HYUNDAI MOTOR INDIA ENGINEERING PRIVATE LIMITED., HYD,HYDERABAD vs. DCIT, CIRCLE-2(2), HYDERABAD, HYDERABAD

PER S. RIFAUR RAHMAN, A.M.:

This appeal is preferred by the assessee against the order passed u/s 143(3) r.w.s. 92CA r.w.s.144C of the Income Tax Act, 1961 (in short ‘the Act’) dated 05/12/2016 relating to AY 2012-13.

2.1 During the year under consideration, the assessee company had entered into international transactions to an extent of Rs. 7,66,94,920/-, and hence, reference was made to the Transfer Pricing

2 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. Officer (TPO) with prior approval of Pr. CIT – 2, Hyderabad for determining Arm’s Length Price u/s 92CA of the IT Act.

2.2 Assessee’s Profile:

The assessee company is engaged in providing/rendering R&D support services in respect of CAD and CAE tools in designing the automobile parts and is into modelling and iterative simulation. It receives the basic design from its group company. With respect of CAD modelling, it made a 3-D CAD modelling data of vehicle components using CAD software tools primarily CTIA. The CAE modelling services using Hypermesh comprises of finite modelling for the computer simulation which would involve breaking down the model in various structures.

2.3 International Transactions:

As per 3CEB report, the international transactions reflected are as under:

AE Nature of transaction Amount (Rs.) Hyundai Auto Purchase of 20,88,403 Ever equipment Corporation Purchase of computer 2,12,08,832 Purchase of computer 27,41,790 software Reimbursement of 49,08,346 expenses Payable 60,88,745 Hyundia Motor Provisions ITES 47,99,49,928 Company Reimbursement of 3,63,21,335 expenses Receivables 6,34,42,881 Kia Motor Provision of ITES 23,26,70,265 Corporation Receivables 4,32,08,022

3 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd.

2.4 Examination of TP study conducted by assessee:

The assessee has carried out the economic analysis and has summarized it as under:

Nature of Amount MAM PLI Margin of Margin of international (Rs.) assessee comparable transaction Provision of ITES 71,26,20,193 TNMM OP/TC 9.00% 12.50% Purchase of 20,88,403 TNMM OP/TC 15.00% 12.90% equipment Purchase of 2,12,08,832 TNMM OP/TC 15.00% 12.90% computers Purchase of 27,41,790 TNMM OP/TC 15.00% 12.90% computer software Reimbursement 4,12,29,681 TNMM OP/TC 15.00% 12.90 of expenses Receivables 10,66,50,903 - - - - Payables 60,88,745 - - - -

2.5 Analysis of the Transaction:

As per the audited statement of accounts, the financials of the assessee are as under:

Description Amount (in Rs.) Operating revenue 82,46,34,775 Operating cost 75,65,77,602 Operating profit 6,80,57,173 OP/OR% 8.25% OP/OC % 9.00%

2.6 On going through the TP document, the TPO observed that the method of search process suffers from defects which resulted in selection of inappropriate comparables and rejection of companies that are appropriate comparables. He, therefore, rejected the TP document and an independent analysis was made by aggregating all the transactions under TNMM. The TPO selected the following companies as final comparables:

4 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. S.No. Company Name OP/OC% 1. Accentia Technologies Ltd. 11.16 2. Datamatics Global Services 16.84 Ltd. 3. Eclerx Services Ltd. 61.37 4. E4e Health care 13.73 5. Informed Technologies India 7.10 Ltd. 6. Infosys BPO Ltd. 34.68 7. Jindal Intellicom Ltd. 1.98 8. Microgenetic System Ltd. 7.01 9. TCS E-Serive Ltd. (Merged) 65.82 10 Cross Domain Solutions Pvt. 29.88 Ltd. Total 249.59 Average 24.96 2.7 After applying the average margins of the comparables to the financials of the assessee, the TPO determined the arm’s length price as under:

Description Amount (Rs.) Arm’s length margin 24.96% Less: WCA 1.04% Adjusted Arm’s length margin 23.92% Operating cost 75,77,31,854 Arm’s length margin (%) 23.92% ALP @ 123.92% of OC 93,89,81,313 Price received 82,46,34,775 Adjustment u/s 92CA 11,43,46,538 The arm’s length price of the assessee was Rs. 93,89,81,313/- and the shortfall of Rs. 11,43,46,538/- was treated as adjustment u/s 92CA of the IT Act.

