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Income Tax Appellate Tribunal, HYDERABAD BENCH “B”, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
PER Smt. P. Madhavi Devi, J.M.:
This is assessee’s appeal for the assessment year 2014-15 against the final assessment order passed u/s 143(3) r.w.s 92CA(4) r.w.s 144C of the Act, dated 29/10/2018.
Brief facts of the case are that the assessee, a Private Limited Company, furnished its return of income for the assessment year 2014- 15 on 28th November, 2014 electronically declaring total income at Rs.25,31,47,090/-. The aforesaid return was selected for scrutiny under CASS. Accordingly, notice u/s 143(2) was issued on 28th August, 2015 and information was called for. During the assessment proceedings, the A.O. observed that the assessee-company had entered into the following international transactions to an extent of Rs.
123,90,28,349/- in the previous year relevant to assessment year 2014- 15.
AE Nature of Amount (Rs.) Transaction Hyundai Auto Ever Purchase of 27,55,345/- Corporation computer Hyundai Auto Ever Purchase of 47,69,485/- Corporation Computer Software Hyundai Motor Provision of IT 79,00,95,090/- Company Enables Services Kia Motor Provision of IT 32,22,89,270/- Corporation Enables Services Hyundai Motor Reimbursement 10,67,59,106/- Company of expenses Hyundai Auto Ever Reimbursement 1,23,60,053/- Corporation of expenses Hyundai Motor Trade receivables 14,73,24,712/- Company Kia Motor Trade 4,24,66,790/- Corporation Receivables Hyundai Auto Ever Payables 29,61,156/- Corporation
Therefore, he made a reference to the TPO for determination of the Arms’ Length Price (ALP) LP u/s 92CA of the Act. The TPO observed that the assessee is engaged in the business of rendering support services in relation to Computer Aided Designing (CAD).
He observed that the assessee has reported profit margin on cost at 10.22%.In order to determine whether the above transactions were at ALP, the TPO categorised the international transactions under IT enabled services and observed that the assessee has adopted 8 companies as comparables for benchmarking analysis. He also observed that the assessee has adopted TNMM as most appropriate method and the operational profit to total cost ratio has been taken as the Profit Level Indicator (PLI) in TNMM analysis. TPO, however, rejected the TP study of the assessee as not reliable or correct, on the
ground that the assessee has not adopted the appropriate filters and that the data of the relevant assessment year is not available except for the company Microgenetics Systems Ltd. Thus, the TPO rejected all the other 7 companies adopted by the assessee. Thereafter, he conducted fresh analysis and arrived at the following 8 companies as comparable to the assessee:
Sl No. Name of the Company OP / OC (%) 1 Microgenetics Systems Ltd 18.06.%
2 Infosys BPO Ltd 29.53%
3 Microland 20.07%
eClerx Services Ltd 70.75%
BNR Udyog Ltd 24.85%
Crossdomain Solutions Pvt 21.07% Ltd 7. MPS Ltd 47.57%
Hartron Communications 51.80% Ltd Average 35.46%
The average margin of these companies was 35.46%. Thereafter, the TPO observed that the assessee has made Voluntary TP adjustment of Rs.7,69,41,809 in its Return of Income filed for A.Y 2014-15 on 28.11.2014 and that after such adjustment, the assessees’ profit margin is 15%. Accordingly, a show-cause notice as to why the adjustment should not be made, was issued to the assessee. In reply to TPO’s show cause notice, the assessee submitted detailed objections to each of the comparables selected by the TPO. However, the TPO rejected the assessee’s objections and except for Hartron Communications Ltd,
he held all the other 7 companies as comparables to the assessee to arrive at their average profit margin of 33.13%. He accordingly proposed the TP adjustment of Rs. 23,12,11,782/- and after further reducing the voluntary adjustment made by the assessee for the Assessment Year 2014-15 of Rs. 7,69,41,809/-, the shortfall adjustment was proposed at Rs. 15,42,69,973/-. While determining the ALP, the TPO did not allow the working capital adjustment to the assessee on the ground that the assessee has failed to demonstrate that there exists difference in its working capital vis-à-vis the comparable companies. He observed that the assessee has not submitted the details as to whether (i) the comparable companies have financed their working capital by own funds; (ii) whether any cost has been incurred on the working capital of the comparable companies; and if so (iii) how the cost of such working capital has had an impact on the margins of the comparable companies.
