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TMI Blog2017 (11) TMI 1838X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation Technology Enabled Services ('ITES'). For asst. year 2012- 13, the assessee filed its return of income on 30/10/2012 declaring total income of Rs. 6,84,77,190/-. The case was taken up for scrutiny and a reference, u/s. 92CA of the Act was made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO)for determination of the ALP in respect of the international transactions entered into by the assessee with its AE's in the year under consideration. The TPO passed an order u/s. 92CA of the Act dated 29/1/2016 proposing an adjustment of Rs. 9,27,80,713/-; the breakup of which is as under. (i) ITES adjustment Rs. 4,49,14,397/- (ii) Interest chargeable Rs. 4,78,66,316/- Total T.P. adjustment Rs. 9,27,80,713/- After receipt of the TPO's order u/s. 92CA of the Act, the AO passed the draft order of assessment for asst. year 2012-13 dated 25/2/2016 incorporating the aforesaid TP adjustments as proposed by the TPO (Supra). 2.2 Aggrieved by the draft order of assessment dated 25/2/2016 for asst. year 2012-13, the assessee filed its objections thereto before the DRP which disposed off issuing directions u/s. 144C(5) of the Act, vide order date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt as contemplated under Section 92C of the Act. 4.2 Honourable DRP have erred in law and on facts by upholding the approach of the learned AO/TPO in adopting! modifying the following additional filters for conducting Transfer Pricing analysis, without appreciating the Transfer Pricing Documentation prepared by the Appellant. 4.3 Honourable DRP have erred in law and on facts by modifying the approach of the learned AO/TPO and yet including additional comparable companies without considering the detailed submissions of the Appellant. * Accentia Technologies Limited; * TCS E-Serve Limited; * BNR Udyog Limited (Seg) (Medical Transcription); and * Infosys BPO Limited 4.4 Honourable DRP have erred in law and on facts by upholding the approach of the learned AO/TPO in rejecting functionally comparable companies selected in the Transfer Pricing Documentation of the Appellant and the comparable companies sought for inclusion by the Appellant at the time of proceedings before the learned TPO. * Caliber Point Business Solutions Limited; * Cosmic Global Limited; * Datamatics Financial Services Limited; and * ICRA Techno Analytics Limited. 4.5 Honourable DRP has erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in law and on facts by upholding the approach of the learned AO/TPO of considering the miscellaneous income as non-operating in nature which is earned by the Appellant in the normal course of its operations of its business. 8. Risk adjustment and working capital adjustment 8.1 Honourable DRP have erred in law and on facts by upholding the approach of the learned AO/TPO in not appreciating that the Appellant being a captive service provider operates at lower risk levels as compared to comparable companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments to the margins of the comparable companies. 8.2 Honourable DRP have erred in law and on facts by concluding that the arithmetic mean margin of the comparable companies takes care of the adjustments on account of risk differences and thereby upholding the approach of the learned AO/TPO of not granting risk adjustment. 8.3 Honourable DRP erred in law and on facts by ignoring that e4e BS operates as a captive service provider for its AE and therefore there is no need for undertaking negative working capital adjustment when taxpayer does not carry any working capital risk and is fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able ORP has erred in considering the average interest on short term deposit for the period 180 days to 1 year and in not considering US dollar LIBOR prevailing during FY 2011-12 while determining the ALP, in view of the fact that the receivables are dollar denominated. 9.6 Honorable DRP and the learned AO/TPO have based his conclusion and consequent addition of notional interest on outstanding trade debtors, based on a number of assumptions and surmises as indicated below, to which the Appellant objects since the same neither represent facts nor is in line with the position in law and commercial practices. 10. Other transfer pricing related grounds 10.1 Honorable DRP and the learned AO/TPO have erred, in law and on facts in holding that the transactions between the Appellant and its AE were not at an ALP as defined under section 92F(ii) of the Act and upholding the adjustment to the ALP made by the learned TPO. 10.2 Honorable DRP and the learned AO/TPO have failed to appreciate the Appellant's commercial judgment about the application of arm's length principle which is tied to the business realities. 10.3 Honorable DRP and the learned AO/TPO have erred in law and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (Seg.)