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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 ..... 2014 passed u/s 143(3) r.w.s. 92CA of the Act as per the directions of Dispute Resolution Panel (DRP). The appeal pertains to the AY 2009-10. 3. Briefly the facts are, assessee an Indian company was incorporated in the year 1992 as Oracle Research and Consultancy Pvt. Ltd. It was part of MBL group, which was acquired by NFO group in1997. NFO group, in turn, was acquired by TNS group in the year 2003. TNS group, as claimed, is one of the world's largest and leading custom market research specialists. It provides quality marketing information and innovative market research solutions across the product life cycle, from developing products to building brands and marketing communications. The group provides services across the globe. Assessee, on its part, is engaged in rendering a range of comprehensive market research services to domestic and international clients through various offices in different cities across India. Assessee also provides IT enabled back office data processing services (ITES) through its Offshore Research Service Centre (ORSC) at Hyderabad, which is a 100% EoU registered under Software Technology Park of India (STPI) Scheme. For the assessment year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has used multiple year data and applied inappropriate filters which made the TP analysis unreliable. He observed, as a result of faulty approach uncomparables have been selected as comparables, whereas comparables have been excluded. TPO was also of the view that market research services being part of BPO services (ITES), need not be considered separately. After rejecting the TP report, TPO undertook a search himself by applying some of the filters applied by assessee as well as some additional filters which yielded 12 comparables (including four selected by assessee) with arithmetic mean PLI of 27.42%. After allowance of 0.26% towards working capital adjustment, the adjusted arithmetic mean PLI was worked out to 27.16% and the ALP of international transaction was determined at Rs. 92,83,30,698 as against price charged by assessee of Rs. 78,08,02,088. The resultant shortfall of Rs. 14,75,28,610 was treated as the adjustment u/s 92CA(3). The comparables selected by TPO are as under: 1. Accentia Tech. 2. Acropetal Technologies Ltd. (seg.) 3. Aditya Birla Minacs Worldwide Ltd. 4. Cosmic Global Ltd. 5. Crossdomain 6. Eclerx Services Ltd. 7. Infosys BPO Ltd. 8. Jeevan Scientific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation is not available. 2 Acropetal Technologies Ltd. Functionally different as it is involved in engineering design services and has products also, which makes it functionally not comparable to a BPO service provider. It has a state of the art R&D incubation centre which clearly points out towards high end services of the company. Further 65% of the operating cost of the company is in foreign currency under the head 'onsite development expenses', illustrating that the company providing substantial onsite services and also could have outsourced services. 3 Cosmic Global Ltd Fails Employee filter: The company has outsourced the work and does not provide BPO services by itself. The employee cost is not even 25% (-20%) and outsourcing cost is -58% of operating cost. 4 Eclerx Services Ltd. Functionally different The company is a knowledge solutions provider in the field of data analytics operations management and audit reconciliation. The company has provided detailed write-up on its nature of business which are completely different from the back office services provided by the TNS India or any other back office data processing services 5 Genesys International Corporati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ready reference: "Infosys BPO Ltd. 16. It was the contention of assessee that this BPO is a giant in its area and has brand value of Infosys Technologies limited. Assessee's main contention was that it is not functionally similar and its turnover is much more when compared to that of assessee. It was also contended that the Infosys BPO has done brand building exercise by incurring large amounts of brand building and advertisement expenditure and undertaking brand campaigning outside India. Further, it also has huge asset base and therefore, this company is not functionally comparable to assessee. Assessee relied on the decision of the Hon'ble Delhi High Court in the case of CIT V/s. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Del), wherein it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee. 16.1 Even though we are not in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs. 129.8 crores, which as against turnover of Rs. 1016 crores of the Infosys, ( which is only about 5 times) we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Genesys, it is manifested that both are totally incomparable. 