In accordance with the TP order, the draft assessment order was proposed against which, the assessee preferred its objections before the DRP seeking inclusion of certain companies (which have been rejected by the TPO) as comparable and exclusion of Eclerx Services Limited and certain other companies from the final list of comparables and also sought the working capital adjustment. The DRP rejected the assessee’s objections on the comparability of (i) Infosys BPO Limited (ii) Eclerx Services Limited (iii) MPS Limited. As regards the companies to be included such as (i) Allsec Technologies Limited (ii) Jindal Intelicom Limited (iii) Harton Communications Ltd (iv) Tech Mahindra Business Services Limited (v) Sundaram Business Services Limited (vi) Microland Limited and (vii) Tricom Infotech Solutions Ltd, DRP did not accede to the assessee’s request. DRP also did not agree for the working capital
adjustment sought for by the assessee and therefore, assessee is in appeal before us by raising the following grounds of appeal:
“Based on the facts and circumstances of the case, Hyundai Motor India Engineering Private Limited (hereinafter referred to as 'the Appellant') respectfully craves to prefer an appeal against the Assessment order passed under Section 143(3) read with Sections 144C(5) of the Income-tax Act, 1961 ('the Act') by the Assistant Commissioner of Income-tax Circle 2(2), Hyderabad (hereinafter referred to as the 'Assessing Officer' or 'Ld. AO') in pursuance of the directions issued by the Honourable Dispute Resolution Panel- I, Bengaluru (hereinafter referred to as the Hon'ble DRP) on the following grounds which are without prejudice to one another:
ADDITION TO TOTAL INCOME OF Rs. 39,06,63,577/- 1. On the facts and in the circumstances of the case and in contrary to law, the Learned Transfer Pricing Officer i.e. the Deputy Commissioner of Income-tax (Transfer Pricing Officer)-3, (hereinafter referred to as 'the Ld. TPO') and the Ld. AO under the directions issued by Hon'ble DRP, erred in making an addition to the Appellant's total income of Rs. 39,06,63,577 (based on the provisions of Chapter X of the Income-tax Act, ('the Act') and the said addition being wholly unjustified are liable to be deleted. TRANSFER PRICING
Incorrect selection of comparables: 2. Infosvs BPO Limited
2.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting Infosys BPO Limited ('Infosys BPO') as a comparable company to the Assessee though it is functionally different. 2.2. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO ought to have rejected Infosys BPO on account of high turnover. 2.3. On the facts and in the circumstances of the case and in contrary to law, Infosys BPO has to be rejected based on the presence of brand value thereby warranting adjustments to eliminate the impact of brand on profits earned.
2.4. On the facts and in the circumstances of the case and in contrary to law, Infosys BPO has to be rejected based on the fact that it is an oversized company as compared to the Assessee. 2.5. On the facts and in the circumstances of the case and in contrary to law, Infosys BPO has to be rejected based on the fact that it undertakes significant onsite operations. 2.6. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred by not rejecting Infosys as comparable, as exclusion of Infosys BPO as comparable has been upheld by various IT A T orders.
eClerx Services Limited 3.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx Services Limited ('eClerx') as a comparable company to the Assessee though it is functionally different. 3.2. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it fails peculiar economic circumstances filter applied by the Ld. TPO. 3.3. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it operates under different business model. 3.4. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it has earned super normal profits. 3.5. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it has incurred significant sub-contracting costs. 3.6. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it does not have segmented results. 3.7. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred by not rejecting eClerx as comparable, as exclusion of eCelrx as comparable has been upheld by various IT AT orders. 4. Crossdomain Solutions Private Limited
4.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting Crossdomain Solutions Private Limited ('Crossdomain Solutions') as a comparable company to the Assessee though it is functionally different. 5. Microland Limited 5.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting Microland Limited ('Microland') as a comparable company to the Assessee though it is functionally different. 6. MPS Limited 6.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting MPS Limited ('MPS Ltd.') as a comparable company to the Assessee though it is functionally different. 6.2. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting MPS Ltd. as a comparable company though it fails the peculiar economic circumstance filter applied by the Ld. TPO. 6.3. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting MPS Ltd. as a comparable company though it holds huge inventory.
