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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
1. The present appeal has been filed by assessee against the final assessment order dated 30/11/2016 passed by Ld. ACIT circle 5 (1) (1), Bangalore under section 143 (3) read with section 144C of the act on following grounds of appeal: “The grounds mentioned hereinafter are without prejudice to one another.
1. The learned Assessing Officer ("learned AO"), learned Transfer Pricing Officer ("learned TPO") and the Honourable Dispute Resolution Panel ("Hon'ble DRP") grossly erred in adjusting the transfer price by INR
Page 2 of 29 IT(TP)A No.31/Bang/2017 2,32,56,458/- of the Appellant's international transactions with its Associated Enterprises ("AE5") with respect to the Information Technology enabled Services ('ITeS') rendered by the tax payer u/s 92CA of the Income- tax Act, 1961.
2. The learned AO/learned TPO/Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of sub- section (3) of 92C of the Act.
3. The learned AO/learned TPO/Hon'ble DRP erred in rejecting comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing various filters in determining the ALP.
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.
5. The learned AO/learned TPO/Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies, thereby not considering 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% instead of 25% of the total sales, leading to a narrower comparable set.
7. The learned AO/learned TPO/Hon'ble DRP erred in applying related party filter of 25% without giving any cogent reason for doing so.
8. The learned AO/learned TPO/Hon'ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies.
The learned AO/learned TPO/Hon'ble DRP erred in not appreciating the fact that since the lower limit on turnover has already been applied mutually by the Appellant. as well as the learned TPO while carrying out their respective comparability analysis, upper limit on turnover should also have been provided based on the similar principle.
10. The learned AO/learned TPO/Hon'ble DRP has grossly erred in not rejecting the following companies from the list of comparable companies: • Universal Print Stems Ltd Infosys BPO Ltd. • TCS E-Serve Ltd. • BNR Udyog Ltd. • Excel Infoways Ltd) • e4e Healthcare Services Pvt. Ltd.
11. The learned AD/learned TPD/Hon'ble DRP has grossly erred in rejecting companies that ought to have been included as comparables : • ICRA Online Ltd. • Tech Process Ltd. • Crystal Voxx Ltd. • Cameo Corporate Services Ltd. • Caliber Point Business Solutions Ltd.
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12. The learned AO/Hon'ble DRP has grossly erred in rejecting following companies which was mutually accepted by the Appellant and learned TPO during the course of assessment - proceedings: • Accentia Technologies Ltd. • Informed Technologies Ltd.
13. The learned AD/learned TPO/Hon'ble 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. 14. The learned AD/learned TPO/Hon'ble DRP erred in not allowing appropriate adjustment towards to the risk differential between the Appellant vis-â-vis independent comparable companies. 15.The learned AO erred in not considering the income reported in the revised return of income of the Appellant. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.” 2. Assessee has also filed an application for admission of additional grounds were in following issues are raised: “Based on the facts and circumstances of the case, M/s. Replicon Software India Pvt. Ltd., respectfully submits the following additional grounds of appeal
for admission before Your Honours: Transfer pricing grounds 16.The Learned AO/TPO/Hon'ble DRP has erred in not appreciating the fact that negative working capital adjustment should not be allowed. The said ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above ground of appeal, at any time before or at,' the time of hearing, of the appeal, so as to enable the Honorable Income Tax Appellate Tribunal to decide this appeal according to law. The Appellant does not have a Managing Director and hence these additional grounds of appeal are signed by the Director of the Company in accordance with the provisions of the Act.
3. It has been submitted that, no new facts need to be investigated to adjudicate these grounds, and that it arises out of the records already available. The Ld.AR submitted that, broader
Page 4 of 29 IT(TP)A No.31/Bang/2017 ground pertaining to these issues have been included in the regular grounds of appeal
. However, since these grounds were not raised before DRP, by way of abundant caution the same has been raised in the present application for admission.
