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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER PER BEENA PILLAI, JUDICIAL MEMBER
Page 2 of 29 IT(TP)A No.189/Bang/2017 The present appeal has been filed by assessee against order dated 24/11/2016 passed by the Ld.ACIT Circle 5(1)(1), Bangalore under section 143(3) read with section 144C of the act on following grounds of appeal:
The learned Assessing Officer ("learned AO") and the learned Transfer Pricing Officer ("learned TPO') grossly erred in making a proposed Transfer Pricing addition of INR 2,59,80,979/- and the Honourable Dispute Resolution Panel ("Hon'ble DRP") further erred in increasing the adjustment amount by [NR 1,33,09,249/- and adjusting the transfer price by INR 3,92,90,228/- of the Appellant's international transactions with its Associated Enterprises ("AEs") u/s 92CA of the Income-tax Act, 1961 ("the Act").
2. The learned AO / learned TPO / Hon'ble DRP erred in rejecting the Transfer Pricing documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92C of the Act without giving any cogent reason for the same. 3. The learned AO / learned TPO / Hon'ble DRP erred in rejecting comparability analysis undertaken in the Transfer Pricing documentation and in conducting a fresh comparability analysis by introducing various filters in determining the Arm's Length Price (ALP"). 4. The learned AO / learned TPO / Hon'ble DRP erred in not considering the previous two years financial data of the comparable companies while determining the ALP and had selected single year data of the comparable companies for the year ended March 31, 2012 without considering the fact that the current year data was not available in the public domain at the time of preparation of the Transfer Pricing Documentation. 5. The learned AO / learned TPO / Honble DRP erred in applying different financial year ending filter while selecting the comparable companies, leading to a narrower comparable set and had also not considered the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials. 6. The learned AO / learned TPO / Hon'ble DRP erred in applying export earning filter of 75% of the total sales, leading to a narrower comparable set. 7. The learned AO / learned TPO / Hon'ble DRP erred in applying the threshold limit of 25% in respect of employee cost on sales of the comparable companies leading to a narrower comparable set. 8. The learned AO / learned TPO I Hon'ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies.
Page 3 of 29 IT(TP)A No.189/Bang/2017 9. The learned AO/learned TPO/Honble DRP erred in not appreciating the fact that since the principle of applying lower limit on turnover has been mutually accepted by the Appellant as well as the learned TPO while carrying out the comparability analysis, the principle on upper limit on turnover should also have been applied.
The learned AO/learned TPO/Hon'ble DRP erred in selecting companies having higher margins as comparable to the Appellant disregarding the fact that the Appellant had operated in a risk-mitigated environment with regard to the transactions with its Associated Enterprises.
The learned AO/learned TPO/Hon'ble DRP erred in collating the information that are not publicly available using powers under Section 133(6) of the Act.
12. The learned AO/learned TPO/Hon'ble DRP has grossly erred in not rejecting the following companies from the list of comparable companies on account of functional dissimilarity: • Universal Print Systems Ltd. • Infosys BPO Ltd. • TCSE-Serve Ltd. • BNR Udyog Ltd. • Excel Infoways Ltd. • Acropetal Technologies Limited.
13. The learned AO/learned TPO/Hon'ble DRP has grossly erred in rejecting companies that ought to have been included as comparable companies on account of functional similarity: • Accentia Technologies Ltd. • Informed Technologies Ltd. • Jindal Intellicom Ltd. • Tech Process Ltd. • Cameo Corporate Services Ltd. • Caliber Point Business Solutions Ltd. • First Source Solutions Ltd.
14. The learned AO/learned TPO/HonbIe DRP has erred in the computation of mark-up of E4E, Healthcare Services Pvt. Ltd.
15. The learned AU/learned TPO/Honble DRP has erred in making the following errors in the computation of working capital adjustment: a. by not considering the fact that the Appellant does not have any working capital risk, therefore, no negative working capital adjustment should be allowed. b. in considering the wrong SBI PLR while computing the working capital adjustment 16. The learned AO /learned TPO/Honble DRP failed to appreciate that working capital loan was taken by the Appellant to ensure adequate cash in the business and the interest on such loan has been included in the cost plus markup computation and appropriately charged to the service
Page 4 of 29 IT(TP)A No.189/Bang/2017 recipients. Hence, adverse working capital adjustment will lead to duplication of hardship to the Appellant. 17. The learned AO/learned TPO/Honble DRP erred in not allowing appropriate adjustment towards to the risk differential between the Appellant vis-ã-vis independent comparable companies.
