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TMI Blog2018 (7) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... IT") enabled services and Rs. 2,9313,479 in respect of outstanding receivables. In doing so, the Ld. A.O./ Ld. TPO have grossly erred in: 2.1. not allowing adjustment to comparable's margin on account of differences in the rates of depreciation charged by the Appellant visa- vis that of comparables; 2.2. application of incorrect Profit Level Indicator ("PLI") for the purpose of determination of Arm's Length Price ("ALP"); 2.3. considering the amount of reimbursements (received by the Appellant) as a part of cost but not as a part of income while computing the Operating Profit/ Total Cost ("OP/TC") margin of the Appellant; 2.4. not applying appropriate interest rate for the computation of interest on outstanding receivables. 3. The Ld. A.O./Ld. TPO erred on facts and in law in enhancing the income of the Appellant by Rs. 12,40,78,385 holding that the international transactions pertaining to provision of IT enabled services do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in: 3.1. disregarding the ALP as determined by the Appellant in the Transfer Pricing ("TP") documentation maintained by it in terms o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he operating revenue and operating cost, thus, in effect proposing that a mark-up is required to be earned on such non-core, non-value adding pass through transactions. 5. The Ld. AO/ Ld. TPO erred on facts and in law in enhancing the income of the Appellant by Rs. 2,93,13,479 holding that the alleged international transactions pertaining to outstanding receivables do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in: 5.1. re-characterizing the outstanding related party receivable from overseas AEs beyond 90 days period as short term loans advanced to the AEs; 5.2. disregarding the business/ commercial arrangement by not appreciating the fact that unlike a loan or borrowing, outstanding receivable is not an independent transaction which can be viewed on standalone basis and needs to be examined with the commercial transaction as a result of which the debit balance has come into existence; 5.3. rejecting the Appellant's contention that independently benchmarking the outstanding receivables of the Appellant by considering an interest rate for comparability does not amount to the application of Comparable Uncont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is warranted on such investment. 10.3. The Ld. A.O./Ld. DRP erred in law and on the facts and circumstances of the case by stating that the Appellant has made fresh investment during the year whereas no investment has been made by the company during the year under consideration. 10.4. The Ld. AO/Ld. DRP erred in law on the facts and circumstances of the case by ignoring the fact that no exempt income has been earned by the company during the year under consideration. 11. The ld.AO has grossly erred on facts and in law by initiating penalty proceedings u/s 271(1)(c ) of the Act mechanically and without recording any satisfaction for its initiation. 12. The Ld.AO has erred in law and on the facts of the case by charging interest u/s 234B and 234D of the Act." 2. Brief facts of the case are as under: Assessee filed its return of income for the year under consideration on 29/11/11 declaring total income of Rs. 66,58,545/-. The case was selected for scrutiny and notice under section 143 (2) of the Act was issued. In response to the statutory notice, representatives of the assessee appeared before Ld.AO and attended the assessment proceedings. 2.1. Ld.AO observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursed by its AE on actual expenditure incurred by assessee and accordingly no adjustment is called for. The total expenditure incurred by assessee towards travel cost, marketing cost etc amounts to Rs. 6,40,07,521/-. It has been submitted that Ld. TPO had made an adjustment of the said sum on the basis that reimbursements being international transaction in terms of section 92B which are closely linked to assessee's main transactions of providing IT enabled services to its AE. It has been observed by Ld.TPO that the amount involved are substantial and by making payments on behalf of its AE, assessee has performed a service to the AE by using its financial and other services. Ld.TPO was of the opinion that assessee's funds were used for the benefit of AE even though assessee had debited a substantial amount of interest in its P&L account. 5.2. Upon raising objection before DRP, it was held that reimbursements received from AE at actual cost incurred by assessee, should be included in operating income/expenditure and then adjustment should be worked out accordingly. It has been submitted that Ld.AO did not work out adjustment as per directions of DRP, and therefore has raised this gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed above and by following the decision of the Coordinate Bench of the Tribunal in Kadimi Tool Manufacturing Co. (P) Ltd. (supra) which has been confirmed by the Hon'ble High Court as well as Hon'ble Apex Court, we are of the considered view that when undisputedly, the taxpayer is a debt free company, there is no question of charging any interest on receivables by recharacterizing the transaction as loan from its AE and as such, no adjustment on account of arm's length interest on receivables can be made. Consequently adjustment made by the TPO/DRP on account of arm's length interest on receivables is not sustainable in the eyes of law, hence ordered to be deleted. Consequently, grounds no. 2, 2.1, 2.2, 2.3, 2.4, 2.5, 3, 4 & 5 are determined in favour of the taxpayer." It has been mentioned by Ld. counsel that there is no functional difference in the present year under consideration vis-a-vis immediately preceding Assessment Year. Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted the addition by considering the above principle. Delhi Tribunal in Kusum Healthcare Pvt.Ltd (supra) also observed therein as under: "8. In view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cost +1 9% "Cost" - Cost includes alt the expenses incurred in performance of the Services including, but not limited to payroll and employee related expenses and facility and technology costs which are set forth in Exhibit A. 3.2. In addition to the Charges, Inductis Inc. shall pay to Inductis (i) any applicable services tax and/or other statutory taxes that are charged on the Services; and (ii) all travel related expenses (Travel Related Expenses") incurred by Inductis for Services rendered at the customer's site. Travel Related Expenses shall mean and include actual charges in respect of the air ticket, visa, overseas medical insurance, boarding and lodging expenses, kit allowance, per diem and any other allowance paid by Inductis. Any service debits or credits arising under any Service Agreement shall accrue to Inductis. 