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TMI Blog2018 (6) TMI 1639X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is a captive service provider. ITAT Delhi Bench had the occasion to consider the comparability of another company providing medical transcription service i.e. Accentia Technologies Ltd. with the assessee company in assessee s own case BT e-Serv (India) (P.) Ltd. v. ITO [ 2017 (11) TMI 64 - ITAT DELHI] by holding that the functions of medical transcription are not at all comparable to the functional profile of the assessee company. Eclerx Services Limited was functionally different from the assessee company as this company was engaged in Knowledge Process Outsourcing (KPO) services and was engaged in providing financial services like trade processing, reference data services like web content management and merchandising execution, web analytics, social media etc Excel Infoways Limited ompany was also functionally dissimilar as it was engaged in IT enabled BPO services and development of infrastructure facility. It has also been submitted that this company fails the employee cost filter as well as the diminishing revenue filter. TCS e- Serv Ltd. functionally dissimilar to the assessee company as this company provides KPO services to banking and financial services industry in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. Dispute Resolution Panel-I, New Delhi for assessment year 2012-13. 2. The facts in brief are that the assessee company was in the business of providing IT, ITes, Back office Support and other related services to group companies located outside India. The assessee company also had a unit registered in the Special Economic Zone which is operational since 1.4.2008. The return of income was filed declaring income of ₹ 21,650/- after claiming deduction u/s. 10AA of the Income-tax Act, 1961 (hereinafter called 'the Act') amounting to ₹ 10,28,80,615/- by the assessee company. During the year, the company had undertaken the following international transactions:- (i) Provision of IT-enabled services - ₹ 650,738,706/- (ii) Reimbursement of expenses to Associated Enterprise - ₹ 1,176,825/- 2.1 A reference was made to the Transfer Pricing Officer (TPO) by the Assessing Officer (AO). The TPO made an adjustment u/s. 92CA of the Act amounting to ₹ 9,23,05,730/- as under:- (i) Adjustment in respect of receivables - ₹ 4,49,57,277/- (ii) Adjustment in respect of IT enabled services - ₹ 4,73,48,453/- 2.2 Aggrieved, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng provisions are special provisions relating to avoidance of tax while the learned AO/TPO in their respective orders have not substantiated that the applicant has indulged in avoidance of tax. 2. The learned AO/TPO/DRP have erred by not accepting the economic Analysis undertaken by the appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("the Rules"). 3. The learned AO/TPO/DRP have erred in making an adjustment under Section 92CA(3)of the Income-tax Act, 1961 ("Act") without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of Section 92C(3) of the Act. 4. The learned TPO/AO/DRP have erred in: a. Not accepting the use of multiple year data, as adopted by the appellant in its Transfer Pricing ('TP') documentation; and b. Determining the arm's length margins/prices using data pertaining only to financial Year ('FY') 2011-12 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements. 5. The learned AO/TPO/DRP have erred by rejecting certain functionally comparable companies identified by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initiating penalty proceedings under section 271(1)(c) of the Act." 3. The Ld. AR submitted that in the final set of comparables, the following 12 companies had been selected:- 1. Calibre Point Business Solutions Limited 2. e4e Healthcare Limited 3. Informed Technologies India Limited 4. Infosys BPO Limited 5. Jindal Intellicom Limited 6. Microgenetics Systems Limited 7. Accentia Technologies Ltd. 8. Acropetal Technologies Ltd. 9. BNR Udyog Limited 10. Eclerx Services Limited 11. Excel Infoways Limited 12. TCS e Serv Ltd. 3.1 The Ld. AR submitted that out of these 12 companies, the assessee was praying for exclusion of Infosys BPO Limited, BNR Udyog Limited, Eclerx Services Limited, Excel Infoways Limited and TCS e-Serv Ltd. The Ld. AR also submitted that the assessee was also praying for inclusion of R Systems International Limited (Segmental) which had been incorrectly rejected by the TPO/DRP. 3.2 The Ld. AR pleaded for exclusion of these companies as under:- (i) Infosys BPO Limited The Ld. AR submitted that this company was functionally dissimilar to the assessee company as this company was engaged in providing high-end integrated services. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Bangalore Bench in the case of e4e Business Solutions v. ITO [2017] 87 taxmann.com 254. The Ld. AR also submitted that this company had shown an exceptional growth of 2164% in the present year and, therefore, it was liable to be excluded on this ground also. (iii) Eclerx Services Limited The Ld. AR submitted that this company was functionally different from the assessee company as this company was engaged in Knowledge Process Outsourcing (KPO) services and was engaged in providing financial services like trade processing, reference data services like web content management and merchandising execution, web analytics, social media etc. It was submitted that this company was held to be KPO service provider by the Hon'ble Delhi High Court in Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573. Reliance was also placed on the order of ITAT Delhi Bench in the case of Hays Business Solutions (P.) Ltd. (supra) wherein this company had been excluded. (iv) Excel Infoways Limited With respect to this company, it was submitted that this company was also functionally dissimilar as it was engaged in IT enabled BPO services and development of infrastructure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems had a different financial ending. Ld. AR submitted that the results for financial year 2011-12 can be compiled based on quarterly results. Reliance was placed on the judgment of Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd. in ITA No. 217/214 for the proposition that a different financial year ending is not an appropriate filter. Reliance was placed on the order of Delhi Benches in Hays Business Solutions (P.) Ltd. (supra) and Baxter India (P.) Ltd. (supra) wherein this company had been directed to be included. 3.4 Coming to ground nos. 10, 11, 12 and 13, the Ld. AR submitted that all these grounds related to denial of working capital adjustment to the assessee company. Ld. AR submitted that details of computation of the working capital adjustment had been submitted before the TPO and the TPO had rejected the same without pointing out any defect in the computation of the assessee. Our attention was drawn to pages 269 to 274 of the paper book wherein the computation of the working capital adjustment as submitted before the TPO was reproduced. The Ld. AR submitted that this ground was before the ITAT in earlier assessment years 2010-11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d integrated services. It has been submitted and demonstrated from the annual report of BPO Infosys Ltd that this company is rendering a wide array of BPO services in the nature of business platforms, customer service outsourcing, finance and accounting, human resources outsourcing, legal process outsourcing, sales and fulfilment sourcing and procurement outsourcing etc. On the other hand, it is seen that the assessee provides only back office support services in the nature of IT enabled services and it is essentially a captive service provider. Although, the assessee has pleaded for exclusion of BPO Infosys Ltd. on other grounds also, it is our considered opinion that the wide functional dissimilarity between the two companies is sufficient to accept the asseessee's plea for exclusion of this company from the final set of comparables. We also find that BPO Infosys Ltd. was directed to be excluded by ITAT Delhi Bench in the case of Baxter India (P.) Ltd. (supra) which also provided captive IT Enabled Services to its AE. The year under consideration before the ITAT in the case of Baxter India (P.) Ltd. (supra) was also AY 2012-13. The relevant observations are contained in Para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee company as this company was providing medical transcription service. We find that, undisputedly, BNR Udyog Ltd. is carrying out medical transcription, medical billing and coding whereas the assessee is a captive service provider. ITAT Delhi Bench had the occasion to consider the comparability of another company providing medical transcription service i.e. Accentia Technologies Ltd. with the assessee company in assessee's own case BT e-Serv (India) (P.) Ltd. v. ITO [2017] 87 taxmann.com 251 (Delhi) for AY 11-12 in ITA No. 99/Del/2016 by holding that the functions of medical transcription are not at all comparable to the functional profile of the assessee company. The relevant observations of the co-ordinate Bench in assessee's own case for AY 11-12 are as under: "12. We have carefully considered the rival contentions and perused the annual accounts of the Accentia Technologies Limited submitted at pages No. 1 to 108 of the paper book. As per page no. 42 of the annual report the nature of services performed by this company are functions of medical transcription. 