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TMI Blog2018 (8) TMI 1201X X X X Extracts X X X X X X X X Extracts X X X X ..... mative by holding that the ITAT ought not have remanded the matter to the TPO for the de novo determination of the ALP of the international transactions in the various segments. This exercise should be performed by the ITAT itself. This is on the basis of the submission of the Assessee that all the details relevant for such determination are already available on record. 18. The impugned order of the ITAT is accordingly set aside. The assessee's appeal ITA No. 6779/DEL/2015 for the concerned A.Y 2011-12 is restored to the file of the ITAT. The said appeal will be listed before it for directions on 21st August 2017". 4. Pursuant to the order of the Hon'ble High Court, representatives of both the sides were heard at length. Having heard the rival contentions, we have carefully perused the orders of the authorities below and with the assistance of the representatives we have considered the documentary evidences and judicial decisions brought on record in the light of Rule 18(6) of the ITAT Rules, 1962. 5. Facts on record show that the assessee - Bechtel India Private Limited [BIPL] was set up as a subsidiary company in India by Bechtel, USA in April 1994 to render engineering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Ltd 5.78 5 Certification Engineers International Ltd. 78.45 6 Global Procurement Consultants Ltd. 30.86 7 Gujarat Industrial & Technical Consultancy Org Ltd. 7.89 8 1BI Chematur (Engineering & Consultancy) Ltd. 25.96 9 Indus Technical & Financial Consultants Ltd. 14.78 10 Kitco Limited 27.48 11 Mahindra Consulting Engineers Ltd. 30.92 12 Mitcon Consultancy &Engg. Services Ltd. 40.19 13 NTPC Electric Supply Company Ltd. 18.01 14 Pailavan Transport Consultancy Services Ltd. 25.59 15 R E C Power Distribution Co. Ltd. 39.44 16 Rites Ltd. 58.27 17 T C E Consulting Engineers Ltd. 29.29 18 Usha Hydro Dynamics Ltd. 29.45 Average 30.19 10. In the FAS, the following comparables were adopted by the TPO: Not Company Name OP/TC % 1 Accentia Technologies Ltd. 29.18% 2 Acropetal technologies Limited(Seg) 14.36% 3 e4e Healthcare Business Services Pvt. Ltd 9.77% 4 Eclerx Sendees Ltd. 56.82% 5 Infosys BPO Ltd. 17.86% 6 Jindal Intellicom Ltd. 13.70% 7 TCS E-Serve Ltd. 69.31% 8 Microgenetics Systems Ltd -3.20% Average 25.98% 11. In the IT Infra, the following comparables were adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP. The DRP, after considering the facts and detailed submissions of the assessee, directed the TPO to exclude the following comparables from the final comparable set on account of functional dissimilarities: (i) Ashok Leyland Project Services Ltd. (ii) Bengal SREI Infrastructure Development Ltd. (iii) NTPC Electric Supply Company Ltd. (iv) Pallavan Transport Consultancy Services Ltd. 17. In the FAS and IT infra support services, the DRP accepted the approach and the comparable set considered by the TPO, though the working capital adjustment was allowed by the DRP, but the risk adjustment for computing the arm's length margin was denied. In so far as charging of interest is concerned, the DRP directed to use six month LIBOR plus 300 bonus points as the interest rate while computing the interest on inter-company receivables. 18. Pursuant to the directions of the DRP, the following comparables set have been adopted: EDS segment S. No. Company Name WC adjusted OP/TC 1 Acropetal Technologies Ltd (Engineering Design Services) 14.26% 2 Kitco Ltd 28.79% 3 T C E Consulting Engineers Ltd 28.97% 4 Cades Digitech Pvt Ltd. 2.83% 5 Certification Engine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 21. We will take up each comparable one by one. (i) KITCO LIMITED 22. The profile of this company shows that it is a 100% Government owned undertaking rendering services primarily to Central/State Government undertaking and PSUs. Most of the clients or projects undertaken by this company are either for state government or government run institutions. Therefore, the majority revenue of this company comes from government /state or centre run projects and the company derives benefit out of its parental relation with the Government in getting contract and because of this, the profit margins of this company cannot be said to be indicative of a free market economy where the appellant company and others operate. For these reasons, this company was excluded by the Tribunal in assessee's own case in assessment year 2010-11 in ITA No. 1478/DEL/2015 wherein the Tribunal relied upon the findings of the coordinate bench in the case of ThyssenKrupp Industries India Private Limited ITA No. 6460/MUM/2012. 23. The relevant findings given in the case of ThyssenKrupp Industries India Private Limited and of the coordinate bench in assessee's own case read as under: "We find it as undisputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gineering design. It is engaged in activities that extend from concept to commissioning. Whereas the assessee provides services as a captive unit to its overseas AEs. The diversified functions of this comparable company include pre-project activities, procurement assistance, project management, commissioning and coordination, inspection, construction and supervision. Further, there is no segmental accounting in the annual report of the Company which provides profitability, for the engineering design segment. Hence the same cannot be accepted as a comparable." 