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TMI Blog2016 (12) TMI 1720X X X X Extracts X X X X X X X X Extracts X X X X ..... D modeling and iterative simulation. It receives the basic design from its group company with respect to CAD modeling and makes a 3D CAD modeling data of vehicle components using CAD software tools. Assessee is a routing support service provider and it assumes less than normal risk associated with carrying out such business. The International transactions reported by assessee are as under S.No. Name of the Associated Enterprise Nature of the international transactions Amount in Rs. 1. Hyundai Motor Company, Korea Engineering/Consulting Engineering Services/ IT enabled Services (ITeS) 43,57,37,674 2. Kia MotorCorporation, Korea 20,52,60,386 3. Hyundai Autoever Corporation, Korea Purchase of computers 2,64,56,224 Purchase of Security equipment 64,667 Annual License fee for software 98,95,527 Purchase of computer Software 23,07,715 Reimbursement of expenses 11,08,347 4. Hyundai Motor Company, Korea Reimbursement of expenses 2,72,10,590 3. Assessee has selected seven companies as comparables in its Transfer Pricing documentation whose arithmetic mean was arrived at 7.35% as against the margin of assessee at 9.02%. As assessee has international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which time was permitted up to 05-10- 2016. However, vide letter dt. 04-10-2016, the office of the CIT-DR sought further time of another two weeks to furnish, whereas the JCIT(TP) wanted time up to second week of November, 2016. Finally, the written submissions submitted by ITO, Ward-2(3) / DCIT, TPO-2 were placed on record with a covering letter dt. 11-11- 2016. In the written submissions, the officers have reiterated their submissions as considered by the TPO and the DRP only. Assessee's Appeal in ITA No. 128/Hyd/2016: 6. Aggrieved on the orders of the DRP/TPO, assessee has raised various grounds running from 1 to 20 and an additional ground Ground No. 16A on working capital adjustment which has arisen consequent to the directions of the DRP in the final order. 7. Ld. Counsel at the time of arguments has submitted that Ground Nos. 1, 2, 3 & 20 are general in nature along with Ground Nos. 13 to 15. Ground No. 16 pertains to adjustment of (+/-) 5% as provided in second proviso to Section 92C(1) of the Act. Ground Nos. 17 to 19 pertains to corporate issues. Transfer Pricing Issues: 8. The TP issues are covered from Ground No. 4 to 12 and additional ground No. 16A which are cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Accentia Technologies Limited cannot be considered as a comparable based on the functional dissimilarity as the said company is into diversified outsourcing services. It has relied on annual report for AY. 2010-11 showing that assessee is having multi location, diversified knowledge process outsourcing company and also it has products such as instaKare and instaweb which makes the company a product based company as well. Not only that, it was also submitted that there was no segmental information provided by the Accentia Technologies Limited in its annual report and margin calculated was done at over all entity level, whereas it was involved in various activities like medical transcription, billing and collections and income from coding etc. It was also further submitted that there are extraordinary events during the year like acquiring companies in USA such as GSR Physicians Billing Services INC, GSR Systems INC and Denmed Inc. It was also submitted that the said company has shown abnormal growth pattern due to acquisition and is a super normal profit company. It also has Intellectual property rights and accordingly, functionally different from assesseecompany. 9.4. It was su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an entity makes high / extremely high profits / losses does not ipso facto, lead to its exclusion from the list of comparables for the purpose of determination of ALP. In such circumstances enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable." 6.3. After considering the rival submissions and pursuing the relevant material on record, we find that functionally, this company is into development of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DPO), high end software services. It is submitted by the ld.AR that segmental information in respect of this company is not available. We find that the Ld. TPO had adopted this company as a comparable as the Ld. TPO is of the view that the services rendered by this comparable are in the nature of BPO or back office services and that nothing he is earned from sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lted in exclusion of the above company. Accordingly, considering the function of the assessee, we are of the view that there is no infirmity in inclusion of the above company in comparables". 9.9. We notice that this company is categorised as KPO company and the services are similar being provided to the services being provided by the above company. Further, as seen from the so called extraordinary event, it is noticed that the said company has wound-up a subsidiary company w.e.f. 29-03-2011. Since it has not acquired the company whose turnover is included in assessee-company but only wound-up a dormant company, we are of the opinion that it does not have any bearing on assessee's operating results. Super normal profits cannot be a basis for exclusion of a company and since the DRP has considered the objections, we agree with the findings of DRP. Even though the company was excluded in earlier year, we are of the opinion that each year is to be considered separately on the basis of the facts and in TP matters the facts will vary from year to year. Accordingly, we are of the opinion that this company cannot be excluded. To that extent, the ground raised by assessee is rejected. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO/DRP erred in confirming the TPO's stand of treating the provision for bad and doubtful debts and bad debts written off as nonoperating expenses for the purpose of margin computation of comparable companies as selected by TPO. 10. This ground pertains to the issue of provision for bad and doubtful debts and bad debts written off which should be considered as operating in nature while computing the margin of comparable companies. This is a general ground pertaining to computation of margin of the comparable companies. It was the submission that the provision for bad and doubtful debts and bad debts written off are part of its operating expenditure as an entity undertakes marketing and creates a customer base for itself. Some of them fail to make the payment due to which the provision is created in the books of account. Since this provision is in relation to the services rendered, this expenditure is an operational expenditure. It was submitted that this contention, even though was accepted by the DRP in its various findings, the TPO has not acted upon the same. 10.1. After considering assessee's objections and perusing the orders of the DRP, we are of the opinion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the Act and in utter disregard to the principles of natural justice. Ground No. 10. That the AO/DRP erred in excluding the companies not objected, when the AO/TPO had already examined and decided the issues based on the facts and material available on record. 