TMI Blog2023 (7) TMI 1337X X X X Extracts X X X X X X X X Extracts X X X X ..... 1401 - ITAT BANGALORE] R Systems International Ltd. is remitted to AO/TPO for fresh consideration to verify whether it satisfies all the filters adopted by TPO while selecting comparables. Ordered accordingly. BNR Udyog Ltd. is to be included in the list of comparables to determine the ALP of international transactions. Bhilwara Infotechnology Pvt. Ltd. - remit this issue to the file of AO/TPO to verify whether this company satisfies all the filters adopted by the AO/TPO while selecting comparables. Working capital adjustment - As there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. Treatment to lease equalization cost - Whether be excluded while computing the operating markup of the Appellant? - contention of the ld. A.R. is that the assessee has itself disallowed this expenditure while computing the income and not claimed any expenditure and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Received / Receivable Paid / Payable BPO services 252,19,09,071 Technical Support Services 5,21,94,845 Shared services availed 26,15,49,163 Reimbursement of expenses 53,11,04,921 Unbilled revenue 47,00,40,927 Availing of services 3,40,37,129 Trade receivable 4,63,14,712 Trade' payables 24,42,48,809 Purchase of components 4,11,82,640 * Since the TP Officer has made adjustment only towards BPO Services and Technical Support Services (together considered as ITES segment), the other transactions are not discussed in this note being hell to fie.at arm's length by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following filters. S No Filters used for ITES segment 1. Use of current year data 2. Companies having different FY ending (i,e not 31.03.2017) or data of the company does not fall within 12 month period ie, 01.04.2016 to 31.03.2017, were rejected 3. Companies whose income was less than Rs 1 crore were excluded 4. Companies whose ITES income was less than 75 percent of the total operating revenues were excluded 5. Companies who have more than 25 percent related party transactions were excluded 6. Companies who have export sales less than 75 percent of the sales were excluded 7. Companies with employee cost less than 25 percent of turnover were excluded 3.6 The TP Officer determined the 35th to 65''' percentile at 22.37% to 27.41% with median at 24.37% based on the weighted average operating profit/total cost of the following 13 comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.74% Median (percent) 24.37% Arm's length price 310,50,40,000 TP adjustment (Rs), 41,52,50,000 The TP Officer therefore passed the order dated 29.01.2021 under section 92CA of the Act and determined an adjustment of Rs. 41,52,50,000/-in the ITES segment. AS PER DRAFT ASSESSMENT ORDER ( 9A0 ): 3.9 The learned Assessing Officer ( AO ) passed the DAO on 30.09.2021 incorporating the TP adjustment of Rs. 41,52,50,000/- determined by the TP Officer in the order passed under section 92CA of the 'Act. The AO accordingly proposed to assess the income of the Assessee at Rs. 66,23,50,150/- against the returned income of Rs. 24,71,00,150/-. 3.10 The Assessee being aggrieved by the TP addition proposed in the DAO, filed its objections before the Dispute Resolution Panel ( DRP ). AS PER 154 ORDER OF TP OFFICER: 3.11 The TP Officer revised his order passed under section 92CA of the Act by passing the order dated 07.10.2021 under section 154 of the Act. The TP Officer initiated rectification for the reason that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP Expense: The DRP agreed with the Assessee that ESOP cost was non-operating in nature and directed the TP Officer to exclude the same from the cost base. (iv) Exclusion of Ultramarine Pigment Ltd: The DRP accepted the objection of the Assessee and directed the TP Officer to exclude Ultramarine Pigment Ltd.(v) Inclusion of Crystal Voxx Ltd: The DRP directed the TP Officer to include this company if it qualifies all the filters adopted by the TP Officer. The DRP accordingly disposed of the objections of the Assessee vide directions dated 23.06.2022. As PER FINAL ASSESSMENT ORDER ( FAO ): 3.16 The TP Officer passed the order dated 25.07.2022 to give effect to the directions of the DRP. The TP Officer determined the adjustment of Rs. 13,52,50,000/- against the adjustment of Rs. 42,29,80,000/- proposed in the 154 order passed by the TP Officer. 3.17 The AO has passed the FAO assessing the income of the Assessee at Rs. 38,23,50,150/- against the returned income of Rs. 24,71,00,150/-. 3.18 Aggrieved by the TP adjustment of Rs. 13,52,50,000/- made in the FAO, the Assessee has filed the present appeal before this Tribunal. 4. Ground Nos. 1 to 11 are not press ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , knowledge is also applied. In view of the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. Accordingly, the ld. DRP rejected this plea of the assessee. 