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TMI Blog2018 (4) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... ,020/-. The assessee-company also reported the following international transactions with its Associated Enterprises (AE) in 93CE report: Amount Software Development, Software Solutions, Back office Operations & IT Consulting 39,18,46,257/- Reimbursement of Expenses 5,13,14,609/- 4. The assessee-company sought to justify the consideration received for the international transactions entered with its AE to be at arm's length price [ALP]. The assessee-company had submitted transfer pricing study report adopting TNMM as the most appropriate method for purposes of bench marking the international transactions. The assessee-company claimed that the same was comparable with other comparables. The international transactions have been classified into two segments in the TP study report .i.e. software segment and ITES segment. The profit margin of the assessee-company in respect of software development segment is 17.45% and the same was found to be at arm's length by the TPO. Therefore, we are not concerned with the software segment. 5. In respect of ITES segment, profit margin of the assessee-company was computed at 15.19% and the same was claimed to be at arm's length as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnologies India Ltd. 1,96,36,431 1,82,45,770 6.08 4 Infosys B P 0 Ltd. 1316,75,11,974 962,91,06,964 36.30 5 Jindal Intellicom Ltd. 30,27,51,875 30,29,02,990 -0.05 6 Microgenetic Systems Ltd. 1,29,93,217 1,08,63,390 19.61 7 TCSE-Serve Ltd. 15,78,44,000 9,64,28,000 63.69 8 B N R Udyog Ltd.(Seg)(Medical Transcription) 1,47,04,000 97,87,000 50.61 9 Excel Infoways Ltd.(Seg)(IT/BVPO) 790,96,95,000 559,06,04,000 29.79 10 e4e Healthcare Services Pvt Limited 89,50,04,209 74,59,23,078 19.85 Average PLI 28.11% 7.2 The TPO computed average profit margin of the said comparable in respect of ITES segment at 28.11% after giving working capital adjustment of 1.10%, adjusted arithmetical mean of comparable was determined at 27.01%. On the said basis, the TPO computed TP adjustment as follows; Arm's Length Mean Margin on cost 28.11% Less: Working Capital Adjustment 1.10% (As per Annex. F) Adjusted margin 27.01% Operating Cost 26,38,56,713 Arm's Length Price(ALP) 33,51,24,411 127.01% of Operating Cost Price Received 30,39,30,768 Shortfall being adjustment u/s. 92CA: 3,11,93,643 5% of price received 1,51,96,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('the Rules'), and conducting a fresh economic analysis for the determination of the ALP of the Appellant's international transaction pertaining to provision of IT enabled services by the Appellant and holding that the said international transaction is not at an arm's length without sharing the detailed accept reject matrix for selection or rejection of companies evaluated by him. 5. That on the facts of the case and in law, the learned TPO / Hon'ble DRP has erred in rejecting the Appellant's claim to use multiple year data for computing the arm's length price and. instead, has adhered to the use of single year updated data to conclude the ALP of the international transaction which was not available to the Appellant at the time of undertaking transfer pricing study required to be maintained under Section 92D of the Act. 6. That on fact of the case and in law, the learned TPO/ Hon'ble DRP has erred in application of inappropriate filters based on low turnover, different financial year end, service income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, being a statutory allowance under section 32 of the Act, cannot be disallowed under section 40(a)(ia) of the Act, and, in ignoring the judicial precedents relied upon by the Appellant in this regard. 13.1.1 That, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP have erred in not following the binding ruling of the jurisdictional Bangalore bench of the Tribunal in the case of Kawasaki Microelectronics vs. DDIT (155 ITD 402) [Jurisdictional Bangalore ITAT] (2015). 13.1.2 That, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP, while placing reliance on the decision of the Mumbai ITAT in the case of M/s V Kay Translines (P) Ltd vs ITO (2011-TOIL-318-ITAT-Mumbai), have ignored the fact that the Mumbai ITAT itself in a subsequent decision in the case of Sonic Biochem Extractions (P.) Ltd. (59 SOT 4)[2013] has held that section 40(a)(ia) disallowance is only with reference to the claim made in the profit and loss account towards revenue expenditure. 13.2 That, without prejudice to ground 13.1, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls in public domain, this company is found to be not comparable and should be excluded from the final set of comparable companies." 19. "The learned AO / TPO and DRP erred in rejecting R Systems International Limited and Caliber Point Business Solutions Limited as comparable companies." 20. The Hon'ble DRP erred in rejecting Informed Technologies Limited as comparable company." 