Corporate Tax 18. The learned AO has erred in law and on facts in making a disallowance under section 14A of the Act read with rule 8D of the Income-tax Rules, 1962 (the "Rules") to the extent of INR 3,46,454 while computing the business income of the Appellant.
Brief facts of the case are as under: 2. The assessee is a company engaged in the business of computer aided engineering analysis. For the year under consideration assessee filed its return of income on 30/11/2012 declaring total income of Rs.46,77,37,065/-. ROI was selected for scrutiny and notice under section 143(2) along with 142(1) was issued to assessee. In response to statutory notices, representative of assessee appeared before the Ld.AO and filed requisite details as called for.
3. During the assessment proceedings, the Ld.AO observed that, assessee had international transaction with its associated enterprise exceeding Rs. 15 crores, and accordingly reference was made to the Transfer Pricing officer to determined the arm’s length price of the transaction.
On receipt of the reference, the Ld.TPO called upon assessee to file economic details of international transaction observed that assessee during the year had following international transaction with its AE:
Page 5 of 29 IT(TP)A No.189/Bang/20 /Bang/2017
5. The details of the margin earned by The details of the margin earned by assessee under both the assessee under both the segments are as under: segments are as under:
6. From the details filed, the Ld. rom the details filed, the Ld.TPO observed that the margin of the margin of engineering consulting services computed by assessee was 37.78% engineering consulting services computed by assessee was 37.78% engineering consulting services computed by assessee was 37.78% with the PLI of the transaction as OP/OC. L with the PLI of the transaction as OP/OC. Ld.TPO found 7 TPO found 7
Page 6 of 29 IT(TP)A No.189/Bang/20 /Bang/2017 comparables with the margin of 15.55% he margin of 15.55%, and therefore held its and therefore held its margin to be at arms length. margin to be at arms length.
7. In respect of business support services which was categorised In respect of business support services which was categorised In respect of business support services which was categorised as I T enabled service segment in the TP study, assessee selected as I T enabled service segment in the TP study, assessee selected as I T enabled service segment in the TP study, assessee selected following 9 comparables with an arithmetic mean of following 9 comparables with an arithmetic mean of 12.50%: 12.50%:
Dissatisfied with the comparabl Dissatisfied with the comparables selected by assessee, es selected by assessee, Ld.TPO carried out fresh search based on the filters applied selected TPO carried out fresh search based on the filters applied selected TPO carried out fresh search based on the filters applied selected following 10 comparables with an arithmetic mean of 28.11%: following 10 comparables with an arithmetic mean of 28.11%: following 10 comparables with an arithmetic mean of 28.11%:
Page 7 of 29 IT(TP)A No.189/Bang/20 /Bang/2017
9. The Ld.TPO however retained 3 comparables considered by The Ld.TPO however retained 3 comparables considered by The Ld.TPO however retained 3 comparables considered by assessee. He thus computed arms length price at Rs. assessee. He thus computed arms length price at Rs.25,980,979/ 5,980,979/- being the shortfall. The Ld.TPO also computed negative working being the shortfall. The Ld.TPO also computed negative working being the shortfall. The Ld.TPO also computed negative working capital adjustment at 5.26%. capital adjustment at 5.26%.
10. The Ld.AO on receipt of the Transfer Pr The Ld.AO on receipt of the Transfer Pricing order passed the icing order passed the draft assessment order on 22/03/2016 by making of further draft assessment order on 22/03/2016 by making of further draft assessment order on 22/03/2016 by making of further disallowance of Rs.3,46,454/ disallowance of Rs.3,46,454/- under section 14A read with Rule 8D under section 14A read with Rule 8D (2)(iii) of the Act.
Page 8 of 29 IT(TP)A No.189/Bang/2017 11. Aggrieved by the draft assessment order, assessee filed objections before the DRP.
The DRP while passing the resolution rejected contentions of assessee to exclude Infosys BPO Ltd., TCS e-serve Ltd. BNR Udyog Ltd. (SEG) (medical transcription), Excel info face Ltd. (SEG). However the DRP suo moto rejected Accentia technologies Ltd., Informed Technologies Ltd. and Jindal Intellicom Ltd.
On receipt of the DRP order, Ld.AO passed the final assessment order by computing Transfer Pricing addition in the hands of assessee at Rs.3,92,90,228/-.