4. In support for admission of additional grounds, the Ld.AR placed reliance on decision of Hon’ble Supreme Court in case of National Thermal Power Co Ltd. reported (1998) 229 ITR 383 and also in case of Jute Corporation India vs CIT reported in (1991) 187 ITR 680.
5. The Ld.CIT.DR strongly opposed to the admission of additional ground raised by assessee for the reason that they were not alleged by assessee before the DRP.
6. We have perused submissions advanced by both sides in light of records placed before us.
7. We note that the issue raised in additional grounds, arise out of records placed before us and that it would be disposed off based on the materials placed before us. Moreover, there are no estopple that, an issue arising out of the records could not be alleged by assessee. We are therefore admitting the additional grounds raised by assessee for adjudication. Brief facts of the case are as under::
8. The assessee is a company engaged in the business of software development , IT enabled services, technical marketing and support services.
9. For the year under consideration it filed its return of income on 25/09/2012 declaring total income of Rs.2,13,23,940/-. The Page 5 of 29 IT(TP)A No.31/Bang/2017 assessee subsequently filed revised return declaring income of Rs.2,06,63,810/- after setting off of brought forward losses. The case was selected for scrutiny and notice under section 143(2) along with 142(1) of the Act was issued in response to which representatives of assessee appeared before Ld.AO and filed requisite details as called for.
The Ld.AO observed that, the assessee had international transaction with its associated enterprise exceeding Rs.15 crores, and accordingly the case was referred to Transfer Pricing Officer to determine the arm’s length price of the international transaction.
Upon receipt of reference under section 92CA, the Ld.TPO called on the assessee to file the economic details of the international transaction in Form 3CD. The Ld.TPO found that, the assessee had following international transaction recorded in the TP study report : International Value (INR) Transactions Provision of software development 15,74,10,533/- services and ITES 12. The segmental details of the assessee in respect of the international transactions are as under: Particulars Amount (INR) 15,74,10,533/- Operating Income Operating Expenditure 14,02,11,728/- 1,71,98,805/- Operating Profit OP/OC 12.27% 13. The Ld.TPO noted that, the assessee computed its margin at 12.27% by using TNMM as most appropriate method and OP/OC
Page 6 of 29 IT(TP)A No.31/Bang/2017 as PLI. It selected 10 comparables with an average margin at 6.24%
S.I Company OP/OC CAT Technologies Limited 1 -10.16% 2 CG-Vak Software & Exports Limited -13.50% 3 Encore Software Limited -6.50% 4 Onward Technologies Ltd 16.71% ICRA Techno Analytics Ltd 17.21% 5 Prism infomatics Ltd 13.97% 6 Oracle (Ofss) BPO Services Ltd 10.79% 7 8 Sundaram Business Services Ltd 2.61% 9 Tata communications Transformation Services Limited 9.59% Axis IT & Ltd 21.66% 10 Average 6.24% Operating margin earned by the Assessee 12.27%
The Ld.TPO only disputed the comparability under ITES segment carried out by assessee in its TP study. In reply to the show cause notice issued by the Ld.TPO, assessee furnished fresh set of 10 comparables having average margin 9.33%: Company Name OP/OC SI. No. 1. Crystal Voxx Ltd. 0.25% 2. Accentia Technologies Ltd. 11.80% 3. Informed Technologies Ltd. 6.08% 4. Jindal Intellicom Ltd. 0.05% 5. Microgenetics Systems Ltd. 19.61% 6. Caliber Point Business Solutions Ltd. 9.18% 7. E4e Healthcare Services Pvt .td 19.49 8. ICRA Online Ltd. (seg.) 21.99% 9. Cameo Corporate Services Ltd. 7.53%
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The Ld.TPO rejected assessee’s TP study and undertook fresh search of comparables based on following filters: • use of current year data • Companies having different financial year ending or data of the company which does not fall within 12 months period were rejected • Companies who service income is less than Rs.1Crore were excluded • Companies whose IT Enabled services less than 75% of total operating revenues were excluded • Companies who have more than 25% related party transaction of sales were excluded • Companies who have export service income less than 75% of the sales were excluded • companies with employee cost less than 25% of turnover were excluded
The Ld.TPO selected following comparables using above filters having average margin of 28.11% Company Name Unadjusted SI. No. Margin Accentia Technologies Ltd. 1 2 Universal Print Systems Ltd. 52.46% 3 Informed Technologies India Ltd. 6.08% 4 Infosys BPO Ltd. 36.30% 5 Jindal Intellicom Ltd. -0.05% 6 Microgenetic Systems Ltd. 19.61% 7 TCS E-Serve Ltd. 63.69% 8 BNR Udyog Ltd. 50.61% 9 Excel Infoways Ltd. 29.79% 10 E4e Healthcare Services Pvt Ltd. 19.85% AVERAGE 28.11%
Further, the Ld.TPO computed negative working capital adjustment of -0.03% to the arm’s length margin on cost and Page 8 of 29 IT(TP)A No.31/Bang/2017 computed the shortfall of Rs.1,64,24,214/- being the proposed adjustment.
