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TMI Blog2019 (9) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... nt functional model as compared to the assessee Infosys Technologies Ltd is into ITeS and its entire revenue is from BPO services only. Therefore, factual findings of the DRP that it falls income of less than 75% of the total operating revenue filter is not correct. Therefore, we remand this issue of comparability of this company to the TPO for reconsideration of the issue by considering only the operating revenue. As regards inclusion of Ace BPO Services Ltd is concerned, it is the case of the assessee that this company satisfies all the filters applied by the TPO and therefore, is functionally comparable to the assessee company. He pointed out that the TPO and the DRP have rejected this company on the ground that no information as to the RPT filter has been reported in its Annual Report and therefore, complete information is not available. The learned Counsel for the assessee has drawn our attention to page 507 and 508 of the paperbook wherein details of the RPT transactions are given. Having regard to the fact that the details with regard to the RPT transaction of the company have been given, we are of the opinion that the findings of the DRP TPO are factually incorrect. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has shortlisted 7 companies as comparable to the assessee, whose arithmetic mean PLI (OP/OC) was 11.13% as against the assessee's PLI of 11.01% and therefore, the assessee treated this transaction to be at Arms' Length. 5. The TPO analysed the transactions and observed that the transaction of Software Development Services was at ALP because the margin of the assessee was higher than the average margin of the comparables and hence no adjustment was required. 6. As regards Software Distribution Services, the TPO rejected the RPM method adopted by the assessee and applied TNMM as the most appropriate method and arrived at 9 companies as comparable to the assessee whose average margin was 1.37% as against the margin of the assessee at -6.44%. Therefore, he proposed an adjustment of ₹ 4,22,90,359/- u/s 92CA of the Act. 7. As regards the ITeS segment, the TPO observed that the assessee's TP analysis suffers from various defects which has resulted in selection of inappropriate comparables and rejection of appropriate comparables. Therefore, the TPO rejected the assessee's TP study and made an independent analysis by aggregating all the transactions under TNMM. On the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Whose data is not available for the FY 2012-13 were excluded: ii.. Companies whose IT Enabled services income <₹ 1 cr. were excluded iii. Companies whose IT Enabled services is less than 75% of the total operating revenues were excluded iv. Companies who have more than 25% related party transactions (soles as well as expenditure combined) of the soles were excluded v. Companies whose employee cost is less than 25% of the soles were excluded vi. Companies who have export soles less than 75% of the soles were excluded. vii. Companies who have diminishing revenues/persistent losses for the last three years up to and including FY 2012-13 were excluded viii. Companies having different financial year ending {i.e. not March 31, 2013) or data of the company does not fall within 12 month period i.e. 01-04-2012 to 31-03- 2013~ were rejected ix. Companies that are functionally different from the taxpayer were excluded. x. Companies that are having peculiar economic circumstances were excluded". 8. Applying the above filters, the TPO rejected the comparables selected by the assessee by observing as under: S.No Name of the comparable Remarks 1 Calib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case laws of various Tribunals in this regard. In this regard, on going through the submissions made it is seen that the taxpayer has projected that receivables at the end of year are forming part of the WCA computation and as such the interest is already impacted therein. However, the receivables are off-set by payables also and in case to case differ. However, there may be a situation where the taxpayer does not receive the amounts due throughout the year but the entire payment is received in March itself then in this case the receivable at the end of the year would be almost nil and it would give a favourable WCA to the taxpayer. Also, the WCA takes into account the payables as well as receivables at the end of the year but does not take into account the receivables within the year. Therefore, the contention of the taxpayer is not acceptable". As per the intercompany agreements filed by the assessee, we have noticed that the payment terms is 60 days from the end of the relevant quarter an in some agreements it is 90 days from the end of the relevant quarter etc. We have considered the due date as 60 days from the end of the relevant quarter as an uniform due date for the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 42,957,746 (based on the provisions of Chapter X of the Income-tax Act, ('the Act') and the said addition being wholly unjustified are liable to be deleted. TRANSFER PRICING Incorrect selection of comparables 2. Hartron Communications Limited 2.1. On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding/confirming the action of the Ld. TPO in selecting Hartron Communications Limited as a comparable. 