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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B. R. BASKARAN
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A No.574/Bang/2015 Assessment Year : 2010-11 M/s. UL India Pvt. Ltd., Vs. The Deputy Commissioner of Income Tax, Kalyani Platina – Block I, 3rd Floor, 24, EPIP Circle -7(1)(1), Zone, Phase – 2nd, Whitefield, Bengaluru. Bengaluru – 560 066. PAN : AAACU 2468 F APPELLANT RESPONDENT IT(TP)A No.378/Bang/2015 Assessment Year : 2010-11 The Deputy Commissioner of Income Tax, Vs. M/s. UL India Pvt. Ltd., Circle -7(1)(1), Bengaluru – 560 066. Bengaluru. PAN : AAACU 2468 F APPELLANT RESPONDENT C.O.No.127/Bang/2015 (in IT(TP)A No.378/Bang/2015) Assessment Year : 2010-11 The Deputy Commissioner of Income Tax, Vs. M/s. UL India Pvt. Ltd., Circle -7(1)(1), Bengaluru – 560 066. Bengaluru. PAN : AAACU 2468 F CROSS OBJECTOR RESPONDENT IT(TP)A No.655/Bang/2016 Assessment Year : 2011-12 M/s. UL India Pvt. Ltd., Vs. The Deputy Commissioner of Income Tax, Bengaluru – 560 066. Circle -7(1)(1), PAN : AAACU 2468 F Bengaluru. APPELLANT RESPONDENT
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Appellant by : Shri. K. R. Vasudevan, Advocate Respondent by : Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru Date of hearing : 21.02.2022 Date of Pronouncement : 24.02.2022 O R D E R Per N. V. Vasudevan, Vice President: IT(TP)A No. 378/Bang/2015 & 574/Bang/2015 are cross appeals by the Revenue and Assessee against the final Order of Assessment dated 29.1.2015 passed by the ACIT, Circle – 7(1)(1), Bengaluru, under section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 (Act) in relation to AY 2014-2015. C.O.No.127/Bang/2015 is cross objection filed by the Assessee in the appeal filed by the Revenue.
Before we set out the various grounds of appeal raised by the Assessee, we need to explain the profile of the Assessee. The Assessee is a company who is a subsidiary of UL Incorporation, USA. The Assessee renders testing and software services to the UL Group. Besides the above, the Assessee also provides Information Technology enabled Services (ITeS) to its group companies. The two transactions of rendering testing and safety certification to UL Group, an Associate Enterprise (AE) and the transaction of rendering of ITeS to UL Group an AE, were international transactions and were subject matter of determination of Arm’s Length Price (ALP) by the AO under the provisions of section 92 of the Act. Apart from the corporate tax issue, the two issues that needs to be adjudicated in these appeals, are with regard to determination of ALP in
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respect of international transaction of rendering testing and safety certification services to the AE and rendering of ITeS to AE.
The grounds of appeal raised by the Assessee and the Revenue in its appeal and the grounds raised by the Assessee in its CO are as follows:
Grounds raised by Assessee in IT(TP)A No.574/Bang/2015
I. Transfer Pricing 1. The learned Assessing Officer ("AO"), the learned Transfer Pricing Officer ("TPO") and the Honourable Dispute Resolution Panel ("DRP") have erred in law and facts of the case in proposing a transfer pricing adjustment under section 92CA of the Income Tax Act, 1961 ("the Act") to the following international transactions of the Appellant with its Associated Enterprises ("AEs") Provision of Testing Services - INR 3,79,24,716; Provision of Information Technology enabled Service ("ITeS") - INR 51,97,365/-; Availing of IT and Management services - INR 4,75,42,575; and Payment of Royalty - INR 1,05,94,443.
A. Common Conceptual Grounds 2. The learned AO / learned TPO have erred in rejecting the Transfer Pricing (`TP') documentation maintained by the Appellant on invoking provisions of sub-section (3) of Section 92C of the Act contending that the information or data used in the computation of the arm's length price is not reliable or correct. 3. The learned AO / learned TPO and the Honourable DRP have erred in not considering the multiple year / prior year financial data of comparable companies while determining the arm's length price and insisting that only the current year (i.e. FY 2009-10) data be used for the determination of arm's length price.
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The learned AO / learned TPO and the Honorable DRP erred in not allowing the benefit of range of +/- 5% as provided in proviso to Section 92C (2) of the Act to the Appellant, while determining the arm's length price. B. Testing Services: 5. The learned AO / learned TPO and the Honourable DRP have erred in not considering the economic adjustments made to the margins of the Appellant in the testing services segment. 6. The learned AO / learned TPO and the Honourable DRP have erred in not appreciating the fact that TP adjustments, if any, should be restricted only to the extent of the international transactions entered into with the AEs. 7. The learned AO / learned TPO and the Honourable DRP have erred in considering the financial data of the comparable companies for the FY 2007-08 in the testing services segment thereby being consistent in application of contemporaneous data filter. 8. The learned AO / learned TPO and the Honourable DRP have erred in selecting companies having significant related party transactions in the testing services segment. C. IT and Management Fees: 9. The learned AO / learned TPO and the Honourable DRP have erred in not taking cognizance of the facts submitted by the Appellant with regard to the payment of IT and management fees and disallowed the same stating that the arm's length price paid on the same is NIL. 10. The learned AO / learned TPO and the Honourable DRP have erred in selecting Comparable Uncontrolled Price Method ("CUP") as the most appropriate method while computing the arm's length price of the payment of IT and management fees to the AE. 11. The learned AO / learned TPO and the Honourable DRP have erred in not appreciating the fact that the IT and management support services received from the AE are integral to the primary business of rendering testing and ITeS services to the AE and the cost pertaining to the same has been included as a part of the operating cost and recovered from the AE. 12. The learned AO / learned TPO and the Honourable DRP have erred in concluding that the Appellant has not received any IT and management support services from the AE and characterized
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the payment towards IT and management fees to be "duplicative" in nature. 13. The learned AO / learned TPO and the Honourable DRP have erred in not considering the information, explanation and submissions provided in support of the receipt of services and the benefits derived out of such services. 14.The learned AO / learned TPO and the Honourable DRP have erred in concluding that the Appellant did not receive any economical and commercial benefits from availing IT and management support services from its AE. 15. The learned AO / learned TPO and the Honourable DRP have erred in not appreciating the fact that the margin earned by the Appellant in the testing and ITeS segment is at arm's length, even after paying IT and management fees to its AE. D. Royalty: 16. The learned AO / learned TPO and the Honorable DRP have failed to appreciate the fact that the technology provided by the AE is unique and critical for the Appellant's business. 17.The learned AO / learned TPO and the Honorable DRP have erred in adopting ad-hoc method to determine the royalty rate to be paid for the use of trademark. 18. The learned AO / learned TPO and the Honorable DRP have erred in rejecting the benchmarking study conducted by the Appellant in the transfer pricing report without providing any cogent reasons for such rejections.
E. IT enabled Services Segment: 19. The learned AO / learned TPO and the Honorable DRP have erred in rejecting the economic analysis performed by the Appellant in the TP documentation justifying the arm’s length nature of the international transaction pertaining to ITeS segment. 20. The Honorable DRP has erred in modifying the filter of related party transaction applied by the learned TPO and by the Appellant to provide that companies having more than zero percent of related party transaction should be rejected as comparable.
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21.The learned AO / learned TPO and the Honorable DRP have erred in rejecting comparable companies selected by the Appellant in the TP documentation and introduced during the assessment proceedings. 22. The learned AO / learned TPO have erred in selecting / introducing companies which are not comparable to the Appellant, on conducting a fresh comparability analysis based on application of additional filters in determining the arm's length price for the ITeS segment.
The learned AO / learned TPO have erred in rejecting Jindal Intellicom Private Limited as a comparable company for the only reason that the financial statements of this company is for 15 months. 24. The learned AO/ learned TPO and the Honorable DRP have erred in applying the filter of different financial year ending to reject the companies that are otherwise functionally comparable. 25. The learned AO / learned TPO and the Honourable DRP have erred in not considering provision for doubtful debts as operating in nature. 26. The learned AO / learned TPO and the Honorable DRP have erred in restricting the working capital adjustment to the average cost of capital of the comparable companies selected in determination of arm's length price for the ITeS segment. 27. The learned AO / learned TPO have erred in incorrectly computing the working capital adjustments in the ITeS segment. 28. The Honorable DRP has erred in not providing an appropriate adjustment towards the risk differential between the Appellant and the entrepreneurial companies selected as comparable but for resorting to determine the risk adjustment on an ad hoc basis.
Corporate Tax II. A. Change in method of revenue recognition 29. The learned AO and the Hon'ble DRP have erred in concluding that the change in method of revenue recognition from proportionate completion method to completed contract method is not bonafide. 30. The learned AO and the Hon'ble DRP have failed to appreciate the judicial precedents wherein it is held that a bonafide change in the method of accounting cannot be discarded if the changed method is regularly and consistently followed by the assesse.
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Notwithstanding the above, the learned AO has failed to appreciate the fact that, as the assessee has been following completed contract method for recognizing revenue for all the subsequent years, proposed adjustment would result in allowing a deduction in subsequent years, which is a futile exercise. 32. The learned AO has erred in placing reliance on the principles of recognition of revenue as per AS-7 without appreciating that AS-7 applies only to contracts for construction of asset or combination of asset and not service contracts which are governed by AS-9. 33.The learned AO and the Hon'ble DRP have erred in concluding that if the assessee had followed proportionate completion method for AY 10-11, the profits would have gone up. They ought to have appreciated that for AY 10-11 there was no understatement of profit. In fact, the assessee having followed completed contract method of revenue recognition had offered to tax excess profit in AY 10-11.
Notwithstanding our contention, the learned AO having disregarded the change in the method of revenue recognition and brought to tax an additional amount in AY 09-10, has erred in not giving consequent relief (on a protective basis) for the amount offered to tax by the appellant in AY 10-11.
Notwithstanding and without prejudice to the above, for the amount considered as revenue of the current year, the learned AO ought to allow consequential benefit in the subsequent years in which the same has been offered to tax. B. Denial of TDS credit
The learned AO has erred In denying TDS credit contending that credit for TDS cannot be claimed on unearned income and advances received.