7.2 The ld. D.R. further submitted that as regards, the export revenue as given in Note No. 18, the revenue is around Rs. 50.43 crores as on 31.03.2017 as against total revenue of Rs. 62.70 crores, which comes to 80.43%. As the company is functionally similar and satisfies the filters adopted by the TPO including export revenue filter of more than 75%, the company is considered as comparable. Therefore, the action of the TPO considering the company was upheld by the ld. DRP. 7.3 The ld. DR submitted that s regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. 7.4 She submitted that the assessee contended before the ld. DRP that this comparable has incurred significant selling, marketing expenses. From the perusal of the annual report, the ld. DRP noted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AY 2017-18 in IT(TP)A No. 186/Bang/2022 dated 5.1.2023, wherein held as under: 7. We have heard the rival submissions and perused the materials available on record. Similar issue was considered in the case of Morgan Stanley Advantage Services P. Ltd. in ITA No. 6523/Mum/2014 dated 23.7.2020 for the AY 2008-09, wherein held as under: 10. We have carefully considered the submissions and perused the records. The assessee in the present case is a subsidiary of Morgan Stanley International Holdings Incorporated USA. The assessee provides back office support functions to its associated enterprises. The transactions of IT Enabled Support Services to its associated enterprises and the arms length price computed by the assessee was accepted by the revenue in A.Y. 2005 06 and A.Y. 2006-07. The same was also upheld by the ITAT for assessment year 2007 08. For the current assessment year, the Transfer Pricing Officer characterized the assessee's functions as knowledge process outsourcing KPO. Thereafter, the Transfer Pricing officer made general comments on the selection systems adopted by the assessee. He proceeded to reject the same. He did not specify as to which of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee relied upon the decision of Delhi High Court in Rampgreen Solution P Ltd Vs CIT (2015) ITR 533 (Delhi). The TPO included this comparable by taking his view that this company is in date process and analytical services. The Id CIT(A) confirmed the action of the TPO by taking his view that this comparable company is into the health care receivable management and therefore renders ITeS services. The Hon'ble Delhi Court in Rampgreen Solution (P) Ltd (supra) held entities rendering voice call center services for customer support and a KPO service provider employ IT-based delivery systems, but characteristics of services, functional aspects, business environment, risks and quality of human resource employed are materially different; and therefore, benchmarking international transactions on basis of comparison of PLI of high-end KPO service providers with PLI of Voice Call Centers, would be unreliable. Further, Mumbai Tribunal in Wills Processing Services (India) Ltd. vs. ACIT (supra) on considering similar contentions excluded this comparable. 38. The Id. AR submitted as we recorded earlier that Coral Hubs Ltd. was outsourcing its significant part of its operation as ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logies Ltd. (earlier Coral Hub Ltd.) are liable to be rejected as invalid comparable. As regards the other comparables namely Cross domain Solutions and Datamatics Financial Services, we find that the Transfer Pricing officer and the ld. CTI(A) have found their functions to be similar to that of KPO and that of E-clerx and Vishal technologies. Since, the ITAT has duly upheld the rejection of the aforesaid companies, i.e., these two companies are also liable to be rejected. Furthermore, Datamatics Financial Services also fails the export filter of 75% which has been adopted by the transfer pricing officer. Hence, in the background of aforesaid, we hold that following comparable are to be rejected: Eclerx Services Ltd. Vishal Information Technologies Ltd Crossdomain Solutions Datamatics Financial Services. 7.1 Accordingly, we direct the AO to exclude this company M/s. Datamatics Business Solutions Ltd. from the list of comparables as this company is a KPO company and not comparable to assessee company. 8.1 In view of the above, we direct the AO/TPO to exclude this company Datamatics Business Solutions Ltd. from the list of comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re Private limited Vs. Dy. Director of Income Tax (ITA No. 789/Bang/2010 ITA Nos 487 925/Bang/2011 observed that TNMM requires only broad comparability. The relevant observation is as under: 'As per the principles of comparability, controlled and uncontrolled transactions are regarded as comparable if their economically relevant attributes and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm's length result. However, in reality, two transactions are seldom completely alike. To be comparable does not mean that the two transactions are necessarily identical, but that either none of the differences between them could materially affect the arm's length price or, where such material