6.4. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting MPS Ltd. as a comparable company though it has huge outsourcing cost and operates under different business model. 7. Microgenetics Systems Limited 7.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting Microgenetics Systems Limited as a comparable company to the Assessee though it is functionally different. Incorrect rejection of comparables 8. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in rejecting the following companies engaged in Information Technology Enabled services as a comparables, without appreciating that the said companies were functionally comparable to the Appellant: • Allsec Technologies Limited • Informed Technologies Limited • Jindal Intellicom Limited • Harton Communications Limited • Cheers Interactive India Private Limited • Sundaram Business Services Limited • Tricom Infotech Solutions Ltd.
Incorrect computation of margin of comparable companies selected by Ld. TPO. 9. Without prejudice to the above grounds on rejection of functionally dissimilar comparable companies, on the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred by incorrectly computing the margin of following comparable companies: • Infosys BPO • Microland Limited Incorrect rejection of Appellant's Transfer Pricing study I Incorrect benchmarking analysis by TPO 10. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon 'ble DRP further erred in upholding I confirming the action of the Ld. TPO in rejecting the transfer pricing analysis I study prepared by the Appellant, without appreciating that none of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied. 11. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO, Ld. TPO erred in and the Hon'ble DRP further erred in upholding I confirming the action of the Ld. TPO in classifying the Appellant as being engaged in providing a mix of high end and low end services without appreciating that the Appellant was a captive service provider, providing
Information Technology Enabled services (i.e. low end services) to its Associated Enterprises and consequently all companies providing high end services (whether selected by the Appellant or the TPO) ought to have been rejected. 12. On the facts and in the circumstances of the case and in contrary to law, Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in conducting a fresh benchmarking which was erroneous and liable to be rejected since the Ld. TPO:
i. Used lower turnover filter without the application of an upper turnover filter, thereby disregarding the importance of turnover in the benchmarking of comparables ii. Selected certain companies wherein peculiar economic circumstances / extra-ordinary events had occurred during the relevant year iii. Selected companies which were not comparable to the Appellant iv. Selected companies earning abnormal profits v. Used Related Party transaction filter of25 percent as against 10-15 percent vi. Used arbitrary filter of export sales applying a threshold limit of 25 percent vii. Rejected of companies having a different Financial Year ended without appreciating that the results for the relevant financial year could be reasonably extrapolated from the Financials of the impugned companies, available in public domain viii. Rejected the multiple year data adopted by the Appellant Incorrect computation of Profit Level Indicator ('PLI') 13. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in considering provision for bad and doubtful debts as a non-operating expenditure while computing the PLI. Depreciation Adjustment 14. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not allowing Depreciation Adjustment in accordance with the provisions of Rule l0B of the Income-tax Rules, 1962 to account for differences due to accelerated depreciation as charged by the Appellant against the different depreciation methodology and rates as applied by comparable companies. Working Capital Adjustment 15. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not ~ allowing Working Capital Adjustment in accordance with the provisions of Rule 10B of the Income-tax Rules, 1962 to account for differences between the international transactions
undertaken by the Appellant, being a captive unit, and those undertaken by the alleged comparables. Risk Adjustment 16. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not allowing risk adjustment in accordance with the provisions of Rule l0B of the Income-tax Rules, 1962 to account for differences between the international transactions undertaken by the Appellant, being a captive unit, and those undertaken by the alleged comparables. LEVY OF INTEREST UNDER SECTION 234B OF THE ACT 17. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. AO in levying interest u/s 234B of the Act and the said levy of interest being wholly unjustified, ought to be deleted.” 7. At the time of hearing, Learned Counsel for the Assessee submitted that the assessee is not pressing Grounds No. 4, 5, 7, 14 and 16. These Grounds are accordingly rejected as not pressed.
Ground No.1 is general in nature and needs no adjudication. With regard to the other grounds and the comparability of the companies selected by the TPO, the assessee has filed a chart giving the details of the issues involved and as to how they are covered in favour of or against the assessee by various decisions. We proceed to dispose of the appeal on the basis of the contentions in the chart filed by the assessee and the submissions of both the parties.
