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TMI Blog2015 (3) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... d we are of the opinion that this company is not comparable to assessee s services. We therefore, direct the Assessing Officer/TPO to exclude this company. Cosmic Global Ltd. - Respectfully following the decision of Mercer Consulting (India) (P.) Ltd. [2014 (10) TMI 467 - THE ITAT DELHI] this company cannot be treated as comparable on FAR analysis. Acropetal Technologies Ltd. (Seg.) - As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company. Accentia Technologies Limited. - Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or statistical purposes. Non-consideration of provision for bad and doubtful debts in computation under TNMM for certain comparables - Held that:- Bad debts and provision for bad and doubtful debts are part of the operating expenses and be included for the purpose of computing profit and loss of comparable companies as relying on Kenexa Technologies Pvt. Ltd. Vs. DCIT [2014 (11) TMI 587 - ITAT HYDERABAD] - Decided in favour of assessee Risk adjustment - Held that:- As risk adjustment has to be quantified on certain scientific basis, it cannot be granted in a routine manner by fixing certain percentage on adhoc basis. It is for assessee, to demonstrate risk assumed by each of the company vis- -vis assessee and quantify the allowance to be made in that regard. As assessee has not undertaken any such exercise, at this stage, we cannot direct AO/TPO to allow risk adjustment at a certain percentage on a purely estimate basis. Remit this issue back to the file of AO for considering afresh Nonconsideration of revised computation of income filed by assessee claiming deduction u/s 10A - Held that:- When assessee has filed revised computation along with certificate in Form 56F, AO s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue back to the file of AO for deciding afresh after considering the submissions of assessee and verifying the evidences produced before him - Decided in favour of assessee for statistical purposes. Adoption of foreign exchange gain/loss as operating income/loss - Held that:- Having considered the submissions of the parties and perused the materials on record and reying on case of Foursoft Ltd. [2008 (9) TMI 919 - ITAT HYDERABAD], we do not find any infirmity in the order of DRP holding that foreign exchange gain/loss has to be treated as part of operating income/loss. - Decided against revenue. - ITA No. 604/Hyd/2014 ITA No. 419/Hyd/2014 - - - Dated:- 13-2-2015 - Shri B. Ramakotaiah And Shri Saktijit Dey JJ. For the Appellant : S/Shri Rajan R Vora Pankaj Jain For the Respondent : Smt. G. Aparna Rao ORDER PER SAKTIJIT DEY, J.M.: These cross appeals are against the directions of the Dispute Resolution Panel (DRP) u/s 144C(5) and the assessment order passed u/s 143(3) read with section 144C(13) in consequence thereto. The appeals are pertaining to AY 2009-10. 1. Registry has pointed out delay of eleven days in department s appeal in ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal management allocation fee - ₹ 10,672,185 iv) Payment of trade mark license fee @2% of external sales to TNS Plc., UK - ₹ 13,743,472 v) Payment of business solutions license fee to TNS UK Ltd., UK - ₹ 10,083,229 vi) Reimbursement to AEs - ₹ 50,811,896 vii) Reimbursement by AEs - ₹ 719,226 To benchmark its international transactions, assessee conducted a TP analysis through an external agency wherein assessee was chosen as tested party. As far as provisions for ITES (BPO services) and Market research services are concerned, assessee adopted Transaction Net Margin Method (TNMM) as the most appropriate method with Operating Profit to Operating Cost as the Profit Level Indicator (PLI). In ITES segment, after searching databases eight companies with weighed average OP to OC of 19.56% were selected as comparables. As assessee s OP to OC was 42.69%, price charged by assessee was found to be within arm s length. In so far as market research services is concerned, by applying TNMM, operating profit to operating cost of uncontrolled transactions was found to be (-)9.82% as against operating margin of 8.23% shown by assessee on transactions with A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate issues. As far as transfer pricing issues are concerned, DRP more or less rejected all objections of assessee, except the issue as to whether foreign exchange gain and miscellaneous operating income is to be treated as part of operating income. DRP following some decisions of ITAT held that foreign exchange gain/loss is to be treated as part of operating income/loss. DRP also dealt with assessee s objections on corporate issues. In terms with the directions of DRP, AO passed the impugned assessment order on 30/01/2014. 