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TMI Blog2018 (4) TMI 705X X X X Extracts X X X X X X X X Extracts X X X X ..... aid claim of assessee. The grounds of appeal No.1 and 2 raised by the assessee are allowed. Ground raised by the assessee on without prejudice basis in allowing the said expenditure as deductible under section 37(1) of the Act is rejected. Transfer pricing adjustment - Held that:- The assessee was offering skills and rule based services i.e. transaction processing, finance & accounting, HR processing, etc; technology based services e.g. Technical help desk solutions and knowledge based solutions such as Sarbanes Oxley solutions, data analytics, etc. The assessee was offering enterprise and extensive solutions in the core business area of knowledge based, skill based and technology based services, thus companies functionally dissimilar with that of assessee need to be deselected from final list. - ITA No.246/PUN/2013, ITA No.459/PUN/2014 And ITA No.525/PUN/2014 - - - Dated:- 9-4-2018 - MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM For The Assessee : Shri Kishore Phadke For The Revenue : Shri Rajeev Kumar, CIT ORDER PER SUSHMA CHOWLA, JM: Out of this bunch of three appeals, appeal filed by the assessee is against order of ACIT, Circle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital adjustment to the appellant. 7. The AO, TPO DRP erred in law and on facts in not granting benefit of proviso to section 92C(2) of the ITA, 1961 though specifically requested during the course of hearing. 8. The appellant craves leaves to add, modify, alter, amend, or withdraw all or any of the Ground of appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 4. Further, the assessee has also raised an additional ground of appeal which reads as under:- 9. Without prejudice to the other ground of appeals, the lower authorities ought to have granted deduction u/s 10A of the ITA, 1961; on the increased total income due to disallowance of depreciation on intangible asset amounting to ₹ 2,26,62,278/-. 5. Briefly, in the facts of the case, the assessee had furnished the return of income declaring total income (loss) of ₹ 2,35,92,780/-. The assessee company was engaged in the business of providing Information Technology Enabled Services (ITES) to its associated enterprises. The assessee also provided technology based support services like Helpdesk, network operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2008-09 and also in succeeding years. The Assessing Officer first deliberated upon the concept of depreciation vide para 3.5 at page 10 of the draft assessment order and referred to AS-6 of ICAI. He then referred to the definition of intangible assets under section 32(1)(ii) of the Act and observed that the claim of assessee that the assessee was eligible for claiming depreciation on the face of it was erroneous. The Assessing Officer was of the view that by no stretch of imagination can it be conceived that the asset named as right to render BPO services by the assessee diminishes in its value due to wear and tear because of its use and efflux of time. At best this asset could be called as goodwill, which has been acquired by the assessee from its Cummins through the said agreement. In view of the same, the Assessing Officer held the asset not to be eligible to claim depreciation and the same was withdrawn. The Assessing Officer thereafter, vide para 3.10 had analyzed the Accounting Standard 26 of ICAI and the claim of assessee that it was an intangible asset and held There, the asset acquired by assessee by paying the consideration over and above the value of net assets can r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities Ltd. (2012) 24 taxmann.com 222 (SC) was not available, hence the claim was not allowed in assessment year 2008-09. He further pointed out that in assessment year 2009-10 before the Assessing Officer, the assessee relied on the ratio laid down by the Hon'ble Supreme Court in CIT Vs. Smifs Securities Ltd. (supra), but the Assessing Officer denied depreciation, against which the assessee is in appeal. However, in assessment year 2010-11, the DRP allowed the claim of assessee and the Revenue is not in appeal against the order of DRP. Reference was made to para 7.6 of the said order. Our attention was drawn to Master Service Agreement, which is placed at page 1 onwards of Paper Book-I. He further referred to the order of Assessing Officer with special reference to paras 3.8 and 3.9.1 at pages 12 and 13 of assessment order and pointed out that the Assessing Officer has categorically said that the payment at best was goodwill. He further stressed that the agreement with Cummins was only for a period of 60 months and it was not an agreement in perpetuity. Where the Assessing Officer clearly says that at best it was goodwill, since it does not fit into the family of intangible ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement was for a period of 60 months. Under the said agreement, Cummins Inc granted the assessee a right to render business process outsourcing services to Cummins group entities on global basis from its office in Pune, India. This was the purpose as per clause (1) of the said tripartite agreement. In lieu thereof i.e. for securing the right to render business process outsourcing services to Cummins group entities globally, the assessee agreed to pay Cummins USD 5,00,000 equivalent to ₹ 20.67 crores by 30.09.2007. We are concerned with Tranche A payment, which is as per clause 2(a). Hence, we are making reference to the same. There is another Tranche B payment, which is contingent upon agreement remaining in full force and effect throughout the period of 60 months. We are not concerned with the same, hence we are not referring to it. 12. The issue which arises in the present appeal is whether the payment so made by the assessee is in the category of intangible assets which is eligible for claim of depreciation under section 32(1)(ii) of the Act. The Assessing Officer had denied the said claim of assessee on the ground that the said payment did not fall in the category o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of ₹ 2.26 crores. Accordingly, we direct the Assessing Officer to allow the said claim of assessee. The grounds of appeal No.1 and 2 raised by the assessee are allowed. However, the ground of appeal No.3 raised by the assessee on without prejudice basis in allowing the said expenditure as deductible under section 37(1) of the Act is rejected. 