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TMI Blog2018 (5) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... variation, assessee should be given an opportunity to explain or modify the claims or to furnish further evidence in support of its claims. AO is directed accordingly. - I.T.A. No. 93/Hyd/2016 And I.T.A. No. 34/Hyd/2016 - - - Dated:- 25-4-2018 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For The Assessee : Shri K.R. Vasudevan And Shri Dheeraj Lalwani, AR For The Revenue : Shri P. Somasekhar Reddy, DR ORDER PER B. RAMAKOTAIAH, A.M. : These two are cross-appeals by the Assessee and Revenue for the AY. 2011-12 against the order of the Assessing Officer (AO) u/s. 143(3) r.w.s. 92CA(4) r.w.s. 144C(13) of the Income Tax Act [Act]. 2. Assessee is a company engaged in the business of providing back office data creation, content development, software and web development. Assessee-company filed its return of income for the AY. 2011-12 on 25-11-2011 declaring NIL income. As assessee-company has international transactions with its Associated Enterprise [AE] in compliance to provisions of Section 92E, assessee furnished a report in Form 3CEB. As assesseecompany had international transactions, reference to the Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the exclusion of the following 4 comparables, as DRP seems to have not given any opportunity before excluding them: i. Cosmic Global Ltd., ii. e4e Health Care Ltd., iii. Mastiff Tech P Ltd., iv. Microgenetic Systems Ltd., 5. Another issue for adjudication is with reference to the interest on outstanding receivables of ₹ 23.32 Crores of assessee. The TPO after elaborate discussion, proposed charging of interest @ 12% and arrived at ALP of ₹ 2,79,92,880/-. After the objections of assessee, DRP in its direction asked the AO to adopt interest @ 5% on inter-company receivables as against 12% adopted by the TPO. Consequent to the above direction, the AO arrived at the adjustment for the entire 12 months period at ₹ 1,16,63,700/-. Assessee is aggrieved on the levy of interest @ 5% and also on the entire period on the amount outstanding at the end of the year, whereas the Revenue is aggrieved on reduction of the rate from 12% to 5%. 6. Next issue for consideration is with reference to negative working capital adjustment proposed by the TPO. This issue is contested by assessee even though there is no addition made under the provisions of Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. 19. Having regard to the rival contentions, we find that in the case of Pegasystems Worldwide (Supra) wherein the Tribunal at para 17 held as under: 17. Ground No.7 pertains to interest on outstanding receivables and 8 on incorrect computation of interest. Assessee raised the issue on separate adjustment made for receivables. TPO noticed that Assessee has receivables of ₹ 27,07,53,864/- at the end of the year. Assessee was asked to submit the details of raising the invoice and subsequent receipts. TPO proposed to charge interest at 12% on the outstanding receivables. While replying that assessee is a fully funded entity of the AE and the amounts outstanding are on services but not loan or advances given. 7t also does not have any working capital risk and there is no interest payment also. It relied on the order of the ITAT in the case M/s. Evonik Degussa India Private Limited in ITA No. 7653/Mum/2011, wherein it was held that TP adjustment cannot be done on hypothetical issues. Assessee also further relied on the decision of Logix Micro Systems Ltd v. ACIT [42 SOT 525] (Bang) wherein ITAT held that a reasonable period should be provided as interest free per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or advances given for capital financing, whereas in Assessee's case, these are outstanding services rendered but not capital financing. The words are to be interpreted invoking the principles ejusdem generis and so the outstanding receivables cannot be equated to capital financing as amended by the provisions of the Act. It was further submitted that working capital adjustments are being made while analyzing the operational performance of the companies, therefore, outstanding amount gets adjusted in working capital adjustments and another separate addition is not required under the TP provisions. Thus, it was contended that the outstanding amounts are not to be considered for adjustment. 17.3. We have considered the issue and examined the rival contentions. In the case of Evonik Degussa India P. Ltd., in ITA No. 7653/Mum/2011, it was already held the TP adjustment cannot be made on hypothetical and notional basis, until and unless there is some material on record that there has been under charging of real income. Thus on the facts and circumstances of the case, we are of the opinion that addition on account of notional interest relating to alleged delayed payment in col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of selected companies. Revenue is aggrieved on the exclusion of 10 companies. The findings of the DRP on each of the comparables are as under: Objection regarding the comparables selected by the TPO 3.9 Ground of Objection:9: Accentia Technologies Ltd should be rejected It is submitted that Accentia Technologies Limited [ Accentia or the Company ] cannot be considered as comparable considering the presence of the following factors: functionally dissimilar, KPO involves outsourcing of core functions, abnormal growth pattern and has super normal profits, the presence of the intangibles, no segmental data in relation to the software services and products and ITeS which mayor may not give cost benefit to the parent company but surely helps in value addition. The processes which are outsourced to KPOs are usually more specialized and knowledge based as compared to BPOs. Services included in KPO are related to R D, Capital and insurance market services, legal services, biotechnology, animation and design, etc. are the usual activities that are outsourced to KPOs. Reliance on Jurisdictional ITATs decision in Assessee's own case for AY 2009-10 (supra): T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar, lTES revenue filter applied by the Transfer Pricing Officer (Learned TPO) hence, should be rejected. Extraordinary events during the year in the form of acquisitions which clearly makes it an outright reject as a comparable to the Assessee. It was submitted that during the course of the transfer pricing assessment proceedings the Assessee submitted the following facts with respect to the aforementioned grounds to the Learned TPO: Acropetal provides software development and engineering design services and hence, is functionally dissimilar to the Assessee. Acropetal fails the ITES 75% filter applied by the Learned TPO Extraordinary events during the year in the form of acquisitions which clearly makes it an outright reject as a comparable to the Assessee. The margin computation of Acropetal is incorrect. Therefore, based on the above, the Assessee submitted