The learned AO ought to have placed reliance on various judicial precedents wherein it is held that credit for TDS has to be provided to the assessee irrespective of the year to which the income relates.
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Notwithstanding the above, the learned AO ought not to have disallowed the TDS credit in respect of the entire advances considering that some portion of the advances were forming part of unbilled revenue and hence offered to tax. C. Denial of set-off of loss and unabsorbed deoresiation brought forward from AY 2009-10 4. The learned AO has erred in denying set off of brought forward business loss and unabsorbed depreciation as claimed in the income tax return filed. D. Interest levied under section 234B 40. The learned AO has erred in levying interest under section 234B which is consequential in nature.
Grounds raised in Revenue’s appeal in IT(TP)A No.378/Bang/2015:
The order of the DRP is opposed to law and the facts and 1) circumstances of the case. Whether the Id, DRP is justified in directing the TPO to grant 2) risk adjustment witl out advising any reasonable accurate method. The learned DRP erred in holding that the size and 3) turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding M/s. E-clerk Services Ltd and Infosys BPO Limited as comparables. The learned DRP erred in excluding uncontrolled 4) comparables having turnover more than Rs. 200 crores in the absence of Turnover criterion prescribed in Rule 10B of Income Tax Rules and also there being no correlation between turnover and profit margin. The Hon'ble DRP has erred in applying 0% RPT. The order of 5) the Hon'ble DRP is in itself contradictory. It has discussed why 0% RPT should not be taken on the other hand the Hon'ble DRP itself has directed the TPO to adopt the same.
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The Hon'ble DRP failed to appreciate that the directions 6) issued are beyond the mandate of the provisions of Sec.144C of the IT Act. For these and such other grounds that may be urged at the 7) time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored. The appellate craves leave to add, to alter, to amend or delete 8) any of the grounds that may be urged at the time of hearing of the appeal.
Grounds raised in CO No.127/Bang/2015 in IT(TP)A No.378/Bang/2015: 1. On facts and circumstances of the case and in law. the respondent wishes to rely upon the directions (dated 26 December, 2014) passed under section 144C (5) of the Income-tax Act. 1961 by the Hon'ble Dispute Resolution Panel (''DRP") and grounds of appeal filed in Form 35A before the DRP which was disregarded by the Learned Assessing officer ("Ld. AO") / Learned Transfer Pricing Officer ("Ld. TP0") while filing an appeal before the Hon'ble Tribunal. 2. The Hon'ble DRP has erred in not adjudicating on the following grounds raised by the Assessee during the DRP proceedings for the exclusion of Infosys BPO Limited ("Infosys") a) Infosys owns substantial brand value; and b) Infosys is functionally dissimilar to the Assessee. 3. The Hon'ble DRP has erred in not adjudicating on the following grounds raised by the Assessee during the DRP proceedings for the exclusion of E-Clerx Services Limited ("E-Clerx"): c) E-Clerx is functionally dissimilar to the Assessee; and d) There are extra-ordinary events of amalgamation / acquisition in E-Clerx during the relevant assessment year 4. The Hon'ble DRP has erred in not adjudicating on the following grounds raised by the Assessee during the DRP proceedings for the exclusion of Fortune Infotech Limited ("Fortune"): e) Fortune is functionally dissimilar to the Assessee; and
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f) Fortune uses intangibles, technology and technical know- how for the provision of BPO services. 5. The Hon'ble DRP has erred in not adjudicating on the other grounds raised by the Assessee during the DRP proceedings for the exclusion of ICRA Online Limited (“ICRA") wherein the Assessee argued that ICRA is functionally not comparable to the Assessee. The respondent craves leave to add, alter, amend and/or delete any of the ground mentioned above.
Apart from the original grounds, the Assessee has raised certain additional grounds in its appeal which reads thus: Additional ground in continuation of the existing grounds of appeal and be read as Ground No. 6; Ground No. 8(i) in continuation to Ground No 8; Ground No 21(i), Ground No. 21(ii), Ground No. 21(iii), Ground No. 21(iv) in continuation to Ground No 21; and 22(i), Ground No. 22(ii), Ground No. 22(iii) and Ground No. 22(iv) in continuation to Ground No. 22. Additionally, it is prayed to permit additional Ground No. 29, Ground No.30 and Ground No 31 immediately after Ground No.28. 1. Ground No. 6: The Learned TPO/AO has grossly erred in not appreciating the fact that the transfer pricing adjustments if any should be restricted only to the extent of the international transactions with the AEs. 2.Ground No. 8( i) The Appellant in Ground No 8 has contended that the learned TPO/AO has erred in accepting companies with significant RPT in the Testing/ certification service segment. The Appellant specifically submits that that the learned TPO/A0 has erred in accepting L & T- Sargent & Lundy Ltd. as a comparable company in the Testing/ certification service segment. 3. Ground No. 21(i) R Systems International Ltd. should be accepted as a comparable
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The Appellant in Ground No 21 has contended that the learned TPO/A0 has erred in rejecting certain comparable companies which have been selected in the TP Documentation. The Appellant specifically submits that that the learned TPO/AO has erred in rejecting R Systems as a comparable company on the ground of different financial year ending. 4.Ground No. 21(ii): Ultramarine & Pigments Ltd. ("Ultramarine ") should be accepted as a comparable The Appellant in Ground No 21 has contended that the learned TPO/AO has erred in rejecting certain comparable companies which have been selected in the TP Documentation. The Appellant specifically submits that that the learned TPO/AO has erred in rejecting Ultramarine as a comparable company on the ground that it fails service income filter. 5.Ground No. 21(iii): Caliber Point Business Solutions Ltd. ("Caliber" I should be accepted as a comparable The Appellant in ground no 21 has contended that the learned TPO/AO has erred in rejecting certain comparable companies which has been selected in the TP Documentation. The Appellant specifically submits that that the learned TPO/AO has erred in rejecting Caliber as a comparable company on the ground that no data is available. 6.Ground No. 21( iv): Datamatics Financial Services Limited I "Datamatics") should be accepted as a comparable The Appellant in ground no 21 has contended that the learned TPO/AO has erred in rejecting certain comparable companies which has been selected in the TP Documentation. The Appellant specifically submits that that the learned TPO/A0 has erred in rejecting Datamatics as a comparable company on the ground that it fails the export filter. 7.Ground No. 22(i ) : Accentia Technologies Ltd. ("Accentia") should be rejected as a comparable The Appellant in ground no 22 has contended that the learned TPO/AO has erred in selecting certain comparable companies, which are not comparable to the Appellant. The Appellant specifically submits that that the learned TPO/AO has erred in accepting Accentia as the company is functionally dissimilar.
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Ground No. 22(ii): Acropetal Technologies Ltd. t"Acrooetal") should be rejected as a comparable The Appellant in ground no 22 has contended that the learned TPO/A0 has erred in selecting certain comparable companies which are not comparable to the Appellant. The Appellant specifically submits that that the learned TPO/AO has erred in accepting Acropetal as the company is functionally dissimilar. 9.Ground No. 22(iin: Fortune Infotech Ltd. ("Fortune") should be rejected as a comparable The Appellant in ground no 22 has contended that the learned TPO/AO has erred in selecting certain comparable companies which are not comparable to the Appellant. The Appellant specifically submits that that the learned TPO/AO has erred in accepting Fortune as the company is functionally dissimilar and has RPT >25%. Ground No. 22(iv): ICRA Online Ltd. ("ICRA") should be 10. rejected as a comparable The Appellant in ground no 22 has contended that the learned TPO/AO have erred in selecting certain comparable companies which are not comparable to the Appellant. The Appellant specifically submits that that the learned TPO/AO has erred in a epting ICRA as the company is functionally dissimilar and failing the export filter. 11. Ground No.29 The Appellant humbly submits that "Finance Cost" ought to be considered as non-operating in case of both the Testing/Certification service segment and the Information Technology—enabled service segment (ITES Segment"). Further, "Loss on sale/scrapping of Fixed Assets" ought to be considered as non-operating in the ITES segment of the Appellant. Ground No.30 12. Without prejudice to any other grounds of the Appellant, even if the arm's length price of the IT Management services and payment for Royalty paid by the Appellant is considered to be nil, the learned TPO/ AO has erred in not deducting the same from the operating cost base of the Company for the purpose of computation of the operating
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margin on operating revenue in the Testing/Certification segment. Thereby the learned TPO/AO has erroneously made an adjustment for payment of IT Management services and payment of Royalty twice. Ground No.31 13. The Appellant humbly submits that the correct mark-up on cost for the comparable companies ought to be considered while computing the arm's length price for the Testing/Certification Service Segment.
These additional grounds are an elaboration of the original grounds already raised by the Assessee in its original grounds of appeal and arise out of the order of CIT(A) and can be adjudicated on the basis of facts already available on record. Keeping in view the decision of Hon’ble Supreme Court in the case of NTPC Ltd. 229 ITR 383 (SC), we admit the additional ground of appeal as these grounds are necessary to be adjudicated to decide the correct tax liability of the Assessee by application of law on the facts already available on record.
Grounds 1 raised by the Assessee was not pressed and is dismissed as not pressed. Grounds 2 to 4 are conceptual grounds which are not required to be adjudicated specifically. Grd.No.5 to 8 & Addl.Grd.8(i) raised by the Assessee are grounds raised by the Assessee challenging the determination of ALP in respect of the international transaction of rendering testing and safety certification services by the Assessee. As far as the international transaction of certification services is concerned, the Assessee rendered certification services to AE as well as non-AEs. For the purpose of determining the ALP, the method adopted was Transaction Net Margin Method (TNMM). The assessee had chosen comparable companies
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rendering certification services and compared their profit margins with that of the Assessee. The arithmetic mean of the profit margin of these comparable companies chosen by the Assessee was comparable with the profit margins of the Assessee. It is not in dispute that the Profit Level Indicator (PLI) of the Assessee i.e., Operating Profit (OP) to Operating Cost (OC) was accepted by the Transfer Pricing Officer ( TPO) to whom a reference was made by the AO for determining ALP u/s.92CA of the Act. In arriving at the profit margin of the comparable companies, the Assessee chose weighted average of profit margin for the preceding two years.