2.2. On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble ORP further erred in upholding / confirming the action of the Ld. TPO in selecting Hartron Communications Limited as a comparable, without appreciating that the said company renders diversified activities - business process outsourcing, legal process outsourcing, Back office, Software Development, Tech Solutions and Medical Billing services without any segmental data. 2.3. Without prejudice to above ground of appeal, the Ld. TPO and the Ld. AO erred in not following the directions of the Hon'ble DR? in considering the correct margin of Hartron Communications Limited. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upholding / confirming the action of the Ld. TPO in rejecting the following companies as a comparables, without appreciating that the said companies were functionally comparable to the Appellant: * Caliber Point Business Solutions * Informed Technologies Private Limited * ACE BPO Services Private Limited * Jindallntellicom Limited * Techprocess Solutions Limited Incorrect rejection of Appellant's Transfer Pricing study/ Incorrect benchmarking analysis by TPO 6. On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding/confirming the action of the Ld. TPO in rejecting the transfer pricing analysis/study prepared by the Appellant, without appreciating that none of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied. 7. On the facts and in the circumstances of the case and in law, the Ld. AO, Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in classifying the Appellant as being engaged in providing a mix of high end and low end services without appreciating that the Appellant was a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law, the Ld. TPO erred in and the Hon'ble DRP further erred by not following the favourable directions given by the Hon'ble ORP for assessment year 2011-12 and also confirmed by the Hon'ble Income Tax Appellate Tribunal in Appellant's own case appeal no. bearing ITA No. I 13/Hyd/2016, wherein the interest on outstanding receivables was deleted on the ground that delay in receivables and payables are adjusted in the working capital adjustment as computed by the Ld. TPO. 11.2 On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble ORP further erred in considering outstanding receivables, which is an outcome of the principal international transaction, as a separate and distinct international transaction and further erred in confirming a transfer pricing adjustment in the nature of interest on receivables amounting to ₹ 25,164,907. 11.3 On the facts and in the circumstances of the case and in law, the Ld. AO erred in not considering the fact that the working capital adjustment evaluates the outstanding receivable in a controlled scenario vis-a.-vis uncontrolled scenario and that differential impact of wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther submitted that the assessee is a debt free company and since it has not charged interest on the outstanding receivables from AE as well as non-AEs, there can be no TP adjustment on account of notional interest. 18. As regards the exclusion of Hartron Communications Ltd, the learned Counsel for the assessee submitted that Hartron Communications is functionally dissimilar to the assessee as it undertakes diversified business activities when compared to the assessee and also that it evidenced abnormal revenue pattern in the last 5 years because Hartron Communications revenue grew from ₹ 3.81 crores to ₹ 18.43 crores compared to earlier year. Therefore, he submitted that it fails peculiar circumstances filter. Without prejudice to this ground, he submitted that the TPO has erred in not computing the correct margin of Hartron Communications i.e. 19.41%. In support of his contention that the said company should be excluded from the final list of comparables, the learned Counsel for the assessee relied upon the decision of the Coordinate Bench of the Tribunal in the case of S&P Capital IQ India (P) Ltd vs. Dy. CIT, reported in (2019) 55 CCH 0449 HydTrib. 