6. Being aggrieved, assessee is before us raising in total 18 grounds. Ground Nos. 1 to 12 are on transfer pricing issues whereas ground Nos. 13 to 18 are on corporate tax issues. As far as transfer pricing issues are concerned, ld. AR confined his argument to ground Nos. 4, 8, 9, 10 and 11,hence, the other grounds relating to transfer pricing issues are dismissed as not pressed. As the major transfer pricing adjustment is on the issue of selection/rejection of comparables, we propose to deal these issues at the outset. In the modified ground No. 8, assessee has objected to selection of the following six companies out of the 12 companies selected by TPO and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Googl Earth that provide geo data. In fact the company is the exclusive reseller for Naveteq data for enterprise space in India. It has a strong focus on R D and has been undertaking pioneering research in the area of Image Intelligence and Recognition, Mobile Mapping as well as Light detection and Ranging (LIDAR) as mentioned in the Director s Report. Super Normal Growth and profit It reported a substantial 77% increase in sales and 107% increase in net profits (Director s report FY 2008-09). The exclusivity of the company s area of operation can be demonstrated from the year on year growth achieved by the company 6 Infosys BPO Ltd. High Brand Value Infosys is a Tier-I IT company and its brand intangibles enjoy a premium pricing. . Ld. AR submitted, the coordinate benches of this Tribunal have held the aforesaid companies not to be comparable with ITES companies in the following Rulings: 1. M/s Berkadia Services India Pvt. Ltd. ITA No. 1802/Hyd/13. 2. Capital IQ Information systems (India) Pvt. Ltd. ITA No. 124/Hyd/2014 3. Excellence Data Researc ITA No. 159/Hyd/2014. 8. The ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, just because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company. (2) Genesys International Ltd. 17. It was the contention that this company functions in two horizontals, and is having super profits. It was further submitted that this company is not only in software development but also in Geospatial Services, which are highly technical. It also involves in consulting activity. It was the contention that this company was analysed by the coordinate Bench of the Tribunal at Delhi in the case of M/s. Mercer Consulting (India) Ltd. V/s DCIT (vide order dated 6th June, 2014 in ITA No.966/Del/2014), wherein this company was excluded in that case. Learned counsel for assessee relied upon the findings of the Tribunal vide paras 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading Geographical Information Systems Services , whereas those rendered by the assessee fall partly under clause (vii) with the heading Human Resources Services and partly under clause (xi) with the heading Payroll . On juxtaposition examination of these two sets of services, we find that there is a vast difference which make one quite distinct from the other. In view of such functional incomparability between assessee and Genesys, we hold that this company cannot be treated as comparable. We, therefore, direct to exclude this case from the list of comparables. 17.1. On careful consideration of the matter, respectfully following the above decision of the coordinate Bench, we are also of the opinion that there is vast difference between the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nslation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- 13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at ₹ 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at ₹ 9.90 lacs, Translation charges at ₹ 6.99 crore and Accounts BPO at ₹ 27.76 lac. The ld. AR has made out a case that outsourcing activity carrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper. 20.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company. (6) Acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions to Allsec Technologies Ltd. and Cepha Imaging Pvt. Ltd. Hence, we will confine our finding to these two companies. 11. As far as Allsec Technologies Ltd. is concerned, ld. AR submitted that TPO rejected this company on the ground that it has operating loss and has made significant acquisition and is also undergoing peculiar economic circumstances. Ld. AR submitted that in the annual report nowhere it has been mentioned that losses were due to acquisition made by company. On the other hand, annual report reveals that operating losses were significantly reduced in the year. Further, ld. AR submitted that in case of Capital IQ Information Systems (India) Pvt. Ltd. Vs. Addl. CIT (supra), this company has been held to be a comparable to a BPO service provider. 12. On the other hand, ld. DR submitted that as the company has made acquisitions during the relevant previous year, it cannot be treated as a comparable. 