The TPO used the same set of comparables taken by the taxpayer in respect of Certification (Technical Services) based on current year data alone. The taxpayer had excluded certain expenses which it considered as extraordinary in nature and not related to the operation of the taxpayer. Forex loss was considered as operating expenses by the TPO following the ITAT's decision in the case of SAP Labs India (P) Ltd. Vs. ACIT 134 ITD 253 (Bang-ITAT). The TPO accordingly computed ALP and the consequent addition to the total income on account of determination of ALP.
Aggrieved by the aforesaid adjustment made to the total income of the Assessee, the Assessee filed objections before the Dispute Resolution Panel (DRP). The DRP gave certain directions which was followed by the AO while passing the final order of Assessment. To the extent the Assessee did not get the necessary relief before the DRP, it has raised ground Nos. 5 to 8 (i) before the Tribunal.
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We have heard the rival submissions. The ld. counsel for the Assessee submitted that the TPO while computing Profit Level Indicator (PLI) of the Assessee in the certification services segment, has included certain items of expenses, whereas the Assessee has excluded those expenses as being extra-ordinary in nature and not having impact on the operating margin of the Assessee. These objections, however, were not met by the DRP, despite submissions made by the Assessee before the DRP. It was submitted that as far as Bangalore Benches of the Tribunal are concerned, the threshold limit for application of RPT filter for excluding comparable companies, should be 15% of the total revenue being with related parties and in this regard placed reliance on the decision rendered in 24/7 Customer Pvt. Ltd. (ITA No.227/Bang/2010), Sony India Private Ltd. reported in (2009) 315 ITR (80) 150 (Del.) wherein it has been held that comparables having RPT of up to 15% of total revenues can be considered as comparable company. It was submitted that the adjustment and addition to the total income should be made u/s. 92 of the Act only in respect of international transaction and not in respect of transactions with Non-AE. In this regard, the ld. counsel pointed out that out of the total revenue from certification services in respect of transactions with AE should alone be the subject matter of determination of ALP and not the entire transaction. Lastly, it was submitted that economic adjustment like working capital adjustment, capacity utilization adjustment and other adjustments ought to be allowed while determining the margins of Assessee and comparable companies as mandated under Rule 10B(2) of the Rules. The ld. DR relied on the order of the DRP.
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At the time of hearing of this appeal, it was brought to our notice that the issue raised in this appeal for Assessment Year 2014-15 is identical to the issues raised by the Assessee in Assessment Year 2010-11 which was subject matter of decision by this Tribunal in IT(TP)A No.291/Bang/2014 for Assessment Year 2009-10 vide order dated 20.9.2019. The learned Counsel for the Assessee submitted that similar directions as was given by the Tribunal in the aforesaid order for Assessment Year 2009-10 may be followed as the facts and circumstances are identical in the Assessment Year 2010-11 also. Learned DR while relying on the order of the AO did not dispute the aforesaid factual position.
We have considered the rival submissions. This Tribunal on identical issue remitted the question of determination of ALP to the AO/TPO in AY 2009-10 with the following directions: “16. We have given a careful consideration to the rival submissions and are of the view that the issue with regard to determination of ALP in the certification services segment should be remitted back to the TPO. Accordingly, the issue is restored back to the TPO for fresh consideration with the following directions:- (1) The foreign exchange loss/gain to the extent it relates o revenue items and are directly related to certification services rendered by the assessee should be considered as part of the operating profit or loss, as the case may be. The law in this regard is well settled by the decision rendered by the ITAT Bangalore Bench in the case of SAP Labs (supra) and Auto Desk India Pvt. Ltd. Vs. DCIT IT(TP)A.No.540 & 541/Bang/2013. (2) The TPO should restrict the addition only in respect of international transactions with the AE. However, the submission made by the Id. DR with regard to a part of the certification services having been subcontracted to
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the AE and receipt of sub-contracting charges from the AE to the extent the same will have impact on the consideration received from the AE for rendering the certification services should also be examined by the TPO. (3) Errors, if any, in the computation of margins of comparables should be looked into by the TPO in the-set aside proceedings. (4) Threshold limit for applying RPT filter should be 15% or 25% of sales depending upon the availability of comparable companies after all exclusions as held by the Tribunal in the case of Auto Desk India Pvt. Ltd. Vs. DCIT [2018] 96 taxmann.com 263 (Bang.Trib.) [para 24 to 25]. 17.The above directions will be sufficient to take care of the grievances projected by the assessee in ground Nos. 5 & 6 and additional grounds No.6 (d), 26 & 27.The TPO will afford opportunity of being heard to the assessee before deciding the issue.”
As the parties prayed for similar direction in the present AY also, respectfully following the aforesaid order of the Tribunal, we remit the issue of determination of ALP of the international transaction of rendering of certification services by the Assessee to its AE to the TPO/AO for determination of ALP, after affording the Assessee opportunity of being heard and in the light of the directions given by the Tribunal in Assessment Year 2009-10. The relevant grounds of appeal in this regard are treated as allowed for statistical purposes.
As far as Grounds 9 to 15 raised by the Assessee are concerned, the same relates to determination of ALP in the IT and Management Fees segment. As far as determination of ALP in the aforesaid segment is
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concerned, the TPO held that the Assessee has not established the receipt of services in the nature of IT and management fees and hence determined the price at Nil and thereby treated the entire fees paid of Rs.4,75,42,575/- as an addition on account of determination of ALP. The DRP confirmed the order of the TPO.
Before the Tribunal, the Assessee has filed evidence in proof of receipt of services from the AE for which it made payment for IT and Management fees. It is the plea of the Assessee in the application for admission of additional evidence that it filed basic documents like agreement copies and copies of invoices and those evidence were considered not adequate by the revenue authorities and therefore the evidence in the form of E-mail communications for support services received, invoices raised for services received, screenshots of software used, evidence of services received are now being filed as additional evidence (these are contained in pages 1 to 606 of the paper book). It is the prayer of the learned counsel for the Assessee that these documents are necessary for adjudication of the issue involved in the appeal and hence should be admitted as additional evidence in the interest of justice.
Having considered the prayer for admission of additional evidence and the grounds on which the prayer is so made, we are of the view that the additional evidence requires to be admitted. Since, the additional evidence has a bearing on deciding the issue of ALP in respect of IT and Management fee paid to AE and the AO/TPO did not have the benefit of
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these evidence, we deem it fit and proper to remand the issue to the AO/TPO for consideration afresh after affording opportunity of being heard to the Assessee.
As far as grounds No.16 to 18 are concerned, the Assessee paid royalty at the rate of 5% on local sales and 8% on export sales to its AE. According to the Assessee the same was benchmarked along with the certification segment and not separately benchmarked as the said transaction was closely linked and connected with the certification services that the Assessee provided to the AE. The TPO however held that as per the RBI guidelines 1% royalty payment for use of trademark is allowed and hence 4% on local sales was excessive and therefore added a sum of Rs.1,05,94,443/- on account of determination of ALP. The DRP confirmed the order of the TPO.
After hearing the rival submissions, we are of the view that this issue also has to be remanded to the AO/TPO for consideration de novo because the fact that the Assessee adopted a combined approach and benchmarked the payment of royalty along with the other segment i.e., certification segment has not been considered either by the TPO or DRP. It is only when the combined approach is not accepted can there be a separate benchmarking of payment towards royalty. Since this exercise has not been done, we deem it fit and proper to remand the issue to the AO/TPO for consideration afresh in accordance with law after affording the Assessee opportunity of being heard.
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As far as grounds No. 19 to 24 and grounds No.21 (i) 21(iv) and 22 (i) to 22 (iv) are concerned, the same relates to determination of ALP in the Information Technology Enabled Services (ITeS) segment. As far as the provision of ITeS segment is concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison of the Assessee’s profit margin with that of the comparable companies. The Assessee chose companies who are engaged in providing similar services such as the assessee. The Assessee identified companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm’s Length.
The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/OC. The TPO on his own selected companies as comparable companies with the Assessee. Thus, a final set of 10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows:
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Comparables selected by TPO and their arithmetic mean: Sl. Mark-up Mark-up on No. on Total Total Costs Name of the Company Costs (WC (WC–unadj) – adj) (in %) (in %) 1. Accentia Technologies Ltd. 43.06 39.17 2. Acropetal Technologies Ltd. (Seg) 22.27 17.67 3. E-Clerx Services Ltd. 55.97 52.98 4. Fortune Infotech Ltd. 22.80 20.05 5. ICRA Online Ltd. (Seg) 43.39 40.72 6. Informed Technologies India Ltd. 26.15 25.94 7. Infosys BPO 31.23 28.68 8. Cosmic Global Ltd. 14.97 16.20 9. Sundaram Business Services Ltd. -12.31 -13.28 10. Jeevan Scientific Technology Ltd. 21.05 37.99 (Seg) Average 26.86 26.61
The Computation of arm’s length price by the TPO and the adjustment made was as follows: Arm’s Length Mean Margin 26.86% Less: Working Capital Adjustment* 0.23% Adjusted mean margin of the comparables 26.63% Operating Cost Rs.3,56,09,578 Arm’s Length Price - 126.63% of Rs.4,50,92,409 Operating Cost Price Received Rs.3,84,27,929 Short fall being adjustment u/S. 92CA Rs.66,64,480
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It may be clarified that the TPO restricted the working capital adjustment at 0.23% though the actual working of working capital adjustment was much higher than 0.23%. If the actual working capital adjustment as computed by the TPO had been allowed then the adjusted mean profit margin of comparable companies for the purpose of comparison with the Assessee’s margin would be less than 26.63% computed by the TPO. Thus, a sum of Rs.66,64,480/- was added to the total income of the assessee on account of determination of ALP for provision of ITeS services by the assessee to its AE.