19. The learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increase in overall revenue to the extent of 154.8% over the last year. It is mentioned that the income from BPO services both export and domestic for the current year is ₹ 18.34 crores as against previous year's ₹ 3.81 crores which shows an increase to the tune of ₹ 483.72% over the last year. Therefore, there is an abnormal increase in the revenue of the company. As seen from the margin of the said company taken by the TPO, we find that the TPO has only taken the segmental results and not the total income of the assessee which includes the rental income and income from sale of land etc. Therefore, though the said company is into diversified activities, only segmental results have taken by the TPO and therefore, the said results cannot be said to be not comparable with the assessee as the revenue from both the companies is from ITeS services only. As regards the argument that it has evidenced abnormal revenue pattern, we agree with this argument of the assessee, because as reported by the said company, it is into BPO services and has shown increase to the tune of 483.72% over the last year. In the case of S&P Capital IQ India P Ltd (Supra), the Coordinate Bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er books of account as required by law and there is no qualification by the auditors. At para 1.6 of the notes forming part of the accounts for the year ending 31.03.2013, it is mentioned that all the revenues are accounted from accrual basis, except for processing charges (export income), interest on calls arrears, listing fee and leave encashment which are accounted for on cash basis. At Para 12 of the said report, it is stated that the income from BPO services is ₹ 17,99,52,212 which has been booked on the basis of Indian currency realized. At note 17, the revenue from operations is reported, we find that the export income has been reported at ₹ 17,99,52,211/-. Further, from the data published by the assessee, this year is an exceptional year of operation. The financial results of Hartron Communications Ltd cannot be considered for the preceding and succeeding financial years is as under: F.Y 2009-10 (-) 22.07% F.Y 2010-11 (-) 97.56% F.Y 2011-12 (-) 37.15% F.Y 2012-13 25.05% F.Y 2013-14 (-) 2.52% F.Y 2014-15 (-) 26.02% Therefore, it can be seen that this year has been an exceptional year for the said company. Therefore, we are of the opinion that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een incurred on outsourcing of medical transcription activity. Therefore, according to him, when the TPO himself has accepted the said company as a comparable and the assessee has not challenged its inclusion, the DRP ought not to have directed its exclusion. 10. The learned DR, however, relied on the order of the DRP and submitted that the P&L a/c of the Microgenetics Systems Ltd and Schedule-F thereof shows the expenditure incurred towards medical transcription activity which is nothing but for outsourcing of medical transcription activity and though it may not be exactly 23% of the expenses, it is evidently incurred on outsourcing of the medical transcription activity. 11. Having regard to the rival contentions and the material on record, and after going through the P&L A/c of the comparable Microgenetics Systems Ltd and particularly Schedule-F thereof placed in Paper Book filed by the assessee relating to production expenses, we find that during the relevant previous year the assessee has incurred ₹ 22,03,823 towards medical transcription charges. Though, it is not 23% of the expenses incurred by the assessee as observed by the DRP, the payments were for outsourcing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y one segment and the entire revenue is from export of services. 28. The learned DR, however, submitted that though it is admitted that Infosys Technologies Ltd is also into ITeS services and is only into one segment, it has also shown non-operating income of ₹ 1.64 crores in the Annual Report and therefore, it does not give the correct picture/correct figure of the operating revenue of company and therefore, has been rightly excluded. 29. After hearing both the parties, we find that Infosys Technologies Ltd is into ITeS and its entire revenue is from BPO services only. Therefore, factual findings of the DRP that it falls income of less than 75% of the total operating revenue filter is not correct. Therefore, we remand this issue of comparability of this company to the TPO for reconsideration of the issue by considering only the operating revenue. 30 As regards inclusion of Ace BPO Services Ltd is concerned, it is the case of the assessee that this company satisfies all the filters applied by the TPO and therefore, is functionally comparable to the assessee company. He pointed out that the TPO and the DRP have rejected this company on the ground that no information as to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial or descriptive information is not available to undertake analysis are rejected This is an appropriate filter 3 Companies that have been declared sick or have persistent negative net worth are rejected This is an appropriate filter 4 Companies having financials for at least 2 out of 3 years This is not an appropriate filter 5 Companies that have substantial (excess of 25%) transactions with related parties are rejected/ This is an appropriate filter 6 Companies that have exceptional years of operations This is not an appropriate filter 7 Selection of companies engaged in distribution of software products This is an appropriate filter 37. The TPO therefore, adopted the following filters: Stage-1 Adoption of appropriate filters a. Use of current year data b. Companies having different financial year ending (i.e. not