14.3. The TPO on page 48 of his order has examined CBDT Circular SO 890 (E) dated 26.9.2000 which provides a detailed list of products or services that can be covered under the ITES for the purposes of Section 10A and 10B of the Act. In this Circular, Information Technology Enabled Products/Services have been divided into fifteen categories, starting with Bank Office operations, Call centres etc. and ending with Website services. From the very description of such services, it is palpable that even though these fall under the overall ITES category, but some of them are quite different from each other. To cite, service at Sl.No. (vi) of this Circular is 'Geographic Information System services and at Sl. No. (vii) is 'Human Resources Services.' No doubt, all these fifteen categories of products/services have been included under the major head of 'Information Technology Enabled Services' (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. V/s. ACIT (ITA No.7466/Mum/2012 for assessment year 2008-09 dated 7.3.2014) and the principles laid down by the coordinate bench of the Tribunal(Delhi) in the case of M/s. Mercer Consulting (India) Pvt. Ltd., (supra), assessee submits that this company cannot be selected as a comparable. 18.1 The Learned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded. 18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and 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. (4) Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative argument advanced by the ld. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs. 27.76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs. 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs. 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables." In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. (5) Acropetal Technologies Ltd. (Seg.) 20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. 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) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected." Same view has also been expressed by the coordinate bench in case of Excellence Data Research Pvt. Ltd. Vs. ITO in ITA No. 159/hyd/14 dated 31/07/14 and M/s Berkadia Services India Pvt Ltd. Vs. DCIT in ITA No. 1802/Hyd/2013, dated 19/09/14. As the aforesaid decisions of the coordinate bench are in relation to ITES Service Provider and for the same AY i.e. AY2009-10, respectfully following the view expressed by the coordinate bench in the aforesaid decisions, we direct AO/TPO to exclude the aforesaid companies from the list of comparables. This ground is considered to be allowed. 10. In Ground No. 9, tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the export revenue filter of 75% unacceptable. The Tribunal never considered the aspect of acquisition made by Allsec during the year. In the aforesaid view of the matter and considering the fact that the acquisition made by the company during the relevant FY might have had an impact on the financial results, we do not consider it expedient to interfere with the decisions of TPO/DRP. Accordingly, we uphold the rejection of the aforesaid comparable. 15. As far as Cepha Imaging Pvt. Ltd. is concerned, it is seen that in case of Capital IQ Infomration Systems (supra), the coordinate bench after considering the functionality of the company and following the observations made by Delhi Bench of the Tribunal in case of Mercer Consulting Pvt. Ltd. (supra) held the aforesaid company as uncomparable to assessee. As ld. AR has failed to bring any material to contradict the aforesaid finding of the coordinate bench, we are inclined to follow the decision of the coordinate bench in upholding the view of the TPO. Thus, ground no. 9 is dismissed. 16. In Ground No. 4, assessee has challenged the determination of ALP of management fees and licence fee paid to AEs at Nil. 17. During the year unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es need and are desirous of using. He further submitted that these services, knowledge and expertise benefit TNS India by allowing it to operate coherently within the global networks of TNS, thereby enhancing business growth prospects, service quality and opportunities to maximize profitability. Further, it was submitted that in carrying out its business, TNS India receives continuous assistance and support from its AEs. The services are received by TNS India on a regular basis in its business operations through inter alia support in the form of access to database, advice on all aspects of the business operations and development including strategy, knowledge management, marketing, finance, treasury, public relations, HR, IT, legal, taxation, IT infrastructure, training etc. Ld. AR submitted, AEs employ personnel with substantial experience and act as a central unit to provide variety of beneficial services to companies within 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group companies to assessee and assessee also paid various other amounts including royalty. As submitted by assessee, even though some correspondence was placed on record with reference to the advise given to assessee, providing a concrete evidence with reference to the services in the nature of specific activities is difficult, like proving the role of an anesthesian in an operation conducted by a surgeon. There may be an evidence of operation being performed by the Doctor in the form of sutures or scars etc, which can be proved later but the role of an anesthesian before operation and after gaining consciousness is difficult to prove as that is not tangible in nature. Likewise, for the advise given by various group centers to the group companies in day-to-day manner is difficult to place on record by way of concrete evidence but the way business is conducted, one can perceive the same. Assessee has given a detailed 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee / royalty payment was 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 emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, we direct him to allow the claim. 