Aggrieved by the order of Ld.AO, assessee is in appeal before us now.
At the outset the Ld.AR submitted that assessee wish to argue Ground No.12 and certain comparables in Ground No.13. He also submitted that Ground No.15, pertaining to negative working capital adjustment is also to be considered. Except for these grounds all other grounds were not pressed, as submitted by the Ld.AR.
Before we undertake the comparability analysis, it is sine qua non to understand the functions performed, assets owned and risk assumed by assessee.
Ld.TPO extracted the functions performed by assessee under the ITES segment as under: 18. It has been submitted that, as per the agreement, assessee performs following functions: • business or services (including talent acquisition team)
Page 9 of 29 IT(TP)A No.189/Bang/2017 • finance/accounting/taxation services • is services related to Management Information Systems • procurement/purchase • quality control • Treasury services • global delivery operations • information security services • and legal services. Assets owned: 19. In the TP study at page 353 of paper book, it has been submitted that assessee owns tangible assets for carrying out its business like land and building, computer equipments, furniture’s and fittings and other of office equipments and vehicles. It has been submitted that assessee do not own any non-routine intangibles and accordingly does not own trade secrets or undertake research and development activities on its account that would lead to development of any non-routine intangibles. Risk assumed: 20. It has been submitted that ITES services are intercompany service provided/availed within Quest group. The end customer in railing such services are the respective quest group companies and no specific risk in the nature of market risk/contractor’s/credit risk/foreign exchange risk are all warranty risk are born by assessee in respect of providing/prevailing any of such services.
Page 10 of 29 IT(TP)A No.189/Bang/2017 Thus, assessee has been characterised as a captive service provider/recipient that assumes lower than the normal minimal risk associated with the business of providing back-office support services.
Based on the above FAR, we shall undertake the comparability analysis in respect of the comparables alleged by assessee for inclusion/exclusion. As submitted by the Ld.AR, Ground Nos.1-10 are not pressed and accordingly not adjudicated.
Ground No.12: The assessee seeks exclusion of following comparables: Universal Print Systems Ltd., Infosys BPO Ltd., TCS e-serve Ltd., BNR Udyog Ltd., Excel Infoways Ltd.
It is vehemently submitted by the Ld.AR that, these comparables are functionally not comparable with assessee, as it is engaged in integrated IT-BPO delivery model designed for one-stop shop solution model.
In respect of Universal Paint Systems Ltd., it is submitted that, this company is engaged in painting business and the functions are different with that of the services rendered by assessee.
Ld.AR placed reliance on decision of coordinate bench of this Tribunal in case of is Indicom Global Services India Pvt.Ltd., in IT(TP)A No.185/B/2018, by order dated 28/09/2019, wherein these comparables are held to be not comparable in case of a captive service provider like that of assessee 26. On the contrary, Ld.CIT.DR placed reliance on orders passed by authorities below.
Page 11 of 29 IT(TP)A No.189/Bang/2017 27. We have perused submissions advanced by both sides in light of records placed before us.
We have perused the submissions advanced by both sides and the decision relied by the Ld.AR in case of Indicom Global Services India Pvt.Ltd. (supra). We note that this comparable was also held to be a captive service provider providing services only to its AE is and it was under these circumstances that this Tribunal had considered the aforestated comparables as under: “1. Universal Print Systems Ltd (segmental) (BPO) Assessee sought to exclude this comparable for the reason that, it fails employee cost filter and has insufficient company information. It is also been submitted that, functionally this company is providing integrated print solution to its customers and does not provides routine ITeS services like that of assessee. It has been submitted that this company is not a captive service provider like that of assessee and has products sale as well as services sale, which is evident from page 335 of paper book (Index for Annual Reports). 4.1 Ld.CIT DR placed reliance upon orders of authorities below and submitted that this comparable is functionally comparable with that of assessee.