DRP Directions: Before the DRP, the assessee requested for exclusion and inclusion of the following companies from the set of comparable companies: (Page 41 of Paper Book) Exclusion of following companies: i) Accentia Technologies Ltd (Gr. 1.17 before DRP) ii) Acropetal Technologies Ltd (Gr. 1.18 before DRP) iii) Eclerx Services Ltd (Gr. 1.19 before DRP) iv) Fortune Infotech Ltd (Gr. 1.20 before DRP) v) ICRA Online Ltd (Gr. 1.21 before DRP) vi) Infosys BPO (Gr. 1.22 before DRP) vii) Jeevan Scientific Tech Ltd (Gr. 1.23 before DRP) Inclusion of following companies i) Nittany Outsourcing services Pvt Ltd ii) Datamatics Financial Services Ltd iii) R Systems International iv) Caliber Point Business Solutions v) Ultramarine Pigments vi) Jindal Intellicom Pvt Ltd. The DRP gave a direction to exclude companies on the following issues:
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i) Applying upper turnover filter of Rs 200 Crores by applying upper turnover filter ( Para 10.7 at Page 9 of DRP order) – by applying this filter, two companies, viz., Eclerx services & Infosys BPO gets excluded. ii) Applying RPT filter at 0 % ( Para 10.12 at Page 10 of DRP order) – It is not clear which of the companies have been excluded by the TPO by applying the RPT filter @ 0 %. It would appear that the decision of the DRP has not been implemented by the TPO. However, the DRP has not adjudicated at all, on the functional comparability of any of the individual companies (Ground No. 15 at Page 13 of the DRP order)
22.1. Before the Tribunal: Before the Tribunal, the assessee has raised a General Ground objecting to exclusion and inclusion of comparables, without specifically mentioning the names of the companies which are sought to be excluded/ included (Grounds No. 21 & 22). Vide Additional Grounds filed (No. 22), the assessee is seeking exclusion of the following companies: i) Accentia Technologies Ltd (Additional Gr. 22(i) ) ii) Acropetal Technologies Ltd (Additional Gr. 22(ii) ) iii) Fortune Infotech Ltd (Additional Gr. 22(iii)) iv) ICRA Online Ltd (Additional Gr. 22(iv) ) Vide Additional Grounds filed (No. 21), the assessee is seeking inclusion of the following companies: i) R Systems International Ltd (Additional Ground Gr 21(i) ) ii) Ultramarine Pigments Ltd (Additional Ground Gr 21(ii) ) iii) Caliber Point Business Solutions (Additional Ground Gr 21(iii) )
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For exclusion of the above mentioned four companies, Reliance is placed on the decision of the Hon’ble Tribunal in the case of Arctern Consulting Pvt. Ltd.,IT (TP) A No. 195 & 302/Bang/2015 order dated 11.08.2017. A chart of comparables have been filed.
22.2. The submissions for inclusion of the above three companies are as under : i) R Systems International This company was excluded by the TPO only because this company has a different financial year ending (Page No. 11 of TP order). In this regard, reliance is placed on the decision in the case of Mercer Consulting Co (Del HC) and Business Process Outsourcing India Ltd (Bangalore Tribunal) – both the orders are placed in the case law compendium – Page 138 of case law compendium.
ii) Ultramarine Pigments Ltd This company was excluded by the TPO because it fails the service income filter. (Page No. 11 of TP order)However, this company was ordered to be included in the set of comparables by the Bangalore Tribunal in case of Business Process Outsourcing India Ltd - Page No. 108 to 110 of case law compendium.
iii) Caliber Point Business Solutions This company was excluded by the TPO only because no data is available in the public domain.
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In this regard, it is submitted that the Annual Report and Financial Statements are available in public domain and were submitted to the DRP (Page No. 214 to 251 of Paper Book). However, the DRP failed to consider the same.
The learned DR relied on the order of the DRP.
We shall first take up for consideration grounds No.22(i) to (iv) regarding exclusion of comparable companies. In the case of Arctern Consulting Pvt. Ltd. (supra) IT(TP)A No.195/Bang/2015 & 302/Bang/2015 Order dated 11.08.2017 for AY 2010-11, exclusion of all these companies was considered by this Tribunal and excluded. With regard to exclusion of Acropetal technologies, we find that the expenses incurred on on-site provision of ITeS by the Assessee was 64% of the total expenses and therefore the company was to be regarded as one providing onsite ITeS and cannot be compared with a company providing offshore ITeS such as the Assessee. Secondly the employee cost is less than 25% of the total cost of the company. ITeS services essentially involve and predominantly dependent on employees and therefore wherever the employee cost is less than 25% of the total cost, then the company cannot be regarded as providing ITeS. Therefore, we direct the Assessing Officer to apply 25% employees cost filter and accordingly exclude Acropetal Technologies Limited.
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With regard to exclusion of Accential Technologies Ltd., we find that ICRA is engaged in providing services which are in the nature of Knowledge Process Outsourcing (KPO) services. It provides financial and analytical services and support to clients in the area of Data Extraction, Aggregation, Electronic Conversion of Financial statements, Validation and Analysis, Accounting and Finance, Research and Analytics which are dissimilar to the services rendered by the Assessee. The outsourced services segment of the company is engaged in the provision of high end consultancy services which cannot be compared to the assessee who is into provision of low end IT enabled services which are routine in nature. Further, the safe harbour rules clearly distinguish between an ITE service provider and a KPO service provider. This Tribunal has held that a KPO service provider cannot be compared to an ITE service provider. Reliance in this regard is placed on the decision in the case of Arctern Consulting Pvt. Ltd. (supra) IT(TP)A No.195/Bang/2015 & 302/Bang/2015 Order dated 11.08.2017 for AY 2010-11, & in the case of Outsource Partners International (P) Ltd. I.T(TP)A No.337/Bang/2015 Order dated 6.2.2017 for AY 2010-11, wherein on identical circumstances, the exclusion of this company came to be upheld/the company was directed to be excluded. In the case of Outsources Partners International (P) Ltd.,(supra), this Tribunal has adjudicated identical issue and held that this company was not functionally comparable to an ITeS company such as the Assessee and for the reason that this company fails the export earning filter. Respectfully following the said decision, we uphold exclusion of this company from the list of comparable companies for the reasons given in this paragraph.
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As far as Accentia Technologies Ltd, is concerned, we find that this company has been held to be not Functionally not comparable and as a Product development company with Presence of Intellectual Property rights (Approx.57% of the net fixed assets) and with extraordinary events during the year relevant to AY 2010-11 and the segmental data not being available, in the case of & in the case of Outsource Partners International (P) Ltd. I.T(TP).A No.337/Bang/2015 Order dated 6.2.2017 for AY 2010- 11. Hence, we direct exclusion of the company Accentia Technologies Ltd., from the list of comparable companies.
As far as Fortune Infotech Ltd., is concerned in the case of Outsource Partners International Pvt. Ltd. (supra) this company was held to be Functionally not comparable being a Product development company with Presence of Intellectual Property rights (Approx.57% of the net fixed assets) and with related party transactions ( RPT) of more than 25%. Hence, we direct exclusion of this company from the list of comparable companies.
We now take up for consideration grounds No.21(i) to (iii) for inclusion of certain comparable companies. (Grd.No.21(iv) was not pressed). As far as the plea for inclusion of R. Systems International Ltd., is concerned, the exclusion of this company by the TPO was on the basis that this company had a different financial year ending. It is the plea of the Assessee that though this company has a different financial year, the results of this company for the relevant financial year as that of the Assessee can
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be carved out and in such an event this company which is otherwise comparable should be regarded as a comparable company. We are of the view that the plea taken by the Assessee has to be accepted and the issue is remanded to the AO/ TPO to verify the claim of the Assesee regarding availability of results for the period of comparison.
As far as the plea for inclusion of Ultramarine & Pigments Ltd., is concerned, the plea of the Assessee has been that this company was rejected on the ground that the service income was less than 75% of the total income whereas factually it is incorrect. We feel that this issue has to be remanded to the AO/TPO for verification of the plea of the Assessee and if found correct, include this company as a comparable company, if otherwise this company is comparable with that of the Assessee.
As far as the plea of the Assessee for Caliber point Business Solutions Ltd., is concerned, it is the plea of the Assessee that rejection of this company by the TPO on the ground of non availability of data is incorrect and that the data is available in public domain. We feel that this issue has to be remanded to the AO/TPO for verification of the plea of the Assessee and if found correct, include this company as a comparable company, if otherwise this company is comparable with that of the Assessee.
The next grievance of the Assessee in its appeal is projected in Grd.No.27 on not allowing working capital adjustment on actual and
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restricting the same to 0.23%. As far as Gr.No.27 raised by the Assessee is concerned, the Assessee is praying for a direction, directing the AO/TPO to grant the working capital adjustment without any restrictions. In this regard, it was submitted on behalf of the Assessee that DRP ought to have that working capital adjustment must be granted in full without there being any arbitrary and adhoc upper cap or restriction to the same. It was submitted that Rule 10B(3) of the Income-tax Rules, 1962 (‘the IT Rules’ for short), provides that an adjustment ought to be provided for any differences in the economic factors between the tested party and the comparables. A working capital adjustment is one such adjustment which is to be applied in order to adjust for the differences between the working capital positions of the tested party and of the comparable. The IT Rules do not provide for any cap or upper limit to such adjustments. This position under the Act and the IT Rules is also evident from the OECD Guidelines. Further, there was no basis for the TPO to restrict the adjustment and the Revenue’s contention to that extent is ill-conceived. In any event, the restriction is patently not on the basis of the average working capital cost of the companies. Reliance in this regard was placed on the decision of this Hon’ble Tribunal in the case of ARM Embedded Technologies P. Ltd v. DCIT reported in [2015] 64 taxmann.com 445 (Bangalore - Trib.) wherein this Hon’ble Tribunal directed grant of the adjustment without putting any restrictions. The learned DR reiterated the stand of the revenue as reflected in the grounds of appeal of the revenue.