Upon receipt of proposed adjustment the Ld.AO passed draft assessment order on 15/03/2016 under section 144C (1) of the Act.
Against the draft assessment order, the assessee raised objections before the DRP. Before the DRP, assessee objected certain comparables for its exclusion which were rejected. The DRP further suo moto excluded Accentia Technologies Ltd. and Informed Technologies India Ltd., which was acceptable to assessee as well as the Ld.TPO. As regards the computation of negative working capital adjustment, the DRP directed the Ld.TPO to verify the calculations of working capital adjustment and to rectify the mistakes.
Assessee before DRP had also raised the issue of not considering the income as per revised return while passing the draft assessment order which was accepted by DRP and the Ld. AO was directed to make necessary rectification and adopt correct figures of the returned income.
Upon receipt of DRP directions, the Ld.AO computed addition in the hands of assessee at Rs.2,32,56,458/-. Agreed by the additions made by the Ld.AO, the assessee is in appeal before us now.
At the outset, Ld.Counsel submitted that Ground No. 1-9 are general in nature and therefore do not require adjudication.
Page 9 of 29 IT(TP)A No.31/Bang/2017 He submitted that only following comparables in Ground No. 10, 11, 12 needs to be adjudicated.
He submitted that in respect of Ground No.10 assessee wishes to seek exclusion of following comparables: Universal Print Systems Ltd. Infosys BPO Ltd. TCS e-serve Ltd. BNR Udyog Ltd. Excel Infoways Ltd.
It was submitted that E4e Healthcare Services Pvt. Ltd., is not pressed as per the instructions from assessee and accordingly not argued before this Tribunal.
In Ground No.11 assessee wishes to seek inclusion of only 1 comparable being Crystal Voxx Ltd. Other comparables alleged for inclusion in Ground No. 11 are being not pressed by the Ld.Counsel as per instruction from assessee and therefore not argued before this Tribunal.
In Ground No. 12 assessee seeks inclusion of Accentia Technologies Ltd. and Informed Technologies Ltd., which were rejected by the DRP suo moto.
In Ground No.13(a) assessee alleges that the Ld.AO did not rectify the working capital adjustment as directed by the DRP. Similar ground has been raised by assessee in the additional ground of appeal which is already been admitted by assessee herein above. The Ld.Counsel has not pressed for the risk adjustment, and accordingly the same is not adjudicated.
Page 10 of 29 IT(TP)A No.31/Bang/2017
Ground No. 15 is in respect of considering the income reported in revised return filed by assessee which has not been followed by the Ld. AO as directed by DRP.