The ld Counsel for the assessee Shri H Srinivasulu submitted that the assessee is the 100% captive service provider to its AEs in R&D support services of automobile parts. He submitted that the basic designs come from the AE while the assessee uses data base of AE located outside India and also the instructions of work which come from AE to render the services of CAD & CAE. He submitted that the assessee uses CAD and CAE software to render the support services and send it back to AE and there is no patenting of intellectual property in India. Therefore, according to him, the assessee is providing only ITeS services
(BPO). He further led us to the AE agreement, wherein it is seen that no software development services are provided nor were any research services provided by the assessee and the assessee is also not rendering all the services specified in the agreement, but only CAE and CAE testing support services are provided. He submitted that the assessee company was established in the year 2007 in India and from the AY 2008-09 onwards, the assessee has been held to be an ITeS (BPO) company till AY 2010-11 and only in the AYs 2011-12 and 2012-13, the ITAT has held this company to be comparable to E-Clerx Ltd which is a KPO. He submitted that again in the AY 2013-14 and 2014-15 the assessee has been held as ITeS by the TPO as well as the DRP. Therefore, he submitted that it is necessary to go into the actual nature of work carried on by the assessee to hold whether the assessee is an ITeS company or a KPO. He submitted that the assessee’s business falls within the ambit of Rule 10TA(e) of the Act and not under 10TA (g) of the Rules. He tried to distinguish the ITeS service from KPO service by submitting that the KPO requires Domain Expertise, Advance Analytical Skills, Technical Skill, in depth knowledge, judgment and interpretation. He submitted that for rendering these services, the manpower plays a key role. He submitted that in the automobile industry, persons having 10 years and above experience with technical qualifications come within the category of technical skill, whereas majority of the assessees’ manpower i.e. the 80% are B.Tech or fresh graduates while employees with masters degree were 7% and Master (ME/M.Tech.) degree were 8% and others are only 2%. Thus, he submitted that the assessees manpower does not have the advance analytical and technical skill which is required to render KPO services. He submitted that in the case of the assessee, the basic design and database comes from AE and fresh graduates of the assessee renders only the support services. He referred to Rule 10TA(g) of the I.T. Rules
which refers to “engineering services and design services” as a KPO service, to impress upon us that the assessee is not rendering any of such services and therefore, it cannot be considered as a KPO. He also led us to page 972 of the Paper Book being the workflow chart to demonstrate that the assessee is rendering the entire work on the instructions of the AEs. He also led us through the research agreement at pages 967 to 971 of the Paper Book, wherein the assessee is required to provide the computer aided design engineering services. He submitted that the assessee has not rendered the project support services, software development services and research services which are mentioned at page 969 of the Paper Book. He also drew our attention to page 540 of the Paper Book, wherein in its TP study, the assessee has stated that it is primarily involved in advance R&D support services focused on project design engineering and quality enhancement and provides all back end operations like computer aided design and computer aided engineering. He also drew our attention to the profile of the company at page 544 of the Paper Book. As regards the functions performed by the assessee company to its AE, he submitted that the assessee is rendering only recruitment of technical manpower, rendering and delivering of CAD/CAE engineering services and professional and quality review of services. He also submitted that the assessee is taking risk of only foreign exchange, manpower and local and statutory risk. Therefore, all the risks and major functions are borne by the AE. He submitted that both the TPO as well as the DRP have considered the assessee as an ITeS company only and therefore, it cannot now be held to be a KPO. He also drew our attention to page 946 of the paper book which is “notes forming part of the financial statements for the year ending March, 2014” wherein the corporate information is given and it is stated that the company located in Hyderabad, was primarily engaged in research & development focussed
design engineering and quality enhancement and provides back end operations like computer aided engineering and computer aided design etc. He submitted that this sentence is not included in inter-company agreement with AE. He has also drawn our attention to the ITAT orders in the assessee’s own case for the earlier AYs wherein for the AY 2008- 09 to 2010-11, the assessee has been held to be ITeS and E-Clerx Ltd has been directed to be excluded on account of functional dissimilarity and an extra ordinary event. He submitted that only for the AY 2011- 12 and 2012-13 the assessee has been held to be comparable with E- Clerx Ltd which is a KPO. He therefore, tried to distinguish the said decisions from the facts of the case for the AY before us. As far as the comparability of E-Clerx Ltd is concerned, he submitted that financials of E-Clerx Ltd are not reliable as segmental details are not available. He submitted that E Clerx Ltd is rendering both ITeS and KPO services and the TPO has taken the entity level results as no segmental results are available. He also submitted that the business model of the E Clerx Ltd is different as it outsources most of its work. Therefore, he sought exclusion of this company from the final list of comparables.