“In our opinion, the differences, if any, in respect of the comparables, are taken care of by taking the arithmetical mean of the comparables u/s 92C(2) of the Act. Hence, in the circumstances mentioned above and considering the functional profile of the assessee, we are of the view that the determination of the Arm’s length price, based on 10

5 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. comparables selected by the TPO, is reasonable. Accordingly, objection Nos. 9 to 13 are rejected. ” As per the directions of the DRP, the adjustment u/s 92CA(3) was determined at Rs. 10,76,02,725/- against Rs. 11,43,46,538/- proposed by the TPO.

“ General 1. That on the facts and circumstances of the case and in law, the AO/DRP erred in confirming transfer pricing adjustment of Rs. 10,76,02,725 on account of provision of Information Technology enabled Services ('ITES') by the Appellant to, its Associated Enterprises ('AEs'). 2. That on the facts and circumstances of the case and in law, the AO/DRP erred in rejecting transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('Rules') and undertaking a fresh economic analysis during the course of assessment proceedings and thereby making an adjustment of Rs. 10,76,02,725 to the international transactions. Selection of uncomparable companies 3. That on the facts and the circumstances of the case and in law, the AO/ DRP erred in accepting the following comparable companies as selected by the TPO: a) Eclerx Services Limited; b) Infosys BPO Limited; c) TCS e-Serve Ltd; and d) Crossdomain Solutions Private Limited.

6 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. Rejection of comparable companies 6. That on the facts and circumstances of the case or in law, the AO/ORP erred in confirming the rejection of Crystal Voxx Limited as not comparable. Adjustment should be restricted to the international transactions 7. That on the facts and circumstances of the case or in law, the AO/ORP has erred in making the adjustment by considering total revenue of the Company without appreciating that the transfer pricing adjustment should be restricted only to the value of international transactions with the AE. Working capital adjustment 8. That on the facts and circumstances of the case or in law, ORP has erred in directing the AO/ TPO to consider the average Prime Lending Rate (PLR) of 13.85% for the FY 201112, instead of the PLR of 14.75% as adopted by the TPO vide his order. Use of Filters 9. That on facts and circumstances of the case and in law, the AO/ORP erred in upholding the use of different financial year end filter for rejection of comparable companies while undertaking the comparative analysis. Rejection of use of multiple year data 10. That on facts and circumstances of the case and in law, the AO/ORP erred in rejecting the use of multiple year data and using data for FY 2011-12 only. Adjustment for risk differences 11. That on the facts and circumstances of the case and in law, the AO/DRP erred in disregarding the risk profile of the Appellant vis-a-vis alleged comparable companies selected by the TPO and not allowing risk adjustment as per the provisions of Rule 10B(1)(e) of the Rules. Arm's length range of 5% 12. That the AO/TPO be directed to re-work the profit margins of the appellant vis-à-vis the resultant comparable companies and to allow the benefit of +/- range as provided in proviso to section 92C(2) of the Act. 5. Ground Nos. 1 & 2 are general in nature. As regards ground Nos. 8 to 12, no arguments were advanced by the ld. Counsel for the

7 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. assessee at the time of hearing, therefore, the same are dismissed as not pressed.

6.1 Eclerx Services Ltd. – Ld. AR submitted that this company cannot be a comparable to the assessee company as this company is a knowledge process outsourcing company and as per the annual report of the company, it is engaged in the provision of services in business units of financial services and sale and marketing support. He submitted that there was an extraordinary events as a subsidiary company of Eclerx Services Ltd. was wound-up. It has super normal profits during the year and cannot be compared to the assessee company. He submitted that it has diverse activities & no segmental details are available and it has high turnover of Rs. 472 crores. Further, he brought to our notice that, by referring to annual reports of this company vide page 395 of paper book, this company has acquired Agilyst Inc, USA. The extraction of the submission is reproduced below:

“This year also saw us acquire Agilyst Inc, a US company providing operations and data analysis support to some of the largest cable and telecommunication companies in the world. We are very excited about this acquisition as it provides us access to new customers and services and reduces our reliance on our existing large customers. The Agilyst business model is also very similar to ours and so we see many business synergies, including opportunities for cross-selling services across our combined customer base. The acquisition also adds delivery capability in Chandigarh - now our third location after Mumbai and Pune in India, and brings an additional 1,000 people into the eClerx family”. By this acquisition, the financials are not reliable.