We shall 1st consider the comparables sought by assessee for inclusion/exclusion as under: 30. As per TP documentation at page 412 assessee performed following functions, assets owned and risks assumed during the year under consideration: The Ld.TPO observed as under : Functions: “4.2 Functional Analysis: • In terms of the Master Service Agreement, Replicôn India, Providing certain Information Tech..elegy services in software, business process outsourcing infrastructure management, network security services; Internet professional services; network c data centre management; client server services: IT help desk services, consulting and other allied services and have resources to perform such services on a contractual basis. • Providing services like software development and application testing, sale service of the products to existing customers, customer support, customization of the product to customer need Invoicing. Collections, Product Maintenance Renewals, monitoring customer server sup certain process of company's payroll and accounting activities. Software development includes application development, software design, software des designing software, software application development, enterprise application development platform development.” Assets Owned: 32. As per TP documentation, the assessee owns tangible assets like computers office space etc which is necessary for running its business and rendering services.
Page 11 of 29 IT(TP)A No.31/Bang/2017 Risk assumed: 33. It has been submitted in the Transfer Pricing documentation that the assessee does not undertake any market risk as the parent company abroad is exposed to global market fluctuation. It has been submitted that assessee shares the risk of marketing to a minimal extent as utilisation of capacity is dependent on procuring of business the parent company. Insofar as the financial risk is concerned assessee is compensated at cost plus margin in advance by the AE and the financial risk is comparatively rule over. Other risk like credit and collection risk, service liability risk, technology risk, IPR are not born by assessee.
Thus assessee could be characterised as a captive service provider only providing services to the associated enterprise.
Ground No.10 assessee wishes to seek exclusion of following comparables: 36. Universal Print Systems Ltd., Infosys BPO Ltd., TCS e-serve Ltd., BNR Udyog Ltd., Excel Infoways Ltd.
At the outset, Ld.Counsel submitted that, above comparables have been considered by coordinate bench of this Tribunal in case of M/s.Indicom Global Services (India) Pvt.Ltd vs DCIT reported in (2020) 116 taxmann.com 910 for same assessment year 2012-13. It has been submitted that these comparables were considered for exclusion as not comparable to a captive service provider therein under ITES segment by this Tribunal. He placed reliance on observations of this Tribunal in Page 12 of 29 IT(TP)A No.31/Bang/2017 respect of all these comparables recorded in the case of M/s.Indicom Global Services (India) Pvt.Ltd vs DCIT (supra) 38. The Ld. CIT DR placed reliance on orders of authorities below and submitted that this comparable is functionally similar with that of assessee.
We have perused submissions advanced by both sides in light of records placed before us. We have also considered the observations by this Tribunal in respect of all these comparables recorded in the case of M/s.Indicom Global Services (India) Pvt.Ltd vs DCIT (supra).
We note that, the assessee before us is a captive service provider rendering services only to its AE as per the directions and requirement of AE. The assessee considered by this Tribunal in case of M/s.Indicom Global Services (India) Pvt.Ltd vs DCIT (supra) is also a captive service provider assuming minimal risk in carrying out its ITes functions. This Tribunal while considering similar comparables observed as under: “Comparables sought to be excluded:
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.
5. 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
Page 13 of 29 IT(TP)A No.31/Bang/2017 of products and services unlike a captive service provider such as assessee, who works on 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 (P.) Ltd. v. Asstt. CIT [2019] 101 taxmann.com 292 (Bang. - Trib.), 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 assessee-company 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 (P.) Ltd. (supra) wherein it was held as follows: '47. The next submission of the learned counsel for the Assessee was with 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 Assessee 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
Page 14 of 29 IT(TP)A No.31/Bang/2017 services provided mainly with the assistance or use of information technology. It was also submitted that this company does not 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.
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 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.
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The requirements of Rule 10B(1)(2) & (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows: "10B. (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) (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 (if) 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); (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 Page 16 of 29 IT(TP)A No.31/Bang/2017 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."
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 10B(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 Page 17 of 29 IT(TP)A No.31/Bang/2017 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. Since 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/AO for fresh 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.
