TMI Blog2023 (7) TMI 897X X X X Extracts X X X X X X X X Extracts X X X X ..... d.as fails RPT filter and also fails the functionality test - As decided in GTS E-SERVICES PRIVATE LTD. [ 2019 (7) TMI 296 - ITAT MUMBAI] as this entity was engaged in medical transcription, medical coding and medical billing etc. thus medical transcription would not be, at all, functionally similar. Thus we direct the AO/TPO to exclude this company as it fails the functionality test since the assessee is engaged only in trading, distribution of laboratory products and chemicals, strategy sourcing, ITeS, etc. This ground is allowed. - IT(TP)A No.92/Bang/2023 - - - Dated:- 25-5-2023 - SHRI MAHAVIR SINGH, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER For the Appellant : Shri Aliasgar Rampurwala, CA For the Respondent : Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru. ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER This appeal by the assessee is directed against the final assessment order of the DCIT, Circle 7(1)(1), Bangalore passed u/s. 143(3) r.w.s. 254 r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 27.12.2022 for the assessment year 2012-13. 2. The assessee has raised the following grounds:- 1. On the facts and in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2. Disregarding the fact that BNR fails service revenue filter (i.e., Service Revenue 75% to be excluded) applied by the Ld. TPO. 3.3.3. using the information under section 133(6) of the Act, which tantamount to choosing secret comparable companies whose information was not available in public domain. 4. Corporate Tax grounds: 4.1. That on the facts and circumstances of the case, the Ld. AO has erred in levying consequential interest under section 234A. 4.2. That on the facts and circumstances of the case, the Ld. AO has erred in granting short credit of taxes paid under protest amounting to INR 53,79,565 on February 17, 2018 and May 11, 2020. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal. 3. The crux of ground No. 3 is with regard to exclusion of UPS Print Systems Ltd. and BNR Udyog Ltd. from the list of comparables for the purpose of determining the ALP of the international transactions. The facts of the case are that the assessee originally came in appeal before this Tribunal in ITA No.779/Bang/2017 for AY 2012-13. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable company sought to be excluded is Universal Print Systems Ltd. This company was chosen as a comparable company by the TPO. In reply to the proposal of the TPO to include this company as a comparable company, the Assessee vide its letter dated 22.12.2015 had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP TC of this company will be only 51.80%. The Assessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.6% of the total revenue from operations of this company as per its annual report. The .Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not regarded as engaged in providing ITES. At this stage the TPO ought to have dropped this company as a comparable company because this filter has to be applied at the entity level and not at the segmental level. The learned DR submitted that if the service revenue filter is applied at the segmental level there can be no objection by the Assessee. She relied on the order of the DRP/TPQ. 50. The requirements of Rule 10B(1)(2) (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows: 10B. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a) to (d)** ** ** (e) transactional-margin method, by which, (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 5.2 There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of net profit margin realized by the enterprise from an international transaction with the net profit realized from a comparable uncontrolled transaction . Therefore comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e method. This method requires broad based comparability of the functionality of the comparables. So, in case the company is in ITES/BPO it would not matter as to what kind of customer it serves as the broad range of services remain the same and that is the back end support. So, this objection of the assessee does not have any merit as the company is functionally similar to the assessee. 5. Assessee further contended that the company UPS fails service revenue filter applied by the TPO. As regards to this contention, TPO has stated, it is pertinent to note here that the company had contended against the service revenue filter and not the employee cost filter. However, given that similar response has been provided against the same contention for BNR, it would be presumed that this mistake is typographical . The DRP upheld the action of the AO. 6. As regards contention of assessee that Employee cost filter to be calculated only at the segment level and not on the entire revenue, the DRP observed that the employee cost is found to be 44% in relation to this segment and the company operates in four major segments viz., Epro, Label Printing, Offset Printing and pre-press BPO and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment Advisors and the Delhi Tribunal in Nokia India Pvt Ltd (ITA No. 24210/2010). Counter to the objection on Employee Cost Filter: The company operates in four major segments viz., Repro, Label Printing, Offset Printing and Pre-press BPO and for our study, only the Pre-press BPO segment has been considered. Therefore, filters are to be applied only on the figures of this segment. The company was specifically asked to furnish the details of employee cost U/S 133(6) of the Act. Vide its' letter dated 18/12/2015, the company has furnished P L a/c of Pre press BPO segment, from which it is seen that the 'employee cost relating to Pre-Press BPO segment is Rs. 268. 76 (Lacs). The employee cost of Rs 268.76 (Lacs) turnover of Rs 611.96 (Lakhs) works out to 44%. Therefore, this comparable clears the employee- cost filter. The response received from the company u/s 133(6) of the Act has been attached with this order. (Annexure-G) The TPO has used only current data for the F.Y 2011-12. The corrected margin is 52.46%. The Hon'ble DRP also confirmed the findings of TPO. (ii) Being aggrieved, the assessee-company is before us. It is contended by the assessee that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 020] 115 taxmann.com 341 (Pune Trib) 10. The ld. DR relied on the order of lower authorities. 