We have heard submissions advanced by both sides in light of record placed before us. On perusal of annual report of this company placed in paper book, we are of considered opinion that this comparable is basically into sale of products and services unlike a captive service provider such as assessee, who works on Page 12 of 29 IT(TP)A No.189/Bang/2017 cost plus basis, providing services only to its AE's. It is also observed that this comparable is basically providing BPO services from its Prepress units. In written submission filed, assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Put Ltd., vs ACIT reported in (2019) 101 taxmcm.com 292, wherein this comparable has been excluded by observing as under: 10.4 We heard rival submissions and perused the material on record. The issue of comparability of Universal Print Systems Ltd. with that of the assesseecompany has been duly considered by TPO after referring to information contained in Annual Report. The relevant findings of the TPO had not been countenanced by learned AR of the assessee. However, the issue of comparability of Universal Print Systems Ltd. has also been considered by the co-ordinate bench of this Tribunal in the case of CGI Information Systems & Management Consultants Put. Ltd. 'supra) wherein it was held as follows: 47. The next submission of the learned counsel for the Assessee was uth regard to exclusion of 2 comparable companies from the list of 7 comparable companies that remain after the order of the DRP. The first comparable company sought to be excluded is Universal Print Systems Ltd. This company was chosen as a comparable company by the TPO. In reply to the proposal of the TPO to include this company as a comparable company, the Assessee vide its letter dated 22.12.2015 had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP/TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP/TC of this company will be only 51.80%. The As.sessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.63% of the total revenue from operations of this company as per its annual report. The Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not Page 13 of 29 IT(TP)A No.189/Bang/2017 satisfy the definition of ITES as contained in Rule IOTA('e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company, The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue.
48. The TPO at page-20 of his order has dealt with the above objections by observing as follows: (a) Pre-Press BPO unit provides back office support services. (b) This company has four major segments viz., Repro, Label Printing, Offset Printing and pre-press BPO. The employee cost of pre-press BPO was more than 25% of the revenue from pre- press BPO and therefore the employee cost filter is satisfied in the case of this company. (c) On the service revenue filter viz., the requirement that a comparable company must have revenue from rendering services of more than 75% of its total revenue, the TPO again held that the pre-press BPO segment's entire income is from services and therefore this objection is not to be accepted 49. On objections by the Assessee before the DRP, the DRP confirmed the action of the TPO. One of the objection before the DRP was that this company did not figure in the list of companies engaged in ITES. On this objection the DRP held that though this company did not figure in the list of companies in ITES in the main search of capital line and prowess database but on a segmental search these two companies satisfied the requirement of being considered as companies engaged in providing ITES.
Aggrieved by the directions of the DRP, the Assessee is in appeal before the Tribunal. The learned counsel for the Assessee reiterated submissions that were made before the TPO/DRP. In particular it was submitted that the service revenue filter was applied by the TPO himself at the entity level and on such search this company was not regarded as engaged in providing ITES. At this stage the TPO ought to have dropped this company as a comparable company because this filter has to be applied at the entity level and not at the segmental level. The learned DR submitted that if the service revenue filter is applied at the segmental level there can be no objection by the Assessee. She relied on the order of the DRP/TPQ.
The requirements of Rule 1OE(1)(2) & (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows: "1OB. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:- (a)to (d)
Page 14 of 29 IT(TP)A No.189/Bang/2017 (e) transactional-margin method, by which, (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii)) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub- clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arms length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences."
Page 15 of 29 IT(TP)A No.189/Bang/2017 52. There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of "net profit margin realized by the enterprise from an international transaction" with the "net profit realized from a comparable uncontrolled transaction". Therefore comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Pre- press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 1OB(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre- press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised by the Assessee in this regard about lack of information about allied services performed by the pre-press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by the TPO or DRP. Sirict the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s. 133(6) of the Act, The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO.' Respectfully following the decision, we remand this comparable to the file of the TPO/AOforfresh adjudication on the above lines. Respectfully following aforesaid decision, we remand this comparable to file of Ld.AO/TPO, for fresh adjudication, on the basis of directions reproduced hereinabove. Needless to say that proper opportunity shall be granted to assessee as per law.” Accordingly we set aside this comparable back to Ld.TPO.
2. Infosys BPO Ltd. Assessee objected for inclusion of this comparable primarily on the basis of functional incompatibility and presence of intangibles. It has been Page 16 of 29 IT(TP)A No.189/Bang/2017 submitted that this company owns huge brand and not a fit comparables for company like assessee, who provide captive service to its AE's. Ld.CIT DR opposed the exclusion and placed reliance upon orders passed by authorities below.