(Medical Transc) 41.58 9 Excel INfoways Ltd. (Seg.) 29.79 10 e4e Healthcare Services Pvt. Ltd. 19.85 Average PLI 28.11 % 5.4 The TPO then computed the arms length price ('ALP') of the ITES of the assessee's transactions with its AE's as under:- Operating Cost Rs. 8,23,79,455 Arm's Length Mean Margin on Cost 28.11% Less : Working Capital Adj. (-) 48.38% Adjusted Margin 76.49% ALP @ 176.49% of operating cost Rs. 14,53,90,866 Price Received Rs. 10,04,76,469 Shortfall being adjustment in respect of the ITeS transactions. Rs. 4,49,14,397. 5.5 The TPO also proposed a TP adjustment in respect of interest chargeable on outstanding receivables for its AE's as under : Receivables exceeding 6 months Rs. 34,56,05,173. ALP Interest 13.85% Interest chargeable Rs. 4,78,66,316 5.6 These TP adjustments (Supra) were included by the AO in the draft order of assessment for asst. years 2012-13. The assessee filed its objections in this regard before the DRP, which were disposed off by the DRP by issuing directions u/s. 144C(5) of the Act vide order dated 23/11/2016. Pursuant thereto, the AO passed the impugned order of assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced reliance on the decisions of the co-ordinate bench of this Tribunal in the assessee's own case for asst. years 2011-12 in e4e Business Solutions India (P.) Ltd. v. Dy. CIT [IT(TP) A No: 1397/Bang/2016 dated 13/1/2017]. 7.2 Per Contra, the ld DR for Revenue supported the orders of the TPO in including this company, 'Accentia' in the final set of comparables, wherein it has been held that this company is providing only ITES Services and is not into software products or licensing activities. 7.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The co-ordinate bench of this Tribunal in the assessee's own case for asst year 2011-12 (Supra) has excluded this company from the list of comparables. In doing so, the co-ordinate bench relied on the decision of the Tribunal in the assessee's own case for asst. year 2009-10 in IT(TP)A No: 1777/Bang/2013, wherein the Tribunal has rendered the finding that 'Accentia' is engaged in diversified activity of medical transcription, medical coding, medical billing, etc. which are different from the activities of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gments has not been disclosed; that 'TCS' has huge turnover, and is a global brand with lakhs of employees. According to the ld AR since the TPO himself had rejected this company, 'TCS', as a comparable in the assessee's own case in the earlier year on account diversified activities, this company ought to be excluded in the year also. 8.2 The ld DR placed strong reliance on the orders of the authorities below in including this company, 'TCS', in the final set of comparables to the assessee. 8.3.1 We have heard he rival contentions perused and carefully considered the material on record. From a perusal of the Annual Report of this company, 'TCS' for the year under consideration, it is seen that this company is an integral part of the Tata Consultancy Services strategy to build on its Full service Offerings ranging from IT Software development services to BPO services. This company offers BPO services in Banking, Financial Services and Insurance Services, the Operations including core business services, Analytics and Insights and support services for data and voice recording. 8.3.2 According to the assessee, the TPO rejected this company, 'T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Medical Billing and Coding services in addition to Medical Transcription, but has not reported the results from these two activities in different segments, thereby rendering its results incomparable. Therefore, this company can be classified as rendering KPO services. 9.2.2 Apart from the above, it is also contended that this company, 'BNR', should be excluded from the set of comparables as its RPT at 49.60% is higher than the RPT filter of 25% applied by the TPO (Viz., that 'BNR' has RPT revenues of Rs. 1.70 crores as against total revenues of Rs. 3.63 crores) and thereby fails the RPT filter. It is also contended that this company also fails the service income filter applied by the AO. 9.3 Per contra, the ld DR for Revenue supported the order of the TPO in including this company in the list of comparables to the assessee. 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record. The contention of the assessee that this company, 'BNR', fails the RPT filter at the entity level has been countered by the TPO who has mentioned that while this company has three segments, the benchmarking has been done only with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adequate opportunity of being heard and to file details/submissions in this regard which shall be duly considered. We hold and direct accordingly. 