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TMI Blog2015 (12) TMI 903X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld the export filter applied by ld. TPO in earlier part of our order, we reject the assessee’s contention. There is no denying of the fact that Infosys BPO operates on a large scale and caters to wide variety of customers operating in different industries. Ld. counsel has filed before us extracts from the annual reports and white paper issued by Infosys in regard to ‘Process Progression Model ( “PPM”), a holistic model to transform business processes’.In view of above discussion, we direct ld. TPO to exclude Infosys BPO. eClerx Services Limited to be excluded from the list of comparables as this company is functionally different, which is evident from the business profile of eClerix, reproduced earlier from Annual Report. TPO had denied the risk adjustment claimed by assessee on the ground that assessee failed to show that the comparables had actually undertaken suck risk and failed to demonstrate how the same material affected from margins. He pointed out that unless it was shown that how the risk adjustment to fetch the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r adjustment directed by ld. TPO was on account of accrual of interest on receivables, aggregating to ₹ 79,98,190/-. The assessee filed objections before ld. DRP. Ld. DRP issued directions on the basis of which the AO passed the final assessment order and made total TP adjustment of ₹ 2,67,22,563/-. Being aggrieved with the assessment order, the assessee is in appeal before us and has taken following grounds of appeal: 1. The assessment order passed by the Income Tax Officer, Coy. Ward 1(3), New Delhi [Learned Assessing Officer (Ld. AO')] pursuant to directions of the Hon'ble Dispute Resolution Panel (Hon'ble DRP') is bad in law. 2. The Hon'ble DRP erred both on the facts and in law, in cnfirming the addition to the extent of ₹ 26,722,563 to the income of the Appellant by holding that its international transaction pertaining to provision of information technology enabled services do not satisfy the arm's length principle prescribed under the Income Tax Act, 1961 ('the Act'). 3 On facts and in law, the Hon'ble DRP, Ld. AO and the Learned Transfer Pricing Officer-l (5) (hereinafter referred to as 'Ld. TPO') erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in levying interest under section 234B and 234D of the Act. 12 On facts and in law the Ld. AO made computational errors in calculating the tax payable and interest under section 234B and 234D of the Act. 4. Brief facts of the case are that the assessee is an Indian company and subsidiary of Actis LLP.UK. The group was established as a Private Equity Investment Fund. 99.99% shares of company were held by Actis International Ltd. and the balance one share was held by Actis Assets Ltd. The function of the assessee in the TP document had been summarized as a back office service provider to the AE Actis Capital LLP. Services provided were stated to be financial accounting function, fund accounting function, HR support function, IT support function etc. Thus, the functions of the assessee primarily were of providing IT enabled services such as back office operations/ processing centres, bill paying centres, web enabled services, email support, IT help desk etc. to the group entity. 5. The international transactions, entered during the year, were as under: i. Provision of back office support service ₹ 16,38,25,500/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO on various comparables, were as under: S. No. Name of the Company Average (%) Remarks 1. AOK Inhouse BPO Services Ltd. 12.58% Rejected, as not fulfilling the filters 2. Aditya Birla Minacs Worldwide Ltd. 8.06% Rejected, as not fulfilling the filters 3. Cameo Corporate services Ltd. 9.77% Rejected, as not fulfilling the filters 4. Cosmic Global Ltd. 34.14% Accepted as it qualifies all the filters proposed by TPO 5. Delta Services (I) Pvt. Ltd. 6.67% Rejected, as not fulfilling the filters 6. Informed Technologies Ltd. 12.01% The company ahs ITES income less than 75%. Hence rejected 7. Infosys BPO Ltd. 24.29% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35.63 13. Ld. TPO had, accordingly, determined the ALP of provision of back office support service as under: Operating cost 16,39,77,726 Arms Length Margin 35.53% of the OC Arms Length Price (ALP) 22,19,11,057 Price received 18,03,75,500 Shortfall being adjustment u/s 92CA 4,15,35,557 14. As regards the consequent adjustment on account of non-receipt of interest on amount receivable from AE, ld. TPO observed that an amount of ₹ 5,90,80,860/- was due from AE at the end of the financial year. Ld. TPO, after considering the assessee s submissions, observed that the argument that none of the invoices outstanding more than six months, was found contrary to the facts. He observed that from books of account it is evident that every single day of the year there has been some outstanding towards AE. He bench marked the transactions by applying prime lending rate of SBI plus 500 bps and, accordingly, calculated the interest outstanding balance @ 16.75% which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er than the geographical location allocation is of primary importance and TNMM method is less affected by transactional difference at net level. In TNMM method broad comparability of functional profile is to be taken into consideration. He submitted that Rule 10B(2)(d) dealing with the conditions prevailing in the market in which the respective parties to the transaction operate being a relevant condition for deciding the comparability is relevant only in CUP method and not in TNMM method, where margins are considered and not price. He submitted that rejecting companies on the ground that they do not have adequate foreign exchange revenues is not a comparability factor prescribed under the Indian Transfer pricing law and, has thus, no legal basis for removing otherwise good comparables. 