10. Ground Nos.2 to 12 relates to the criteria to be adopted for selection of comparables. Vide these grounds of appeal, the assesseecompany is seeking exclusion of the following comparables. a) Infosys BPO Limited b) TCS e-Serve Limited c) Universal Print Systems Limited d) BNR Udyog Limited (Medical Transcription segment) e) Excel Infoways Limited and inclusion of the following comparables. i) R Systems International Limited ii) Caliber Point Business Solutions Limited iii) Informed Technologies Limited 11. Now we shall deal with each of the comparables. A. Infosys BPO Ltd.: i. This company was selected by the TPO. In pursuance to the show cause notice issued by the TPO for inclusion of this company in the list of comparables, the assessee company have vehemently contested on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nication media and entertainment, manufacturing emerging market solutions, insurance and healthcare, retail, energy, utilities and resource, automotive and aerospace, transportation and services. b) Operates as full-fledged risk bearing entrepreneur whereas Appellant is risk insulated c) Big Brand Value - The Company's spend on brand building is almost equivalent to 22% of the Appellant's income from rendering of IT enabled services and therefore is not comparable to the Appellant. d) Exceptional year operation - Acquired 100 percent voting interest in Portland Group Pty. Limited. Acquisition of Portland Group Pty. e) Significantly Large scale of operations - INR 1312.41 crores turnover vis-à-vis INR 30.39 crores of the Appellant in ITeS segment (43 times of Appellant's revenue). The TPO should apply a corresponding upper turnover filter. and also placed reliance on the decisions of the co-ordinate bench of this Tribunal in the following cases: a) M/s. Global e-Business Operations (P.) Ltd. Vs. DCIT in IT(TP)A Nos. 160 & 289/Bang/2014 b) Tesco Hindustan Service Centre (P.) Ltd. in IT(TP)A Nos. 191 & 569/Bang/2015 c) Baxter India (P.) Ltd. Vs. ACIT in ITA No. 6158/Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in case of Rampgreen Solutions (P.) Ltd. Vs. CIT as reported in 377 ITR 533 (Delhi) explained the distinction between business process outsourcing and knowledge process outsourcings as under: "34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlanc e is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by holding as under. "The Annual report of the company is available. The company is mainly engaged in providing BPO services in BFSI domain. Being functionally comparable, it is being considered." The findings of the TPO were confirmed by the Hon'ble DRP. ii) Being aggrieved, the assessee-company is in appeal before us. It was contended that this company cannot be compared with that of the assessee-company on the grounds that : a) Functionally dissimilar - core business processing services, analytics & insights (KPO) and support services for both data and voice processes. No segmental information regarding BPO services. b) Further, engaged in provision of technology solution, c) Presence of valuable intangibles d) Part of the Tata group hence owns significant brand value that contributes to the economic profitability. e) Insufficient segmental information - earns revenue through two services transaction processing and technical services, no segmental available f) High turnover - INR 1578.44 crores vis-à-vis INR 30.39 crores of the Appellant in ITeS segment turnover (57 times of Appellant's revenue). The TPO should apply a corresponding upper turnover filter in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objection on Functional Comparability: The functions of the comparable are similar in the sense that the Pre-Press BPO unit provides back office support services. Counter to the objection on High Margins: Reliance is placed on the decisions of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors and the Delhi Tribunal in Nokia India Pvt Ltd (ITA No. 242/D/2010). Counter to the objection on Employee Cost Filter: The company operates in four major segments viz., Repro, Label Printing, Offset Printing and Pre-press BPO and for our study, only the Pre-press BPO segment has been considered. Therefore, filters are to be applied only on the figures of this segment. The company was specifically asked to furnish the details of employee cost u/s 133(6) of the Act. Vide its letter dated 18/12/2015, the company has furnished P&L a/c of Pre press BPO segment, from which it is seen that the employee cost relating to Pre-Press BPO segment is Rs. 268.76(Lacs). The employee cost of Rs. 268.76(Lacs) on a turnover of Rs. 611.96 (Lakhs) works out to 44%. Therefore, this comparable clears the employee cost filter. The response received from the company u/s 133(6) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted by the assessee-company before TPO for the following reasons: "XL Health is engaged in providing the 'Manual claim processing services' to its foreign A.E. Here it is important to mention that the XLHealth Corp. group is, inter alia, engaged in health related insurance business. So the services provided by the assessee under this segment are mainly in the nature of processing on manual basis, the insurance claims lodged by its policyholders. Whereas the Business nature of the Comparable Company BNR Udyog is Medical Transcription services, which is totally dissimilar to that of the Assessee. As XLHealth is engaged in rendering the Medicare Support, Insurance Claims Processing and Data Operations, we find no logical comparison of BNR Udyog with XLHealth." ii) The above objections were rejected by the TPO by holding that medical transcriptions also fall within the ITES which