14. The additional ground of appeal raised by the assessee of granting deduction under section 10A of the Act on the increased income due to disallowance of depreciation on intangible assets amounting to ₹ 2.26 crores is though covered in favour of assessee by the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. (supra), however, since we have allowed the claim of assessee, the issue becomes academic in nature and the same is thus, dismissed. 15. Now, coming to the second issue raised vide grounds of appeal No.4 to 7 i.e. against transfer pricing adjustment made in the hands of assessee at ₹ 6,23,37,926/-. 16. The learned Authorized Representative for the assessee pointed out that it was the second year of operation but the first year of adjustment. He referred to the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e excluded is Genesys International Corporation Ltd., which was also high end KPO service provider. In this regard, he placed reliance on the decision of Pune Bench of Tribunal in Vistcon Engineering Center (India) (P.) Ltd. Vs. ACIT (2016) 70 taxmann.com 248 (Pune Trib.). 18. The learned Authorized Representative for the assessee further pointed out that two other concerns the assessee wants to be excluded are Triton Corporation and Maple eSolutions Ltd. In this regard, he placed reliance on the ratio laid down by Pune Bench of Tribunal in Oceans Connect (I) (P.) Ltd. Vs. ACIT (2015) 57 taxmann.com 368 (Pune Trib.) and the Delhi Bench of Tribunal in ACIT Vs. Tech Book Electronics Services (P.) Ltd. (2016) 67 taxmann.com 169 (Delhi Trib.). In this regard, he pointed out that both the concerns Triton Corporation and Maple eSolutions Ltd. were found to be not comparable to a concern engaged in ITES services by the Tribunal in the above mentioned decisions. 19. Another issue raised by the assessee was against rejection of concerns by the TPO on the ground that they were loss making. In this regard, he stressed that where the concerns were not persistent loss making, then t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices totaling ₹ 31,03,86,216/-. The TPO noted from the TP study report that the assessee was engaged in ITES segment. The assessee had selected TNMM method as most appropriate method and in TNMM analysis, operating profits earned by comparables were compared on PBIT over operating revenue. The assessee had identified certain concerns as comparable. The operating margins of assessee was 8.65% on operating cost. However, during the course of TP proceedings, the assessee submitted the updated margins of comparables selected and the mean margins of comparables totaling 16 worked out to 4.2% as against revised margins of assessee at 9.48%. The assessee was show caused in respect of certain concerns as being not comparable on account of the fact that they were functionally different or they were loss making. In view thereof, the TPO proposed another set of comparables totaling 14 whose arithmetic mean margins worked out to 33.9% as against margins of assessee at 9.48%. The assessee was show caused in this regard. The assessee in reply objected to selection of certain concerns and gave reasoning in respect of each of the said concerns. The TPO dealt with the objections of assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of hearing was granted to the assessee with regard to proposed enhancement in the TP adjustments. The assessee objected to the same on the ground that the DRP had not considered submissions of assessee that both the concerns Maple eSolutions Ltd. and Triton Corporation Ltd. were bad comparable. Rejecting the same, the Assessing Officer in the final assessment order made transfer pricing adjustment of ₹ 6,23,37,926/-, against which the assessee is in appeal. 24. The first issue which is raised is in respect of selection / rejection of comparables. First, we may take up comparables for which directions of DRP were given i.e. Triton Corporation Ltd. and Maple eSolutions Ltd. The assessee had claimed that both the concerns were fraudulent companies and though it had selected said concerns as comparable during last year but since the new financial details were available, the same were not to be applied. In this regard, the Assessing Officer had applied the margins of said concerns, whereas the DRP directed that only the margins of segmentals should be applied. The learned Authorized Representative for the assessee in this regard has pointed out that exclusion of Triton Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles. 26. The next concern which the assessee has claimed to be not comparable is Crossdomain Solutions Ltd., which as per the assessee is engaged in providing high end KPO services. The plea of learned Departmental Representative for the Revenue before us was that the assessee is also engaged in providing knowledge based services and hence, functionally comparable. We find that the issue of a concern providing ITES services being dissimilar to a concern providing KPO services is covered by the decision of Pune Bench of Tribunal in Maximize Learning Private Limited Vs. ACIT in ITA No.267/PN/2014, relating to assessment year 2009-10, order dated 29.04.2015, wherein it was held as under:- 19. The last plea raised by the assessee was for exclusion of Crossdomain Solutions Ltd. from the list of comparables. The said comparable was part of the final list of comparables selected by the TPO for benchmarking the international transaction of the assessee in assessment year 2008-09. The said comparable was engaged in high end KPO services and hence were claimed to be not a comparable with the assessee which was a normal ITES provider. The Tribunal accepting the said plea of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information, knowledge and experience which cannot be found in most of their competitors. Thus, they tend to command higher margins of profits. Low-end IT enabled service providers employ workers who have the basic knowledge and can be trained to perform the necessary functions. KPO firms earn extraordinary profits due to the highly skilled resources they employ in the form of highly-qualified professionals. 