.08.2017. The same have duly been considered and the issue is being decided as follows: 10.1 In the case under consideration, the appellant is selling its product to AE as well as to non AEs, for the manufacture of which, part purchases are from AE .....

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..... some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm's length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. 56. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee." 17. In the light of the decisions referred to above, we hold that section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE and the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee. The TPO/AO is directed to compute the ALP in the light of the directions as given above, after affording assessee opportunity of being heard. 18. In the result, appeal of the assessee is .....

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