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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 ..... % 16.20% Software development services 34,03,33,789 TNMM OP/OC 15.33% 10.39% Related IT Services 69,73,50,295 TNMM OP/OC 15.17% 10.39% Shared Services 25,12,89,099 TNMM OP/OC 11.01% 11.13% Recovery of expenses 2,00,437 CUP method NA NA NA Reimbursement of expenses 56,59,352 CUM method NA NA NA 3. Therefore, the determination of the Arms' Length Price (ALP) of these transactions was referred to the TPO u/s 92CA of the Act. The TPO in Para 5 of his order recorded the assessee's submissions as under: "5. Examination of TP study conducted by taxpayer: In the TP documentation, the taxpayer has benchmarked the transactions under three segments namely; software distribution, software development (including related IT services) and shared services (ITES). As per the taxpayer analysis, the PLI of the taxpayer is higher than the comparable companies' results for the transactions pertaining to software development and software distribution segments. No adjustment has been proposed to the transactions pertaining to software distribution and software development segments as the same meets the arm's length price". 4. As regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orting manufacturing + trading sales/net sales < 25% i.e. predominantly into rendering of services This is an appropriate filter which similar to the filter of service income used by this office 5 Companies with foreign exchange earning >25% This is an appropriate filter 6 Select companies having RPT<25% This is an appropriate filter 7 Companies with similar nature of operations This is an appropriate filter As per the provisions of section 92C(3) r.w.s. 92CA where during the course of any proceeding, the TPO, on the basis of material or information or documents in the possession is of the opinion that the information or data used in computation of the arm's length price is not reliable or correct, the TPO may proceed to determine the arm's length price in relation to the international transactions in accordance with Sec. 92C(1) and 92C(2) on the basis of such material or information or document available with him. After rejecting the filters applied by the taxpayer, the TPO has used the following filters or criteria, which lead towards selecting proper comparables functionally similar to that of the taxpayer, apart from the above filters or criteria accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1819827 931110730 160709097 17.26 7 Hartron Communications Ltd (Seg.) 184308416 138132416 46176000 33.43 22.30 10. The assessee submitted its objections to the above companies except Microland Ltd. The TPO rejected the assessee's objections and computed the Average Mean Margin of these companies at 22.30% and after allowing working capital adjustment, he proposed the adjustment of Rs. 2,09,93,894/-. 11. The TPO further observed that the assessee has trade receivables which was not reported in its form 3CEB. Observing that with retrospective amendment of section 92B of the Act, receivables form part of international transaction, he proposed to charge interest @14.45% p.a. The assessee objected to the same by submitting that "outstanding receivables are consequent to the international transactions of provision of ITES and not in the nature of any advance/loans. Since these are closely linked with the sale of services, they have been aggregated with the principle transaction of sales for the purpose of economic analysis. It is fully funded entity and the sales and receivables are running accounts and WCA duly considered the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the DRP order, the final assessment order dated 31.10.2017 was passed, against which the assessee is in appeal before us by raising the following grounds of appeal: "Based on the facts and circumstances of the case, Infor (India) Private Limited (hereinafter referred to as 'the Appellant') respectfully craves to prefer an appeal against the Assessment order passed under Section 143(3) read with Sections 92CA(3) and l44C (13) of the Income-tax Act, 1961 ('the Act') by the Deputy Commissioner of Income-tax Circle 2( 1), Hyderabad (hereinafter referred to as the 'Assessing Officer' or 'Ld. AO') in pursuance of the directions issued by the Hon'ble' Dispute Resolution Panel - I, Bengaluru (hereinafter referred to as the Hon'ble ORP) on the following grounds which are without prejudice to one another: ADDITION TO TOTAL INCOME OF Rs. 42,957,746 I. On the facts and in the circumstances of the case and in law, the Learned Transfer Pricing Officer i.e. the Deputy Commissioner of Income-tax (Transfer Pricing Officer)-2, (hereinafter referred to as 'the Ld. TPO') and the Ld. AO under the directions issued by Hon'ble ORP, erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se and in law, the Ld. TPO erred in and the Hon'ble DR? further erred in upholding / confirming the action of the Ld. TPO in selecting E4e Healthcare Business Services Private Limited as a comparable. 11.2 On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DR? further erred in upholding / confirming the action of the Ld. TPO in selecting E4e Healthcare Business Services Private Limited as a comparable, without appreciating that the said company is engaged in the business of providing health care outsourcing services for health care industry. 11.3 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 E4e Healthcare Business Services Private Limited as a comparable, without appreciating that E4e Healthcare Business Services Private Limited is engaged in the forward contract and hedging activities which have an impact on the margin of E4e Healthcare Business Services Private Limited. Incorrect rejection of comparables 5. On the facts and in the circumstances of the case and in law, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies having a different Financial Year ended without appreciating that the results for the relevant financial year could be reasonably extrapolated from the Financials of the impugned companies, available in public domain viii. Rejected the multiple year data adopted by the Appellant Incorrect computation of Profit Level Indicator ('PLI') 9. 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 considering provision for bad and doubtful debts as a nonoperating expenditure while computing the PLI. Risk Adjustment 10. 