10. Infosys BPO Ltd., ('Infosys') 10.1 This company was selected by the TPO and included in the final set of comparables overruling the objections of the assessee to its inclusion on grounds of its being functionally different from the assessee. Before us also, the assessee seeks exclusion of this company from the list of comparables on grounds this company, 'Infosys', being functionally different as it is engaged in providing integrated IT and BPO solutions across a variety of verticals like Banking, Communication, Media and Entertainment, Manufacturing, Retail and Energy sectors. It is also contended that this company has diversified activities, owns IPR's and has tremendous brand value. In support of its claims/contentions, this assessee placed reliance on the decision of the coordinate bench in the assessee's own case for Asst. year 2011-12 in IT(TP)A No.1397/Bang/2016 dated 13/1/2017. 10.2 Per contra, the ld DR for Revenue supported the orders of the authorities below. 10.3.1 We have been heard the riva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded this company i.e. Infosys BPO Ltd. from the list of comparables to low end ITES/BPO support service providers as it is functionally different being an established market leader, enjoying huge brand value and goodwill, with huge economies of scale and diversity and geographical dispersion of customers. At para 24 of its order, the co-ordinate bench has held as under :- "(7) Infosys BPO Ltd 24. This company is listed at Sl.13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit & loss account of this company for the F.Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F.Y. 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at Rs. 31,86 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t financial year. In support of the assessee's above contentions for inclusion of this company 'Caliber' as a comparable, reliance was placed on the decision of the Hon'ble Delhi High Court in the case of CIT v. Mckinsey Knowledge Centre India Pvt. Ltd. (Supra). 11.2 Per contra, the ld DR for Revenue vehemently supported the orders of the authorities below. 11.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement cited. From a perusal of the TPO's order it appears that this company, 'Caliber' has been excluded solely on the ground that this company has a different financial year. It is a settled principle that the application of different financial year ending is an appropriate filter as companies having different financial years cannot be a good comparable. 11.3.2 In the case cited by the assessee (Supra), it has been held that a comparable cannot be excluded solely on the ground that comparables have different financial year endings. If from the data available on record, the results of the financial year can be reasonably extrapolated, then the comparable cannot be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en its reasoning as to why this employee filter is an appropriate filter for ITES companies. However, in our view, a filter cannot be applied selectively or arbitrarily, as applying a filter could alter the contours of the comparability analysis. In this view of the matter, we deem it appropriate to remand the issue of comparability of this company to the file of the TPO for fresh consideration. The TPO shall take into account the observations of the DRP, while considering the applicability of the employee cost filter and also apply the decision taken in this regard to all the other companies thrown up in the comparability analysis. We make it clear that we are not expressing any opinion on whether this filter is an appropriate one. 13. Datamatics Financial Services Ltd.,- 'Datamatics' 13.1 This company was selected by the assessee in its TP study. The TPO, however, rejected this company on the grounds that no data is available. The DRP upheld the rejection of this company on the ground that while it is engaged in the business of registration and share transfer work and ITES, but there is no segmental information available in the Annual report of this company. Further, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information related to ITES and therefore excluded this company. 15.2.2 The principle on which the DRP has excluded this company, 'Jindal' is valid. It is settled principle, upheld by several orders of the coordinate benches of this Tribunal, that if a company renders both IT and ITES services and there is no segmental information, then that company ought to be rejected as a comparable. However, in our considered view, the procedure adopted by the DRP is not proper. This company, 'Jindal', was selected as a comparable by the TPO, which was accepted by the assessee. If the DRP felt that this company had been wrongly selected by the TPO, the least the DRP ought to have done was to have afforded an opportunity to both the assessee and the TPO to explain their stand, in the light of DRP's observations, instead of suo moto excluding this company from the set of comparables. In the fitness of things, the assessee and TPO should be afforded adequate opportunity of being heard in the matter. In this view of the matter, we remand the issue of the comparability of this company 'Jindal' to the file of the DRP to determine the issue afresh after affording