are similar to that of the assessee-company. Even before the DRP it was contested that companies had high margin of 50.61% and also it is contested that it fails the filter of 75% of export earnings applied by the TPO as the earnings from the export earnings in these companies is only 42.91% and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before us that the inclusion of this company in the list of comparables was contested before the TPO. A mere look at the explanation filed by the assessee-company pursuant to the show cause notice issued by the TPO, it is clear that this company was not contested before the TPO. Even before the Hon'ble DRP, the objections were filed on the ground that this company does not pass through the filter of export earnings of more than 75% of the earnings and also the employee cost filter of 25%. These objections were over ruled by Hon'ble DRP. The objections of the assessee-company are as under. "7.13 In relation to objection regarding treating Excel Infoways Limited as a comparable, the assessee has submitted that the company fails export revenue filter and employee cost filter as applied by TPO. The submissions of the assessee have duly been considered. In relation to this comparable, no objection, whatsoever was raised by the assessee before TPO. In this case the TPO has taken segmental data for the purposes of calculation of the margin. Since in the segment related to ITES of this company the entire revenue is from the exports, so the company passes the export revenue filter. So th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies having financial year from April to March - Inappropriateness of different accounting year ending filter - Financials cover a 12-month period (like the Assessee), thereby establishing comparability - In light of Hon'ble ITAT judgment in case of Mercer Consulting (India) Private Limited Vs. DCIT (ITA 966/Del/2014), the operating margin (considering the TPO's position regarding operating and non-operating items) pertaining to IT enabled service segment for year ending 31 March 2011 is submitted by the Assessee. i.e., 0.32% - The learned TPO has not cited any instances of functional dissimilarity of R Systems vis-a-vis the Assessee and accordingly, it can be safely assumed that learned TPO does not have any reservations in this regard. ii) The Hon'ble DRP also confirmed the TPO's finding by upholding the appropriate application of the filter of same financial year ending. iii) Being aggrieved, the appellant is in appeal before us. It is contended that there is no functional dissimilarity between this company and the assessee-company and use of contemporary data does not necessarily mean selection of companies having financial year from April to March and relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raft order, notwithstanding that such matter was raised or not by the eligible assessee. Further, from the annual report of the company it is observed that the company is having substantial 'other income', which is about 48% of the total revenue, however, segmental details are not available and as such direct and indirect expenses relating to this 'other income' cannot be segregated. Although a part of such income under head 'other non-operating income' is shown to be net of expenses directly attributable to such income, however details of indirect expenses relating to earning of this income as well as direct / indirect expenses for earning the remaining part of 'other income' is not available. While working out the margins of this company the TPO has taken the revenue from operations (ITES) but while taking the expenses, entire expenses debited to the profit and loss account (other than interest and finance charges) have been considered as relating to ITES segment. This has resulted in distorted margins of this company in the ITES segment. Further page 19 of the annual report of this company reads as follows. (iii) In respect of loans, either granted by the Company, secured or un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision made in 2005-2006. (emphasis supplied) Considering the facts that segmental data is not available. The action of the management which is prejudicial to the interest of the company and non-existence of internal audit, this company selected by the TPO is directed to be excluded from the list of comparables." The ld. Counsel has not confronted the DRP order. Therefore we uphold the exclusion of this company from the list of comparables. 13. The other grounds of appeal relates to disallowance of depreciation under software on the ground that the TDS was not deducted at source. This issue was dealt by the coordinate bench in the case of M/s. Vogue Vestures Pvt. Ltd. Vs. DCIT in ITA No. 1199/Bang/2016 dated 26.12.2017 wherein it was held as under. "7. We heard rival submissions and perused the material on record. The issue in present appeal is whether the provisions of section 40(a)(ia) are applicable to the purchase of capital assets. Undisputed facts of the case are that the assessee has purchased software which is capitalized in the books of account and claimed depreciation thereon. The Assessing Officer denied depreciation holding that the assessee had failed to ded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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