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TMI Blog2017 (8) TMI 1433X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee company has been adopting cost plus 15% mark up for invoicing these Associated Enterprises in respect of Tele-calling Services. The assessee company in respect of sales agency, has been charging and paying sales commission of 10%. For purpose of complying with Transfer Pricing Regulations, the assessee company adopted cost plus 15% mark up as Arms Length Price in respect of Tele-calling and Comparative Uncontrolled, thus companies functionally dissimilar with that of assess need to be deselected from final list. Disallowance of expenditure included in employees cost - Held that:- We are of the opinion that this issue required to be examined by the Assessing Officer/TPO in detail whether the said amount claimed to have received by the assessee as reimbursement expenses are indeed reimbursement or not. In case of reimbursement at cost of the expenditure incurred on behalf of the AEs and has not formed part of the expenditure claimed as operating cost of the assessee then, the reimbursement should not be considered as part of assessee's sales. The amounts should be excluded in computing the operating profits. Since the Assessing Officer has not examined and it is also n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regards the addition in respect of international transactions, the CIT(A) gave partial relief to the assessee. 6. Aggrieved by the order of the CIT(A), the revenue is in appeal before us against the deletion of addition on account of unmatured advances and the assessee is in appeal before us against partial relief on account of international transactions. 7. As regards the issue of taxing of accrued income shown as unmatured advances in the balance sheet, raised by the revenue in its appeal (Ground Nos. 1 2), the AO observed as under: 1. The advances shown by the assessee are already accrued to the assessee. These are not refundable receipts. As per notes to Accounts at Point No.2, it was mentioned that Unmatured income includes the amount whereof has not been linked and identified with the individual customers - contracts in view of volumes and heterogeneous nature of contracts. Besides, there are no uniform payment terms in the variety of contracts entered into during the year. This, however, does not impact income accrual and disclosure in the balance sheet except in case of debtors to the extent of amount not so determined.' This note to the accounts clearly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. AR has relied on the order of the CIT(A). 11. Considered the rival submissions and perused the material facts on record. The issue is covered in favour of the assessee by the decision of the ITAT, Hyderabad in assessee s own case in ITA No. 1762/Hyd/11, for AY 2007-08, order dated 31/03/2017 wherein the coordinate bench observed as under: 11. Considered the rival submissions and perused the material facts on record. The issue is covered in favour of the assessee by the decision of the ITAT, Hyderabad in assessee s own case in ITA No. 1081/Hyd/04, for AY 2001-02, order dated 10/08/2007 wherein the coordinate bench observed as under: In the second ground, the revenue is aggrieved against the deletion of the addition made on account of difference in professional receipts. It was noted by the AO that as per two TDS certificates, the assessee had received professional fees aggregating to ₹ 1,39,125 (Rs. 1,18,125 + 21,000). However, the assessee had shown total receipts of ₹ 60,558/- only. The explanation of the assessee was that it follows mercantile system of accounting and under the said system, it recognizes the revenue on the basis of proportionate co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.1 As the issue in the AY under consideration is materially identical to that of AY 2007-08, following the decision of the ITAT, we uphold the order of the CIT(A) and dismiss the ground raised by the revenue. 12. As regards the issue regarding ALP adjustment by TPO, raised by the assessee in its appeal (3-10 grounds of appeal), it is observed that the assessee made certain international transactions pertaining to BPO services to its AEs, commission received on selling other entities database from its associated enterprises and loans taken from associated enterprises. The AO referred the matter to TPO vide letter dated 06/08/2012 to determine Arm s Length Price (ALP). TPO vide his order u/s 92CA(3) of the Act dated 30/12/2013 determined the ALP adjustments of the international transactions at ₹ 1,49,51,346/- u/s 92CA(3) of the Act. 12.1 It is observed that as per 3CEB report, the international transactions reflected are as under: AE Nature of transaction Amount (Rs.) Monster Worldwide Inc., USA Provisions