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TMI Blog2016 (9) TMI 1392X X X X Extracts X X X X X X X X Extracts X X X X ..... / TPO erred on facts and in law in making an addition of Rs. 3,69,72,323 allegedly on account of difference in the arm's length price of the 'international transactions' of BPO / ITES Services rendered to the associated enterprise on the basis of the order passed under section 92CA(3) of the Act by the TPO. 3. That on facts and circumstances of the case and in law, the DRP/TPO erred in not holding that since the associated enterprise ("the AE") has incurred a loss, in relation to ITES services rendered by the appellant to the AE, which, in turn, were rendered by the AE to ultimate third party customer(s), no Transfer Pricing adjustment was warranted. 4. That on facts and circumstances of the case and in law, the DRP/TPO erred in not holding that the Transfer Pricing adjustment, at best, could not exceed the total profit earned by the group, as the same would result in taxation of notional income. 5. That the DRP/TPO erred on facts and in law in not appreciating that the appellant is engaged in the business of rendering low end data processing services resulting in low combined profitability and, therefore, there could not be an allegation as to transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 234D of the Act. 15. That the assessing officer erred on facts and in law in initiating penalty proceedings under Section 271(1)(c) of the Act. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing." 3. Ground Nos. 1 & 2 are general in nature, Ground No. 15 is prematurely raised, so these grounds do not require any comment on our part. Ground Nos. 6 to 9, 12 & 13 were not pressed so these are dismissed as not pressed. As regards to Ground Nos. 3, 4, & 5, the ld. Counsel for the assessee stated that these are academic in nature, therefore, do not require any comments on our part. 4. Vide Ground Nos. 10 & 11, the grievance of the assessee relates to the consideration of foreign exchange/loss as non-operating nature and working out a profit margin of the comparable M/s Allsec Technologies Ltd. at -2% as against actual Operating Profit to Operating Cost (OP/OC) ratio at -15.78% submitted by the assessee and consideration of Crossdomain Solutions Pvt. Ltd. as comparable in the final set of comparables by the TPO/DRP while working out operating profit to operating cost ratio (OP/OC) when the complete fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies and to include Allsec Technologies in the final set of comparables. However, the TPO while giving effect to the directions of the DRP, failed to include Allsec Technologies Ltd. in the final set of comparable and by considering the another 4 comparables, he worked out an average operating profit to operating cost ratio at 21.11% as per following details: S. No. Name of the company OP/OC (%) 1. Aditya Birla Minacs Worldwide Ltd. 11.95 2. Crossdomain Solutions Pvt. Ltd. 25.63 3. Igate Global 22.58 4. Infosys BPO Ltd. 24.28 Arithmetic Mean 21.11 7. Accordingly, the TPO worked out an adjustment of Rs. 3,69,72,323/-. Thereafter, the AO passed the assessment order dated 03.12.2013 by making the addition of Rs. 3,69,72,323/- and assessed the income at Rs. 5,11,78,590/-. 8. Now the assessee is in appeal and moved an application under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 for admitting the additional evidence in the form of annual accounts of associated enterprises (AE). The assessee submitted that the TPO rejected those comparables selected by the assessee for which data pertaining to financial year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Appellate Tribunal Rules, 1963 has been moved. Since, the informations now provided by the assessee are available at public domain and are very much relevant to decide the present controversy. Therefore, the additional evidence now furnished by the assessee are admitted. However, since these documents were not available to the TPO/AO, therefore, this issue is set aside to the file of the TPO/AO to be decided afresh after taking into consideration the addition evidences now furnished by the assessee. In the present case, the assessee claimed that the Crossdomain Solutions Pvt. Ltd. is a KPO while the assessee is BPO. Therefore, this comparable considered by the TPO should be excluded while working out the average operating profit to operating cost ratio of the comparables, this fact also needs verification at the level of the TPO/AO and if this fact is found to be true than Crossdomain Solutions Pvt. Ltd. shall be excluded from the list of the comparables on the basis of functional dissimilarity. We, therefore, by keeping in view the relevant facts of the present case as discussed hereinabove, set aside this case back to the file of AP/TPO for fresh adjudication. 12. As re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter of related party transactions applied by the TPO. 2.6 That the DRP/TPO erred on facts and in law in considering TCS E-Serve Ltd. in the final set of comparable companies without appreciating that the financial results of the company cannot be considered on account of (i) provision for errors amounting to Rs. 4,28,54 thousands made in the accounts and (ii) change in the method of revenue recognition. 