both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion in the Act which seeks to tax any hypothetical income, the assessee cannot be subjected to tax on 'hypothetical income'; i.e., to say an income which ought to have been earned or that income which the assessee failed to earn. The ld AR further submitted that since in the case on hand, no income has been earned or can be said to have been earned by the assessee in respect of interest chargeable from AE's, the question of applying the provisions of section 92 of the Act does not arise. According to the assessee, notwithstanding its contention that no notional interest is chargeable, if the outstanding receivables are to be treated as being in the nature of loan, then the interest should be benchmarked with LIBOR rates and not Indian Bank rates. 16.5 Per contra, the ld DR supported the orders of the TPO and the directions issued by the DRP. In support of the contention that outstanding debtors constitute international transactions warranting adjustment, the ld DR placed reliance on the decisions of the Chennai Bench of ITAT, in the case of Professional Access Software Development (P.) Ltd. v. Dy. CIT [2017] 79 taxmann.com 25. It was also submitted that the TPO has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is a long delay in realization of the receivables from the AE's. Therefore, there are contrary decisions of various Tribunals on this issue. 16.6.2 Be that as it may; even if the receivables outstanding from AE's are to be treated as international transactions subject to transfer pricing adjustment, we find that the process and procedure adopted by the TPO in this regard is not in order. The TPO has assumed that receivables outstanding beyond a period of 6 months are to be treated as loans and requires adjustment. Even if the receivables outstanding are to be treated as international transactions, the TPO should have performed a comparability analysis to determine whether the transaction requires to be adjusted. The TPO ought to have examined whether the assessee has charged interest for delayed realizations in the case of Non-AE transactions, if any. The TPO should have also examined whether the debtors were outstanding beyond the specified period purely because of business reasons and whether this is a common business practice prevailing in the industry and the delay, if any, in the payment is not due to extension of the credit period by the assessee to its AE's. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the margin. Similarly, as the details in this regard were stated to have not been filed before the DRP also, the DRP upheld the action of the TPO. Before us it was submitted that the assessee had furnished details to the DRP in support of its claim that foreign exchange gain was only out of transactions related to ITES and therefore should be treated as operational in nature. 17.3 After considering the rival submissions and perusing the record we find that the assessee, in Form No: 35A submitted before the DRP, at pgs 590 to 592 of paper book, has furnished certain details on this issue, which does not appear to have been considered by the DRP. In view of the above, we deem it appropriate to remand this issue to the file of the TPO for examination and consideration of the details filed and to decide the issue afresh, as per the principles laid down by the decision of the coordinate bench of this Tribunal in the assessee's own case for asst. year 2009-10 (Supra), after affording the assessee adequate opportunity of being heard in the matter and to file details/submissions required. Consequently, ground no: 6 (6.1 to 6.4) raised by the assessee is allowed for statistical purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, as discussed above, we dismiss this claim raised by the assessee for grant of risk adjustment 20. WORKING CAPITAL ADJUSTMENT 20.1 As regards its claim for working capital adjustment, the assessee contends that the TPO has computed negative working capital adjustment which is not tenable. In support of its contentions, the assessee placed reliance on the decision of the ITAT, Hyderabad Bench in the case of Adaptec (India) (P.) Ltd. v. Asstt. CIT [2015] 57 taxmann.com 307. 20.2.1 We have heard the rival contentions and perused and carefully considered the material on record. A perusal of the TPO's order u/s. 92CA of the Act indicates that the working capital adjustment has been computed at (-) 48.38%, which appears to be an extremely high negative figure. As contended by the assessee, the Hyderabad Bench of the ITAT in the case of Adaptec (India) Pvt. Ltd., (Supra) has held that there cannot be a negative working capital adjustment. Similar decisions have been rendered by co-ordinate benches of this Tribunal. 20.2.2 We, however, find that the assessee has raised generic ground before the DRP that the computation of working capital adjustment has been wrongly done; without ..... X X X X Extracts X X X X X X X X Extracts X X X X
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