27. Respectfully following the findings of the coordinate bench [supra], we direct to exclude TCE Consulting Engineers Ltd from the final set of comparables. (iii). CERTIFICATION ENGINEERING INTERNATIONAL LTD 28. This company was also excluded by the Tribunal from the set of comparables in assessee's own case in assessment year 2009-10 in ITA No. 882/DEL/2014. 29. The relevant findings of the coordinate bench in assessee's own case [supra] read as under: "32. On the basis of foregoing discussion, we have no hesitation to hold that the functions of assessee Bechtel India are quite dissimilar with CIEL which was wrongly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delivery, quality control, thorough inspection, effective cost control and adherence to re schedules. Our expertise will benefit the clients in getting an unbiased cost effective and exclusive professional service, which is also environment friendly financial institutions and project authorities who are particular on judicious utilization of funds prefer independent procurement consultants like GPCL. GPCL's consultancy services encompass: * Preparing and reviewing technical specifications. * Estimation of costs. * Selection of vendors. * Inspection and expediting. * Quality control and time management. All contractual aspects involved in procurement will also be handled by the company, to ensure that the client's interests are protected. In addition to core expertise, with technical back-up drawn from the shareholding partners, who have specialization in different fields, GPCL will provide, services that are time bound, cost effective ap optimal for the clients leveraging upon knowledge of suppliers and vendors through a vast database, drawing upon its familiarity with international trade and its access to infotech. 32. A perusal of the aforementioned profile o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso exclusively completed QCI-NABET accreditation process mandatory for EIA consultants. The company has also executed environment monitoring assignments for TACO group, Volkswagon, Kirloskar Brothers. This company is also engaged in the banking and finance, entrepreneurship and vocational training. In our considered opinion, the functional profile of this company is not at all comparable with the function performed by the appellant company. Therefore, this company cannot be a good comparable. We, accordingly, direct for exclusion of Mitcon Consultancy and Engineering Services from the final set of comparables. (vi). REC POWER DISTRIBUTION COMPANY LIMITED. 32. This company is a wholly owned subsidiary of REC Ltd which is a Navratna PSU and is engaged in the rural electrification projects. Being a Government company, it cannot be considered a good comparable in the case of the appellant company in the light of the findings given by the co-ordinate bench in the case of Thyssenkrupp Industries [supra]. We, accordingly, direct the TPO/Assessing Officer for exclusion of REC Power Distribution Co, Ltd form the final set of comparables. (viii). RITES LIMITED 33. This company was exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries India Pvt. Ltd. (supra). The Government undertakings can even operate on losses in furtherance of social objectives of the Government. By relying on the judgement supra as well as on functional disparity between aforesaid comparable company and the appellant company, this company is ordered to be excluded from the list of comparables." 35. Respectfully following the findings of the coordinate bench [supra], we direct the TPO/Assessing Officer for exclusion of RITES Ltd. from the final set of comparables. (ix). USHA HYDRO DYNAMICS LTD 36. Profile of this company reveals that it is engaged in the business of cleaning of various machines and equipment for various industries and is also doing trading business whereas the business of the appellant company is engineering design and related services. Two services are highly different and cannot be said to be comparable to each other. More than 90% of its income is from cleaning process. Being a functionally different company, it deserves to be excluded from the final set of comparables. We order accordingly. 37. Having excluded the aforesaid companies from the final set of comparables, we find that the assessee has pleade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.O to include this company as a comparable." 40. Respectfully following the findings of the coordinate bench [supra], we direct the TPO/Assessing Officer for inclusion of Accuspeed Engineering Services India Limited in the final set of comparables. SEGMENT II FINANCIAL ACCOUNTING SUPPORT SERVICES SEGMENT 41. The assessee as a captive service provider is engaged in the provision of services related to accounts payable management, payroll processing, invoice processing and handling of related queries to its AEs. 42. The functions performed by the assessee are broadly outlined as under: "Invoice processing: Under this process, scanned invoices raised on Bechtel Group Companies are provided to BIPL. The financial and accounting support services team at BIPL is responsible for uploading the information presented in the scanned invoices on the in-house database of the Bechtel Group. This team also provides support in processing employee payroll processing and reimbursements for the BIPL employees. Help desk support: Under this function, BIPL provides query management and troubleshooting support to the Group Companies with respect to their supplier management functions. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice quality. Research & Development ('R&D') risk: Represents risk that R&D activities performed by an enterprise may not be successful. BIPL does not undertake any R&D activities in relation to the services provided to its AEs. Hence, it does not bear any risk in this respect. The Group is engaged in R&D for developing new processes/ methodologies, tools, etc for its operations. Accordingly, it is exposed to this risk. Credit Risk: This is the risk arising from non-payment of dues by customers. BIPL does not bear this risk as it provides services to its AE only. Its remuneration does not depend on recovery carried out by the AEs. The AEs bear this risk in relation to the possibility of non-payment from the end client. Foreign Exchange Risk: This risk relates to the potential impact on profits that may arise because of changes in foreign exchange rates. BIPL receives its remuneration in foreign currency. Accordingly, it bears the risk of foreign exchange fluctuations depending on the movement of the foreign currency vis-a-vis the Indian rupee. The Group has business dealings with a number of customers and subsidiary companies in their local c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 46. The counsel has strongly objected to the inclusion of the following comparables as they are functionally dissimilar comparables: a) Accentia Technologies Ltd b) Eclerx Services Limited c) T C S E-serve Limited 47. We will consider the objections raised by the ld. AR one by one. I. Accentia Technologies Limited [ATL] 48. The business profile of this company shows that the promoters of Accentia had initially ventured into ITES business through GeosoftTechnologies (Trivandrum) Ltd. In the year 2006, the promoters took over a Mumbai listed company named Company named HiTech Entertainment Limited and in the same year, HiTech Entertainment Limited took over Geosoft and Iridium and the name HiTech Entertainment was changed to AccentiaTechnologies Ltd. It would not be out of place to mention that Geosoft Technologies started Product Division under the name of Iridium. Products like Iridium Medical Transcription Automation Software (iMTAS), Iridium Certified Home Based Medical Transcription (iCHMT), Iridium Certified Medical Transcription (iCMT), Falcon-2000, FI HBPO automation Software, iridium Real Time School (iRTS), iridium Accounts Management System (iAMS), iridium Inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is rendering high-end services involving specialized knowledge and domain expertise and was incomparable to the assessee company engaged in providing low-end services to group customers. 53. As mentioned elsewhere, the DRP has erroneously considered the assessee as a KPO whereas the assessee, as pointed out hereinabove, is providing service to its AEs as captive service provider engaged in the provisions of services related to accounts payable management, payroll, processing invoice processing and handling of related queries to its AEs. In our considered opinion, ESL is not a good comparable as it is functionally dissimilar from the assessee company. We, accordingly, direct for exclusion of ESL from the final set of comparables. (III) TCS E-SERVE LIMITED [TCS] 54. The business profile of this company shows that it undertakes, customer service, transaction processes, collections, risk management, and analytics, and has created a lot of applications which are in the nature of intellectual property in terms of reconciliation software, fund transfers, etc. The company also undertakes software testing and validation activities. Needless to mention that this company is associated wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itoring, * Network management, including VPN services, * Service desk capabilities, * Physical security, * Network security, * Risk management, and * Regular administration. For this function, the Group Companies specify the basic requirements and BIPL is responsible for undertaking the routine activities in line with the same. The details of the services performed by BIPL with respect to IT infrastructure support services are given below: * Monitoring Services: Remote monitoring and management of the Windows based servers and machines: * Network Services: Remote monitoring and management of the various network components like routers, switches, firewalls; * Messaging Services: Managing the mailboxes and user accounts including the messaging servers like. Lotus Notes, etc; * Data Base Administration: Maintaining the various databases and carrying out administration activities; * Network Services: BIPL provides a variety of network services to help Group Companies share information more effectively. It enables the Group Companies to enjoy greater mobility and real-time data access, extend and leverage existing infrastructure and enhance service delivery with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FOSYS LIMITED 62. At the very outset, INFOSYS cannot be considered as a good comparable in the case of the appellant company because its turnover is over 1600 times more than that of the appellant's. Brand profits and owns significant intangibles. Moreover, it has significant expenditure on research & development for developing new products and innovative technology. It also incurs Significant advertisement and marketing expenditures resulting in non-routine marketing intangibles. It owns branded / proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect, thereby making it diversified product portfolio product company. This company has been rejected as a comparable in a series of judgments of the coordinate benches. In our considered opinion, INFOSYS Ltd does not make a good comparable and deserves to be excluded from the final set of comparables. We order accordingly. (II) WIPRO TECHNOLOGY SERVICES LTD [WTSL] 63. Wipro Technology Services Limited ('the Company') was incorporated on 15 September 2004 as a subsidiary of Citicorp Banking Corporation. Pursuant to the share purchase agreement dated 21 January 2009, all the shares of the Company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has applied an Employee Cost Filter, whereby the companies having employee cost less than 25% of their total cost have been excluded. The employee cost incurred by Acropetal Technologies Limited can be understood from the following chart: Particulars Amount (in 1NR) Selling and Marketing expenses - Salaries 9,040,989 - Contribution to PF 564,552 - Staff welfare expenses 29,147 General administration expenses - Salaries 11,996,581 - Contribution to PF 877,799 - Staff welfare expenses 128,000 Software Development expenses - Salaries 135,160,463 - Contribution to PF 3,851,751 - Staff welfare expenses 1,395,789 Total Employee Cost 163,045,071 Total Operating Cost 1,065,696,7 Employee Cost ratio 15.30% 67. We find that the DRP has simply confirmed the findings of the TPO by making an observation that the assessee has not been able to controvert detailed findings of the TPO in support of his decision on the comparables selected. In the light of the above factual chart, we do not find any merit in the observation of the DRP consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s shows that it is engaged into diversified services like product engineering services / outsourced product development services - Includes product designing and development product feature enhancement, product platform migration, software product testing, license management, Enterprise application development which includes customer relationship management, enterprise resource planning, business intelligence, knowledge management etc. IT service includes global onsite/ offshore software development, custom software development, software testing and Technology expertise - Includes technology competency centers in relation to Microsoft competency centre, Sun Java competency centre, Open Source competency centre, cloud computing practice, mobility practice and BI practice. Because of these highly diversified services, this company was not considered as a good comparable for IT Infra Support Services by various coordinate benches to name a few: (i) 3DPLM Software Solutions Limited [IT (TP) A No. 1303/Bang/2012] (ii) NXP Semi-conductors Pvt. Ltd. Vs. ACIT [IT(TP)A 1174/Bang/2011] (iii) Hewlett- Packard (India) Software Operation P. Ltd vs. ACIT [TS-446-ITAT-2015(Bang)TP] (iv) F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustments" be made only for the enhance comparability. But at the same time such data must be reliable and robust and there should be no scope for mechanical adjustments. The Panel has carefully considered the facts of the case and the submissions of the taxpayer. As per Rule 10B(2) and 10B(3) of Income Tax Rules, 1962, Indian transfer pricing provisions prescribe only for "reasonable accurate adjustment" and further adjustment to the margins of comparables can be made only if they enhance comparability. But at the same time the data for the same must be relevant reliable and. robust. Risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparables had actually undertaken such risk and how the same materially affected their margins. The revised OECD guidelines of.2010 has also stated. in para 3.54 as under:- "Ensuring the needed level of transparency of comparability adjustments may depend upon the availability of an explanation of any adjustments performed the reasons for the adjustments being considered appropriate how they were calculated how they changed the results for each comparable and how the adjustment improves 12 ITA No.1476/Del/2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g disallowance of utilization adjustment and risk adjustment in para 8.2.6 further goes to prove that merely academic reasons have been given to disallow the same. Case law relied upon by the DRP is not applicable to the facts and circumstances of the case when examined in the light of data brought on record by the taxpayer to decide the issue in controversy. So, findings of DRP/TPO on this issue are liable to be reversed. Consequently, Ground No.2 read with Ground No.1.6 are determined in favour of the appellant for statistical purposes and the file is ordered to be restored to the TPO to decide the matter afresh by passing speaking order after providing opportunity of being heard to the parties." 78. Respectfully following the findings of the coordinate bench, we direct accordingly. 79. Last issue relates to adjustment on account of receivables. 80. This issue was decided in favour of the assessee and against the Revenue by the coordinate bench in the assessee's own case for A.Y 2010-11 in ITA No. 1478/DEL/2015 and order of the Tribunal was upheld by the Hon'ble High Court and Hon'ble Supreme Court in CA No. 4956 of 2017. In A.Y 2010-11, the coordinate bench ash given ..... X X X X Extracts X X X X X X X X Extracts X X X X
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