Infosys BPO Ltd. Assessee objected for inclusion of this comparable primarily on the basis of functional incompatibility and presence of intangibles. It has been 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 Pvt Ltd. (supra), 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 (P.) Ltd. v. 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:-
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23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/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 ld. 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 Officer/TPO to exclude Infosys BPO Ltd. from the list of comparables for the purpose of computing the average margin.
It was also brought to our notice that the Hon'ble Delhi High Court in in the appeal filed by the Revenue against the aforesaid order 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 comparable with captive service provider. Respectfully following the same we direct this company to be excluded from the list of comparables.
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 Page 19 of 29 IT(TP)A No.31/Bang/2017 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 Pvt Ltd. (supra) Baxter India (P.) Ltd. v. ACIT [2017] 85 taxmann.com 285 (Delhi - Trib.) Pr. CIT v. BC Management Services (P.) Ltd. [2018] 89 taxmann.com 68/253 Taxman 138/403 ITR 45 (Delhi) It is observed that this comparable has been excluded by this Tribunal. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions (P.) Ltd., (supra) 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 Page 20 of 29 IT(TP)A No.31/Bang/2017 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 has been 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. Respectfully following aforesaid decision, we direct Ld.TPO to exclude this company from the list of comparables.
BNR Udyog Ltd. (segmental) 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. v. Dy. CIT [2018] 97 taxman.com 2 (Bang. - Trib.).
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 trained to understand language spoken by doctors, outside India to whom medical reports of patience are Page 21 of 29 IT(TP)A No.31/Bang/2017
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. v. Asstt. CIT [2017] 85 taxmann.com 60 (Bang. - Trib.), 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, w also notice that that the TPO has held all the services rendered by the assessee to be BPO 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 Indegene (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 matrix of the case on hand, as laid out above and following the decision of the co-ordinate Bench in the case of Indegene (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 above 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 Nielson Sports India (P.) Ltd., v. ACIT [IT (TP) Appeal No.196(B)/2017 dated 28-06-2019]. 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) This comparable selected by Ld.TPO is alleged to be functionally not comparable with assessee, as it is handling business relations and Page 22 of 29 IT(TP)A No.31/Bang/2017 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. (supra) 9. 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 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 (P.) Ltd., (supra), 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.
2. 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:-
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8. 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 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. v. 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 (P.) Ltd. (supra)this comparable failing employee cost filter has been analyzed as under: 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 argument of the Id. counsel for the Page 24 of 29 IT(TP)A No.31/Bang/2017
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. v. Assts. CIT [2014] 48 taxmann.com 2484 [2015] 152 ITD 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. 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 observations by the coordinate bench of this Tribunal, we direct Ld.AO/TPO to exclude Infosys BPO Ltd., TCS e-Serve Ltd., Excel Infoways Ltd., from the final list of comparables. And remand the Universal Print Systems Ltd. and BNR Udyog Ltd. to the Ld.TPO for considering it afresh. Accordingly ground No. 10 raised by assessee stands allowed as indicated hereinabove.
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Ground No.11 Assessee wishes to seek inclusion of only 1 comparable being Crystal Voxx Ltd.
This comparable has been alleged by assessee by way of additional ground with stands admitted hereinabove. 44. It has been submitted that this comparable was submitted by assessee in a fresh search during the Transfer Pricing proceedings however the same was not considered by the Ld.TPO. He thus submitted that the comparable may be considered as they are functionally similar with a captive service provider like that of assessee. 45. On the contrary, the Ld.CIT.DR submitted that this comparable was not raised by assessee for inclusion before the DRP and therefore cannot be raised at this stage. 46. We have perused submissions advanced by both sides in light of records placed before us. 47. Admittedly, this comparable has been filed by assessee before the Transfer Pricing officer for consideration. However the same was ignored by the Ld.TPO. It has been submitted that this comparable is functionally similar with that of assessee however as the same has not been verified and looked into by the Ld.TPO be deem it fit and proper to remand this comparable to the Ld.TPO to consider it in the light of the functions performed, assets owned and risk assumed by it vis-a-vis that of assessee. In the event the FAR analysis is found to be similar with that of assessee the same may be included in the final list of comparables.