8 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. He relied on the following cases:

6.3 Considered the rival submissions and perused the material on record. As per the submission of ld. AR, this company has acquired new entity. Agilyst Inc, USA and it is extraordinary event. By further relying on the case law Exevo India Pvt. Ltd. (supra), he submitted that this company cannot be compared. We cannot agree with the submission of the counsel on this aspect as this company acquired new company in USA, how it will have an impact on the financials during this year since, the USA company is an independent entity and engages in USA and having its own functions may be similar to the assessee. We do not see any impact of acquiring independent entity in USA will have any impact on the functions of the assessee further. It is accepted that assessee and Ecelrex are both classified as high end BPO. Further, we find that in assessee’s own case for AY 2011- 12, the coordinate bench has held as under:

“9.9. We notice that this company is categorised as KPO company and the services are similar being provided to the services being provided by the above company. Further, as seen from the so called extraordinary event, it is noticed that the said company has wound-up a subsidiary company w.e.f. 29-03-2011. Since it has not acquired the company whose turnover is included in assessee-company but only wound-up a dormant company, we are of the opinion that it does not have any bearing on assessee's operating results. Super normal profits cannot be a basis for exclusion of a company and since the DRP has considered the objections, we agree with the findings of DRP. Even though the company was excluded in earlier year, we are of the opinion that each year is to be considered separately on the basis of the facts and in TP

9 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. matters the facts will vary from year to year. Accordingly, we are of the opinion that this company cannot be excluded. To that extent, the ground raised by assessee is rejected.”

Following the decision of the coordinate bench as above, we exclude this company as comparable.

6.4 Infosys BPO Ltd. - Ld. AR submitted that this company cannot be a comparable to the assessee company as it has functional dissimilarity as well as extraordinary events took place and it has high turnover of Rs. 1,312 crores. He relied on the following cases:

6.6 Considered the rival submissions and perused the material on record. We find that in AY 2008-09 and 2009-10 the coordinate bench of this Tribunal in assessee’s own case has excluded this company as comparable from the list of comparables by observing as below:

“11.1 We are in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs.15.79 crores, as against turnover of Rs.1016 crores of the Infosys. We are also of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys BPO is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, because of its big brand value this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company.”

10 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. Further, DRP has excluded Infosys from the list of comparables in the AY 2010-11 by following ITAT order of earlier years. Following the same, we direct the AO to exclude the said company as comparable.

6.7 TCS eServe Ltd. - Ld. AR submitted that this company cannot be a comparable to the assessee company as it has functional dissimilarity as well as diversified business and has high turnover. He relied on the decision of the coordinate bench of this Tribunal in assessee’s own case for AY 2010-11 in ITA No. 1917/Hyd/2014, vide order dated 13/11/2015.

6.8. Ld. DR, on the other hand, relied on the orders of revenue authorities.

6.9 Considered the rival submissions and perused the material on record. In assessee’s own case for AY 2009-10 (supra), the coordinate bench has held as under:

11.2.2. We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned we find that this Tribunal in assessee's own case for A.Y. 2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of the company. The Hon'ble DelhI High Court in the case of CIT vs. Agnity India Technologies P. Ltd., (2013) 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon 'ble High Court (supra), the turnover of the assessee was about Rs.15.79 crores as against the turnover of Rs.1 0 16 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value arid also on the grounds of functional dissimilarity and huge turnover. Though,

11 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. the company before us is TCS e-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs.50 crores as against the turnover of TCS e-Serve Limited of Rs.1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No.6 is partly allowed.” Following the said decision, we direct the AO/TPO to exclude the said company as comparable.