The ld DR, on the other hand, submitted that the services rendered by the assessee company are also similar to the functions performed by the E-Clerx. He submitted that the assessee itself has specified, that it was rendering high end services at page 946 of the paper book and at page 967, it is stated that the services are included but not limited to. He submitted that the above high-end services can be performed only by highly qualified persons and the workforce is to be highly suited for such services and the assessee is also having such skilled workforce. Therefore, according to him, the assessee is not low end BPO, but is a KPO and therefore, E-Clerx Ltd cannot be excluded.
As regards non-reliability of the financials of the E-Clerx concerned, the ld DR stated that the assessee has not raised any such objections either before the TPO or before the DRP. He submitted that the ITAT in the AY 2008-09 to 2010-11, has simply followed some other decisions to exclude E-Clerx Ltd and it was only in the AY 2011-12 that to actual services rendered by E-Clerex have been considered and is held to be a comparable. He therefore, placed reliance upon the decisions of the ITAT in the assessee’s own case for the AY 2011-12 and 2012-13.
As regards the exclusion of Infosys BPO Ltd, the ld Counsel for the assessee has placed reliance upon the ITAT decision in the assessee’s own case for the earlier AYs and particularly in the AY 2013- 14 wherein the said company has been held to be functionally different and having brand value and therefore, directed to be excluded.
The ld DR however, relied on the orders of the authorities below.
As regards the comparability of MPS to the assessee is concerned, the ld Counsel for the assessee submitted that the said company is a publishing company and is totally into a different business model and therefore, cannot be considered as a comparable to the assessee company.
The ld DR however, submitted that nowadays, 90% of the publishing work is in digital form and therefore, the functions of MPS as well as the assessee are similar. Therefore, both the companies are comparable to each other.
Let us, therefore, compare the functions performed by the assessee before us, i.e. Hyundai Motor India Engineering (P) Ltd, E- Clerx, Infosys BPO Ltd and MPS Ltd.
Hyundai Motor India Engineering (P) Ltd
Summary of functions performed by Hyundai India and its AEs under IT Enabled Services
Functions Hyundai India AEs IT Enabled Services Identifying the customer No Yes Identifying the need for research services No Yes Conceptualizing basic design No Yes Negotiation of contractual terms with customers No Yes Imparting training No Yes Recruitment of manpower – Technical Yes No Rendering and delivering CAD/CAE related engineering design Yes No services Supervision and quality review of the services Yes No Connectivity-Server transmitting data will be located at No Yes Hyundai Group & KMC Korea
Summary of risks assumed by Hyundai India and its AE’s under IT Enabled Service
Risks Hyundai India AEs Market Risk No Yes Service liability risk NO Yes Customer credit risk No Yes Foreign Exchange risk Yes Yes Technology risk No Yes Manpower risk Yes Yes Legal & statutory risk Yes Yes
As far as E-Clerx Ltd is concerned, according to its Annual Report, it performs the following services:
Financial Services eClerfx enables financial institutions to balance these priorities by partnering with them to increase control, execute ongoing functions with a significant reduction in cost and accelerate change initiatives by providing domain :specific engineering expertise, We provide a broad suite of services that allow our clients to operate on a day to today basis, including trade processing, reference data, accounting and finance and expense management activities. Our professional services practice includes consulting, business analysis, and solution testing.
Sales & Marketing Services
eClerx powers the operations of the Sales and Marketing divisions of some of the largest Fortune / FT / Internet Retailer 500 scale companies globally, augmenting bandwidth to drive greater quality and control to their digital operations, data management, and analytics needs. 20. Cable & Telecom Services
For the cable and telco industry, we offer a wide range of services that span all lines of business (data, video, and voice), all support channels (chat, email, and phone), and multiple functional areas (care, repair, billing, retention, sales and technical operations).