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We have given a very careful consideration to the rival submissions. Similar issue had come for consideration before this Tribunal in the case of ARM Embedded Technologies P. Ltd. (supra) and this Tribunal held that working capital adjustment has to be allowed on actual basis without any restriction. The following were the relevant observations: “24. Now coming to the issue of working capital adjustment, findings of the TPO in this regard as it appears at para 3.7, reads as under : "3.7 Working Capital Adjustment: The working capital adjustment is computed as per the formula given in Annexure to the OECD Guidelines, 2009. In this case, the average PLR adopted by SBI, the largest scheduled bank, for short term working capital loans for the relevant FY 2008-09 is considered. The average PLR of 12.50% p.a was adopted by the TPO while computing the working capital adjustment. The working capital adjustment is restricted to the average cost of capital computed at 1.71% in the case of the uncontrolled comparables selected by the TPO. Hence, the working capital adjustment in the case of the taxpayer is allowed as per the calculation in annexure-C or the average cost of capital to the comparables whichever is the least. The detailed discussion on this is given in the Annexure-D to the order. The computation of the working capital adjustment is annexed to this order as Annexure C." TPO had restricted the cost of capital to 1.71%. Rationality for such an upper limit being placed on working capital adjustment was an issue which had come up before this Tribunal in the case of Rambus Chip Technologies (India) (P.) Ltd. v. Dy. CIT [IT (TP) A. 23/Ban/2015, dt. 22.07.2015. Coordinate bench had held as under at para 13 and 14 of its order: "13. As regards ground No. 3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71% in case of uncontrolled comparables selected by the TPO. The learned counsel for the assessee submitted that the TPO has not given any basis for such restriction of the working capital adjustment. He submitted that the CIT
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(A) also has not applied his mind to this issue but has summarily confirmed the order of the AO and therefore it has to be set aside. 14. On going through the TPO's order as well as annexure D referred to in the transfer pricing order on working capital adjustment, we find that the AO has not given any basis for restricting the adjustment to 1.71%. In all the cases relating to transfer pricing adjustment, this Tribunal has been directing to give working capital adjustment on actual basis and the TPO having arrived at 5.97% ought to have adopted the same instead of restricting it to 1.71 %. In view of the same, we deem it proper to remand this issue to the file of the AO/TPO for working out the ALP after giving adjustment of working capital as per the calculation of the AO in annexure D annexed to the transfer pricing order. This ground of appeal is accordingly allowed." 25. Accordingly we direct the AO/TPO to correctly work out the PLI of the final comparables after giving due adjustment for the working capital on actual basis. Related ground of the assessee is therefore allowed.” Respectfully following the aforesaid decision, we hold that the working capital adjustment has to be given on the basis of actual without any restriction.
No arguments were advanced on Grounds 41 to 43 of additional grounds sought to be raised by the Assessee in Assessee’s appeal nor even a prayer was made for its admission and hence these grounds are dismissed.
As far as the appeal of the revenue is concerned, the same is with reference to the determination of ALP in the ITeS segment and therefore, we deem it convenient to deal with those grounds at this stage itself. Grounds No.1, 7 and 8 are general grounds and needs no specific adjudication. As far as Grd.No.2 with regard to grant of risk adjustment is concerned, the grievance of the revenue is premature and it is for the TPO/AO to work out the accurate quantum of risk adjustment and hence
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this ground is without any merit. As far as ground No.3 with regard to exclusion of Infosys BPO Ltd., is concerned, the said company was excluded on the ground that the company is engaged in providing high-end integrated services, and whereas, the Assessee is engaged in providing low level back-office support services. Further, the company has huge brand name and owns significant intangibles. It is submitted that the brand name that is associated with Infosys Technologies Ltd. has an impact on the business operations of Infosys BPO. Also, during the financial year 2009- 10, the company acquired all the outstanding membership interests of McCamish Systems LLC which constitutes a peculiar economic circumstance for which no reasonable adjustment could be made to mitigate its effect on the company’s margin. Also, the company has incurred huge selling and marketing expenses and the same has been increasing year on year. Reliance in this regard was placed on the decision in the case of Arctern Consulting Pvt. Ltd. (supra) and Tesco Hindustan Service Centre (P.) Ltd. (2017)77 taxmann.com 48 (Bangalore) for AY 2010-11, where in identical circumstances, the exclusion of the company came to be upheld/company was directed to be excluded. The learned DR reiterated the stand of the revenue as reflected in the grounds of appeal of the revenue.
We have carefully considered the rival submissions. In the case of Tesco Hindustan Service Centre Pvt. Ltd.(supra) vide paragraph 47 & 48 of its order, the Tribunal upheld exclusion of this company from the list of comparable companies, on the ground of presence of brand value and other
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factors. Respectfully following the decision of the Tribunal, we uphold the order of DRP excluding this company from the list of comparable companies.
As far as exclusion of Eclerx Services Ltd., is concerned, it was submitted on behalf of the Assessee the DRP rightly excluded this company from the final list of comparables as the same is functionally dissimilar to the Assessee. In this regard, it was submitted that the company is functionally dissimilar as it is a KPO engaged in providing data analytics and data process solutions. It provides end-to-end support through the trade lifecycle, including trade confirmation, settlements, transaction maintenance, risk analytics and reporting. The data analytics services being provided by Eclerx is significantly different from the routine ITE services provided by the Assessee. Reliance in this regard was placed on the decisions in the cases of Arctern Consulting Pvt. Ltd. (supra) and Tesco Hindustan Service Centre (P.) Ltd. (supra), where in identical circumstances, the exclusion of the company came to be upheld/the company was directed to be excluded. The learned DR reiterated the stand of the revenue as is reflected in the grounds of appeal raised by the revenue.
We have carefully considered the rival submissions. In the case of Tesco Hindustan Service Centre (P) Ltd. (supra), this company was excluded from the list of comparable companies in the case of a company
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rendering ITeS similar to the services rendered by the Assessee in this appeal, observing as follows: “37. Eclerx Services Ltd. : In this regard, the ld. counsel for the assessee has contended that this company's function is dissimilar with the assessee company as it provides industry specialised services like data analytics, operations management and audits & reconciliation services which cannot be compared to a BPO or IT Offshoring company. It was further contended that this company has abnormal profits and sales for the year. The ld. counsel further contended that this company was examined by the Tribunal in the case of Stream International Services (P) Ltd. (supra)and the Tribunal has held that even the company's functions are different, therefore it cannot be considered as comparable, following the order of the Mumbai Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt. CIT [2014] 43 taxmann.com 100/147 ITD 83 (Mum.) (SB). Therefore, this company may be excluded from the list of comparables. 38. The ld. DR simply placed reliance upon the order of the AO. 39. Having carefully examined the orders of lower authorities in the light of Tribunal's finding in the case of Stream International Services (P) Ltd. (supra), we find that the profile of this company was examined by the Tribunal in this case and following the order of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. (supra), the Tribunal held this company to be non-comparable. For the sake of reference, we extract the relevant portion of the order of the Tribunal:— "(xi) Eclerx Services Ltd. & Mold-Tek Technologies Ltd.:- For both these companies, the ld. Counsel for the assessee stated that these companies are functionally different, therefore, cannot be considered as comparables. We find that the Mumbai Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. in ITA No. 7466/Mum/2012 has rejected eClerx Services Limited because solutions offered by this company included data analytics, operations, management, audits and reconciliation, metrics management and reporting services. The Special Bench opined that if these functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Limited and Mold-Tek Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparable for the purpose of determining
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ALP of the transactions of the assessee company with its AEs. Facts being identical, respectfully following the observations of the Special Bench (supra), we direct that these two entities be excluded from the list of final comparables." 40. Since the Tribunal has examined this issue under similar set of facts, we find no reason to take a contrary view. Accordingly following the order of the Tribunal in the case of Stream International Services (P) Ltd. (supra), we hold that this company is not a good comparable and direct the AO/TPO to exclude it from the list of comparables.”
Respectfully following the aforesaid decision, we uphold the order DRP excluding the aforesaid company from the list of comparable companies.
As far as Ground No.4 is concerned, the law by now is well settled and turnover is a relevant criterion for choosing comparable companies.
As far as Ground No.5 and 6 are concerned, the law by now is well settled that the threshold limit for applying RPT filter is 15% or 25% depending upon the availability of comparable companies. If more companies are available in the data set, then the threshold limit has to be 15% and 25% if the data set available is less. We hold and direct accordingly. The appeal of the revenue is therefore partly allowed on ground No.5.
CO No. 127 of the Assessee was pressed only in so far as it concerns, exclusion of e-clerk Ltd. and Infosys BPO Ltd., on the ground of functional dissimilarity. Since these two companies were excluded from the list of comparable companies on the ground of turnover and upheld by us
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on the basis of functional comparability, these grounds are allowed and hence the CO is partly allowed.
We shall now take up for consideration the corporate tax issues raised by the Assessee. Grounds No.29 to 35 raised by the Assessee is with regard to change in the method of revenue recognition of revenue by deferring the recognition of revenue, which was not accepted. At the time of hearing, learned Counsel for the Assessee fairly admitted that the issue is covered against the Assessee in the order of the Tribunal rendered for Assessment Year 2009-10 (supra). The issue has been dealt with by the Tribunal in the aforesaid order and the claim of the Assessee has been rejected by the Tribunal. The facts and circumstances of the present Assessment Year are identical and the grievance projected by the Assessee in ground No.29 to 35 is accordingly rejected. We, however, make it clear that with regard to grievance projected in ground 35, the AO should give consequential relief in the year in which the revenue deferred was offered to tax to ensure that there is no double taxation. With these observations, ground 29 to 35 are dismissed.
The grievance projected by the Assessee in ground No.36 to 38 is that the credit for TDS has not been given by the AO despite directions by the DRP. We are of the view that it would be just and appropriate that if a direction is given to the AO to consider the claim of the Assessee afresh in accordance with law, that would be sufficient to dispose those grounds. We hold and direct accordingly.
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Grounds No. 39 with regard to denial of set off of unabsorbed depreciation brought forward from AY 2009-10 and the levy of interest u/s.234B of the Act are purely consequential and the AO is directed to give consequential relief.
Except the grounds adjudicated as above, no other grounds were pressed for adjudication. In the result, the appeals of the Assessee and revenue for AY 2010-11 are partly allowed and the CO by the Assessee for AY 2010-11 is partly allowed.
IT(TP) A.No.655/Bang/2016 is an appeal by the Assessee against the final order of assessment dated 28.1.2016 of DCIT, Circle-7(1)(1), Bangalore, passed u/s.143(3) read with Sec.144C(13) of the Act, in relation to AY 2011-12.