'Medical transcription' services are IT enabled services that require specialized sk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out by well-trained persons who must be knowledgeable in the field of pharmacology. Further the comparable company has considered all the 3 segments as one segment. On perusal of pages No. 78 of the annual report of the company it is noted that w.e.f. 1st April 2008 the company which is engaged in the similar line of business has been amalgamated with this company. However, we do not find any reason to exclude this company for the reasons of amalgamation because the functions performed by the amalgamated company and amalgamating company are similar. But on comparison of the functional profile of the comparable with assessee company, which provides corporate services, marketing and business development services etc which are of routine administrative nature, we find that functions of the assessee company are not at all comparable with the medical transcription function of the comparable company. But same cannot be said with respect to the medical coding and medical billing activities of the comparable company which are almost similar to the support functions performed by the assessee. However, in absence of segmental information available in case of comparable company with respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability services. From the above narration of the nature of business carried on by e-Clerx Services Ltd, it is manifest that the same being a KPO company is quite different from the assessee, providing only IT enabled services to it AE. Apart from that, it is further observed that this company has significant intangible which it uses in rendering KPO services, against which the assessee does not have any intangibles. As such, e-Clerx Services ltd. cannot be considered as comparable. The same is directed to be eliminated." 39. We also find that assessee is also engaged in this appeal in ITES industry and therefore the judgment of the coordinate bench cited by the Ld. authorized representative appropriately applies to the facts of this case also. In the above decision, it has been held that the e- Clerx services Ltd. is a knowledge process outsourcing company providing data analytics and data process solutions to global clients. It is further held that it is a KPO company and is quite different from the assessee providing only IT enabled services. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 (INR'000) (INR'000) (INR'000) (INR'000) (INR'000) (INR'000) Revenue 204,161.34 203,526.39 79,096.95 76,098.95 52,792.12 22,994.38 Operating Cost 43,986.99 50,571.24 55,991.57 47,539.99 41,355.78 22,895.57 Operating Profit 160,174.35 152,775.14 23,105.38 28,558.55 11,436.34 98.81 OP/OC(%) 364.14% 301.03% 41.27% 60.07% 22.65% 0.43% 25. From the above, it is clear that above company does not pass the diminishing revenue filter as adopted by the TPO himself since its revenue has decreased consistently from financial years 2009-10 to 2011-12 i.e. including the year under consideration. Further, the above company has super normal profits. We further find the submissions of the assessee that Excel Infoways Ltd. has super normal profits during the current year has not been controverted by the Revenue. We find the Mumbai Bench of the Tribunal the case of Willis Processing Services (India) Pvt. Ltd. (supra) has upheld the order of the DRP rejecting Excel Infoways Ltd. as comparable company on the ground that the company has a super normal profit of 203.80% and low employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voice services, business process management and analytics. It was further stated that during the year it was taken over by the TCS Ltd and therefore it has an exceptional year of operation. It was further contested that it be high risk and also earns super normal profit and further it has insufficient segmental information. He further held that this comparable has been excluded by the Ld. dispute resolution panel in assessment year 2010 - 11 on account of being functionally dissimilar to the assessee. He further relied on the decision of the coordinate bench in case of capita India private limited versus ACIT and Actis global services private limited versus ITO. 41. The Ld. departmental representative vehemently contested the arguments of the Ld. authorized representative and submitted that above comparable is functionally carrying on the same activities and therefore has rightly been included by the Ld. transfer pricing officer for comparability analysis. 42. We have carefully considered the rival contention and also perused the orders of the lower authorities with respect to this comparable. We also perused the direction given by the Ld. dispute resolution panel for assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d TPO. Before us the Id AR submitted that different year end is not an appropriate filter, anyway, he submitted that audited results of R System for the comparable period are available. Ld DR did not state that this company is functionally not comparable with the functions of the assessee but stated that only reason for its exclusion is unavailability of the audited accounts. 