11. We have heard both the parties and perused the material on record. As rightly pointed out by the ld. AR, this issue came up for consideration before the coordinate Bench of the Tribunal in the case of GTS e-Services (P.) Ltd. for the AY 2012-13, [2019] 108 taxmann.com 604 (Mumbai Trib.) and the Tribunal held as under:- (ii) Universal Print Solutions Ltd. The Ld. AR disputed the inclusion of this entity on similar ground of functional dissimilarity by drawing our attention to the fact that this entity was an integrated print solution provider and operates in the segment of Repro, Label Printing, Offset Printing and Pre-Press BPO. The Ld. TPO picked up the pre-press BPO segment for the purpose of comparison. In this segment, the entity provides services in the nature of scanning, layouts, trapping, hand-outlined clipping path and image masking magazine/catalogue publishing. Another point to which our attention is drawn is the fact that this entity has unallocated expenses of Rs. 89.67 Lacs which would distort the segmental profits and therefore, the segmental results would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts Pvt. Ltd. (supra) wherein it was held as follows: 47. The next submission of the learned counsel for the Assessee was with regard to exclusion of 2 comparable companies from the list of 7 comparable companies that remain after the order of the DRP. The first comparable company sought to be excluded is Universal Print Systems Ltd. This company was chosen as a comparable company by the TPO. In reply to the proposal of the TPO to include this company as a comparable company, the Assessee vide its letter dated 22.12.2015 had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP TC of this company will be only 51.80%. The Assessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from nonfinancial service income. The Assessee pointed out that the percentage of income from ITES was only 21.6% of the total revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l before the Tribunal. The learned counsel for the Assessee reiterated submissions that were made before the TPO/DRP. In particular it was submitted that the service revenue filter was applied by the TPO himself at the entity level and on such search this company was not regarded as engaged in providing ITES. At this stage the TPO ought to have dropped this company as a comparable company because this filter has to be applied at the entity level and not at the segmental level. The learned DR submitted that if the service revenue filter is applied at the segmental level there can be no objection by the Assessee. She relied on the order of the DRP/TPQ. 50. The requirements of Rule 10B(1)(2) (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows: 10B. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a) to (d). ****** (e) transactional-margin method, by which, (i) the net profit margin realised by the enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be comparable to an international (i) none of the differences, if any, between the transactions being compared or between the enterprises entering into such transactions are likely materially affect the price or cost charged or paid in, or the profit arising from such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 5.2. There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of net profit margin realized by the enterprise from an international transaction with the net profit realized from a comparable uncontrolled transaction . Therefore, comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation is not received by the TPO. Hence, he passed the order u/s 92CA(3) of the Act on 16.12.2022 by observing as under: The company operates in four major segments viz. Repro, Label Printing, Offset Printing, and Pre-press BPO and for our study. only the pre-press BPO has been considered. Therefore, filters are to be applied only on the figures of this segment. The employee cost of pre-press BPO is more than 25% of the revenue from pre-press BPO. Therefore, the employee cost filter is satisfied in the case of this company. Further, on the service revenue filter, the requirement that a comparable company must have revenue from rendering services of more than 75% of its total revenue, the Pre-press BPO segment's entire income is from services. Therefore, the service income filter is satisfied in the case of this company. On the issue of export filter being more than 75%, the filter are to be applied only on the figures of this segment. The total revenue from Pre-press BPO segment is from exports only. Therefore. the export filter is satisfied in the case of this company. On the issue adopting segmental data for applying filter. the Hon'ble ITAT in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable is engaged in pre-press BPO services which is similar as backoffice support services. As seen from the activities of Label and -Offset printing segment. it can be seen that the both the segments supplement the functions performed in the Pre-press BPO segment. Hence, the claim of the taxpayer is rejected and this company is considered as comparable to the taxpayer. 14.2 Against this the assessee is in appeal before us. In our opinion, Tribunal on earlier occasion given the finding that if the adjustment cannot be made reasonable or accurately, this company M/s. Universal Print Systems Ltd. to be excluded from the list of comparable companies. For this purpose, the TPO should exercise power u/s 133(6) of the Act. Actually the AO issued a notice u/s 133(6) of the Act to M/s. Universal Print Systems Ltd. and no reply has been received from them. Having no option, he considered this company as comparable to the assessee company and included in the lists of comparables. In our opinion, the required information u/s 133(6) of the Act is not made available to the TPO, in such circumstances, T.P. adjustment on this count cannot be made reasonable or accurately made in this regard. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. From the details on record we observe that while the assessee has contended that the services rendered by this company M/s TCS E-serve Ltd are high end KPO services, it has not brought out as to which of these are the services that would come under technical services. On the other hand, we also notice that that the TPO has held all the services rendered by the assessee to be BPO services with any proper analysis. In this factual matrix of the case, we find that on similar facts, the co- ordinate Bench o ITAT Bangalore in the case of Indegene (P) Ltd., (supra) has remanded the matter of comparability of this company to the file of the TPO for fresh consideration. In view of the factual matrix of the case on hand, as laid out above and following the decision of the co-ordinate Bench in the case of Indegene (P) Ltd. (Supra) which is also rendered on similar facts, we deem it appropriate to remand the matter of the comparability of this company, TCS E-serve Ltd. To the file of the TPO for fresh consideration in the light of out above observations. Needless to add, the TPO shall afford the assessee adequate opportunity of being heard and to file details/submissions in this regard. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come from providing ITES being more than 75% of the total income. The DRP accepted the view of the TPO. 4.5 The, submission of the Assessee was identical as were made before the TPO and DRP. We have while deciding the objection with regard to excluding Universal Print Systems Ltd., already held that when clear segmental information is available then there is no bar in applying filters at the segmental level. The reasons given while coming to the above conclusion will equally apply to including BNR Udyog Ltd., as a comparable. Since this company passes RPT filter as well as income from providing ITES being more than 75% of its revenue, this company has to be regarded as comparable company. No other arguments were advanced for exclusion of this company. Hence this company is held to be comparable with that of the Assessee. 4.6 We found BNR Udyog Ltd., is providing IT enabled services of more than 75% of its revenue and whereas the learned AR could not substantiate with evidence in respect of other filters. Therefore, we are not inclined to interfere with the action of the AOITPO in including the comparable company for transfer pricing adjustment. Accordingly, the ground of obje ..... X X X X Extracts X X X X X X X X Extracts X X X X
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