We have perused submissions advanced by both sides in the light of the records placed before us. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Put Ltd., us ACIT vide order dated 28/06/19 in ITA (TP) a No. 1661/Bang/2016, wherein this comparable has been excluded by observing as under: '5. We have heard the rival submissions on the comparability of Infosys BPO as a comparable company. The Delhi ITAT in the case of Baxter India Put. Ltd. Vs. ACIT for AY 2012-13 in the case of a company rendering ITES such as the Assessee, vide order dated 24.8.2017 Paragraph 23 held that Infosys BPO is not comparable with a company rendering ITES for the following reasons:- "23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Office r/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Further it was also submitted that the Infosys BPQ Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd.. We find the submissions of the id. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPQ Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd. being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based company M/s Portland Group Pty Ltd. during financial year 2011-12. They provide sourcing and category management services in Sydney, Australia. Therefore, this company also failed the TPO's own filter of rejecting companies with peculiar circumstances. In view of the above i.e. functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that Infosys BPO Ltd. should not be included in the list of comparables. We accordingly direct the Assessing Offlcer/ TPO to exclude Infosys BPO Ltd. from the list of comparables for the puipose of computing the average margin." It was also brought to our notice that the Hon'ble Delhi High Court in ITA No.26012028 in the appeal filed by the Revenue against the aforesaid order Page 17 of 29 IT(TP)A No.189/Bang/2017 dismissed the appeal at the admission stage observing that rationale given by the ITAT for exclusion was correct. In view of the aforesaid decision, we direct exclusion of Infosys BPO from the list of comparable companies chosen by the TPO.” From above, it is clear that this company is functionally not comprab1e with captive service provider. Respectfully following the same we direct Infosys BPO to be excluded from the list of comparables and remand Universal Paint to Ld.AO/TPO for fresh consideration.
3. TCS e-Serve Ltd.
Ld.AR submitted that this company has been objected by assessee for its functional dissimilarity as it renders both BPO and KPO services without segmental reporting. It is submitted that this company owns huge brand of TATA group and has also incurred brand related expenses and therefore cannot be accepted to be compared with a captive service provider like assessee.
Ld.CIT DR on the contrary opposed its exclusion and placed reliance upon orders passed by authorities below.
We have perused submissions advanced by both sides in light of records placed before us. Assessee placed reliance upon following decisions in support of its argument for exclusion of this comparable: • Zyme Solutions Put Ltd. vs ACIT (supra) • Baxter India Put. Ltd vs ACIT reported in (2017) 85 Taxmann.com • 285 (Delhi-Trib) • PCIT vs BC Management Services Pvt. Ltd. reported in TS-948- HC-0 2017 (Del)-TP Page 18 of 29 IT(TP)A No.189/Bang/2017 It is observed that this comparable has been excluded by this Tribunal. The assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Put Ltd., vs ACIT reported in (2019) 101 taxman.com 292, by observing as under: "11.3 We have heard rival submissions and perused material on record. The issue of comparability of this company was considered by the co-ordinate bench of Tribunal in the case of XLHealth Corpn. India (P) Ltd. (supra). The relevant findings of the Tribunal are as under: “…We have heard the rival submissions and perused the material on record. From the perusal of the Annual Report of this entity placed at page Nos. 583 to 678 of paper book, at page No. 604 it is stated as under. ‘2. COMPANY OVERVIEW Your Company, along with its subsidiary companies - TCS e-Serve International Limited and TCS e-Serve America Inc., is primarily engaged in the business of providing Business Process Services ('BPO) for its customers in Banking, Financial Services and Insurance domain. The Company's operations include delivering core business processing services, analytics & insights (KPO) and support services for both data and voice processes. Your Company is an integral part of the Tata Consultancy Services' (TCS) strategy to build on its 'Full Services Offerings' that offer global customers an integrated portfolio of services ranging from IT services to BPO services. The Company provides its services from various processing facilities, backed t) a robust and scalable infrastructure network tailored to meet clients' needs. A detailed Business Continuity Plan has also been put in place to ensure the services are provided to the customers without any disruptions." Thus, this company is also stated to be a Knowledge Process Outsourcing and therefore for reasons stated by us while dealing with this issue of comparability of the company Infosys BPO Ltd. shall equally hold good and therefore we direct the AO/TPO to exclude this company from : list of comparables. Since the appellant company is into low end BPO, it cannot be compared with KPO service provider. 11.4 Respectfully following the decision of the co-ordinate bench of Tribunal, we direct for exclusion this company from the list of comparable". It is observed that this company is into high-end KPO services and an assessee rendering low end BPO services cannot be compared with it. Further, this company has been excluded due to absence of segmental information.