6.10 Crossdomain Solutions Pvt. Ltd. - Ld. AR submitted that this company cannot be a comparable to the assessee company as this company is functionally dissimilar as it has a diversified Knowledge Process Outsourcing Company providing services in insurance, health care, HR and accounting domains. Company also offers business excellence market research and data analytics and IT services. It was also submitted that the company is engaged in software development activities. It was also submitted that in assessee's own case in AY. 2008-09, this company was rejected by the ITAT due to the fact that it has diversified activity and further, segmental information was not available. It was also contended that the margin calculated by the TPO is incorrect and furnished a revised computation. The issue was whether the bad debts were non-operating expenses and TPO has not followed the guidelines on the issue.

6.11. Ld. DR, on the other hand, relied on the orders of revenue authorities.

6.12 Considered the rival submissions and perused the material on record. In assessee’s own case for AY 2011-12, the coordinate bench held as under:

“9.11. We have considered the rival contentions and perused the documents placed on record. Assessee has raised the same objections before DRP which gave a finding that the engineering design services being rendered by assessee are

12 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. akin to KPO services of the above company. It further considered that functional comparability need to be decided on the basis of the information available in the annual report and not based on the website information which may vary and may not be reliable. It was further noted that in the case of M/s. Excellence Data Research Pvt. Ltd., in ITA No. 159/Hyd/2015, the ITAT rejected the objection of assessee for exclusion of above company noting that the annual report refers only service and is in the pay roll service activity. Thus, stating DRP rejected assessee's objections. We do not find any reason to interfere with the said objections as the very basis of the contentions are based on the website information but not on the annual report. However, the DRP has directed the TPO to verify the margin which assessee submits that has not been considered. Therefore, while retaining the company as a comparable one, we direct the AO/TPO to examine the contentions with reference to margin computation of the above said company after giving due opportunity to assessee to make submissions. This issue is considered partly allowed.”

Following the said decision, we reject the contention of the assessee and retain this company as comparable.

13 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. 7.1 Aggrieved, the assessee raised objections before the DRP and before the DRP it was submitted that the provision for bad and doubtful debts should be considered as operating in nature. On this count, the assessee sought for recomputation of margin in the case of Eclerx Services Ltd., Infosys BPO Ltd., TCS e-Serve Ltd and Datamatics Global Services Ltd.

7.2 The DRP after considering the submissions of the assessee, upheld the action of the TPO by observing as under:

“Having considered the submission, it is noticed by us that the approach of the assessee is contradictory which is evident from the fact that in one side it sought to consider the bad debts and provision for bad and doubtful debts as operating in nature. and on the other side in the case of Microgenetic System Ltd., where the TPO has increased the operating cost with regard to Rs. 13,50,479 reduced from the operating cost on account of 'Provision no longer required'. no objection has been raised. This Panel has been consistently holding that provisions are not an ascertained liability which is not allowable for purpose of computation of business profit under the IT Act. We are also of the view that the provision for bad & doubtful debts is not made in all the cases. There is no rationale to consider such provision as operating in nature. Even otherwise, for the comparability analysis, such provisions are excluded from the tested parties as well as the comparable, the error in the margins of the relevant year are taken care of. This view of the Panel finds support from several decisions of the Hon'ble ITAT, for example, in the case of M/s Telcordia Technologies India Pvt. Limited (22 taxmann.com 96/ 137 ITO 1 (Mum), is squarely applicable to the assessee case in which it was decided that the provision for doubtful debt cannot form part of operating cost. Further. In the case of Thyssen Krupp Industries India Pvt. Ltd., ((2013) 33 taxmann.com 107), the Hon'ble Mumbai Tribunal held that provision for doubtful debts is to be considered as non-operating in nature because it is only a provision. While working out the operating profit, only items of receipts and expenditure, which have direct relation for determining the profit have to be taken into account. In the case of Four Soft Ltd, vs. Oy. CIT [2011] 142 ITJ 358/(2012) 16 ITR (Trib.) 73 (Hyd.), it was held that for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the AEs has to be considered and that bad debts/reimbursements have to be excluded. Accordingly, the above objection is rejected.”