differences exist, then reasonably accurate adjustments can be made to eliminate their effect. It is important to note that the type and attributes of the comparables available in a given situation typically determine the most appropriate transfer pricing method. In general, closely comparable products/services are required if the comparable uncontrolled price ('CUP') method is used for arms' length pricing; the resale price, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise on similar operation 10.4 The ld. DRP further observed that in the case of TCL holdings Pvt. Ltd., vs. Assistant Commissioner of Income Tax, (ITA No. 7129/Mum/2011), where in the ITAT held that: ...................................... in TNMM method it is not necessary that the product should be exactly the same as dealt in by the assessee 10.4 Therefore, the ld. DRP rejected these pleas of the assessee. 11. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this has been considered in the case of Global E:Business Operations Pvt. Ltd. by this Tribunal for the AY 2017-18 in IT(TP)A No. 174/Bang/2022 dated 16.11.2022, wherein held as under: 12.1.20 We have heard the rival submissions and perused the materials available on record. We have considered the arguments of both parties. In the assessment year 2016-17, in the assessee s own case in IT(TP)A No. 212/Bang/2021 dated 27.9.2022, the Tribunal has considered this company as not comparable wherein held as under: 10. As mentioned earlier, the limited submission of the assessee before the Tribunal as per ground 1.12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried out as it is committed to provide best in class services to both horizontal and vertical focus areas. 12. The DRP was of the view that just because the company is providing cloud based services over various mainframe computers, the company would not be functionally different as claimed by the assessee and rejected this plea of the assessee. Regarding the plea of the assessee that this company is into high end ITES service provider, and hence not comparable, the DRP held that under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard the DRP relied on the Bangalore Tribunal decision in the case of GE India Technology Centre (P.) Ltd. v. Dy. 13. DIT [2013] 30 taxmann.com 249/141 ITD 245 and other decisions wherein it was observed that TNMM requires only broad comparability. 14. The contention of the assessee that Infosys BPO has various Revenue Models and its revenues are generated principally on time and material basis, transaction basis and fixed price contracts and therefore, it should not be compared with the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e any impact on the profits of the company. Hence, these pleas were rejected by the DRP. 18. The assessee's contention that this comparable has incurred significant selling and marketing expense was also not accepted by the DRP, since from the perusal of the annual report, the DRP noted that the expenses on this count is only 4.56% of the total expenditure and which is not at all significant to affect the profitability of the comparable. 19. Thus, in view of the discussions held above, all the grounds raised by the assessee were rejected and the action of the AO/TPO was upheld by the DRP. 20. We have heard both the parties and perused the material on record. This comparable has been considered as not comparable in SwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 (Bang. - Trib.) wherein it was observed as under : We have perused submissions advanced by both sides in light of records placed before us. We note that this company is providing services in various areas of sourcing and procurement, customer services, finance and accounting legal process outsourcing, sales and fulfilment, analytics, business platforms, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at presence of outsourcing cost/subcontracting cost does not affect functional comparability. Further, it reduces the operating margin of the company, which is beneficial to the assessee. He, therefore, submitted that the TPO/DRP has rightly included this company as comparable. 16.3 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) has excluded this company as comparable by observing as under: '38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: 6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS E-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the objection was that the said company renders vide array of services and has high brand value and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also. 11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables. 