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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 ..... cted from final list. Functional comparability need to be decided on the basis of the information available in the annual report and not based on the website information which may vary and may not be reliable. 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 - Held that:- DRP has not 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. Deselection of companies who fails export earning filter as the export turnover was 91.41 Lakhs as against domestic turnover of ₹ 13.33 Crores. ALP adjustment - Held that:- 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 - Hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transactions with its Associated Enterprise [AE], a reference u/s. 92CA was made to the Transfer Pricing Officer [TPO] for determining Arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions. Revised ALP addition was determined at ₹ 10,39,16,986/- and assessment order has been passed accordingly. Assessee is aggrieved on the above said TP adjustment and also on two other corporate issues, whereas Revenue is aggrieved on the directions of the DRP excluding certain comparables. 5. These issues were discussed in detail in this order, after considering the arguments of the Ld. Counsel for assessee and Ld. CIT-DR and also perusing the written submissions placed by assessee and Revenue. It is to be placed on record that on completion of hearing on 27-09-2016, Ld. CIT-DR wanted to file written submissions for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case and in law, the AO/DRP erred in not following the order of Hon'ble Income Tax Appellate Tribunal in Appellant's own case for AY 2008-09, AY 2009-10 and AY 2010-11. 9. Assessee is contesting the selection of the following three companies: i) Accentia Technologies Limited; ii) Eclerx Services Limited; and iii) Cross domain Solutions Private Limited. 9.1. Assessee has objected to the above companies stating that they are functionally different but DRP has rejected them. 9.2. Ld. Counsel submitted that each of the company cannot be selected for the following reasons: i) Accentia Technologies Limited; 9.3. It was submitted that 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions India Pvt. Ltd., in ITA No. 1316/BANG/2012, wherein the dissimilarities between KPO services and BPO service has been drawn up. He further contended similar view has been upheld by the Hon'ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd., vs. CIT in ITA 102/2015. 6.2. Ld. DR, however, referred to extracts from the ld.TPO's order to submit that Accentia Technologies Ltd. is comparable with assessee. The ld. DR relied upon order dated 27.04.2015 passed by Hon'ble Delhi High Court in the case of Chris Capital Investment versus DCIT reported in I.T.A.No. No.417/2014, wherein Hon'ble Delhi High Court has held that: .... the mere fact that 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 purs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing design services provided by the assessee is comparable to the services provided by the above company. Further, in the safe harbor guidelines issued by the CBDT, engineering design services have been considered under KPO. Further, the objection in regard to the exclusion of the company due to high profit is not found acceptable due to the detailed reasons given in paragraph 2.6 of this order. There is no extraordinary event have been pointed out by the assessee similar to the earlier years in which the Hon'ble ITAT directed to exclude the company due to such event. Further, it appears to us that the high end function of the company were not brought to the notice of the Hon'ble ITAT, which resulted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted assessee s objections. We do not find any reason to interfere with the said objections as the very basis of the contentions are based on the website information but not on the annual report. However, the DRP has directed the TPO to verify the margin which assessee submits that has not been considered. Therefore, while retaining the company as a comparable one, we direct the AO/TPO to examine the contentions with reference to margin computation of the above said company after giving due opportunity to assessee to make submissions. This issue is considered partly allowed. 9.12. In the result, grounds are considered partly allowed. Ground No. 7. That on the facts and the circumstances of the case and in law, the 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 pert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin of the above company . We do not find any reason to interfere with the directions of the DRP. However, TPO is directed to re-workout the margins considering that annual report of each of the companies which are being objected to by assessee. AO/TPO is directed accordingly. The ground is considered allowed. Ground No. 8. That on the facts and circumstances of the case and in law, the AO/DRP erred in excluding the following companies, viz., a. e4e Healthcare Business Services Private Limited; b. Mastiff Tech Private Limited. Ground No. 9. That the AO/DRP erred in excluding the companies without providing any show cause notice or a reasonable opportunity of being heard to the Appellant, completely disregarding the provisions 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service segment is ₹ 2,73,94,000/- as against the revenue from infrastructure management services of ₹ 26,12,95,000/- and therefore, the company fails the revenue earning filter applied by the TPO. Further, it is also noticed that the company is engaged in IT infrastructure management services and takes support services which are not comparable with the function of the assessee company and therefore, the above company in our view cannot be retained as a comparable . Since the turnover is very small in the IT Enabled Services Agreement, we affirm the findings of the DRP and reject the assessee s contentions. ii. R Systems International Limited; 12.3. It was submitted that this company was selected by the TPO in the earlier year and hence, this company should be selected 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as against domestic turnover of ₹ 13.33 Crores. We do not see any reason to differ from the findings of the DRP. Accordingly, we are of the opinion that TPO/DRP has rightly excluded the above company. In the result, the ground is partly allowed. 13. Ground No. 12 pertains to the issue of adjustment which should be restricted to the international transactions. The ground is as under: Ground No. 12. That on the facts and circumstances of the case or in law, AO/DRP has erred in making the adjustment by considering total revenue of the Company without appreciating that the transfer pricing adjustment should be restricted only to the value of international transactions with the AE. 13.1. It was submitted that the adjustment should be restricted to the International transaction and assessee has 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under : 14. Ground No.11 : Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under : The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as : The company does not bear any working capital risk since it is been fully funded by it's A.E. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act as computed in the Assessment Order dated 28 December 2015. 15.1. It was submitted that even though the DRP has directed the AO to verify the record and allow the set-off of deprecation, the AO has not followed the directions. Ld. DR however, submitted that this is a matter of verification of record. 15.2. After considering the rival contentions, we are of the opinion that AO has not followed the directions of the DRP. DRP vide para 3 in page 26 has clearly directed the AO to verify the records and consider the submissions made in accordance with the provisions of the Act. AO in the order itself has stated that assessee filed revised return of income on 30-03-2013 revising the total income to ₹ 18,18,817/- after set-off of unabsorbed depreciation of earlier years. However, while computing the income, he has not started from the income returned, 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 accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee s appeal at Ground Nos. 8, 9 10 covers the ground No. 3 in Revenue s appeal and since those grounds were allowed, we treat this contention of Revenue also as allowed. 18.3. Coming to Ground No. 1, there is no specific objection with reference to companies which are rejected and accepted on the principles that TPO has not gone into the verticals horizontals of the comparables. Even though the said conceptual contention may be correct generally, but as seen from the order of the DRP, they have very clearly specified why a particular company is not functionally comparable. We do not see any reason to interfere with such findings. Thus the issue does not arise from the order of DRP. Accordingly, Ground No. 1 is rejected. 18.4. Coming to Ground No. 2, we notice that DRP has excluded both Infosys BPO Ltd., as well as TCS E-serve Ltd. Revenue is objecting only one, Infosys 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the branded services/products. The Assessee wishes to humbly submit that the Assessee does not have any brand associated with it. Hence the Assessee submits that Infosys spa cannot be comparable to the Assessee. Ratio of sum of advertising and marketing expenses to sales greater than 3% The Learned TPO has failed to appreciate the marketing expenses filter. Since Infosys BPO spends 8.40% of its sales in advertisement, this has generated significant revenue and creation of brand value for Infosys spa as there is a high degree of correlation between advertising and sales. Size of the comparable The Learned TPO has failed to appreciate the fact that the ITES industry is clearly demarcated based on size and that Assessee cannot be compared to companies having sales disproportionate to the sales generated by the Assessee. If one were to look at the turnover/size of the 13 comparable companies selected by 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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