The grounds of appeal raised by the Assessee in IT(TP)A No.655/Bang/2916 reads as follows: I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another.
The learned Assessing Officer (“learned AO”), learned Transfer Pricing Officer (“learned TPO”) and the Honourable Dispute Resolution Panel (“Hon’ble DRP”) have grossly erred in adjusting the transfer price by INR 2,74,49,522/- to the Appellant’s international transactions with its Associated Enterprises (“AEs”) with respect to Certification Services & IT Enabled Services (“ITES”) rendered.
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The learned AO, learned TPO and the Hon’ble DRP have erred in rejecting the Transfer Pricing (“TP”) documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92C of the Act. 3. The learned AO, learned TPO and Hon’ble DRO have erred in rejecting the economic analysis carried out by the Appellant in the TP documentation and upholding the economic analysis carried out by the learned TPO during the assessment proceedings. 4. The learned AO, learned TPO and Hon’ble DRP have erred in not considering the previous two years financial data of the comparable companies while determining the arm’s length price. 5. The learned AO, learned TPO and Hon’ble DRP have erred in using the data available at the time of assessment proceedings, instead of the data available at the time of preparing the TP documentation for comparable companies while determining ALP. 6. The learned AO, learned TPO and Hon’ble DRP have erred in applying different financial year ending filter while selecting the comparable companies. 7. The learned AO, learned TPO and Hon’ble DRP have erred in not considering the provision for bad and doubtful debts as operating in nature. 8. The learned AO, learned TPO and Hon’ble DRP have erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis-à-vis the comparable companies and restricting the adjustment without giving any cogent reasons. ITES SEGMENT 9. The learned AO, learned TPO and Hon’ble DRP have erred in accepting companies that ought to have been rejected as comparables: Accentia Technologies Ltd. Acropetal technologies Ltd. ICRA Online Ltd. Jeevan Scientific Technology Ltd.
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The learned AO, learned TPO and Hon’ble DRP have erred in rejecting companies that ought to have been accepted as comparables: Informed Technologies India Ltd. Microgenetics Systems Ltd. R Systems International Ltd. Caliber Point Business Solutions Ltd. Omega Healthcare Management Services 11. Without prejudice to the above ground with respect to rejecting certain comparable companies, the learned AO, learned TPO and Hon’ble DRP have erred in wrongly computing the net margin of the following companies: Cosmic Global Ltd. E4e Healthcare Business Services Pvt. Ltd. Jindal Intellicom Ltd. ICRA Online Ltd. Jeevan Scientific Technology Ltd. 12. The learned AO, learned TPO and Hon’ble DRP have erred in making the following errors in the computation of working capital adjustment by: a. proposing a restriction to the working capital adjustment without giving any cogent reason; and b. considering the wrong SBI PLR while computing the working capital adjustment. CERTIFICATION SEGMENT 13. The learned AO, learned TPO and Hon’ble DRP have erred in disregarding the adjustments made by the Appellant to the net operating margin on account of extraordinary and non-recurring expenses incurred during the financial year 2010-11. 14. The learned AO, learned TPO and Hon’ble DRP have erred in concluding that the adjustments made by the Appellant for the extraordinary and non- recurring expenses incurred during the FY. 2010-11 amounts to “capacity utilization adjustments”.
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The learned AO, learned TPO and Hon’ble DRP have erred in the computation of mark-up of Central Mine Planning & Design Institute Ltd. 16. The learned AO, learned TPO and Hon’ble DRP have erred in rejecting Ashco Niulab Industries Ltd. on the ground of functional dissimilarity. 17. The learned AO, learned TPO and Hon’ble DRP have erred in not providing appropriate adjustments towards the difference in working capital employed by the comparable companies’ vis-à-vis the Appellant in the certification segment. II. Corporate Tax A. Change in method of revenue recognition 1. The learned AO and the Hon’ble DRP have erred in concluding that the change in method of revenue recognition from proportionate completion method to completed contract method is not bonafide. 2. The learned AO and the Hon’ble DRP have failed to appreciate the judicial precedents wherein it is held that a bonafide change in the method of accounting cannot be discarded if the changed method is regularly and consistently followed by the assesse. 3. Notwithstanding the above, the learned AO has failed to appreciate the fact that, as the Appellant has been following completed contract method for recognizing revenue for all the subsequent years, proposed adjustment would result in allowing a deduction in subsequent years, which is a futile exercise. 4. The learned AO has erred in placing reliance on the principles of recognition of revenue as per AS–7 without appreciating that AS-7 applies only to contracts for construction of asset or combination of asset and not service contracts which are governed by AS-9. 5. Notwithstanding our contention, the learned AO having disregarded the change in the method of revenue recognition and brought to tax an additional amount in AY 09-10 and 10-11, has erred in not giving consequent relief (on a protective basis) for the amount offered to tax by the appellant in AY 11-12. 6. Notwithstanding and without prejudice to the above, for the amount considered as revenue of the current year, the learned AO ought to allow consequential benefit in the subsequent years in which the same has been offered to tax.
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B. Denial of TDS credit 1. The Learned AO has erred in not following the directions of Hon’ble DRP while granting TDS credit. The Learned AO ought to have appreciated that the Hon’ble DRP has directed the learned AO to verify the facts and allow the TDS credit as per law 2. Having accepted the reconciliation statement of TDS, the learned AO has erred in neither granting TDS credit as per said reconciliation nor as per Form 26AS. 3. Notwithstanding the above, the learned AO has erred in denying TDS credit on advances received which will be offered to tax as and when the same is accrued. The learned AO ought to have placed reliance on various judicial precedents wherein it is held that credit for TDS has to be provided to the Appellant irrespective of the year to which the income relates. 4. Notwithstanding the above, the learned AO has erred in not following his assessment orders for previous years and thereby erred in not granting credit for TDS of Rs.13,735,965 which was denied in AY 2010-11. 5. Notwithstanding the above, the learned AO ought not to have disallowed the TDS credit in respect of the entire advances considering that some portion of the advances were forming part of unbilled revenue and hence offered to tax. C. Deduction under Section 10A of the Act 1. The learned AO has erred in reducing telecommunication expenses from export turnover as Rs.191,089 instead of Rs.119,665, resulting in an addition of Rs.16,353. D. Non-grant of depreciation on foreign exchange loss disallowed as capital expenses in AY 2009-10 1. The learned AO and Hon’ble DRP has erred in not granting consequential depreciation of Rs.205,984 on foreign exchange loss disallowed and capitalized in the assessment order for AY 2009-10. E. Interest levied under section 244A and 234D 1. The learned AO has erred in levying interest under section 244A and 234D which is consequential in nature.
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The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.
Grounds No.1 to 8 were not pressed and hence these grounds are dismissed as not pressed. Grounds No.9 to 12 are with regard to determination of ALP in respect of a transaction of rendering of ITeS by the Assessee to its AE. The Assessee provides Information Technology Enabled Services (ITES) to its Associated Enterprise (AE). In terms of the provisions of Sec.92A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec.92B(1) of the Act, the transaction of providing ITES was an “international transaction” i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, any income arising from an international transaction shall be computed having regard to the arm’s length price.
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As far as the provision of ITES are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) for the purpose of comparison. The operating revenue/income was Rs.3,36,85,524/-. The Assessee chose companies who are engaged in providing similar services such as the Assessee from the Prowess and Capitaline Plus Data Base. The Assessee identified 10 companies whose average arithmetic mean of profit margin was comparable with the profit margin of the Assessee and hence the Assessee claimed that the price it charged in the international transaction should be considered as at Arm’s Length.
The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. The TPO selected a set of 10 comparable companies. Some of the companies so chosen were comparable companies which the Assessee had chosen in its Transfer Pricing Study and worked out the average arithmetic mean of their profit margins and adjustment to ALP as follows:-
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Transfer Pricing adjustment proposed by the TPO: Computation of Arm’s Length Price Particulars Amount INR Arm’s Length Mean Margin on 24.77% Cost Less: Working capital 1.47% adjustment Adjusted Margin 23.30% Price Received vis-à-vis the Arm’s Length Price Particulars Amount INR Operating Cost 3,10,93,812 Arm’s Length Price @ 123.30% 3,83,41,136 of operating cost Price received 3,44,84,457 Shortfall being adjustment u/s. 38,56,679 92CA
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Aggrieved by the aforesaid addition of Rs.38,56,679/- to the total income of the Assessee, the Assessee filed objections before the Disputes Resolution Panel (DRP) u/s.144C of the Act. The DRP gave directions for exclusion of some of the comparable companies chosen by the TPO. In effect, the TP adjustment made by the TPO in respect of the ITES segment of the Assessee survived post the DRP's directions. The Assessee aggrieved by the aforesaid order of the DRP which was incorporated in the final order of assessment has preferred the present appeal raising grounds No.9 to 12.
Before the Hon’ble Tribunal, the assessee has raised Ground Nos. 9 and 10 seeking exclusion and inclusion of the following companies: Exclusion of four companies: - Ground No. 9 vii) Accentia Technologies Ltd viii) Acropetal Technologies Ltd ix) ICRA Online Ltd x) Jeevan Scientific Tech Ltd 52. For exclusion of the above mentioned four companies, the learned counsel for the Assessee placed reliance on the decision of the Hon’ble Tribunal in the case of Arctern Consulting Pvt. Ltd., IT (TP) A No. 195 & 302/Bang/2015. A chart of comparables has also been filed before us. Inclusion of companies: Ground No. 10 i) Informed Technologies India Ltd ii) R Systems International iii) Caliber Point Business Solutions iv) Omega Healthcare Management Services For inclusion of the aforesaid companies, the learned counsel for the Assessee submitted as follows:
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i) Informed Technologies India Ltd This company was excluded by the TPO on the ground that the rental income is more than the operating income. In this regard, reliance is placed on the decision of the Hon’ble Tribunal in the case of FNF India Pvt. Ltd. – IT(TP) A Nos. 195/Bang/2016 for AY. 2011-12 wherein this company was remanded back to the TPO by the Hon’ble Tribunal.
ii) R Systems International This company was excluded by the TPO only because this company has a different financial year ending (Page No. 23 of TP order). In this regard, reliance is placed on the decision in the case of Mercer Consulting Co (Del HC) and Business Process Outsourcing India Ltd (Bangalore Tribunal) – both the orders are placed in the case law compendium for A.Y 2010-11 - Page 138 of case law compendium.
iii) Caliber Point Business Solutions
This company was excluded by the TPO only because this company has a different financial year ending (Page No. 23 of TP order). In this regard, reliance is placed on the decision in the case of Mercer Consulting Co (Del HC) and Business Process Outsourcing India Ltd (Bangalore Tribunal) in case of R Systems International – the principles apply to this company also. Detailed submissions made before DRP was not considered.