11.1 In view of the above, we direct the AO/TPO to exclude this company Infosys BPM Services Pvt. Ltd. from the list of comparables. (III) Manipal Digital Systems Pvt. Ltd. 12. The ld. A.R. submitted that Manipal Digital Systems Private Limited should be rejected as a comparable company as it is functionally dissimilar and ought to be rejected. Further, the Company did not disclose segmental details with respect to its back office support services activity and also incurred advertisement/ promotional expenditure. Functionally not comparable No segmental details are available Advertising and sales promotion expenses 12.1 The ld. D.R. submitted that the ld. DRP in his report observed that it is crystal clear from the annual report that the principal business activity of the company is given as IT enabled services which contributes 100% turnover of the company. On perusal of the breakup of the revenue given at page 41 of the annual report, the revenue earned from IT enabled services is Rs. 23.63 crores out of total revenue of 24.34 crores which comes to around 97.08%. The oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annual report that the company was operating under one reportable geographical segment and one business segment. Therefore, the ld. DRP observed that disclosure as prescribed under AS 17- segment reporting is not applicable and hence, the objection on lack of segmental information is not valid and not acceptable. 12.4 The ld. DRP further observed that the assessee also contended that this comparable has incurred significant selling, marketing expense. From the perusal of the annual report, he observed that the expenses on this count is only 14.95% of the total sales and which is not at all significant to affect the profitability of the comparable. Accordingly, this plea was rejected and in view of the above, the pleas of assessee were rejected and selection of this company was upheld by the ld. DRP. 13. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this has been considered in the case of Global E:Business Operations Pvt. Ltd. by this Tribunal for the AY 2017-18 in IT(TP)A No. 174/Bang/2022 dated 16.11.2022, wherein held as under: 12.1.8 We have heard the rival submissions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited, 90% of the revenue is earned from ITes which is similar to that of the assessee company. The TPO further observed that most of the information provided by the assessee was from website and it cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the contention of the assessee was rejected and the company was taken as comparable company. 10. That before the Ld. DRP, objections have been raised by the assessee which are at running Page No. 34 of the appeal memo and therein, apart from reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions perform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21st November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion of this company i.e. Manipal Digital Systems Private Limited since it was chosen as comparable by him. 14. We are of the considered view on going through the order of the TPO, findings of the Ld. DRP and the various judicial pronouncements placed on record, first of all the Revenue has selected Manipal Digital Systems Private Limited as comparable to that of the assessee company based on the earning of the company from ITes. However, there is no segmental specification provided neither by the TPO nor by the Ld. DRP for the reason of such inclusion of this company in the final set of comparable companies with that of the assessee company. In the decision of the Hon ble Delhi High Court (supra.), it is very much clear in the wide spectrum of ITes if two companies are to be comparable one has to look into the characteristic of service or business provided under ITes by them. This exercise was not done by the Department in this case. We also opine that as per Indian Council for Advertising, the online advertising has to be published on true and honest disclosure basis and therefore, when proper documentation of activities are not physically available, in such scenario, refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment (10.29 crores - 15.33%). The assessee's argument that the comparable is into different activities is based on the website information. The ld. DRP observed that the assessee has raised pleas against functional comparability of the company, with reference to certain information said to be available in the company's website. At the outset, he observed that the information put in website cannot be given complete credence, as they are mere forward looking information and statements with the motive of advertisement and other promotional gains. Further, the information in website are dynamic and cannot be related to a particular period. There is no way to verify whether the said information has any relevance for the year under scrutiny or it totally related to subsequent current year developments. There is no way to verify the correctness of this information and the relevant period to which they may pertain to. Therefore, the information in the annual report which is based on audited financial statements and management reports is more reliable and authentic, for qualitative analysis of comparability. Therefore, the pleas raised based on information said to be available i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nologies