21. Ld. DR has filed written submissions, which are placed on record. 22. Ld. DR submitted that as per Rule 10B(2), geographical location ha specifically been included in the Rules and is, thus, of specific consideration. She submitted that if exactly same transaction is not available, then TPO has to adopt some reasonable basis. He submitted that comparables may be functionally same but the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eloped countries. The companies in the developed countries are outsourcing work to India for this reason only. The location costs saving benefits are available to exports of services. The same are not available to the domestic players. In case the filter adopted by the TPO is not taken into account, it will lead to comparison of revenue and corresponding margins earned by entities rendering services within India with the entities rendering services outside India. Since the margins earned by exporting services outside India is bound to be more than the margins earned by rendering services within India, due to the higher price of service in the export sector by using the same low costs, it is clear that non application of this filter will lead not only to inadequate comparison but also an inaccurate. (4) While examining the operational comparability, the operating market i.e. wherein the services are being sold is also important:- While arguing for operational comparability, Ld. Counsel emphasized on the nature of operational! service only and ignored the market in which services are sold. The operating markets should be same or similar in the case of taxpayer and the comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that they have advantage of time zone and higher productivity etc. It appears that the assessee company agreed that one criterion for selection/rejection of the comparables is FAR analysis. The aforesaid companies do not have any export business for the year under consideration whereas the assessee company has full fledged export business. The functions, risks and assets are entirely different. Hence, the aforesaid company cannot be considered as a comparable company for determining the ALP. It is the contention of the learned counsel for the assessee that there is nothing mentioned in the India TPR that comparables may be rejected merely on the ground that it has no foreign exchange revenue. He referred to the meaning of the uncontrolled transaction as given in Rule 10A of the Incometax Rules wherein it states that the transaction between enterprise other than the associate enterprise whether resident or non-resident. In our considered view, the reference to resident and non-resident in Rule 10A of IT Rules, is related to the residential status and not related to the domestic or export. Moreover, the Delhi Bench of the Tribunal in the case of Mentor graphics (supra) he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejal Info Hubs Ltd. enders services in India. This fact alone is sufficient to exclude this comparable. Thus, it is held that the AO/TPO rightly rejected this case as a comparable case. (d) In the case of Mis Indo American Jewellery Ltd. (2010-TII-24-ITAT- Mum- TP) ITA T held that Domestic Company cannot be compared with the taxpayer who is mainly an exporter. (e) In the case of Mis Ranbxy India 299 ITR (AT) 175 (Del) the ITA T held that economic conditions prevailing in the market including geographical locations, size of market, government order in force, etc are required to be considered. (f) In the case of Mis Vedaris Technology, ITA T, Delhi held that domestic company cannot be taken as a comparable when the taxpayer is mainly an exporter. (6) By considering the export earnings criterion, an attempt has been made by TPO to taken into account the factors which are similar to the factors in which the assessee operates. The reliance is again placed on the judgment in the case of Mentor Graphics (Noida) (P) Ltd. vs. Deputy Commissioner of Income Tax, Circle -6(1), New Delhi [2007] 109 ITD 101 (DELHI). Further it was also observed by the Hon'ble Tribunal in the ~ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; (b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction: Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (il) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arkets, 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 accruing adjustments can be made to eliminate the material effects of such differences. 