TMI Blog2021 (9) TMI 1502X X X X Extracts X X X X X X X X Extracts X X X X ..... otra, CIT(DR) ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against the final assessment order dated 21/10/2016 passed by the Ld.ACIT Circle-4(1)(1), Bangalore for assessment year 2012-13 on following grounds of appeal: The grounds stated here-under are independent of and without prejudice to one another. The Appellant submits as under: Assessment and reference to Transfer Pricing Officer are bad in law a) The final order issued by the Assistant Commissioner of Income Tax, Circle - 4(l)(1) ['Ld. AU'], is bad on facts and in law, and is in violation of the principles of natural justice. b) The Ld. AU has erred in law in making a reference to the Assistant Commissioner of Income-Tax, Transfer Pricing 2(1)(1)['Ld. TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. c) The directions issued by the Dispute Resolution Panel ['Hon'ble DRP' or 'Ld. Panel'] and the order passed by the Ld. AO/ Ld. TPO is without jurisdiction, inter alia, in so far as it purports to give effect to an invalid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparing the Appellant's activities with companies operating as full-fledged entrepreneurs without considering the differences in size, turnover, functions performed, assets employed and risks assumed by the Appellant vis- -vis alleged comparable companies. b) The Ld. AO/Ld. TPO and the Ld. Panel have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant for having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) c) The Ld. AU, Ld. TPO and the Ld. Panel have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using employee cost greater than 25% of the total revenues. d) The Ld. AO, Ld. TPO and the Ld. Panel have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using export sales less than 75% of the total sales. e) The Ld. AO/ Ld. TPO, while applying the turnover filter at the lower limit so as to reject companies having turnovers less than Rs.l crore in financial year 2011-12, erred in not applying the said filter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration assessee filed its return of income on 30/11/2012 declaring total income of Rs.1,69,30,710/-. 2.2 The Ld.AO issued notice under section 143(2) along with 142(1). On receipt of the notice representative of assessee appeared before the Ld. AO and, filed requisite details as called for. 2.3 The Ld.AO observed that, the assessee has international transactions with its associated enterprises exceeding Rs. 15 crores. Accordingly reference was made to the Transfer Pricing officer for determining arms length price of the transaction between assessee and its associated enterprise. 2.4 On receipt of reference under section 92CA of the Act, the Ld. TPO called upon assessee to file economic details of the international transactions entered between assessee and its associated enterprises in Form 3 CEB. The Ld.TPO on perusal of various information/details filed observed that, assessee had its following international transaction with its associated enterprise: 2.5 The Ld.TPO accepted international transaction in respect of import of hardware and software products, marketing support services and reimbursement of expenses to AE. The only transaction that was disputed wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own cash flows, accounts payable, accounts receivables, employee management, management information system and training and hiring employees. Product development functions (iii) Kronos Systems is only engaged in distribution of Kronos products and it does not undertake any functions attributable to manufacturing. The functions relating to product development such as product strategy ad design, research development, assembly etc. are not undertaken by Kronos Systems. Procure functions (iv) Kronos Systems procures Kronos products from Kronos US on receiving confirmed orders from end Customers. Kronos US in turn outsources the order to Kronos Mexico (contract manufacturing entity of Kronos Group) which provides the products requested by Kronos Systems to Kronos US, who in turn delivers the product to Kronos Systems for distribution in India. Sourcing Scheduling (v) Kronos Systems is responsible for managing the procurement schedule with respect to the sale of Kronos products in India and plan the product orders in order to meet the customer delivery requirements. Kronos Systems places purchase order with Kronos US and communicates regarding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved in price negotiations with the customers. However, ronos Systems quotes only those prices as specified in the standard price list provided by Kronos US to which price adjustments are made to meet the Indian market conditions. However, in few instances discussions are undertaken with Kronos US If the prices are below the standard price list less discounts which could be provided to the customers. Assets owned: Except for Routine tangible assets like computers, furniture and fixtures and office space, assessee do not own any intangible assets. Risks assumed: In the process of rendering the above functions, assessee assumes risks pertaining to Market, credit and collection, Foreign exchange risk and scheduling risk. Ground No.3(g) 3. The assessee seeks exclusion of Universal Print Systems Ltd., Infosys BPO Ltd., TCS e-serve Ltd., BNR Udyog Ltd. and Excel info ways Ltd. 3.1 It was submitted by the Ld.Counsel that, these comparables are functionally not similar with that of assessee. 