11. As can be seen from the grounds, the two companies are excluded by the DRP, even though these are not objected to by assessee and Revenue also has raised objections in their grounds. Considering that TPO has included them as comparable companies and assessee has not objected to them and also on the fact that Revenue is raising the ground on the issue before us, we are of the opinion that DRP has wrongly excluded the above two companies on the reason of inconsistency in accounting and huge variation in the margin due to uncertainty of the receivables. These cannot be considered as a valid reason for excluding the company when all other filters have been compared and accepted by the TPO. In view of this, we modify the order of the DRP and direct the AO/TPO to consider these companies as comparable companies. However, if there is any objection with reference to the margins as considered in Ground No. 7 with referen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected as comparable. It was further submitted that TPO excluded the company on the basis of different financial year ending which was upheld by the DRP. It was contended that if the company is having financial year, data available in the public forum can be adjusted for the financial year ending 31-03-2011. Then, this company can be considered as a comparable. Assessee relied on the Co-ordinate Bench decision in the case of Techbooks International Private Limited (ITA No. 240/Del/2015) and also the decision of Hon'ble Delhi High Court in the case of CIT Vs. Mckinsey Knoweldge Centre India Pvt. Ltd., in ITA No. 217/2014 dt. 27-03-2015 for the proposition that if from the available data on record, the results for the financial year can reasonably be extrapolated then, the comparable cannot be excluded solely on the ground that comparables have different financial year endings. 12.4. Since the objection of assessee is valid, we direct the AO/TPO to examine afresh this comparable and to verify whether the comparables satisfy other filters, then select the company as comparable. AO/TPO is directed accordingly. iii. Accuspeed engineering Limited; 12.5. It was submitted that Accusp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished the segmental report reporting to the TPO. Assessee relied on the following case law: i. Saven Technologies Ltd. Vs. ACIT (ITA No. 1456/Hyd/2010); ii. DCIT Vs. M/s. Firestone International (P) Ltd (ITA No 4520/Mum/2011); and iii. DCIT Vs. M/s. Federal Mogul Bearing India Ltd (ITA No. 1255/Mum/2014; 13.2. In principle, we agree with assessee's contentions that the ALP adjustment should only be restricted to international transactions and not to the entire turnover of assessee. However, this requires verification by the AO/TPO. Therefore, we direct the AO/TPO to verify and restrict the adjustment only to the international transactions. Ground is considered allowed for statistical purposes. Working capital adjustment Ground No. 16A : The Appellant submits that negative working capital adjustment, if any, resulting from the exclusion or inclusion of the companies mentioned in Grounds No 5, 6, 7, 8, 9, 10 and 11, should not be made while computing the arm's length margin under the provisions of the Income-tax Act, 1961. 14. This is an additional ground raised by assessee consequent to the orders of the DRP. Even though TPO has given positive working capital adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from its inception and has no working capital contingencies. * The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under : "7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to t his s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturned, but has started from income from profits and gains of business and added income from other sources and the arm's length adjustment ignoring the set-off of unabsorbed depreciation. We direct the AO/TPO to follow the directions of the DRP and allow the unabsorbed depreciation as per the provisions of the Act. Ground is accordingly considered allowed. 16. Ground Nos. 18 & 19 pertaining to levy of interest u/s. 234A, 234B & 234D. The Grounds are as under: Ground No. 18: The AO has erroneously levied interest under section 234A though the assessee has filed its return of income within due date specified in section 139(1) of the Act. Ground No.19: That the consequential effect should be given to the liability of interest under section 234B and 234D. 16.1. This being consequential, we direct the AO to follow the provisions of the Act, principles of law on the basis of the total income computed after giving effect to this order. Grounds are accordingly considered allowed. 17. In the result, this appeal of assessee is partly allowed for statistical purposes. Revenue's appeal in ITA No. 216/Hyd/2016: 18. This appeal is against the order of the DRP in which the following three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BPO that it was wrongly excluded on the ground of high turnover as it does not influence the net margins of the company. However, there are other reasons also on which the DRP has excluded the above company. The DRP's order with reference to Infosys BPO Ltd., is as under: "2.13 Ground of Objection 13 Infosys BPO Limited ("Infosys" or "the Company") has to be rejected based on the presence of the brand thereby warranting adjustments are required to eliminate the impact of brand on profits earned. Since it might not be possible, Infosys is to be rejected as a comparable. Infosys BPO Limited ("Infosys" or "the Company") has to be rejected based on the fact that it is an oversized company as compared to the tested party. The Learned TPO erred by not rejecting Infosys as comparable, as exclusion of Infosys as comparable is upheld by Jurisdictional ITAT in assessee own case (ITAT No.255/Hyd/2014 &ITA.No.1850/Hyd/2012) for AY 2009-10 and AY 2008-09. It is submitted that the company should be excluded due to the following reasons :- Functional dissimilarity - Niche Areas That Infosys SPO is backed by Infosys Technologies Limited which supports Infosys SPO to offer an integrated IT-B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Learned, TPO and plot it on a scattered diagram, then one could notice that both Infosys is a clear outlier. The scattered diagram of the 13 comparable companies is presented below: The assessee relied on the decision of the Hon'ble I TAT, Hyderabad in assessee's own case for A.Y. 2009-10 in which the Hon'ble ITAT held that 'We are in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs. 15.79 crores, as against turnover of Rs. 1016 crores of the Infosys. We are also of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys BPO is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, because of its big brand value this company has to be excluded on th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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