14 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. 7.3 Aggrieved by the DRP decision, the assessee is in appeal before us and submitted that the issue in dispute is squarely covered by the decision of the coordinate bench of ITAT, Hyderabad in the case of M/s Kenexa Technologies Pvt. Ld., in ITA No. 243/Hyd/2014 vie order dated 14/11/2014 wherein the coordinate bench has held as under:

"106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted. 107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is equally applicable to balances written back more particularly when ld. CIT(A) has not given any separate finding and the Transfer Pricing Officer has said nothing specifically on this item. The balances written back should also be treated as part of operating profit. We direct accordingly."

15 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies.”

7.4 Ld. DR, on the other hand, neither controverted the submissions of the ld. AR of the assessee nor brought any contrary decision in this regard.

7.5 Considered the rival submissions and perused the material on record. As the issue in dispute is similar to the issue decided in the case of M/s Kenexa Technologies Pvt. Ltd. (supra), following the decision of the coordinate bench, we direct the AO/TPO to recompute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies. Accordingly, this ground is allowed.

8.1 Before the DRP, the assessee submitted that this company qualifies all the filters applied by the TPO and therefore, the TPO was not justified in rejecting the above company.

8.2 DRP after considering the submissions of the assessee, upheld the action of the TPO by observing as under:

“Having considered the submission, we perused the order of the TPO from which it is noticed that the above company was proposed as an additional comparable by the assessee. However, the TPO rejected the inclusion of the additional comparable due to the reason that the company failed the service income filter and also has persistent losses at the segmental level. On a perusal of the Annual Report, it is noticed by us that the finding of the TPO are not in conformity with the Annual Report. However, It is noticed by us from the Annual Report, that the entire revenue of Rs. 3,05,34,534 has been shown as 'professional income'. Nowhere in the Annual Report is there any clarity with regard to functions performed by the

16 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. above company except that, in the segmental reporting, it is mentioned that the company's operation predominantly relates to single segment, namely "BPO activity”. The mention of the word 'predominantly' indicates that the company is also performing other functions, in regard to which no information is available. Further, the company cannot be retained as a comparable even if it is considered that the company is providing BPO services, considering the high end services (KPO) provided by the assessee. Accordingly, the above company cannot be considered as a comparable.” 8.3 Aggrieved, the assessee is in appeal before us.

8.4 Considered the rival submissions and perused the material on record. The contention of the ld. AR before us is that the DRP has taken decision contrary to the decision of TPO, but, the DRP has not given opportunity to the assessee to represent its case. Therefore, in the interest of justice, we remit the issue back to the file of TPO for fresh consideration of the issue in accordance with law after providing reasonable opportunity of being heard to the assessee.

9.1 When the assessee raised objections before the DRP, the DRP rejected the objection of the assessee on the ground that the assessee is required to furnish the evidence to support that in respect of the invoices raised for revenue of Rs. 71,26,20,193/-, the cost involved is only Rs. 67,86,85,898. Since, assessee failed to furnish such evidence, either before the TPO or before them, the objection was rejected.

17 ITA No. 87 /Hyd/2017 Hyundai Motor India Engg. Pvt. Ltd. 9.2 Aggrieved, the assessee is in appeal before us.

9.3 Considered the rival submissions and perused the material on record. Since the assessee failed to furnish the evidence in respect of the invoices raised for revenue of Rs. 71,26,20,193/- either before the TPO or before the DRP, the DRP rejected the objections raised by the assessee. To meet the ends of justice, we remit this issue back to the file of the TPO with a direction to give one more opportunity to the assessee to submit the required information to substantiate its claim. We direct the assessee to file the required information to substantiate its claim. This ground is allowed for statistical purposes.

Pronounced in the open court on 8th June, 2018

Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated: 8th June, 2018 kv

Copy to:-

1) Hyundai Motor India Engg. Pvt. Ltd., Survey No. 5/2 & 5/3, Opp. Hitech City Railway Station (MMTS), Hyderabad – 500 084 2) DCIT, Circle – 2(2), 5th Floor, Signature Towers, Kondapur, Hyd. 3) DRP - 1, Bengaluru 4) The Departmental Representative, I.T.A.T., Hyderabad. 5) Guard File