3.2 On the contrary the Ld.Sr.DR placed reliance on observations passed by authorities below. We have heard submissions advanced by both sides in light of record plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. has also been considered by the co-ordinate bench of this Tribunal in the case of CGI Information Systems Management Consultants 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 fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of being considered as companies engaged in providing ITES. Aggrieved by the directions of the DRP, the Assessee is in appeal 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 manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment and level of competition and whether the markets are wholesale retail (3) An uncontrolled transaction shall be comparable to an internatiorial (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of functional incompatibility and presence of intangibles. It has been submitted that this company owns huge brand and not a fit comparables for company like assessee, who provide captive service to its AE's. Ld. CIT DR opposed the exclusion and placed reliance upon orders passed by authorities below. We have perused submissions advanced by both sides in the light of the records placed before us. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions (P.) Ltd. v. Asstt. CIT [2019] 108 taxmann.com 495 (Bang. - Trib.), wherein this comparable has been excluded by observing as under: '5. We have heard the rival submissions on the comparability of Infosys BPO as a comparable company. The Delhi ITAT in the case of Baxter India Pvt. Ltd. v. ACIT ITA No.6158/Del/2016 for AY 2012-13 in the case of a company rendering ITES such as the Assessee, vide order dated 24.8.2017 Paragraph 23 held that Infosys BPO is not comparable with a company rendering ITES for the following reasons: 23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by assessee for its functional dissimilarity as it renders both BPO and KPO services without segmental reporting. It is submitted that this company owns huge brand of TATA group and has also incurred brand related expenses and therefore cannot be accepted to be compared with a captive service provider like assessee. Ld.CIT DR on the contrary opposed its exclusion and placed reliance upon orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. Assessee placed reliance upon following decisions in support of its argument for exclusion of this comparable: Zyme Solutions (P.) Ltd. (supra) Baxter India (P.) Ltd v. ACIT [2017] 85 taxmann.com 285 (Delhi - Trib) Pr. CIT v. BC Management Services (P.) Ltd. [2018] 89 taxmann.com 68/(Delhi) It is observed that this comparable has been excluded by this Tribunal. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions (P.) Ltd. (supra), by observing as under: 11.3 We have heard rival submissions and perused material on record. The issue of comparability of this company was considered by the coordinate bench of Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that this company is into medical transcription, coding, business support services and e-governance projects and therefore functionally not similar with that of assessee. Ld. CIT DR however contended that this company is compared only for segment of medical transcription and therefore should not be excluded. She placed reliance upon decision of this Tribunal in case of Mobily Infotech India (P) Ltd. v. Dy. CIT [2018] 97 taxman.com 2 (Bang. - Trib.) in support. We have perused submissions advanced by both sides in the light of the records placed before us. Assessee is challenging functional dissimilarity of this company with that of assessee as it is into medical transcription. We have our reservation to consider medical transcription services to be one of KPO services. In our considered opinion medical transcription services is basically back-office services provided by graduates who are trained for short period of 6 months to one year. These are short crash courses undertaken by graduates who are trained to understand and speak English. There is no value addition in the services rendered by people in medical transcription. To our understanding, basically these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spectfully following the same, we set aside this comparable back to Ld.TPO for considering it afresh. Needless to say that proper opportunity shall be granted to assessee as per law. 3.4 Nothing has been placed before us by the Ld.Sr.DR contrary to the above observations by coordinate bench of this Tribunal. Further it is observed that this Tribunal considered the above comparables in case of a captive service provider like the assessee before us. Respectfully following the same we direct exclusion of Universal Print, TCS e-serve and Infosys BPO from the list of comparables and remand BNR Udyog Ld. AO/TPO to consider it afresh in light of the observations made by coordinate bench of this Tribunal reproduced hereinabove. 4. In Ground No.3(g) assessee is aggrieved by negative working capital computed by the Ld.TPO, without appreciating the fact that assessee is a captive service provider. The grievance of the assessee is with regard to negative working capital adjustment computed by the Ld.TPO and confirmed by the DRP. It was submitted that Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee however doe ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