26. All these factors are relevant for all the methods, which have been spelt out in Rule 10B(1). Therefore, the submission of ld. counsel that Rule 10B(2)(d) is relevant only for CUP method cannot be accepted. All these factors have bearing on the net margin to be determined in all methods including TNM method. We are in agreement with the submission of ld. Sr. DR, reproduced earlier, that those geographical markets in which parties entering into transactions operate is an important factor which influence the price of the transaction and that has to be factored into for identification of uncontr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is clearly stated that assessee acquired McCamish, a premier business process solutions provider based in US, which enhanced its capability to deliver end to end business solution for its insurance and financial services clients with a compelling value proposition. Thus, ld. counsel submitted that during the year under consideration there was an extraordinary event of merger and, hence, this could not be taken as a comparable. Further, he referred to the significant Accounting Policies and Notes on Accounts, wherein in the company s over- view, it is stated as under: Infosys BPO Limited ( Infosys BPO or the company ) was incorporated as Progeon Limited on April 3,2002 to provide business process management services to organizations that outsource their business processes. Infosys BPO is a majority owned and controlled subsidiary of Infosys technologies Limited ( Infosys , NASDNM: INFY). The Company helps clients improve their competitive positioning by managing their business processes in addition to providing increased value. The name of the Company was changed from Progeon Limited to Infosys BPO Limited with effect from August 29,2006. 34. Ld. counsel submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s turn over of ₹ 18.04 crores. This huge difference in the turnover itself makes it clear that the margins achieved by Infosys BPO being a service sector company, are much higher than that of assessee. In service sector higher turnover reflects higher margin because it is primarily the customer s satisfaction which is relevant in selecting the service provider even at the payment of higher margins. 40. In Merker equitable service centre India Pvt. Ltd. 133 ITD 543, it was held that Infosys BPO cannot be considered as a comparable to a captive service provider, like assessee. 41. Ld. DR has submitted that Actis is also a brand and, therefore, adjustment should be made for the difference. We are unable to accept this contention particularly because the department has not brought on record any brand value of Actis on record. Moreover, the wide difference in turnover makes it clear that there is wide difference in the brand value of the two companies and, therefore, without quantification of the same, effect on turnover cannot be ascertained. We further find that the Infosys BPO has not been taken as comparable in detailed list annexed to synopsis filed by assessee inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct and services marketing and sales-with a focus on online support to include content development and management, search engine management, web operations, pricing and customer analytics, product database management and catalog audits. The Company is also pursuing a strategy of creating a portfolio of platform attached services, by creating a suite of services that are complementary to industry standard IT platforms. 46. Ld. counsel further submitted that this comparable has to be excluded in view of the decision of Hon ble Delhi High Court in the case of Rampgreen Solution (ITA no. 102/2015), wherein in para 31 it has been held as under: 31. In the present case, the Tribunal noted that Vishal and eClerx were both engaged in rendering ITeS. The Tribunal held that, once a service falls under the category of ITeS, then there is no sub-classification of segment . Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITeS. We find it difficult to accept this view as it is contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITeS enco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Actis Global Services Private Limited Caliber Point Business Solutions Ltd. Cosmic Clobal Ltd. Inhouse Productions Ltd. Cross Domain Solutions Pvt. Ltd. Infosys BPO Ltd. Eclerx Services Pvt. Ltd. Market Risk No Yes Yes Yes Yes Yes Yes Service Liability Risk No Yes Yes Yes Yes Yes Yes Credit Risk No Yes Yes Yes Yes Yes Yes Foreign Exchange Risk No Yes Yes Yes Yes Yes Yes Manpower Risk Limited Yes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the AE of the assessee itself, for whom services were rendered by the assessee. Accordingly, AO issued show cause notice, inter alia, observing, as under: Accordingly, the above deferred payment/ receivable is proposed to be considered as an international transaction requiring determination of ALP. In absence of any suitable CUP data or credit rating of your AE, interest on the outstanding balance at the end of the year is proposed to be benchmarked at the prime lending rate of SBI plus 500 bps. The 500 of basic point is added to take into account various factors including opportunity cost. Accordingly, shortfall on account of non-charging of interest is proposed to be calculated @ 16.75% which comes to 98,96,044/- which is proposed to be adjusted. 54. The assessee s reply has been summarized as under, in which following points were raised: (a) The working capital adjustment would contain the element of interest part of the receivables. (b) Amount, which is more than six months old, should only be considered for accrual of interest. 55. The ld. TPO did not accept both these arguments for the reasons mentioned in his order, for which primarily be observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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