Page 19 of 29 IT(TP)A No.189/Bang/2017 Respectfully following aforesaid decision, we direct Ld.TPO to exclude this company from the list of comparables. 5.BNR Udyog Ltd. (segmental) 31. Ld.AR submitted that this company fails RPT filter and also fails export filter applied by Ld.TPO. It is submitted that this company is into medical transcription, coding, business support services and e- governance projects and therefore functionally not similar with that of assessee.
Ld. CIT DR however contended that this company is compared only for segment of medical transcription and therefore should not be excluded. She placed reliance upon decision of this Tribunal in case of Mobily Infotech India (P) Ltd vs DCIT reported in (2018) 97 taxman.com 2 in support.
We have perused submissions advanced by both sides in the light of the records placed before us.
Assessee is challenging functional dissimilarity of this company with that of assessee as it is into medical transcription. We have our reservation to consider medical transcription services to be one of KPO services. In our considered opinion medical transcription services is basically back-office services provided by graduates who are trained for short period of 6 months to one year. These are short crash courses undertaken by graduates who are trained to understand and speak English. There is no value addition in the services rendered by people in medical transcription. To our understanding, basically these people who carry out medical transcription services are irained to understand language spoken by Page 20 of 29 IT(TP)A No.189/Bang/2017 doctors, outside India to whom medical reports of patience are sent for expert opinion. Medical transcriptionist simply reproduces opinion expressed by Doctor, which is then communicated to the patients.
It is observed from annual report placed at page 223 of paper book (Index to Annual Reports) that this company has segmental information of medical transcription and revenue earned under this segment is Rs.147.40 Lacs. It is also been observed that various other decisions by co-ordinate Benches of this Tribunal has remanded this comparable back to Ld.TPO, for proper analysis and fresh consideration. We draw support for same from Indegene (P) Ltd vs ACIT reported in (2017) 85 Taxmanrt.com 60, wherein it has been held as under: "9.3.1. We have heard the rival contentions and perused and carefully considered the material on record including the judicial pronouncements cited. From the details on record we observe that while the assessee has contended that the services rendered by this company M/s TCS E-serve Ltd are high end KPO services, it has not brought out as to which of these are the services that would come under technical services. On the other hand, iv also notice that that the TPO has held all the services rendered by the ass essee to be EPO services with any proper analysis. In this factual matrix of the case, we find that on similar facts, the co-ordinate Bench o ITAT Bangalore in the case of mdc gene (P) Ltd., (supra) has remanded the matter of comparability of this company to the file of the TPO for fresh consideration. In view of the factual inatrx of the case on hand, as laid out above and following the decision f the co-ordinate Bench in the case of Inclegene (P) Ltd. (Supra) which is also rendered on similar facts, we deem it appropriate to remand the matter of the comparability of this company, TCS E-serve Ltd. To the file of the TPO for fresh consideration in the light of out ahoy observations. Needless to add, the TPO shall afford the assessee adequate opportunity of being heard and to file details/ submissions in this regard. It is also been observed that similar view has been taken by decision of this Tribunal in case of M/s Nielson Sports India Pvt.Ltd., Vs ACIT in IT(TP)A No.196(B))/2017 vide order dated 28-06-2019.
Page 21 of 29 IT(TP)A No.189/Bang/2017 Respectfully following the same, we set aside this comparable back to Ld.TPO for considering it afresh. Needless to say that proper opportunity shall be granted to assessee as per law. Accordingly we set aside this comparable back to Ld.TPO 6. Excel Infoways Ltd. (segmental) 36. This comparable selected by Ld.TPO is alleged to be functionally not comparable with assessee, as it is handling business relations and managing customer relationships. It has been submitted by Ld.AR that this comparable fails employee cost filter.
Ld.CIT DR however contended that this company is compared only for segment of medical transcription and therefore should not be excluded. She placed reliance upon decision of this Tribunal in case of Mobily Infotech India (P) Ltd vs DCIT reported in (2018) 97 taxman.com 2 in support.