3.3 The Charges payable for the Services performed pursuant to this Agreement shall be invoiced by Inductis in US Dollars, on a monthly basis, or on such other basis as mutually agreed, and shall be due within ninety (90) days of receipt of such invoice by Inductis Inc..) Ld. DR submitted that interest on receivables is an international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' He pointed out that while answering the above question, Hon'ble Bombay High Court noticed that amendment to section 92B has been carried out by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble Bombay High Court restored the issue to the file of the Tribunal for fresh decision in the light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has been rightly determined by Ld.TPO. In so far as the charging of the rate of interest is concerned, he relied on the decision of the Hon'ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same are shown as receivables and also as to whether the said transactions can be characterized as international transactions." In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. 6.9. Accordingly we set aside this issue to Ld. AO/TPO. 7. Now we shall take up the comparable analysis on the basis of the comparables which has been agitated by assessee of having been wrongly included/excluded by ld.TPO in the final list. Before 18 doing so it is sine qua non necessary to understand the functional profile, as it involved risk assumed by assessee. (A) Functional profile Assessee is a wholly owned subsidiary of Inductis LLC. It provides IT enabled back-office research and data analytics services to Exl Group Companies (which includes Inductis companies as well). It provides following services to its group companies: * back-office research involving Data collection/coalition; * data processing, synthes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sk or risk mitigated environment. Ld.TPO observed that assessee had selected 12 comparables as comparables with an average margin of 16.33% viz-a-viz assessee's own margin worked out at 19.55%. It had applied TNMM as the most appropriate method with OP/OC as a PLI. Assessee thus concluded its international transaction to be at arm's length. 9. Unsatisfied with the comparables selected by assessee, ld. TPO undertook research activity and proposed 8 comparables having average margin of 29.57%. Ld.TPO accordingly worked out the arm's length price of assessee at a margin of 29.57% and proposed an adjustment of Rs. 33, 600, 539/-. 10. Aggrieved by adjustment proposed by Ld.TPO, assessee raised objections before DRP. DRP directed to exclude following comparables from the final set of comparables selected by TPO: * Acropetal Technology Ltd * Eclerx Services Ltd * ICRA Techno analytics Ltd * Microland Ltd DRP also directed to include the expenses reimbursed from AE's as its operating income/expenditure. The adjustment was finally then computed at Rs. 15,33,91,864/- 11. Ld.Counsel submitted that assessee is aggrieved with inclusion of the following comparables: * Accentia Tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure and abnormal profits. Ld. DR, by placing reliance upon the order passed by ld. TPO submitted that this company is comparable with assessee. He relied upon decision of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. reported in (2015) 56 Taxmann.com 417 We have perused the submissions advanced by both sides in the light of records placed before us. From the financials of this company placed at page 594-715 of paper book it is observed that technical services offered by this company are in the nature of servicing and maintenance of software testing, verification and validation of software, which are akin to software maintenance services falling within the overall category of software development services and has created a lot of applications which are in the nature of intellectual property in terms of reconciliation software, fund transfers, etc. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post acquisition. In such factual background, the ratio relied upon by Ld.DR in case of Chryscapi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions and capital market. The outsourced services consist of financial database and backoffice activity for research/advisory report. He thus submitted that this company is comparable with that of assessee. Ld.DR at the outset relying upon the annual report at page 722 submitted that the company has been categorised as operating in IT enabled knowledge-based back-office processing centre. He submitted that the revenue earned by this company is from sales and services as well as other income. It is also submitted that there is no separate segmental details in respect of the 2 separate services rendered by this company. He submitted that the functions carried out by this company are not at all similar to that of a contract service provider like assessee. Relying upon decision of Hon'ble Delhi High Court, in case of Rampgreen Solutions (P.) Ltd. (supra), he submitted that this comparable has been rightly rejected by ld. TPO. We have perused submissions advanced by both the sides in the light of records placed before us. We observe that this company itself categorises it to be dealing in knowledge-based back-office processing services. Further it is observed that it deals in analys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has not earned any exempt income. It has been submitted that investments made by assessee are old investments in foreign subsidiary company situated in Singapore, dividend from which if any received, is not exempt from tax in India. He submitted that Ld. AO made disallowance of 0.5% of average investments made in foreign subsidiary company as per rule 8D which deserves to be disallowed. Ld. DR though supported the orders of authorities below, could not controvert that the investments shown in the accounts of assessee are also in domestic companies. It is also an admitted fact that assessee has not earned any exempt income during the year under consideration. 13.2. We have perused the submissions advanced by both the sides in the light of the records placed before us. It is observed from the balance sheet at page 8 that the investments are to the extent of Rs. 4,295,506/-. The breakup of the investment is given in Schedule 4 which is basically equity shares of Singapore being wholly owned subsidiary of assessee. Accounts do not reveal any other investments made by assessee apart from this. Even in Schedule 12 representing other income assessee has earned merely dividend fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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