2.7 That while undertaking benchmarking analysis of the transaction undertaken by the appellant, a captive service provider, the DRP/TPO erred on facts and in law in applying inconsistent approach in rejecting loss making companies and considering following companies earning super normal profit, in the final set of comparable companies: Name of the company OP/TC (%) TCS E-Serve Ltd. 53.80% TCS E-Serve International Ltd 63.38% 2.8 That the DRP/TPO erred on facts and in law in considering following companies in the final set of comparable companies without appreciating that companies with such high turnover does not satisfy the test of comparability laid down under Rule 10B(2) of the Income Tax Rules, 1962, for being operating in different market conditions an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the Transfer Pricing Documentation and worked out weighted average operating profit margin (OP/OC) at 7.98%. During the course of assessment proceedings, the assessee submitted the updated margins of the comparable companies and excluded 2 comparables, namely, Eclerx Services Ltd. and TCS E-Serve International Ltd., the average operating profit margin was worked out at 4.52%. Since operating profit margin of the assessee was at 8%, therefore, the international transaction of provisions of BPO services was claimed to be entered at arm's length price. The TPO, however, worked out the average operating profit to cost ratio at 24.78% by taking into consideration the following comparables: S. No. Company Name OP/OC (%) 1. Cosmic Global Ltd. 18.28% 2. Infosys BPO Ltd. 31.46% 3. Jindal Intellicom Ltd. 13.62% 4. Omega Healthcare 15.31% 5. TCS E-Serve International Ltd. 53.80% 6. TCS E-Serve Ltd. 63.38% 7. Interglobe Technologies Pvt. Ltd.(seg) 6.21% 8. Microland Ltd. (ITES Segment) -3.79% Average 24.78% 17. The TPO proposed an adjustment of Rs. 4,20,27,410/- on account of difference in the price charged for in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival submissions the ld. DR supported the order of the authorities below. 23. We have considered the submissions of both the parties and carefully gone through the material available on the record. In our opinion, the inclusion of M/s Omega Healthcare Ltd. as comparable was not justified when the profit and loss account of the said company for the financial year 2009-10 was not available in public domain and since the order of the DRP is a non-speaking order relating to this comparable because it has only been mentioned in the order of the DRP that this company passed the entire quantitative filter applied by the TPO but the said order is silent about the financial datas. At the same time, it is not clear as to whether the financial data in respect of the said company were available to the TPO. We, therefore, set aside this issue back to the file of the TPO/AO to be decided afresh by taking into consideration the financial datas of the said company relating to the year under consideration. 24. As regards to the TCS E-Serve Ltd. and TCS E-Serve International Ltd., the ld. Counsel for the assessee submitted that these companies were not to be included in the list of the comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh-end integrated services in improving the competitive position of their clients and manage their business process and providing value added services to them. Further, the Infosys also carrying huge brand value and therefore this comparable should not be taken. b. Ld DR Relied on the orders of lower authorities and stated that all the reasons have been considered by the TPO and DRP for inclusion of this comparable. c. We have considered the rival contention regarding exclusion of Infosys BPO Ltd. It is engaged in high and integrated services and therefore it is functionally dissimilar. The Infosys brand is indisputably is a huge brand and definitely, result of that brand goes to this comparable. Therefore, the brand of Infosys definitely results in opening higher profits to this company. In view of the following decisions, the same is required to be excluded and hence it is ordered accordingly. 23. TCS E Serve International Ltd, a. This comparable was taken by TPO where the margin is 54.02%. The TPO has taken this comparable considered this a company in IPS industry and considered it as a singled segment. The TPO was also of the view that there are no exceptional circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets in form of software licenses and it makes a payment for Tata Brand and therefore it gets the benefit use brand value of Tata. b. Ld. DR relied on the orders of lower authorities and submitted that all the above reasons for selection of this comparable has been considered by the TPO. c. We have also considered the rival contention for exclusion of TCS e-service Ltd. It is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and use of 'Tata' Brand, which has definitely benefited this comparable, it is directed to be excluded." 27. So, respectfully following the aforesaid referred to order of the Co-ordinate Bench, we direct the AO/TPO to exclude the said companies i.e. M/s Infosys BPO, M/s TCS E-Serve International Ltd. and M/s TCS E-Serve Ltd. from the list of the comparables while working out the operating profit/operating cost ratio. 28. It is also noticed that the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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