Further, it is seen that at Page 78 of the Paper Book, the Company, eClerx Ltd incurred huge sum of Rs.1100.00 million towards contracts, out of the total other expenses of Rs.1905.82 millions. Thus, major part of its work is outsourced. Its salaries and bonus towards employees are Rs.2112.32 crores as against the total expenses of Rs.2152.00 crores under the employee benefit expenses, and out of the total operating expenses of Rs.4874.18 million. Thus, it can be seen that the majority of operating expenses are towards employees cost. However, the skills set of the employees is not known.
Infosys BPO Ltd Results of Operations
The function-wise classification of the Standalone Statement of Profit & Loss is as follows: Year ended March 31 2014 % 2013 % Income from software services 44,341 100.0 36.765 100.0 and products Software development expenses 26,738 60.3 21,662 58.9 Gross profit 17,603 39.7 15,103 41.1 Selling and marketing expenses 2,390 5.4 1,870 5.1 General and administration 2,686 6.0 2,218 6.0 expenses 5.076 11.4 4,088 11.1 Operating profit before 12,527 28.3 11,015 30.0 depreciation Depreciation and amortization 1,101 2.5 956 2/6 Operating profit 11,426 25.8 10,059 27.4 Other Income 2,576 5.8 2,215 6.0 Profit before exceptional item 14,002 31.6 12,274 33.4 and tax Dividend income - - 83 02 Profit before tax 14,002 31.6 12,357 33.6 Tax expense 3,808 8.6 3,241 8.8 Profit after tax and exceptional 10,194 23.0 9,116 24.8 item
The function-wise classification of the Consolidated Statement of Profit and Loss is as follows:
Year ended March 31 2014 % 2013 % Income from software services 50,133 100.0 40,352 100.0 and products Software development expenses 30,804 61.4 24,179 59.9 Gross profit 19,329 38.6 16,173 40.1 Selling and marketing expenses 2,625 5.2 2,034 5.0 General and administration 3,323 6.7 2,606 6.5 expenses 5,948 11.9 4,640 11.5 Operating profit before 13,381 26.7 11,533 28.6 depreciation Depreciation and amortization 1,317 2.6 1,099 2.7 Operating profit 12,064 24.1 10,434 25.9 Other Income 2,664 5.3 2,365 5.9 Profit before tax 14,728 29.4 12,799 31.8 Tax Expense 4,072 8.1 3,370 8.4 Profit for the period before 10,656 21.3 9,429 23.4 minority interests Less: Minority expenses - - - - Profit for the period 10,656 21.3 9,429 23.4
Break-up of Revenue as follows:
Standalone Consolidated 2014 2013 2014 2013 Income Software services 42,531 35,163 48,305 38,726 Software products 1,810 1,602 1,828 1,626 Total 44,341 36,765 50,133 40,352
Thus, it is seen that this company not only into services, but is also into development of software products, Further, we also notice that Infosys BPO Ltd also possesses Intellectual Property Rights as given in the following Schedule 2.8 of fixed assets: Particulars Original Cost Depreciation and amortization Net book value As on Additions/ Deductions/ As on As on Additions/ Deductions/ As on As on As on April Adjustments Retirements March April Adjustments Retirements March 31.3.14 31.3.13 2013 during the year during the year 31, 2013 during the year during the year 31, 2014 2014 Tangible assets Land:freehold 492 290 1 781 - - - - 781 492 Leasehold 348 1 0 349 - - - - 349 348 Buildings 4,053 825 - 4,878 1,467 287 - 1754 3,124 2,586 Plant & Equp 779 312 1 1090 547 125 1 671 419 232 Office Equp. 276 117 - 393 159 56 - 215 178 117 Comp.equp. 1525 672 19 2178 1053 520 19 1554 624 472 Furniture & 518 161 - 679 345 96 - 441 238 173 fixtures Vehicles 10 3 - 13 5 2 - 7 6 5 8001 2381 21 10361 3576 1086 20 4642 5719 4425 Intangible assets Intellectual 59 - - 59 31 15 - 46 13 28 Property Rights Total 8001 2381 21 10420 3607 1101 20 4688 5732 4453 Previous Year 7173 1422 535 8060 3112 956 461 3607 4453
At Note 2.16, the income from software services and products is given as under: Particulars Year ended March, 31 2014 2013 Income from software 42,531 35,163 services Income from software 1,810 1,602 products 44,341 36,765
MPS LTD In the report of the Board of Directors, this company has explained its activities as under: 26. Overall company strategy: The company’s current strategy remains: To increase the size, scope and technological advantage of its business as a global, high value-add, IT-enabled service provider for publishing activities including e-Pub and be a leader in this area. This strategic intent is to play a major part in preparing India’s skills, abilities and cost- advantages and to contribute to India’s domination of IT-enabled services in the coming years.