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iv) Omega Healthcare Management Services This company was excluded by the TPO only because no data for RPT transactions are available. Detailed submissions made before DRP was not considered.
The learned DR relied on the order of the DRP.
As far as the plea of the Assessee for exclusion of Acropetal Technologies Ltd., Accentia Technologies Ltd., ICRA Online Ltd., and Jeevan Scientific Tech Ltd., are concerned, we find that Acropetal Technologies Ltd., is engaged in the business of software development and services, contract centre service and IT enabled services and the same are reported together as one segment. In the absence of segmental details made available, the company could not be treated as a comparable. The TPO, while choosing the company as a comparable, has selected its Engineering Design Segment (‘EDS’ for short) which is in the nature of high end IT enabled services which are in the nature of Knowledge Process outsourcing (“KPO”). The high-end services provided by the company cannot be compared with the routine services provided by the Assessee. This Is a settled position and reliance can be placed on the decision of this Hon’ble Tribunal’s in the case of Symphony Marketing Solutions India Pvt. Ltd., (ITA No. 1316/Bang/2012) where it was held that Acropetal cannot be considered as a comparable to Assessees performing routine low end IT enabled services function.
As far as exclusion of company Jeevan Scientific Technology Ltd., we find that this company was rejected by the DRP for the reason that it
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was engaged in diverse functions and the same were reported under one segment without segmental details regarding the same being made available. The DRP is right in excluding the company as without segmental details, the comparability of the company cannot be determined. In any event, the ERP segment of the company is not comparable to the Assessee, the BPO segment of the company fails the filter of service income being greater than 75% of total revenue, and the company suffers from huge fluctuations which indicate that certain peculiar circumstances influencing the profit margin of the company exist, for which appropriate adjustments cannot be made to balance the effect. It is submitted that the ERP implementation services are not in the nature of IT enabled services which were notified by CBDT vide Notification No. SO 890(E) dated 26.09.2000. If the BPO segment is considered, the company fails to satisfy the TPO’s own filter of service revenue from the relevant segment having to be in excess of Rs. 1 crore as the revenue from the BPO segment of the said company is Rs. 79 lakhs only. The company is therefore not comparable to the Assessee. This Tribunal in the case of Swiss Re Shared services (India) Pvt. Ltd. v. ACIT (order dated 08.07.2016 in IT(TP)A No. 380/Bang/2016) directed the TPO to verify as to whether the TPO’s filter of Sales > 1 Crore is satisfied by this company. In the present case, as can be seen from the annual report of the company the sale of the company in respect of the BPO segment amounts to only 79 lakhs, and therefore it fails the TPO’s filter.
As far as exclusion of Accentia Technologies Ltd., is concerned, we find that this company was excluded by the DRP for the reason that the details regarding its diverse functions were reported under one segment,
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without segmental details regarding the same being made available. In the absence of segmental details being made available, the comparability of the company with that of the Assessee cannot be determined. In any event, Accentia is engaged in providing high end services in the nature of Knowledge Process Outsourcing (‘KPO’) which is evident from its annual report, whereas, the Assessee is engaged in rendering routine low end information technology enabled services. Further, the said company not only does medical transcriptions, but has also ventured into healthcare receivables cycle management and high-end consultancy to start-ups requiring field experts. As can be seen from the annual report, coding income is contributing 15% of the total income which activities are akin to software development activity while the Assessee is a mere provider of IT enabled services. The company has invested huge sums in the development of EMR software. Segmental details of its various activities are unavailable. The company further owns significant intangibles. This Tribunal in the case of Swiss Re Shared India Pvt. Ltd. v. ACIT [TS-598- ITAT-2016(Bang)-TP at paras 9-20 on pages 7-21] where, in similar circumstances and for the same assessment year, this Hon’ble Tribunal directed the exclusion of this company from the list of comparables. Accentia Technologies Ltd. is, therefore, not comparable to the Assessee and was rightly rejected as a comparable.
As far as the plea for exclusion of ICRA online Ltd., this Tribunal in the case of M/s. Zyme solutions Pvt. Ltd. Vs. ACIT IT(TP) A.No.85/Bang/2016 for AY 2011-12 order dated 28.4.2017 in paragraph- 26 of its order was pleased to remand to TPO/AO for fresh consideration,
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the comparability of this company with the Assessee. Following the said decision, we set aside the order of the AO in this regard and remand to the TPO/AO for fresh consideration the comparability of this company with the Assessee on the lines indicated in the order in the case of M/s. Zyme solutions Pvt. Ltd. (supra).
We shall now deal with the plea of the Assessee for inclusion of Informed Technologies India Ltd., R. Systems International, Caliber Point Business Solutions and Omega Healthcare Management services.
As far as inclusion of comparable company M/S. R Systems Ltd., is concerned, the DRP excluded this company from the list of comparable companies for two reasons viz., (i) the financial year ending of this company was different and (ii) that the segmental information relating to ITES segment is not available. As far as the first objection is concerned, this tribunal in the case of Aspect Technologies Ltd. considered the exclusion of this company on ground No. (i) viz., that the financial year ending of this company was different from that of the Assessee company, in IT (TP) No.221/Bang/2015 for AY 2010-11 order dated 31.1.2019. The tribunal held that if the financial results of the comparable company, even though it has a different year ending than the company with which its margins are sought to be compared, can be culled out from the financial data available financial in public domain for the financial year of the company with which it is sought to be compared, than a company cannot be regarded as not comparable. The following are the relevant observations of the Tribunal:-
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“3. At the time of hearing, assessee not pressed ground nos. 1, 2, 3, 3(a), 4, 5, 6, 7, 8, 9, 10,11 & 12. The ld. AR pressed only ground related to the comparables in 3(b) with reference to R Systems International Limited. Other five comparables viz., Nittany Outsourcing Services Pvt. Ltd., Datamatics Financial Services Ltd., Caliber Point Business Solutions Ltd., Ultramarine & Pigments Ltd. and Jindal Intellicom Ltd. are not pressed. 4. The first ground for consideration in this appeal is with regard to considering R Systems International Ltd. as comparable. 5. The assessee has selected in the transfer pricing documentation R Systems International Ltd. as a comparable company since it is functionally comparable and passing all the filters applied by the assessee in the TP documentation. However the lower authorities rejected that company on the basis that it has different year ending. Against this assessee is in appeal before us. The ld. AR submitted that R Systems International Ltd. accounting period is January to December and assessee’s accounting period is April to March, therefore that the assessee and R Systems International Ltd. were operating for a period of 12 months accounting cycle. Since they were facing similar business cycles, market and economic conditions, it is not possible to say that because of different accounting period it had any impact on its financials and resulted into distortion of comparability. Since use of different accounting period have no effect on the comparability parameters as mentioned in Rule 10B(2) of the IT Rules 1962, therefore it would be inappropriate to reject R Systems International Ltd. which is functionally comparable company only on the reason that it has different accounting period. He relied on the judgement of Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Mercer Consulting (India) Pvt. Ltd. in ITA No. 101 of 2015(O&M) dated 24.08.2016 wherein Hon’ble High Court held that “the Rule 10(B)(4) does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing
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the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus, so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R.Systems International Limited is available. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B.” 6. On the other hand, the ld. DR submitted that the accounting period of assessee and R Systems International Ltd. are different and hence the lower authorities have not considered R Systems International Ltd. as comparable. The same to be upheld. For this purpose she relied on the decision of Pune Bench of the Tribunal in the case of Schlumberger India Technology Centre (P.) Ltd. Vs. DDIT in ITA No. 640 (PUN.) of 2014 dated 10.01.2018 wherein held in para 21 as follows:- “21. Now, coming to the concern Jindal Intellicom Pvt. Ltd. The case of assessee before us is that the said concern has different financial year than the one of assessee. The Assessing Officer had applied the current year data as contemporaneous data to be used for benchmarking the arm's length price of international transactions of assessee. The assessee had prepared its financial statements for the financial year starting from 1st April, 2009 to 31st March, 2010. The case of assessee before us is that Jindal Intellicom Pvt. Ltd. has prepared its financial statements for period of 15 months and the same is not to be selected in the final set of comparables. 22. We find that the Pune Bench of Tribunal in the case of BMC Software India Pvt. Ltd. Vs. DCIT in ITA No.1425/PN/2010, relating to assessment year 2006-07,
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order dated 16.03.2016 had rejected the concern having 15 months financials. 23. The Hon'ble Bombay High Court in the case of CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014 had also held that the comparable data should pertain to the same financial year. Accordingly, we hold that the margins of concern having different accounting period cannot be selected for benchmarking international transactions and the same is to be excluded from the final set of comparables. Accordingly, we direct the Assessing Officer to exclude Jindal Intellicom Pvt. Ltd.” 7. We have heard both the parties and perused the material on record. As rightly pointed out by the ld. AR, Rule 10(B)(4) does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R.Systems International Limited is available. We are, therefore, entirely in agreement with the decision relied by ld. AR that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B and the same is the view taken by Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Mercer Consulting (India) Pvt. Ltd. (supra). Being so, in our opinion data relating to the assessee financial year to be interpolated and thereafter if required, it should be considered as a comparable to the assessee’s case. With this observation we remit this issue to the file of TPO for his fresh consideration.”
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We are therefore of the view that the TPO should consider the financial results of this company for the period relatable to the Assessee’s financial year and for this purpose the issue is remanded to the TPO. The discussion in the earlier paragraphs regarding non availability of financial data for the period will equally apply to the comparable sought to be included by the Assessee viz., Caliber Point Business solutions also and the TPO is directed to consider comparability of this company on the basis of data that can be culled out for the relevant period of comparison.