13. As far as Cepha Imaging Pvt. Ltd. is concerned, ld. AR submitted that as the company satisfies all the filters applied by TPO, he should not have rejected the company. The DR, on the other hand supported the reasoning of the TPO. 14. We have considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing services: S. No. Nature of service Description of services 1 New business targeting assistance Advice and assistance on targeting potential new MNC clients, provision of training in techniques for new business development etc. 2 Strategic planning assistance Provision of background research materials into potential clients, particular industry and markets etc. 3 Media support services Coordination of media requirements, development and provision of planning and research tools etc. 4 Public relations services. Advice, assist and training in managing relationships with local media, publication and distribution of internal newsletter for employees, promotion of the group name with potential clients, employees etc 5 Financial administration services Advice on general accounting methods, preparing and monitoring periodic profitability analysis, budgeting, financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the group. Ld. AR submitted that as the management fees and licence fee payments were between the parties, TPO was in correct in determining the ALP at Nil by applying the benefit test. Ld. AR submitted that in assessee s case for AY 2003-04 to 2005-06, the coordinate bench of the Tribunal in ITA Nos. 944/hyd/2007, 194/Hyd/08 and 793/Hyd/09 dated 22/01/14 has held that TPO cannot determine ALP of an international transaction at Nil. 19. Ld. DR, on the other hand, relied on the observations made by TPO/DRP. 20. We have heard the parties and perused the materials on record. There is no dispute to the fact that assessee has entered into agreement with AEs for payment of management fee and licence fee towards provision for certain services. It is also a fact on record that fees were paid in pursuance to such agreement. It is evident from the order of TPO that he adopted CUP method for determining the ALP of management fees and licence fees. As per Rule 10B(1)(a), for determining ALP under CUP method TPO has to bring comparable to benchmark price of the assessee. However, as can be seen from the record, TPO has not brought any comparable company to justify the determination o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed write-up as well as the services provided and benefit obtained which were not contradicted. The Assessing Officer did not believe the same in the absence of concrete evidence. Unless the Assessing Officer steps into assessee s business premises and observes the role of these companies/ assessee s business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations. What sort of evidence satisfies the AO is also not specified. Assessee has already placed lot of evidence in support of claims. Therefore, on that count, we are not in agreement with the Assessing Officer and TPO that services were not rendered by the group companies to assessee. 16.1. Even otherwise, the role of Transfer pricing Officer is to determine the arms length price of a transaction. He cannot reject the entire payment under the provisions of sec. 92CA as held by the Hon ble Delhi High Court in the case of EKL Appliances ltd (supra) wherein the Hon ble Delhi High Court, on similar facts where the TPO also determined the ALP at Nil, has held as under : 21. The position emerging from the above decisions is that it is not necessary for assessee to show that any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not warranted. Assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee l royalty payment while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter is restored to the file of the Assessing Officer to examine this aspect and allow the amounts, if the payment is according to pricing methodology agreed between the parties. Therefore, while allowing the ground on the question of claim of management fees as such, the quantification thereof is restored to the Assessing Officer to examine with reference to the agreement between the parties. Accordingly, grounds 2 to 5 are considered allowed for statistical purposes. In view of the aforesaid order of the coordinate bench, though, in principle we agree with assessee that determination of ALP at Nil and denial of management fee is not correct, however, following the order of the coordinate bench we remit the issue back to the file of the AO/TPO to determine the quantum of management fee and licence fee with reference to agreement between the parties. This ground is allowed for statistical purposes. 21. In Ground No. 10, assessee has raised the issue of nonconsideration of provision for bad and doubtful debts in computation under TNMM for certain comparables. 22. The ld. AR submitted before us while computing operating profit margin of the comparable companies under TN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted. 107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is equally applicable to balances written back more particularly when ld. CIT(A) has not given any separate finding and the Transfer Pricing Officer has said nothing specifically on this item. The balances written back should also be treated as part of operating profit. We direct accordingly. 42. We are of the view that in the instant case bad debts and provision for bad and doubtful debts are part of the operating expenses and we direct the TPO to re-compute the margins of 24 comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies. Respectfully following the decision of the coordinate bench, we remit this issue to the file of AO/TPO for considering afresh in the light of the said decision of the coordinate bench. 