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TMI Blog2016 (1) TMI 1406X X X X Extracts X X X X X X X X Extracts X X X X ..... lue and such companies having different functions, assets and risk profile is to be excluded. As regards TCS E-Serve International Ltd., is concerned, the assessee had contended that the assessee is a subsidiary of TCS e-Serve Limited and being part of the group of a large conglomerate, this company has large client base. As regards TCS E-Serve Limited, though TCS E-Serve International Ltd., has not been considered in any of the above decisions, we find that the rationale on which these companies have been excluded is also applicable to TCS E-Serve International Ltd. - we direct the TPO/A.O. to exclude TCS E-Serve International Ltd., also from the final list of comparables. Accordingly, Ground No.3 of the assessee is allowed International transactions - Disallowance of expenditure of copyright infringement settlement expenses paid to the A.E. as non-operating and extraordinary expenditure while calculation of arms length margin - HELD THAT:- Unless it is found to be not relating to the normal business operations of the assessee company, it cannot be directed to be excluded from the operating expenditure of the assessee. Further, assessee’s contention that it does not relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), filed its return of income for the A.Y. 2010-2011 on 12.10.2010 declaring total income of ₹ 3,16,66,236 after claiming deduction of ₹ 3,96,58,148 under section 10A of the Act. During the assessment proceedings under section 143(3) of the Act, the A.O. noticed that assessee has entered into international transactions with it s AE. Therefore, in accordance with the provisions of section 92CA of the I.T. Act, the A.O. referred the determination of the arms length price of the international transactions to the TPO. The TPO passed an order under section 92CA(3) of the Act dated 31.10.2013 and in accordance to which, the A.O. passed the draft assessment order and the same was forwarded to the assessee for its objections, if any. 2.1. The assessee preferred its objections before the DRP and the DRP vide order dated 28.11.2014 granted partial relief to the assessee and in accordance with the DRP directions, the final assessment order was passed on 19.01.2015 against which both the Assessee as well as the Revenue are in appeal before us. In the assessee s appeal, the assessee has raised 8 grounds of appeal which are as under : 1. The assessment order passed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le-10B(2) which prescribes comparability of international transactions with uncontrolled transactions with reference to functions performed, assets employed and risks assumed ? (iii) In the facts and on the circumstances of the case, whether the Hon'ble DRP was not justified in considering the brand value of Infosys BPO and TCS e-Serve Ltd as a reason for exclusion without proving how the brand value impacted the profit margins and how the brand value makes the company functionally different. (iv) In the facts and on the circumstances of the case, whether the Hon'ble DRP was not justified in considering the predominant market presence of Infosys BPO and TCS e-Serve Ltd as a reason for exclusion without proving how the predominant market presence impacted the profit margins ignoring the fact that the alleged predominant market presence at best can earn more revenues and do not increase the profit margin and further as to how the market presence makes the company functionally different. (v) In the facts and on the circumstances of the case, the Hon'ble DRP was not justified in rejecting Accentia Technologies Ltd and eClerx Services Ltd on the mere assumption that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16,32,26,818 Avineon Europe Ltd., Provision of ITES 14,49,87,629 Avineon Inc. Reimbursement of expenses paid 20,86,461 Avineon Inc. Reimbursement of expenses received 11,93,600 Avineon Europe Ltd., Reimbursement of expenses received. 28,65,288 31,43,59,796 6.2. The TPO, after going through the T.P. documents submitted by the assessee, observed that the method of search adopted by the assessee suffers from defects which has resulted in selection of inappropriate comparables. Therefore, he rejected the T.P. documents of the assessee and conducted an independent analysis by aggregating all the transactions under TNMM. A detailed show cause notice dated 19.08.2013 was issued to the tax payer and the assessee filed its reply dated 17.10.2013. Thereafter, the TPO adopted the following 11 companies as comparables in his final list of comparables. S.No. Name of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been taken as representative of the Arm's Length Price. The issue has been considered. The receipt of reimbursement has not been routed through books of account. No independent party would render such services without any mark up. Even otherwise, recovery of expenses always forms part of operating cost in the case of independent comparable companies. Thus these expenses incurred by the taxpayer and subsequently