March 31, 2014) or data of the company which does not fall within 12 month period i.e. 01-04-2013 to 31-03-2014 were rejected. c. Companies whose income was less than ₹ 1 crore were excluded d. Companies whose software development service income is less than 75% of its total operating receives were excluded. e. Companies who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 269543 24.04 6 Cigniti Technologies Ltd 556298162 435838603 120459559 27.64 7 Infosys Ltd 446500000000 327410000000 1190400000000 36.36 8 Persistent Systems Ltd 11851170000 8710090000 3141080000 36.06 9 Infobeans Tech Ltd 330156390 232374867 97781523 42.09 10 Thirdware Solutions Ltd 2067574000 1373708000 693866000 50.51 11 Tech Mahindra (Seg.) 170139000000 13739350000000 327455000000 23.83 12 Tata Elxsi Ltd (Seg.) 6827022000 5582594000 1244428000 22.29 Average 34.31 40. Thus, the average mean margin of the final set of comparables was arrived at 34.31% as against the assessee's margin of 14.68%. Thereafter, the TPO also considered the additional comparables proposed by the assessee, but rejected all of them and also rejected the assessee's request for working capital adjustment. He proposed the adjustment of ₹ 19,44,89,544/- in respect of software development services of the assessee's international transactions. 41. Further, with regard to ITES segment, the TPO rejected the assessee's TP study and adopting the following filters, he conducted fresh search for comparables: i) Companies whose data is not available for the financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56148.14 18.06 2 Infosys BPO Ltd 23470000000 18120000000 53500000000 29.53 3 Microland Ltd 3447100000 2870900000 5762000000 20.07 4 Eclerx Services Ltd 7152910000 4189020000 2963890000 70.75 5 B N R Udyog Ltd 14259000 11421000 2838000 24.85 6 Crossdomain Solutions P Ltd 746275406 616399666 129875740 21.07 7 MPS Ltd 1882921000 1275935000 606986000 47.57 Average 33.13 44. Thus, he arrived at the average margin of the comparables at 33.13% as against the assessee's margin of 10.74% and rejecting the Working Capital Adjustment and risk adjustment, he proposed an adjustment of ₹ 5,37,30,633/-. 45. Further, the TPO also proposed ALP adjustment of ₹ 1,81,13,140/- towards interest on trade receivables after allowing credit period of 30 days and by applying the applicable SBI interest rates as short term deposits. In accordance with the directions of the DRP, the AO passed the draft assessment order, against which the assessee preferred its objections to the DRP, which confirmed the draft assessment order and accordingly final assessment order was passed against which the assessee is in appeal before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed to be excluded. 52. The learned DR, on the other hand, relied upon the orders of the authorities below. He also submitted that the assessee is also into diversified activities and until and unless it proves that the existence of brand or high turnover has an impact on its operating margin, Infosys BPO Services Ltd, should not be excluded. 53. Having regard to the rival contentions and the material on record, we find that this company is into diversified activities and it also has brand value and huge turnover of ₹ 2023 crores. The Hon'ble Delhi High Court in the case of CIT vs.Aginity India Ltd (Supra) has held that such a company cannot be compared with any other company in the market. Therefore, respectfully following the same, we direct the AO/TPO to exclude this company from the final list of comparables. 54. As regards eClerex Services Ltd is concerned, the learned Counsel for the assessee submitted that it is rendering KPO services, such as, data management and analytics solutions and has earned super normal profit during the year under assessment i.e. 70.26%. He also relied upon the assessee's own case for the A.Y 2011-12 wherein the Tribunal had held i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of this company should be considered. 61. The learned DR, however, submitted that this company was taken up by the assessee itself as comparable before the TPO and further that in the earlier A.Y 2013-14 this company has been accepted as a comparable. Therefore, he submitted that it should be retained as a comparable. 62. Having regard to the rival contentions and the material on record, we find that this company is into R&D activities and has achieved abnormal growth during the current A.Y. In the case of S&P Capital IQ (India) Ltd, we have considered the comparability of this company to ITeS Company and has directed its exclusion. Respectfully following the same, we direct its exclusion for this A.Y as well. 63. As regards comparability of MPS Ltd is concerned, it is a case of the assessee that this company is a publishing company and is totally into a different business model and therefore, cannot be considered as a comparable to the assessee company. 64. The learned DR supported the orders of the authorities below. 