As far as the other reason given for excluding this company that segment details relating to the ITES segment are not available, is concerned, we find that this is not the reason assigned by the TPO for disregarding this company as comparable company. Secondly, the Assessee was not put on notice on this aspect by the DRP. Thirdly, the learned counsel brought to our notice page-97 of the Annual report of this company that the segmental results of the ITES segment is available. Therefore, we deem it fit and proper to direct the TPO to consider the comparability of this company afresh.
As far as comparability of the company Informed Technologies Ltd., is concerned, it is undisputed that the Assessee in Annexure 1.18 of its objections to the draft assessment order of the AO, objected to the exclusion of this company from the list of comparable companies, but this objection was not considered by the DRP at all. We are of the view that in the light of the objections by the Assessee before the DRP against exclusion of this company by the TPO, the TPO should reconsider his
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decision of excluding this company from the list of comparable companies and for this purpose, we remand this issue also for fresh consideration by the TPO.
As far as the comparable company Omega Healthcare Management Services is concerned, the detailed submissions made before the DRP on the comparability of this company has not been considered by the DRP and hence we deem it fit and proper to remand to the AO/TPO the question of comparability of this company afresh.
Ground No.12 raised by the Assessee is with regard to not allowing working capital adjustments on the basis of actual and restricting the same. Similar issue had come for consideration before this Tribunal in the case of ARM Embedded Technologies P. Ltd. (supra) and this Tribunal held that working capital adjustment has to be allowed on actual basis without any restriction. The following were the relevant observations:
“24. Now coming to the issue of working capital adjustment, findings of the TPO in this regard as it appears at para 3.7, reads as under : "3.7 Working Capital Adjustment: The working capital adjustment is computed as per the formula given in Annexure to the OECD Guidelines, 2009. In this case, the average PLR adopted by SBI, the largest scheduled bank, for short term working capital loans for the relevant FY 2008-09 is considered. The average PLR of 12.50% p.a was adopted by the TPO while computing the working capital adjustment. The working capital adjustment is restricted to the average cost of capital computed at 1.71% in the case of the uncontrolled comparables selected by the TPO. Hence, the working capital adjustment in the case of the taxpayer is allowed as per the calculation in annexure-C or the average cost of capital to the comparables whichever is the least. The detailed discussion on this is given in the Annexure-D to the order.
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The computation of the working capital adjustment is annexed to this order as Annexure C." TPO had restricted the cost of capital to 1.71%. Rationality for such an upper limit being placed on working capital adjustment was an issue which had come up before this Tribunal in the case of Rambus Chip Technologies (India) (P.) Ltd. v. Dy. CIT [IT (TP) A. 23/Ban/2015, dt. 22.07.2015. Coordinate bench had held as under at para 13 and 14 of its order: "13. As regards ground No. 3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71% in case of uncontrolled comparables selected by the TPO. The learned counsel for the assessee submitted that the TPO has not given any basis for such restriction of the working capital adjustment. He submitted that the CIT (A) also has not applied his mind to this issue but has summarily confirmed the order of the AO and therefore it has to be set aside. 14. On going through the TPO's order as well as annexure D referred to in the transfer pricing order on working capital adjustment, we find that the AO has not given any basis for restricting the adjustment to 1.71%. In all the cases relating to transfer pricing adjustment, this Tribunal has been directing to give working capital adjustment on actual basis and the TPO having arrived at 5.97% ought to have adopted the same instead of restricting it to 1.71 %. In view of the same, we deem it proper to remand this issue to the file of the AO/TPO for working out the ALP after giving adjustment of working capital as per the calculation of the AO in annexure D annexed to the transfer pricing order. This ground of appeal is accordingly allowed." 25. Accordingly we direct the AO/TPO to correctly work out the PLI of the final comparables after giving due adjustment for the working capital on actual basis. Related ground of the assessee is therefore allowed.” Respectfully following the aforesaid decision, we hold that the working capital adjustment has to be given on the basis of actual without any restriction.
We shall now take up for consideration the determination of ALP in the certification Segment. At the time of hearing of this appeal, it was
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brought to our notice that the issue raised in this appeal for Assessment Year 2014-15 is identical to the issues raised by the assessee in Assessment Year 2010-11 which was subject matter of decision by this Tribunal in IT(TP)A No.291/Bang/2014 for Assessment Year 2009-10 vide order dated 20.9.2019. The learned Counsel for the assessee submitted that similar directions as was given by the Tribunal in the aforesaid order for Assessment Year 2009-10 may be followed as the facts and circumstances are identical in the Assessment Year 2010-11 also. Learned DR while relying on the order of the AO did not dispute the aforesaid proposition.
We have considered the rival submissions. This Tribunal on identical issue remitted the question of determination of ALP to the AO/TPO in AY 2009-10 with the following directions: “16. We have given a careful consideration to the rival submissions and are of the view that the issue with regard to determination of ALP in the certification services segment should be remitted back to the TPO. Accordingly, the issue is restored back to the TPO for fresh consideration with the following directions:- (1) The foreign exchange loss/gain to the extent it relates o revenue items and are directly related to certification services rendered by the assessee should be considered as part of the operating profit or loss, as the case may be. The law in this regard is well settled by the decision rendered by the ITAT Bangalore Bench in the case of SAP Labs (supra) and Auto Desk India Pvt. Ltd. Vs. DCIT IT(TP)A.No.540 & 541/Bang/2013. (5) The TPO should restrict the addition only in respect of international transactions with the AE. However, the submission made by the Id. DR with regard to a part of the certification services having been subcontracted to
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the AE and receipt of sub-contracting charges from the AE to the extent the same will have impact on the consideration received from the AE for rendering the certification services should also be examined by the TPO. (6) Errors, if any, in the computation of margins of comparables should be looked into by the TPO in the-set aside proceedings. (7) Threshold limit for applying RPT filter should be 15% or 25% of sales depending upon the availability of comparable companies after all exclusions as held by the Tribunal in the case of Auto Desk India Pvt. Ltd. Vs. DCIT [2018] 96 taxmann.com 263 (Bang.Trib.) [para 24 to 25]. 17. The above directions will be sufficient to take care of the grievances projected by the assessee in ground Nos. 5 & 6 and additional grounds No.6 (d), 26 & 27.The TPO will afford opportunity of being heard to the assessee before deciding the issue.”
As the parties prayed for similar direction in the present AY also, respectfully following the aforesaid order of the Tribunal, we remit the issue of determination of ALP of the international transaction of rendering of certification services by the Assessee to its AE to the TPO/AO for determination of ALP, after affording the Assessee opportunity of being heard and in the light of the directions given by the Tribunal in Assessment Year 2009-10. The relevant grounds of appeal in this regard are treated as allowed for statistical purposes.
Now we shall take up for consideration, the corporate Tax issues raised by the Assessee. As far as ground A 1 to 6 is concerned, the same is with regard to change in the method of revenue recognition of revenue by deferring the recognition of revenue, which was not accepted. At the time of hearing,
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learned Counsel for the Assessee fairly admitted that the issue is covered against the Assessee in the order of the Tribunal rendered for Assessment Year 2009-10 (supra). The issue has been dealt with by the Tribunal in the aforesaid order and the claim of the Assessee has been rejected by the Tribunal. The facts and circumstances of the present Assessment Year are identical and the grievance projected by the Assessee in ground No.1 to 6 is accordingly rejected. We, however, make it clear that with regard to grievance projected in ground 6, the AO should give consequential relief in the year in which the revenue deferred was offered to tax to ensure that there is no double taxation. With these observations, ground A 1 to 6 are dismissed.
As far as ground B 1 to 5 is concerned the same is with regard to denial of TDS credit. We are of the view that it would be just and appropriate that if a direction is given to the AO to consider the claim of the Assessee afresh in accordance with law, that would be sufficient to dispose those grounds. We hold and direct accordingly.
As far as Ground C 1 is concerned, the same is with regard to regarding re-computation of deduction under Section 10A by reducing communication expenses only from export turnover. The AO, proceeded to re-compute the deduction by reducing the telecommunication charges from only its export turnover without making a corresponding reduction in its total turnover. Thereby, the AO made a disallowance of deduction claimed under Section 10A. Although the DRP rejected the primary contention of
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the Assessee that neither the telecommunication charges nor the travel expenses ought to be reduced from its export turnover, it accepted its alternate contention that they should also be reduced from its total turnover by following the decision of the Hon’ble High Court of Karnataka in CIT v. Tata Elxsi Ltd.249 ITR 50 (Karn) and others. Accordingly, it directed the AO to exclude the above expenses from both its export and total turnovers while computing the deduction allowable under Section 10A. Thus, on the basis of the DRP’s above directions, the disallowance under Section 10A ought to be allowed as claimed by the Assessee but the AO did not do so in the final assessment order. We are of the view that the DRP’s directions are in accordance with the aforesaid binding decision of the jurisdictional High Court in CIT v. Tata Elxsi Ltd., reported in [2012] 349 ITR 98 (Kar) which subsequently came to be upheld by the Hon’ble Supreme Court in the case of CIT v. HCL Technologies Ltd. 404 ITR 719 (SC). Therefore, in the light of the above judgment, the Assessee’s ground is allowed.
As far as Ground No.D 1 is concerned, the same is consequential to the order in AY 2009-10 and therefore the Assessee is entitled to claim depreciation on foreign exchange loss disallowed as capital expenditure. The AO is directed to allow the same.
Ground No.E-1 with regard to levy of interest u/s.244A and 234D is purely consequential and the AO is directed to give consequential relief.
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No other grounds except the grounds adjudicated above, were pressed for adjudication. In the result, appeal of the Assessee is partly allowed.
In the combined result, the appeals of the Assessee and revenue for AY 2010-11 & and Assessee’s appeal for AY 2011-12 are partly allowed. The CO of the Assessee for AY 2010-11 is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (B. R. BASKARAN) (N. V. VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT Bangalore, Dated : 24.02.2022. /NS/* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order
Assistant Registrar ITAT, Bangalore.