of ITES 3,96,48,126 Monster SG Pt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SA 27,25,896 17,34,67,871 12.1 After examining the TP study submitted by the assessee, the TPO observed that the assessee has carried out the economic analysis, however, he summarized it as under: Sr.No. Nature of international transaction Amount of transaction MAM PLI Margin of taxpayer Margin of comparables 1 Provision of ITES 5,76,83,907 CPM OP/OC 15 15.5 2 Commission receivable 65,13,815 CUP NA 10 3 3 Commission payable 1,46,82,215 CUP NA 10 3 4 Payment of royalty 1,47,51,888 NA NA NA NA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44.80 12.4 TPO noted that as per the segmental statement of accounts submitted by the taxpayer during the course of hearing are as under: Description Amount (Rs.) Operating revenue 5,76,83,907 Operating Cost 5,01,61,751 Operating Profit 75,22,156 OP/OR (%) 13.04 OP/OC (%) 15.0 12.5 The TPO observed that the company had the following transaction, which was not reported in Form 3CEB or but no bench marking analysis had been done in the TP study: AE Nature of Transaction Amount (in Rs.) Monster Worldwide Inc.,USA Receivable 9,02,43,229 Monster.com SG Pte. Ltd. Receivable 3,13,51,983 Monster Technologies Malaysia Sdn Bhd Receivable 1,76,25,240 E-Career (Beijing) Ltd. Rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 67.58 9. Jeevan Softech Ltd. (Seg.) 8.04 10. Microgenetics Systems Ltd. 6.60 11. Crossdomain Solutions Pvt. Ltd. 17.13 Total 306.88 Average 27.90 12.10 After applying the average margins of the comparables to the financials of the assessee, the TPO determined the arm s length price as under: Description Amount Arm s length margin 27.90% Less: WCA 0.00% Adjusted Arm s length price 27.90% Operating Cost (OC) 5,01,61,751 Adjusted Arm s length Margin (%) AALM 27.90% Arm s Length Price =(100+AALM)*OC 6,41,56,880 Price received (OR) 5,76,83,907 Adjustment u/s 92CA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38,94,088 5,84,113 44,78,201 13.2 The assessee company has contended that it is earning sales commission and paying sales commission in respect of sale of data banks of the Associated Enterprises and that it is charging and paying a sales commission at 10%. The details were also provided to the TPO as detailed below: Associated Enterprise Nature of Transaction Amount (Rs.) E-Career (Beijing Ltd.) Commission received 7,360 E-Career (Beijing Ltd.) Commission paid 1,32,090 Job Korea Co.Ltd. Commission received 25,917 Monster Jobs Mexico S.de R.L.De.CV Commission received 10,325 Monster Worldwide Canada Commission received 1,51,355 Monster Worldwide Canada Commission paid 3,55,919 Monster Worldwide Inc.USA Commission received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 6,41,56,880/-and the shortfall of ₹ 64,72,973/- is treated as adjustment u/s 92CA of I. T. Act and the total income of the tax payer will be enhanced to that extent accordingly u/s 92CA(3) of the I.T. Act . 13.4 It was submitted that ignoring the amounts of profits of ₹ 75,23,988/- shown by the assessee company in respect of international transactions, and in view of the increase in the markup in the cost plus method, the Transfer Pricing Officer has recommended an adjustment of ₹ 64,72,973/-. This amount was accordingly added by the Assessing Officer to the total income. The Transfer Pricing Officer and the assessing officer has also ignored the fact that The agreements in respect of TeIe-rolling activity were entered into the year relevant to the A.Y. 2007-08 and therefore, the mark-up as upheld by the CIT(Appeals) in the appeal in the A. Y. 2007-08, should be adopted far this year also. 13.5 It was submitted that the Transfer Pricing Officer has applied mark-Up of ₹ 12,96,481/- even on the reimbursement of expenses received without appreciating that the said reimbursement in the earlier years were not subjected to mark-Up, The Transfer pricing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and as per the detailed order, adopted the mark-up at 27.90% which was adopted by the Assessing Officer as against earlier of 30.21% as stated above. The Transfer Pricing Officer after duly considering the facts and explanation of assessee passed the order u/s 92CA. The Assessing Officer relying on the order of the Transfer Pricing Officer, adopted the same reasons furnished by the assessee and completed the assessment by accepting 27.90% as determined by the Transfer Pricing Officer. Aggrieved, by the assessment order passed, the assessee filed appeal before the CIT(A)-4, Hyderabad. The assessee in his submissions stated all facts and details as filed before Transfer Pricing Officer and as explained, the mark-up of 15% adopted by the assessee company in the case of cost plus relating to Tele-calling Services, as an Arm's Length Percentage, is not