India Pvt. Ltd. 17. The ld. A.R. submitted that SPI Technologies India Pvt. Ltd. is functionally dissimilar and ought to be rejected. He further submitted that the company had presence of extraordinary events, presence of intangibles and therefore ought to be rejected. Functionally dissimilar - KPO services No segmental details are available Existence of extraordinary event Presence of intangibles 17.1 The ld. D.R. submitted that the ld. DRP in his directions observed that the assessee has relied on the website extract of this company for functional differences. The discussion on the comparability should be based on the Annual Report of the company for the relevant financial year. Having said that, the functionality of the company is analysed with reference to the annual report for F.Y. 2016-17. In page 1 and 2 of the annual report-that Data base services including data processing tabulation services, on-line information and data retrieval services, Electronic Data Interchange (EDI) service, web search portal content services, Code and protocol conversion services etc . All these activities are in the nature of ITES. On page 100 of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, even if there are some differences unless they materially affect the margin, the comparables could not be excluded: This is clearly provided in the Rule 10 B (3) as per which an uncontrolled transaction has to be taken as comparable to the international transaction if none of the differences between the transactions compared or the enterprises entering into such transactions are likely to materially affect the price charged, cost incurred or profit earned and even if there are material differences, the uncontrolled transaction can still be considered as comparable if reasonably accurate adjustments could be made by eliminating the material affects of such differences. 17.2 In this case as the ld. DRP pointed out earlier that difference in various segments i.e. low end to high end in ITES services is mainly on account of differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alid and not acceptable by the ld. DRP. 17.6 The ld. DRP further observed that the amalgamation is of a wholly owned subsidiary. At page no 120 of the Annual Report F.Y. 2015-16 that Laser Words Private Limited provides comprehensive pre-press data processing services like typesetting, composition and copyediting to educational and professional publication houses across the globe. Therefore, the amalgamated company is also in the similar line of business and the same will not have any demonstrable effect on the financials of the company. The assessee has simply pointed to increase in revenue but has failed to bring on record any evidence to suggest that the merger has impacted the profit margin of the company. This is further evidenced in the current year information given in the annual report at page 69 that the said amalgamation happened in previous years and there is no indication of reporting of any impact on the financials due to the amalgamation. Further, as per page 23 of the annual report there is no amounts involved on the structure of the share capital as a result of the amalgamation. 17.7 The ld. DRP further observed that the assessee has also argued that this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c SPI Technologies Ltd. to be excluded. 18.1 In view of the above, we direct the AO/TPO to exclude this company SPI Technologies India Pvt. Ltd. from the list of comparables. 19. In ground No. 13 of the assessee s appeal, the assessee wants inclusion of only following comparable companies. Other comparables were not pressed. 13.1 R. Systems International Ltd. 13.4 BNR Udyog Ltd. 13.6 Bhilwara Infotechnology Ltd. (I) R Systems International Ltd.: 19.1 The ld. A.R. submitted that M/s. R Systems International Limited should be accepted as this company functionally comparable and qualifies all filters of the learned TPO and therefore should be accepted. He further submitted that the Learned TPO has erred in rejecting R Systems on the ground the company was not found in the search matrix.. Annual report was submitted before the learned TPO Functionally comparable Segmental Information Qualifies all of the filters applied by the learned TPO Different financial year ending is not a criteria or rejection 19.2 The ld. D.R. submitted that the ld. DRP observed in his report that this company failed the different financial year filter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Bengaluru Bench of the Tribunal in the case of KBACE Technologies Pvt. Ltd., Vs. DCIT (2020) 118 taxmann.com 231 (Bengaluru) wherein it was held that for a company to be excluded on the ground that it was persistently making losses, the comparable company should have suffered losses in all the 3 previous Financial Years and even if in one Financial Year it makes a profit, then that company has to be regarded as a comparable company if it is otherwise a comparable company. In the light of the aforesaid decision and in the light of the facts brought to our notice, we are of the view that the comparability of this company has to be considered afersh by the AO/TPO in the light of the facts brought to our knowledge as above. The TPO will verify if this company suffered financial loss in all the earlier Financial Years and even if in one Financial Year, the company has made a profit, it has to be regarded as a comparable company. In view of the above, the ld AR for the assessee contended that the action of the TPO in modifying the persistent losses filter is incorrect. 