Statement of P&L for the year ended 31.03.2014 Particulars Note No For the year For the year ended ended 31-Mar- 31-Mar 2013 (INR 2014 (INR in in lakhs) lakhs) Revenue from operations (Net) 21 18,829.21 16,399.59 Other Income 22 666.60 497.80 Total Revenue 19,495.81 16,897.39 Expenses Changes in inventories of work-in- 23 106.76 35.40 process Employee benefits expense 24 7,806.54 7,712.43 Finance costs 25 38.43 58.77 Depreciation and amortization 11 505.22 736.17 expense Other expenses 26 4,444.28 4,360.01 Total expenses 12,901.23 12,902.78 Profit before tax 6,594.58 3,994.61 Tax Expense Current tax 2,240.45 1,221.99 Less: MAT credit - (294.14) Excess: provision for tax relating to - (47.63) prior years Net current tax expense 2,240.45 880.22 Deferred tax 9.69 (74.63) Net expenses 2,250.14 805.59 Profit for the year 4,344.44 3,189.02 Earnings per equity share (Rs.10 31.2 25.82 18.96 each) Basic and diluted
Inventories: Inventories comprising work in process representing cost of typesetting and data digitization services are valued of the lower of cost and net realizable value on weighted average basis. The cost comprises direct cost and appropriate proportion of overheads. 29. Plant & Machineries It has Plant and Machineries worth Rs.3516.43 crores. Under other expenses it has outsourcing cost of Rs.1078.76 crores and Repairs and maintenance of Plant & Machinery for an amount of Rs.144.19 crores.
Description of services: This company can be broadly divided into providing the following services to its customers: a) Books and journal publishing services b) Digital services c) MPS 360 customer services d) MPS technologies e) Learning and new Media services f) Ad-studio g) Business process applications 31. Typesetting and XML Workflows: MPS production supports several workflows, including front-end XML workflows, several automated tools are in place for quick and efficient production, which includes XML production tools, pre-editing and copyediting tools, content consolidation tools, auto-pagination, PDF & Graphic production, quality control and automated receipt and delivery systems.
Thus, on a comparison of the functions of the assessee and other companies reproduced above, we find that E-Clerx Ltd is not only into ITeS services, but is also rendering KPO services and therefore, it cannot be compared to the assessee. In the decisions of the ITAT where it has been held to be a comparable to the assessee, we find that ITAT has held that the services provided by the assessee company and E-Clerx Ltd are similar and that the extra-ordinary event of winding up of the subsidiary company has not been proved to have any bearing on the assessee’s profits and that super normal profit may not be a basis for exclusion of this company. However, we find that the Coordinate Benches of the Tribunal nor the Revenue Officers have not brought out functions which are similar to both the companies. The decision of the ITAT for year AY 2011-12 was followed in the AY 2012-13. Therefore, we are of the opinion that these decisions cannot exactly be binding on this Tribunal for the relevant AY, where the AO/TPO have considered the assessee as an ITeS service provider and not as a KPO. Further, as pointed out by the ld Counsel for the assessee, The TPO has
himself has not taken E-Clerx Ltd as a comparable for the AY 2013-14. Therefore, we direct the TPO/AO to exclude this company from the final list of comparables to the assessee.
Further, as regards Infosys BPO Ltd, we find that it is also a product development company as seen from its expenses towards products and also income from sale of products. Further, we also find that this company is having Intellectual Property Rights and a brand value. Therefore, we hold this company to be not comparable to the assessee and direct the TPO/AO to exclude this company from the final list of comparables.
As regards MPS Ltd, though we find that it has huge Plant & Machinery and has incurred huge expenses towards Repairs and Maintenance, we also find that it has described itself as an ITeS service provider, and that its outsourcing cost is Rs.10.78 crores only. Therefore, it is functionally similar to the assessee and therefore, cannot be excluded.