accepted by the Transfer Pricing Officer. The Transfer Pricing Officer has already recommended cost plus 27.90% as Arm s Length Price after considering all the submissions of the assessee. However, the assessee furnished the same submissions before me also which were already decided by the Transfer Pricing Officer. Therefore, I am not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 219 Taxman 26 (Del), wherein it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee. 16.1 Even though we are not 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 ₹ 129.8 crores, which as against turnover of ₹ 1016 crores of the Infosys, ( which is only about 5 times) we are 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 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, just because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Geographic Information System services and at Sl. No. (vii) is Human Resources Services. No doubt, all these fifteen categories of products/services have been included under the major head of Information Technology Enabled Services (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading Geographical Information Systems Services , whereas those rendered by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (4) Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee s TP study, it has raised objection before the TPO that this company s employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- 13.2. Now coming to the factual matrix of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. 5) Acropetal Technologies Ltd. (seg.) 20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rule of consistency, the companies objected by the assessee in the additional grounds have to be excluded from the list of comparables. In view of the above, we direct the AO/TPO to exclude the aforesaid companies from the list of comparables and recompute the ALP afresh. Accordingly, the grounds raised by the assessee are allowed. 17.1 With regard to comparables i.e. Crossdomain Solutions Ltd. and TCS E Serve Ltd., the coordinate bench of this Tribunal in the case of S P Capital IQ (India) Ltd., in ITA No. 200/Hyd/16, order dated 27/07/2016, has directed the TPO/AO to exclude from the list of comparables, by observing as under: 1. Crossdomain Solutions Ltd. This company was considered as a comparable and listed at Sl.No.7 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. The review and business functions of Cross Domain is as follows:- With a decade of experience in Payroll Outsourcing, Crossdomain. has created a re-engineered payroll service E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 group to its corporate and retail clients. As per the annual report, the company also provide technical services involving software testing, verification and validation of software at the time of implementation and data centre management activities, which makes the company functionally incomparable with the assessee, accordingly, we direct the assessing officer to exclude the above company from comparables . Even though, Ld. DR has argued vehemently for inclusion, we do not see any reason to include as this company is functionally different and being excluded in many cases in earlier years as well being unique in the functionality. 17.2 Even in the case of M/s Corporate Executive Board India Pvt. Ltd., ITA No. 6328/Del/2012 and others, order dated 17/03/2017, the coordinate bench at Delhi directed the TPO/AO to exclude the said companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imately depend upon the outcome of the adjustment to be made to the ALP, the AO/TPO is directed to recompute the interest under the said sections accordingly. ITA No. 1509/H/16 for AY 2011-12 by the revenue and ITA No. 1175/H/16 for AY 2011-12 by the assessee. 21. As regards ground Nos. 1 2 raised by the revenue regarding accrued income shown as unmatured advances amounting to ₹ 73,61,67,985, similar issue has been decided by us in AY 2010-11 in revenue s appeal vide para No. 11(supra). As the issue is materially identical to that of AY 2010-11, following the conclusions drawn therein, we uphold the order of the CIT(A) in deleting the said addition and accordingly, dismiss the grounds raised by the revenue. 22. The grounds raised by the assessee in AY 2011-12 are similar to the grounds raised in AY 2010-11, following the conclusions drawn therein, we remit all the grounds to the file of the AO/TPO to decide the same in line with the directions given in AY 2010-11. Thus, all the grounds are allowed for statistical purposes. 23. To sum up, revenue appeals in AY 2010-11 2011-12 are dismissed and the appeals of assessee in AY 2010-11 and 2011-12 are allowed for stat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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