18. However, as seen from the pricing pattern of the agreement, the methodology prescribed is not as fixed percentage of assessee's turnover/ net receipts. The costs are ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd. to be worked out in the group concern or service provider and are allocated to specific group companies. Neither the TPO nor Assessing Officer examined whether the payment of fee paid is according to the agreement or not. What we noticed, as per the invoice placed, is that assessee was given invoices at a fixed amount where as the agreement provides otherwise. There may be adjustments at the end of year based on over all cost incurred by AEs. This requires examination as TPO/AO denied the claim itself. Therefore, in order to verify the pricing methodology as prescribed in the agreement and payment of the amounts, 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 quant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of M/s Kenexa Technology Pvt. Ltd. Vs. DCIT (supra), which are as under: "41. We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. vs. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007. The relevant portion is extracted below: "106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted. 107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantification for risk adjustment. In these circumstances, we cannot direct AO/TPO to allow risk adjustment at a particular percentage. 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-à-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. Moreover, this issue may become academic if ALP computed by TPO after giving effect to our directions on comparables comes within the tolerance band of assessee's margin. In the aforesaid view of the matter, we remit this issue back to the file of AO for considering afresh, if warranted, after giving 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year. 34. In course of assessment proceeding, AO on verification noticed that assessee has claimed expenditure of Rs. 1,29,97,123 as revenue expenditure. AO held that since the software licence fees was for acquiring an asset of enduring nature, the expenditure incurred has to be treated as capital in nature. Accordingly, AO disallowed assessee's claim of expenditure. However, he allowed depreciation @ 25% on such expenditure. DRP also confirmed the view of AO. 35. Ld. AR submitted before us that the computer software used by assessee are in the nature of application software, the details of software used are as under: a. E-Tab - This license is used by the reporting and charting department to write the reports and charts. b. SPSS - SPSS is a computer program used for survey authoring and deployment, text analysis, statistical analysis etc. c. Scripts - 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llow depreciation on the computer software at 60%. This ground is partly allowed. 38. In Ground No. 15, assessee has challenged the disallowance of depreciation on an amount of Rs. 9,12,652 by holding it to be asset not used for the purpose of business. 39. Briefly the facts are, in course of assessment proceeding, AO found that assessee during the relevant previous year has written off an amount of Rs. 9,12,652 as intangible asset (business commercial rights). AO disallowed the write off alleging that assessee failed to submit the agreement and details regarding nature of commercial rights. DRP also upheld the view of AO. 40. Ld. AR submitted before us, Taylor Nelson Sofres Mode Pvt. Ltd. had purchased business commercial rights in AY 2003-04 and had been claiming depreciation on the same @ 25% under intangible assets. In AY 2005-06, 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 tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffective ground raised by the department is as under: "2. Whether on facts and circumstances of the case the DRP is correct in directing the AO to adopt foreign exchange gain/loss as operating income/loss following the decision of ITAT, Hyderabad bench in the case of M/s Foursoft Ltd., as the decision in the case of M/s Foursoft Ltd. has not become final as further appeal preferred against the same has been admitted by the Hon'ble High Court of AP in ITA No. 274 of 2012." 48. While computing operating margin, TPO treated foreign exchange gain of Rs. 5,08,60,846 and miscellaneous operating income of Rs. 10,17,414 as not part of operating income. However, DRP held that foreign exchange gain/loss has to be taken as part of operating income/loss. The observations of DRP are extracted hereunder: "4.4 In the fourth ground, taxpayer raised an objection for the excluding forex gain of Rs. 5,01,50,845 and miscellaneous operating income of Rs. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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