65. Having regard to the rival contentions and the material on record, we find that the comparability of this company to an ITeS company had arisen for the ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of Maveric Systems Ltd, wherein, it is reported that 6% of the turnover has been spent towards R&D. 72. Having regard to the rival contentions and the material on record, we are satisfied that though this company is functionally similar, it fails the R&D filter of less than 3% of the turnover and hence cannot be taken as a comparable to the assessee. 73. As regards Evoke Technologies is concerned, the contentions of the assessee are that this company is functionally similar to the assessee, whereas the TPO & DRP have held that the financials of this company include the revenue of one branch outside India which are unaudited and hence are not reliable. The learned Counsel for the assessee however, drew our attention to page 963 of the Paper Book, which is part of the Annual Report of Evoke Technologies Ltd wherein the revenue of Indian Branch of assessee is separately shown. Taking the same into consideration, we direct the AO/TPO to reconsider the comparability of this company by taking the revenue from Indian Branch only. Thus, the ground for Maveric Systems Ltd is rejected and for Evoke Technologies Ltd is allowed for statistical purposes. 74. As regards exclusion of Infosy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in product development and product design services. The same view has been reiterated by the Tribunal in the other decisions cited by the learned Authorised Representative. Since, many of these decisions pertain to the impugned assessment year, respectfully following the aforesaid decisions of the Tribunal, we direct the Assessing Officer to exclude this company from the list of comparables. 35. We have considered rival submissions and perused materials on record. On a perusal of the documents placed in the paper book it appears that this company is engaged in various activities including development of niche product and development services. Thus, the company is functionally different from the assessee. Considering the aforesaid aspect, the Co-ordinate Bench in case of Telcordia Technologies India (P.) Ltd. (supra), which is for the very same assessment year, has excluded this company as a comparable. Similar view has also been expressed in the other decisions cited by the learned Authorised Representative. Thus, keeping in view the decisions of the Tribunal referred to above, we hold that this company cannot be a comparable to the assessee. 38. We have considered rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products as contended by the assessee. 82. The learned Counsel for the assessee however, placed reliance upon the decision of the Pune Bench of the Tribunal in the case of PubMatic India Ltd vs. ACIT (2018) 91 Taxmann.com 356 wherein this company was directed to be excluded. 83. Having regard to the rival contentions and the material on record, we find that the assessee is relying upon the Annual Report of the said company wherein under the head "revenue from operations", it is mentioned as "sale of software" and under the head "earning in foreign exchange", there is a mention of goods/export of services, to impress upon us that this company is also into products. However, as rightly pointed out by the learned DR, there is no sale of any products and this company is involved in export of software services only. Mere mention of products in the annual report without any products in effect cannot make this company a product company. Therefore, this company is comparable to the company and need not be excluded. The assessee's ground with regard to this company is rejected. 84. As regards R S Software (India) Ltd, the assessee is seeking its exclusion on the ground that its onsite e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectfully following the same, we direct the TPO to exclude this company from the final list of comparables. Thus, the assessee's grounds of appeal on exclusion of the companies are partly allowed. 86. The common grounds of appeal for the A.Ys 2013-14 and 2014-15 are against the ALP adjustment of interest on trade receivables. Though the learned Counsel for the assessee has relied upon the assessee's own case for the A.Y 2011-12, we find that after the amendment to section 92B of the Act, the interest on trade receivables has become an international transaction and therefore, the ALP adjustment is required to be made. The assessee's contention that it has not paid any interest on outstanding payables and therefore, the interest should not be charged on the trade receivables is not sustainable for these A.Ys. The argument that it is a debt free company and therefore, no interest is also to be charged is not acceptable. 87. The learned Counsel for the assessee has placed reliance upon various case law. However, we find that they are relating to the A.Ys prior to the amendment of section 92B of the Act. However, the interest on trade receivables should be calculated at the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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