reimbursed by AEs are added to the operating revenues as well as the operating costs for the purpose of aggregation of transactions and determining arm's length price under TNMM. The taxpayer has made payments towards the operations and on the employees as also are operational in nature and therefore cannot be excluded. Reimbursement Received 40,58,888 Arm s Length Price of Reimbursement @ 29.25% 52,46,113 Adjustment of Reimbursement 11,87,225 Thus the arm's length price of the taxpayer is ₹ 52,46,113/- and the shortfall of ₹ 11,87,225/- is treated as' adjustment u/s. 92CA of I.T. Act and the total. income of the taxpa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and large client base, has enhanced its service offerings and has also started servicing new clients during the year under review. 7.1. Without prejudice to the above arguments, Ld. Counsel for the assessee further submitted that this company showed abnormal trend in profitability and scale of operations during the last two financial years as reproduced below : Details F.Y. 2007-08 F.Y. 2008-09 F.Y. 2009-10 Income - 54,45,78,000 149,29,56,000 Other Income 16,05,000 18,59,000 - OR Total 16,05,000 54,64,37,000 149,29,56,000 Employee Costs 54,91,000 17,92,62,000 - Operational Expenses 2,25,02,000 53,71,25,000 98,53,96,000 Depreciation - 3,52,81,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard to the rival contentions and the material on record, we find that assessee has raised objections to all the above five companies which are under challenge before the TPO. As regards Accentia Technologies Ltd., is concerned, assessee had contended that the company operates in a different environment from that of the tax- payer and further that it has intangibles of Brand/IPRs. It was also stated that Accentia Technologies Ltd., used its own software on which it owns IP rights and offers different services to its customers as is evidenced from the annual report. Assessee had also objected that the company operates in knowledge process outsourcing and provides data analytics, data management and process improvement solutions to global enterprise clients. 9.1. As regards Infosys BPO Ltd., is concerned, it was submitted that the company has huge turnover with global brand value and operates on large scale with lakhs of employees. It was submitted that the talent pool available with such companies is significantly different and high value and such companies having different functions, assets and risk profile is to be excluded. 9.2. As regards TCS E-Serve International Ltd., i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. During the relevant F.Y., it is stated that an employee of the assessee had used certain photos owned by M/s. Master File Corporation, on the website of the assessee i.e., www.avineon.ind.co. and upon analysing such photos, M/s. Master File Corporation has filed suit on Avineon, USA, a related party of the assessee in USA Courts. Since the cost of litigation in USA Courts was expected to be exorbitant, it is stated that a mutual settlement was reached by the A.E. whereby, an amount of US $ 28000 (equivalent INR 12,60,112) was paid by them to M/s. Master File Corporation and was recovered from its Indian counter part i.e., the assessee herein. It is stated that this agreement was finalized and entered into on 15th April, 2010 after the end of the F.Y. 2009-10 and therefore, it does not relate to the F.Y. 2009-2010. The Ld. Counsel for the assessee submitted that the A.O. had disallowed an amount of ₹ 12,60,112 on account of copyright infringement settlement expenses without giving any opportunity of hearing or submission of information by the assessee to explain the background of these expenses. He has submitted that even the DRP has rejected the plea of the assessee. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified by the TPO/AO. Unless it is found to be not relating to the normal business operations of the assessee company, it cannot be directed to be excluded from the operating expenditure of the assessee. Further, assessee s contention that it does not relate to the relevant financial year is also to be verified by the A.O. In view of the same, we deem it fit and proper to remit this issue to the file of the TPO for re-determination as to whether it forms part of the operating expenditure of the assessee. Needless to mention, the assessee shall be given a fair opportunity of hearing. Accordingly, Ground Nos. 2 and 3 of the assessee are treated as allowed for statistical purposes. 14. As regards Ground No.4 seeking inclusion of two companies ICRA Online and Territory Services Ltd., as comparables to that of the assessee company, the Ld. Counsel for the assessee, has drawn our attention to the submissions of the assessee before the TPO and as to why the TPO has rejected these companies. He has also drawn our attention to the factual inconsistencies in the findings of the TPO against these two companies. Considering the same, we remit the issue to the file of TPO for reconsideration ..... X X X X Extracts X X X X X X X X Extracts X X X X
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