14. We have carefully considered the rival contentions. Undisputedly the R Systems Ltd is having different financial year. However, this company is listed company and quarter to quarter its financial results are available in public domain. Such financial results are also produced by the Id AR before us. In view of this we are of the opinion that once a comparable is found functionally similar and further authentic and reliable financial data are available relevant to the accounting period of the appellant then merely the comparable has different financial year, it cannot be excluded. In view of this we direct the assessee to produce this information and demonstrate before ld TPO that relevant, authentic and reliable information with respect to the comparable is available in public domain and the ld Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rival contentions and specifically sought the details of such workings from the assessee. We also asked ld AR that whether working of such adjustment claim was given to the Assessing Officer or not. We have also sought copies of such claim for the workings of adjustment. However, no such working was also given to us. In view of this we reject the request for adjustment of margins of the comparable on account of working capital and risk." 5.7.1. However, in the proceedings before us for this year, it has been demonstrated by the Ld. AR that the working of the working capital adjustment claim was submitted before the TPO/AO. We also note that the claim of the assessee was rejected without assigning any reason. In such a circumstance, it is our considered opinion that the TPO/AO should consider the claim of the assessee with regard to working capital adjustment afresh after duly examining the computation as submitted by the assessee and after giving due opportunity to the assessee. 5.8. The assessee has also raised grounds against the action of the TPO in making transfer pricing adjustment on account of interest on receivables. Although, the Ld. AR has placed vehement reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... units in SEZ. He referred to the Master Circular on export of goods and services issued by the Reserve Bank of India and referred to the condition of the export proceeds repatriation pertaining to SEZ units. He further relied upon the decision of the Hon'ble Delhi High Court in case of CIT Vs. Bechtel India Pvt. Ltd dated 21.07.2016 and of Pr. CIT Vs. Ameriprise India Pvt. Ltd. in ITA NO. 461/2016 dated 19.10.2016. He therefore submitted that such delay in receiving outstanding receivable is not an 'international transactions', hence, it cannot be benchmarked separately, further there is no interest cost which can be imputed. 21. The Ld DR vehemently contested that outstanding sum of invoices is akin to loan advanced by the assessee to its foreign AE., hence it is an international transaction as per explanation to section 92 B of the act. He therefore, submitted that TP adjustment on that account is required to be made in view of the decision of Special Bench of ITAT in case of Instrumentation Corporation Ltd Vs. ADIT (TS-467-ITAT-2016-Kol-TP). He further submitted that Master Circular of the RBI does not determine whether there is an international transaction or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its AEs. Therefore it is evident that assessee has not stated credit and collection risk in its TP report. Looking at the period of outstanding invoices it is apparent that it is the not the case of mere sale but it is a case of sales as well as loan to its AE in the form of overdue outstanding receivables. The argument that assessee is an interest free entity and does not pay any interest and therefore no interest shall be imputed in the outstanding invoices is also devoid of merit because it is not a case of allowance of interest expenditure in the hands of the assessee but an 'international transaction' to be benchmarked at arm's length. It is a case of determination of arm's length price of a transaction. Undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an 'international transaction'. The natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have any hesitation in confirming the Transfer Pricing adjustment made by the Id. Transfer Pricing Officer on outstanding receivable beyond 30 days credit period applying the interest rate of 14.88% p.a. and computing the interest receivable at ₹ 31577050/-. In the result, grounds Nos. 10 to 12 of the grounds of the appeal are dismissed." 5.8.1. Although, initially we were inclined to dismiss the grounds raised by the assessee by following the order of the co-ordinate Bench, we also note that no detailed arguments were made by either of the parties on this issue and it is not discernible from the records if there are any distinguishable facts in this year as compared to the facts in AY 10-11 on this issue. Therefore, it is our considered opinion that in the interest of justice, the issue of adjustment in respect of interest on receivables should be re-examined by the TPO/AO after giving adequate opportunity to the assessee to present its case and also after giving due consideration to the order of the ITAT in assessee's own case for AY 10-11 (supra) on this issue. 5.8.2. Accordingly, ground nos. 10, 11, 12 and 13 are allowed for statistical purposes. 6. In the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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