that Acropetal is not functionally comparable to the Assessee hence, should be rejected. The Learned TPO rejected the above grounds raised by the Assessee and retained Acropetal in the final set of comparables selected in the TP order based on the following: Enginee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l growth pattern and super normal profits which is beyond the norms and standards of the industry. Reliance on Jurisdictional ITAT's decision in Assessee's own case for AY 2009-10 (supra) (ITA No.159/Hyd/2014t The Assessee places reliance on the jurisdictional Tribunals decision in its own case for AY 2009-10 wherein it has held that Eclerx is functionally different from assessee and also held that Eclerx can be considered as KPO. Hence, Eclerx cannot be accepted as a comparable commpany. The relevant findings of the Jurisdictional Tribunal given at para 16.2 of the order is produced below for your goodself's reference: 16.2 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. Further, the assessee would like to submit to the Hon'ble pan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited should be rejected Having considered the submissions, we examined the annual report produced by the assessee in which there is no indication that the company is engaged in providing knowledge process outsourcing. On page 2 of the Director's Report, it is only mentioned that 'India continues to be a high quality and low cost destination for outsourcing in health care business services and your Directors are confident of capturing the sizeable business in the coming year: In our view, the functional comparability need to be decided on the basis of information available in the annual report and not based on the web site information which may not be reliable. The Hon'ble ITAT, Hyderabad, in the assessee's own case in (ITA No.159/Hyd/2015) rejected the objection of the assessee for exclusion of the above company from the comparables by observing that we have seen the annual report and most of the revenue of this company is from service only. The company is in the pay roll service activity. Therefore, we are of the opinion that the company's functions similar to the activities of the assessee company, which is in the ITeS field. In view of this, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable. even though it has huge turnover and the giant companies are rejected by Jurisdictional ITAT in Hyundai Motor India Engineering Pvt. Ltd (ITAT No.1850/Hyd/2012), case for the AY 2008-09. Functional Dissimilarity: The Assessee has submitted that TCS is functionally not comparable. The Assessee is a mere service provider involved in providing support services in relation to analysis, content search and projections for all types of business information. On the other hand, TCS operations broadly comprise of transaction processing and technical services primarily to Citigroup entities globally, which cannot be compared to the functions performed by the Assessee. Having considered the submissions, on perusal of annual report, it is noticed by us from the schedule to the financial statement that the company is engaged in the business of providing information technology - enabled services/business processing outsourcing service, primary to the Citi group companies introduced globally, the transaction processing include the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citi gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Comparables retained by the TPO During the course of examination of the facts and submissions made by the assessee and the close scrutiny of the comparables retained by the TPO, we have noticed that some of the companies retained by the TPO do satisfy the required conditions for treating the same as com parables. The same are discussed hereunder: Cosmic Global Ltd On close examination of the back ground and the annual report of the Cosmic Global, we are of the view that payment to the extent of 41% on sub contracting suggests a different working model which may have significant effect on the margin and therefore, cannot be retained as comparable. This view also finds support from the decision of the Hon Delhi High Court in the case of Rampgreen Solutions Pvt Ltd ( ITA/102/2015) in paragraph 38 of the decision wherein it is held that plainly, a business model where services are rendered by own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing services by ...... would have no bearing on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and since the comparison is made on Transactional Net Margin Method [TNMM] basis, we are of the opinion that any slight variation in margins will get adjusted in the final analysis. Since both the parties want the above comparable to be included, we direct the AO to do so. Revenue ground to that extent is allowed along with assessee s ground. Mastiff Tech Ltd: 10.1.iii. This comparable is also taken in the grounds by both the parties for inclusion. The DRP has excluded on the reason that the provision of bad debts have influenced the margins. However, we do not find any working of the influence of bad debts on the margins nor we have come across any Co-ordinate Bench order where Mastiff Tech. P. Ltd., is excluded on functionality. Since both the parties want the same to be included, we direct so. However, AO is directed to examine the margins, as there are objections about margin working from assessee before the DRP, after giving due opportunity to assessee. Microgenetic Systems Ltd: 10.1.iv. This comparable is excluded by the DRP on the reason that it was incurring expenditure in the outsourcing of medical transcription activity. In case of M/s. Avineo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussion on the issue and there seems to be no objections raised by assessee. However, TPO and AO made negative working capital adjustments. AO in final order made more adjustments than the TPO. This issue is to be considered in favour of assessee as the Co-ordinate Bench of ITAT in the case of Adaptec (India) P. Ltd., Vs. ACIT in ITA. No. 206/Hyd/2014 (AY 2009-10) dt. 25-03-2015, has decided this issue, wherein it was held that negative working capital should not be made. Therefore, AO is directed not to make any negative working capital adjustment. This ground is considered allowed accordingly. 14. The last issue for consideration is the short credit of tax deducted at source: It was the contention that while granting credit in respect of tax deducted at source, assessee claimed an amount of ₹ 58,03,451/- in the return of income filed, whereas the AO gave credit of ₹ 57,56,800/-. Since assessee did not get any opportunity and the working was not provided. Ld. Counsel pleaded for a direction to AO to give the credit as claimed. Since this requires verification of the TDS claims and the record of the department, we direct the AO to examine and give the credit as cla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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