We have perused submissions advanced by both sides in light of records placed before us. Annual report of this company is placed at page 273 of paper book (Index for Annual Reports). In the Significant Accounting Policies reported at page 308 of paper book, it is observed that these companies operating businesses are organized and managed separately, according to nature of business and services provided with each segment, representing different strategic business unit. Note 15 at page 312 to refers to revenues from operations under the head information technology/BPO related services separately. It is observed that the function performed by this company as reported at page 285 reveals that it Page 22 of 29 IT(TP)A No.189/Bang/2017 is engaged in business of providing customer care services and handling client business relations on their behalf by maintaining relation with customers and also providing services by assisting in managing the workflow and updating the records. It is observed that this Tribunal in case of Zyme Solutions Put Ltd., us ACIT vide order dated 28/06/19 in ITA (TP) a No. 1661/Bang/2016, this comparable is excluded by observing as under: "The third and last company that is sought to be excluded from the list of comparable companies is Exclusion of Excel Info Ltd. The Tribunal had retained this company as a comparable company in its original order. The assessee sought exclusion of this company on the ground that this company was functionally different from. the assessee company and the employee cost to the revenue was less than the threshold limit of 25% and that there were peculiar economic circumstances which impacted the profit margin of this company thereby rendering this company as not comparable company. The Tribunal while adjudicating of exclusion of this company in paragraph 14.3 of its order held that on application of employee cost filter that the Assessee has failed to show as to how the findings of the TPO and DRP are not correct.
The assessee has pointed out certain facts with regard to employee cost and diminishing revenue of this company which takes it out of the comparability and these aspects have not been considered by the Tribunal in its order. On the above objections in the MA, the Tribunal held as follows:- We have examined the contents in the misc. petition and we find that there has been omission to consider the application of employee cost filter by the Tribunal though attention of the Bench was invited to relevant pages Page 23 of 29 IT(TP)A No.189/Bang/2017 pointed out in the misc. petition. We do not however agree with the assessee that functional comparability of this company has not been examined by the Tribunal in paragraph 14.4. The Tribunal has come to the conclusion that this company is a ITeS company and that cannot be reviewed in the misc. application. However there has been omission to adjudicated exclusion of this company on account of extraordinary events. We therefore recall the order of the Tribunal to the limited extent of examining of the employee cost filter and the presence of extraordinary events on warranty exclusion of this company."
We have heard the rival submissions on the exclusion of this company on the basis of extraordinary events that occurred during the relevant previous year which had impact on the profit margin of this company and therefore rendering this company from being chosen as a comparable company. The Delhi ITAT in the case of BT e-Serve (India) Ltd. Vs. ITO for AY 2012-13 order dated 19.6.2018 considered the comparability of this company and came to the conclusion in paragraph 5.4 of its order that there was abnormal volatility of revenue of this company from 2009-10 to 2014-15 and therefore this company should not be regarded as comparable company. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid company from the list of comparable companies chosen by the TPO.
It is observed from order passed by Ld.TPO at page 10 that assessee objected this company that employee cost filter being more than 25% has not been examined by Ld.TPO. It is observed that in decision of coordinate bench of Delhi Tribunal in case of Baxter India Pvt.Ltd vs ACIT reported in (2017) 85 Taxmann.com 285 this comparable failing employee cost filter has been analyzed as under:
Page 24 of 29 IT(TP)A No.189/Bang/2017 Further, from the order of the TPO we find he has obtained the employee cost and the sale for the ITES segment by exercise of his powers u s. 133(6). wherein the said company has allocated entire employee cost to IT - BPO segment with no allocation to Infra Activity segment which accounts to 49% of Excel's total revenue. In our opinion, it is highly impractical that no employee has been hired by Excel for Infra Activity segment. We. therefore. find merit in the arguiuit of the Id. counsel for the assessee that the information provided as per section 133(6) by Excel Infoways Ltd. is unreliable and should not be used to compute employ ee cost for ITES segment. The Delhi Bench of the Tribunal in the case of Motorola Solutions India (P.) Ltd. u. Assts.CIT/2014J 48 taxmann.com 24842015] 152 lTD 158 (Delhi) has held that a company should be rejected as comparable in case there is contradiction in the facts or data sourced from annual report and as per the information gathered u/s. 133(6). In view of above discussion, we hold that Excel Infoways Ltd. cannot be considered as comparable and should be excluded from the list of comparables. We hold and direct accordingly".
From the above observation by coordinate bench, objection raised by Ld.CIT DR stands clarified, as this company for year under consideration made a statement under 133 (6) regarding allocating entire employee cost to IT-BPO segment, with no allocation to other segment, which amounts to almost 49% of its total revenue during the year under consideration. At this stage, we clarify that, we are not inclined to express our opinion regarding functional similarities/ dissimilarity of this company with that of present assessee before us and the same is kept open to be considered in an appropriate case.