As regards the companies which the assessee wants to inclusion as comparables, we find that the TPO has excluded these companies on the ground that they do not satisfy the filters adopted by the TPO himself whereas the assessee has drawn our attention to the fact that these companies satisfy the filters adopted by the TPO. Therefore, we deem it fit and proper to direct the TPO to reconsider whether these companies satisfy the filters adopted by the TPO and are comparable to the assessee company. Thus, grounds 2, 3, 6 and 9 for seeking
exclusion and inclusion of certain companies are disposed of as above.
In Ground No.9, the assessee submits that the TPO has taken incorrect margins of Infosys BPO Ltd and, Microland Ltd. Since we have already held that Infosys BPO Ltd is functionally dissimilar to the assessee and has directed its exclusion, we are not adjudicating the same. However, with regard to Microland Ltd, we direct the TPO to take the correct margins of the said comparable. Ground No.9 is accordingly treated as partly allowed for statistical purposes.
As regards Ground Nos 10 to 12, we find that they need no specific adjudication as the assessee has not advanced any specific argument on the said grounds. As far as Ground No.13 is concerned, we find that this issue is covered in favour of the assessee by various decisions of the ITAT. The assessee has relied upon the following caselaw:
a) ITAT Pune Bench in the case of Demag Cranes and Components India (P) Lt vs. Dy. CIT reported in (2013) 1 ITR (Trib.)-OL-32 (ITAT Pune).
b) ITAT Hyderabad Bench in the case of Kenexa Technologies (P) Ltd vs. Dy. CIT reported in (2015)37 ITR (Trib)306 (ITAT Hyd).
Respectfully following the decisions of the ITAT, particularly the decision of the Coordinate Bench in the case of Kenexa Technologies (P) Ltd (Supra), we hold that the provision for bad and doubtful debts is an operating expense and has to be considered while computing the ALP. AO/TPO is accordingly
directed to take the same into consideration as operating expenditure.
As regards Ground No.15 relating to working capital adjustment, the ld Counsel for the assessee submitted that the assessee has to be given the working capital adjustment and the assessee has also given the calculation of the working capital adjustment, but the AO and the DRP have failed to consider the same and have rejected the adjustment to the assessee. In support of his contention that the working capital adjustment is required to be given, he has placed reliance upon the decision of the Coordinate Bench in the case of Kenexa Technologies (P) Ltd (cited Supra). The Coordinate Bench in the said decision at Paras 27 and 28 of its order has held as under:
“27. With respect to ground No. 2.4, with regard to grant of working capital adjustment, we rely on the decision of Demag Cranes & Components (India) Pvt. Ltd. vs. DCIT, ITA No. 120/PN/2011, dated 4.1.2012, wherein it has been held as follows: "We have so far analysed Rule 10B(1)(e) on one side and other sub-rules in the context of TNMM and we have analysed the need for elimination of the difference, if any, in the comparable uncontrolled transactions which materially affect the profit margin in the open market." 28. Hence in the instant case, we are of the opinion that appropriate working capital adjustment is required to the margins of comparable uncontrolled transactions to generate credible comparable data on transactional net margins since the TNMM is applied. Hence, we set aside this issue to the TPO with a direction to allow requisite adjustments on account of the impugned "working capital" while determining the margins of comparable.
Respectfully following the same, we direct the TPO to allow the working capital adjustment to the assessee and recompute the ALP accordingly.
In the result, assessee’s appeal is partly allowed for statistical purposes.
Pronounced in the open Court on 2nd August, 2019. Sd/- Sd/- (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 2nd August, 2019 Vinodan/SPS Copy to:-
1) M/s. Hyundai Motor India Engineering Private Limited, Survey No.52 & 53, Backside of NAC, Opp. Hitech MMTS Station, Izzatnagar, Lingampally, Hyderabad – 500 084. 2) ACIT, Circle-2(2), Signature Towers, Hyderabad. 3) Dispute Resolution Panel-1, Bengaluru. 4) The DCIT, Transfer Pricing Officer-2, Hyderabad 5) The DR, ITAT, Hyderabad 6) Guard File