Page 26 of 29 IT(TP)A No.31/Bang/2017 Accordingly, this ground raised by assessee stands allowed for statistical purposes.
48. Ground No.12 assessee seeks inclusion of Accentia Technologies Ltd., and Informed Technologies Ltd. which were rejected by the DRP suo moto.
49. From the order passed by the Ld.TPO, we note that, these comparables were included in the final list as accepted by the Ld.TPO to be satisfying all the relevant filters applied by the Ld.TPO. The DRP rejected these comparables suo moto for the reason that, M/s Accentia Technologies were functionally different and the data of M/s.Informed Technologies India Ltd., was not reliable in view of the fact that segmental data was not available.
50. From the transfer pricing order, we note that, the Ld.TPO has not raised any objection regarding the functional profile of these comparables. However since the DRP raised certain objections which needs to be verified, the same is remanded to the Ld.TPO for due verification.
51. We are therefore of the opinion that the comparables needs to be verified by the Ld.TPO afresh. Needless to say that assessee shall furnish all relevant details in respect of these comparables available with it in support of its inclusion. The Ld.TPO shall verify these details/documents filed by assssee and consider these comparables for inclusion, if found functionally similar with that of assessee.
Page 27 of 29 IT(TP)A No.31/Bang/2017 Accordingly we set aside this comparables back to learnt TPO. Accordingly this ground raised by assessee stands allowed for statistical purposes.
52. Ground No.13(a) assessee alleges that the Ld.AO did not rectify the working capital adjustment as directed by the DRP. Similar ground has been raised by assessee in the additional ground of appeal which is already been admitted by assessee herein above. The Ld.Counsel has not pressed for the risk adjustment and accordingly the same is not adjudicated.
53. We note from the directions of the DRP that the Ld.TPO was asked to verify the correctness of the figures adopted by him. The DRP had directed the Ld.TPO to verify the calculations of working capital adjustment and rectify the mistakes if any. It has been submitted that assessee was granted negative working capital adjustment, which is not in accordance with procedure laid down in the statute. In fact, there is no need for making any negative working capital adjustment, when assessee does not carry on with any working capital risk. All the Ld.TPO was supposed to do was to carry out necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to assessee, rather than making negative working capital adjustment.
54. We accordingly, remand this issue back to the Ld.AO/TPO to recompute the working capital adjustment necessary to bring the comparables on par with that of assessee.
Page 28 of 29 IT(TP)A No.31/Bang/2017 Accordingly this ground raised by assessee stands allowed for statistical purposes.
55. Ground No. 15 is in respect of considering the income reported in revised return filed by assessee which has not been followed by the Ld. AO as directed by DRP.
56. We note that, the DRP had directed the Ld.AO to consider the income reported in the revised return of income however the same has not been followed. We thus direct the Ld.AO AO to follow the directions of the DRP, which is in accordance with law for computing income in the hands of assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes. In the result appeal filed by assessee stands partly allowed as indicated hereinabove. Order pronounced in open court on Order pronounced in the open court on 12th March, 2021 Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 12th March, 2021. /Vms/ Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order Assistant Registrar, ITAT, Bangalore
Page 29 of 29 IT(TP)A No.31/Bang/2017 Date Initial On Dragon 1. Draft dictated on Sr.PS 2. Draft placed before -2-2021 Sr.PS author -2-2021 3. Draft proposed & placed JM/AM before the second member -2-2021 4. Draft discussedapproved JM/AM by Second Member. -2-2021 5. Approved Draft comes to Sr.PS/PS the Sr.PS/PS 6. -2-2021 Sr.PS Kept for pronouncement on 7. -2-2021 Sr.PS Date of uploading the order on Website 8. If not uploaded, furnish -- Sr.PS the reason 9. File sent to the Bench -2-2021 Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk.
Date of dispatch of Order.
Draft dictation sheets are No Sr.PS attached