25. The next issue as raised in ground No. 11 is wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable opportunity of being heard to assessee. AO/TPO is directed to determine ALP of the international transaction in terms with our direction, and adjustment on account of shoftfall, if any, may be considered for addition. Now we deal with the corporate tax issues: 29. In Ground No. 13, assessee has raised the issue of nonconsideration of revised computation of income filed by assessee claiming deduction u/s 10A. 30. In the return of income filed by assessee, it had claimed deduction u/s 10A for an amount of ₹ 19,08,89,677. However, subsequently, it was noted that deduction claimed u/s 10A was wrong as it was on the basis of profit before taxes in stead of taxable profit. Accordingly, assessee revised its claim u/s 10A of the Act to ₹ 20,66,74,305 and requested AO to accept the same. A revised Form 56F was also submitted before AO. The AO, however, allowed the deduction u/s 10A as per the original return by observing that revised claim cannot be accepted. DRP also upheld such view. 31. Ld. AR submitted that AO and DRP are not correct in ignoring the revised claim of assessee without verifying its correctness. In support of such contention, ld. AR rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts - This license is used in the scripting department to write the scripts. 36. It was submitted that these application software generally have a useful life of one year. As there is no enduring benefit, expenditure on such computer software should be considered as revenue in nature. In support of such contention, ld. AR relied on the decision of Amway India Enterprises Vs. DCIT, 111 ITD 112 and a number of other decisions. Alternatively, it was submitted by ld. AR that as computer software is also eligible for depreciation @ 60% along with computer, AO was not justified in restricting depreciation to 25%. DRP, though, upheld the view of AO that expenditure incurred towards software licence is a capital expenditure, but, directed AO to allow depreciation at appropriate rate. However, AO while finalising assessment allowed depreciation @ 25%. Ld. DR, on the other hand, supported the reasoning of AO. 37. We have considered the submissions of the parties and perused the materials on record as well as the decisions relied upon by ld. AR. As far as assessee s claim that the expenditure claimed has to be treated as revenue expenditure, we are of the view that as per the ITAT Specia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taylor Merged with TNS India and accordingly business commercial right was transferred and incorporated in the balance sheet of TNS India. Since then, TNS India had been claiming depreciation on the same @ 25%. It was submitted, in AY 2009-10 as there was no additional benefit remaining to be availed from the use of these rights, a decision was taken by the management of the company to write off the entire balance in the books of account. Accordingly, the WDV of business commercial rights as per the income tax depreciation Schedule of ₹ 9,12,652 was written off completely. However, AO has disallowed the entire claim even without allowing depreciation @ 25% by holding that assets are not used. Ld. AR submitted that even if assets are not in use but are existing in the block of assets, depreciation has to be allowed. Ld. DR, on the other hand, relied upon the assessment order. 41. We have considered the submissions of the parties and perused the materials on record. While we uphold the view of AO that the amount cannot be written off till it exists in the block of assets, but at the same time, we are of the view that if depreciation is allowed in the preceding years on such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.4 In the fourth ground, taxpayer raised an objection for the excluding forex gain of ₹ 5,01,50,845 and miscellaneous operating income of ₹ 10,17,414 while computing the operating margin of the assessee and determining TP adjustment. It was argued by the assessee that the exchange gain/loss arising in the normal course of business should be considered in computing the net margins. The issue is no longer res integra and has been upheld in a plethora of TP rulings. The TPO in his order at page 56 at para 26.2 stated that extraordinary expenses or income which do not recur every year like donations, preliminary expenses written off, public issue expenses written off are not considered as operating expenses as the comparison of the profits should be at the same level for the comparable and that of the taxpayer. Further, foreign exchange gain/loss has been taken as operating income/loss following the decision of Hon. ITAT Bangalore in the case of Saplaps Ltd. Trilogy Ebusiness Software India P. Ltd. decision of Hon . ITAT Hyderabad in the case of Foursoft Ltd. In view of the above, the ground of the assessee succeeds. 49. Having considered the submissions of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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