Page 25 of 29 IT(TP)A No.189/Bang/2017 40. We therefore agree with contention raised by assessee regarding this comparable not satisfying employee cost filter. Respectfully following aforestated decision of Delhi Tribunal reproduced hereinabove, we direct Ld.TPO to exclude this comparable from the final list.
Based on the above observation of coordinate benches of this Tribunal, we direct Infosys BPO Ltd., TCS e-serve Ltd., Excel Infoways Ltd. to be excluded from finalist and Univseral Point Systems Ltd., and BNR Udyog Ltd. are remanded to Ld.AO/TPO for fresh consideration. Acropetal Technologies Ltd.
In respect of Acropetal Technologies Ltd., the Ld.AR submitted that, the Healthcare segment considered by DRP is acceptable to assessee however the margins needs to be corrected accordingly. He submitted that the margin needs to be revisited by the Ld. AO/TPO in respect of this comparable. Accordingly we direct the Ld.AO/TPO to correct the margins in respect of Acropetal Technologies Ltd. Accordingly this ground raised
by assessee stands allowed as indicated hereinabove. Ground No. 13
43. The assessee seeks inclusion of Accentia Technologies Ltd., Informed Technologies Ltd., Jindal Intellicom Ltd. Remaining comparables sought for inclusion has been submitted to be not pressed by assessee. Accordingly we do not consider those comparables, for which Ld.AR has not argued.
Page 26 of 29 IT(TP)A No.189/Bang/2017 44. The Ld.AR submitted that, Accentia Technologies Ltd., Informed Technologies Ltd., and Jindal Intellicon Ltd., were acceptable to assessee as well as revenue, however the DRP excluded it suo moto. The Ld.CIT.DR placed reliance on orders of the DRP in support of its exclusion for non-availability of segmental information is. We have perused submissions advanced by both sides in light of records placed before us.
We note that DRP is not disputing the functional similarities of these comparables. We note that assessee along with its synopsis has filed annual reports of these comparables wherein the segmental details are shown to be available. As these comparables were acceptable to assessee as well as revenue and that the Ld.TPO had found segmental details available which is apparent from the records placed before us and from the annual reports filed, the Ld. AO/TPO is directed to consider Accentia Technologies Ltd., Informed Technologies Ltd., and Jindal Intellicon Ltd., these comparables in the final list of comparables in accordance with law. Accordingly this ground raised
by assessee stands partly allowed.
46. Ground No. 15 has been raised by assessee for computing negative working capital adjustment. At the outset is reliance has been placed on coordinate bench of this Tribunal in case of e4e-business Solutions India Pvt.Ltd in by order dated 08/12/2020. Consistently this Page 27 of 29 IT(TP)A No.189/Bang/2017 Tribunal has been taking a view that negative working capital cannot be granted to assessee.
The grievance of the assessee is with regard to negative working capital adjustment carried out by the Ld.TPO which was confirmed by the DRP. It is the plea of the assessee that though the Ld.TPO has observed that the Assessee has a healthy margin, the Ld.TPO has erred in making an adjustment towards working capital and the DRP further erred in upholding the same.
It was submitted that Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee however does not bear any risk and has no working capital contingencies. The Assessee has not incurred any expenses for meeting the working capital requirement. The Assessee is running the business without any working capital risk as compared to the comparables. The Assessee does not bear any market risk as the services are provided only to its group associates. Therefore, requirement for adjustment of negative working capital does not arise.
We draw our support from decision of coordinate bench of this Tribunal in case reported in (2020) 120 com 122 and Lam Research India (P.) Ltd. v. Dy. CIT in [IT Appeal Nos. 1473 & 1385 (Beng.) of 2014, dated 30-4-2015], Tivo Tech (P.) Ltd. v. Dy. CIT [2020] 117 taxmann.com 259, and Dy. CIT v. Software AG Bangalore Technologies (P.) Ltd. [IT Appeal No. 1628 of 2014, dated 31-3-2016], where it has been held that negative working capital adjustment shall not be made.
Page 28 of 29 IT(TP)A No.189/Bang/2017 50. We have considered the rival submissions. We find that in the case of Lam Research India (P.) Ltd. (supra) and Software AG Bangalore Technologies (P.) Ltd. (supra) passed by this Tribunal, it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. We therefore direct Ld.TPO to compute the ALP in accordance with the directions contained in this order after affording assessee opportunity of being heard. Accordingly this ground raised by assessee stands allowed for statistical purposes. In the result appeal filed by assessee stands partly allowed. Order pronounced in open court on 24th June, 2021.