33. The Ld. D.R. submitted that the Ld DRP observed that M/s R Systems International Ltd does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the export sales should be substantially similar if not same. The amount of substantial similarity by convention is accepted as 75% export sales to total sales. In this connection, it is presumed that net margin from export sales irrespective of market it is exported to, is similar. Therefore, market differences do not make significant impact as far as export transactions are concerned. Therefore, we agree with the TPO on this filter. Moreover, export revenue filter is impliedly approved in the following cases: 1. Cisco Systems (India) P Ltd v DCIT (2014) 50 taxmann.com 280 (bang) para 27.4 Motorola Solutions Pvt Ltd (TS-240-ITAT(2014) (Del)- TP) 2. Hyundai Motors India Engg (P) Ltd vs ITO (2014) 44 taxmann.com, 34 (Hyd) para 7(x) 3. 24/7 Customer.com Pvt Ltd v DCIT (2013) 140 ITD 344 4. Genisys Integrating Systems (India) Pvt Ltd vs DCIT (2011) 64 DTR (Snag) (Trib) 225 5. Exxon Mobil company India Pvt Ltd vs DCIT /TA 8311/Mum/2010 dated 10.06.2011 21.2 The ld. DRP on perusal of the annual report observed that from disclosure in notes on additional information of statement of profit and loss account of the Annual Report for the F.Y. 2016-17 that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 /WO. Whether the label printing and offset printing segments supplement the functions performed iii the Prepress BP segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the Top the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press IIPO have to be adjusted taking into account the fact that two other segments supplement the pre-press IWO segment. If such adjustment cannot be reasonably or accurately ma e then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised by the Assessee in this regard about lack of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea for inclusion of this company was rejected by the ld. DRP. 24. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this has been considered in the case of Global E:Business Operations Pvt. Ltd. by this Tribunal for the AY 2017-18 in IT(TP)A No. 174/Bang/2022 dated 16.11.2022, wherein held as under: 13.4 We have heard the rival submissions and perused the materials available on record. The ld AR submitted that this comparable may go back to file of AO/TPO to verify whether it satisfies all the filters adopted by AO/TPO. We accede to the request of the ld. AR. Accordingly, these two comparables i.e. Bhilwara Infotechnology Ltd. and R. Systems International Limited are remitted to the file of AO/TPO for fresh consideration to verify whether they satisfy all the filters adopted by AO/TPO while selecting comparables. Ordered accordingly. 24.1 In view of the above order of Tribunal, taking a consistent view, we remit this issue to the file of AO/TPO to verify whether this company satisfies all the filters adopted by the AO/TPO while selecting comparables. 25. Ground No. 14 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies is different. The cost would depend on the source of funds and the credit standing of the borrower. The assumption of prime lending rate as the interest rate applicable for making the working capital adjustment suffers from risks of inaccuracy. The cost of capital for MNCs is determined more by the global interest rates rather than Indian prime lending rate. There is always difference between prime lending rate of India and that of international market rate of interest. Choosing one of these rates among multiple rates available in the market is as debatable as not allowing any working capital adjustment. Any change in the interest rate in the working capital adjustment will produce significantly different results making the results highly unscientific. Even though it is possible for the comparable companies to borrow in the world market the reality is entirely different. A company with global presence has a distinct advantage in terms of credit worthiness and ability to bargain based on its financial muscle. The issue is well settled by the coordinate bench. The DR was unable to produce any contrary order against the assessee. 8.2 In our opinion, this issue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: (3) An uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to 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. 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