26. On the other hand, the Ld. CIT-DR appearing for the Revenue contended that the TPO as well as the DRP have rejected the plea of the assessee as the submissions were on a wrong footing. It was reiterated that the nature of services rendered by the said concern were falling in the category of IT enabled services which is also broadly the category of the services being rendered by the assessee. Therefore, the said concern was rightly included by the TPO in the list of comparables. 27. We have carefully considered the rival submissions. Ostensibly, the reason advanced by the TPO to reject the plea of the assessee are too general and are not justified. Even where two concerns may be undertaking activities which c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and the said concern was not a comparable concern on the entity level. The TPO has rejected the plea of the assessee on similar grounds as taken by him for rejecting the assessee‟s plea for exclusion of Accentia Technologies Ltd.. 13. Before us, the Ld. Representative has relied upon the decision of the Mumbai Bench of the Tribunal in the case of DCIT vs. M/s Willis Processing Services (India) Pvt. Ltd. vide ITA No.2152/Mum/2014 dated 10.10.2014 in order to justify the exclusion of Crossdomain Solutions Ltd.. 14. We find that M/s Wills Processing Services (India) Pvt. Ltd. (supra) was a concern where the tested party was providing IT enabled services to its various group concerns and activities were quite similar to the activity of IT enabled services rendered by assessee to its affiliates. In this context, the concern, M/s Crossdomain Solutions Ltd. was found to be functionally not comparable by the DRP and such decision was affirmed by the Tribunal by making the following discussion :- 3. M/s Crossdomain Solutions Ltd. This company has been rejected by the DRP on the ground that it is indulged in high skill IT services which are not compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not, had not been verified by the TPO. In case the concerns were persistent loss making, then the same are to be excluded from final set of comparables. However, if the concerns are not persistent loss making and the losses have arisen during the year under consideration only, then the said concerns if functionally comparable, can be selected in final set of comparables. However, this needs verification at the end of TPO. Accordingly, we remit this issue back to the file of TPO for verification. The assessee shall furnish relevant data before the TPO / Assessing Officer, who shall decide the issue after providing reasonable opportunity of hearing to the assessee and in accordance with law. The TPO/Assessing Officer is thus, directed to re-compute the adjustment on account of arm's length price in this regard, if any. 31. The learned Authorized Representative for the assessee pointed out that in case these concerns are rejected, then other TP issues raised would become academic. Hence, we do not adjudicate the same. 32. Before parting, we may also refer to the observations of TPO that the transactions with associated enterprises were in fact controlled. The assessee on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of BPO services by adopting a mark-up of 23.45% over costs at the entity level instead of international transactions with AEs which required to be benchmarked. 2.4 The learned AO / TPO / DRP erred in law and on facts in not granting appropriate working capital adjustment to the appellant. 2.5 The AO, TPO DRP erred in law and on facts in not granting benefit of proviso to section 92C (2) of the ITA, 1961 though specifically requested during the course of hearing. 3. The learned AO erred in law and on facts in not granting credit for the full taxes paid by the Company including taxes deducted at source from the payments received by the Company from its customers. 34. The Revenue in ITA No.459/PUN/2014, relating to assessment year 2009-10 has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the Assessing Officer to exclude Crossdomain Solutions Pvt. Ltd. as comparable company based on the definition provided in Safe Harbor Rules not appreciating the fact that the Safe Harbor Rules have been introduced vide Notification No.S.O.2810(E) dated 18/9/2013 and cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acs Worldwide Ltd. -2.75% 2 Informed Technologies India Ltd. 32.98% 3 Omega Healthcare Management Services Pvt. Ltd. 15.43% 4 Cosmic Global Ltd. 40.61% 5 ICRA Online Ltd. 16.92% 6 Coral Hubs Ltd. 34.06% 7 Crossdomain Solutions Ltd. 29.40% 8 e4e Healthcare Solutions Ltd. 39.45% Mean 25.76% 38. The assessee is aggrieved by inclusion of Coral Hubs Ltd. We have already decided the said concern to be not functionally comparable to the assessee which is providing ITES services to its associated enterprises, whereas the said concern was engaged in e-publishing. Following the same parity of reasoning, we hold that Coral Hubs Ltd. is to be excluded from final set of comparables. 39. Now, coming to the next concern i.e. C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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