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 not allowing risk adjustment in accordance with the provisions of Rule 10B of the Income-tax Rules, 1962 to account for differences between the international transactions undertaken by the Appellant, being a captive unit, and those undertaken by the alleged comparables. Interest on outstanding receivables 11. Interest on outstanding receivables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces of the case and in law, the Ld. A 0 erred in and the Hon'ble DRP further erred in upholding/confirming the action of the Ld. AO in levying interest uls 2348 of the Act and the said levy of interest being Wholly Unjustified, ought to be deleted. The Appellant craves leave to add, alter, vary, omit substitute or amend the above grounds of appeal. at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble' Members" to decide this appeal according to law. 16. At the time of hearing, the Counsel for the assessee submitted that the assessee is not seeking exclusion of e4e Healthcare Business Services Pvt Ltd from the final set of comparables and is also not seeking inclusion of Jindal Intellicom Ltd and Techprocess Solutions Ltd in the final list of comparables Therefore, the grounds on these comparables are rejected as not pressed. 17. As regards the interest on trade receivables, the learned Counsel for the assessee, while reiterating the submissions made before the authorities below, submitted that working capital adjustments factor in the impact of outstanding receivables on the profitability of the assessee and therefore, no separate/fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P order. However, the TPO has considered the assessee to be rendering ITeS services. As seen from the Annual Report of the Hartron Communications Ltd at page 477, 481, 482 and 522 of the paper book, we find that it is in the business of both export and domestic BPO services and is also entered into an MOU with Vector for construction of a modern multistorey building and a new building is under construction. From para 19 of its Annual Report, it is seen that Hartron Communications has revenue from three business segments namely rental income, office back up operations and real estate. It is also rendering medical bill services and is earning huge income therefrom. As regards ITeS export filter is concerned, we find that the Hartron Communications is earning income both from export as well as domestic transactions and the segmental details of the same are available. At page 482 of the Paper Book, the revenue from rent, export earning from BPO, domestic earning from BPO and sale of flats are separately given. Further, from page 478 of the Paper Book, we find that the company has reported total revenue for the year to be at Rs. 33.12 crores as compared to previous year where it was Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Tribunal at Delhi in the case of Ciena India in ITA No.1453/Del/2014 wherein it was held that companies whose financial results are not based on mercantile system of accounting, should not be taken as a comparable. In support of this contention, the learned AR referred to the Annual Report of the said company. 9. On the other hand, the learned DR relied upon the orders of the authorities below and submitted that sufficient information with regard to the revenue from ITES is available and has been taken by the TPO in his order. He submitted that the said company is also following mercantile system of accounting except for a few items and therefore, it is not correct to say that the said company is following cash system of accounting which is not allowed to be followed after it was made mandatory to maintain books of account on mercantile system of accounting. Therefore, according to him, Hartron Communications Ltd is also a comparable company. 10. Having regard to the rival contentions and the material on record, we find that Hartron Communications Ltd has reported income from both the export and domestic sales. As seen from the auditor's report, the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges are shown at Rs. 1,92,11,588/-. He submitted that unless and until it is shown that the revenue from outsourcing of the services has an impact on the operating margin of the said company, the same should not be excluded as long as it is functionally similar to the assessee. The learned Counsel for the assessee had relied upon the decision of the ITAT in the case of Avineon India P Ltd vs. DCIT in ITA No.238 & 257/Hyd/2016 dated 7.7.2017 wherein this company was directed to be excluded. We have gone through the said order which is for the A.Y 2011-12 wherein at Paras 9 to 11, the Tribunal has held as under: "9. As regards Ground No.5, though the assessee has sought inclusion of 3 companies as comparable, the learned Counsel for the assessee submitted that the assessee is now seeking inclusion of only 'Microgenetics Systems Ltd' as comparable to the assessee. According to the learned Counsel for the assessee, the TPO, himself has taken this company as a comparable in his TP study but the DRP has directed its exclusion on the ground that in the case of Microgenetics Systems Ltd which is engaged in the activity of Medical Transcription, the expenses to the extent of 23% h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia) Pvt. Ltd vs. ITO (TS-633- ITAT-2016)(Mum) 26. The learned DR, on the other hand, supported the orders of the authorities below and submitted that this company has been excluded because its turnover was less than Rs. 1.00 crore. The learned Counsel for the assessee did not rebut this argument of the learned DR. Therefore, even though it satisfies the functionality test, because it does not qualify the turnover filter of less than Rs. 1.00 crore, we confirm the order of the TPO. 27. As regards Infosys Technologies Ltd, the learned Counsel for the assessee submitted that it satisfies all the filters applied by the TPO and is functionally comparable, but the TPO summarily rejected it on the ground that sufficient financial information is not available. The learned Counsel for the assessee also drew our attention to the DRPs findings that it fails the filter of income from ITeS not being less than 75% of the total operating revenue filter. He submitted that this findings of the DRP is factually incorrect. He also drew our attention to the annual report of the Infosys Technologies Ltd wherein at para 5 of page 498 of the Paper Book, it is clearly mentioned that it has only one s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out the economic analysis and has summarized the international transactions as under: Nature of transaction Amount (Rs.) MAM PLI Margin of taxpayer Margin of companies Software Distribution and related services 26,59,18,189 RPM GPM 51.79% 4.77% Software development services 41,90,07,650 TNMM OP/OC 14.68% 11.02% Related IT Services 74,40,98,080 TNMM OP/OC 15.29% Shared services 26,57,72,035 TNMM OP/OC 10.74% 6.04% 35. The TPO also observed that the assessee has not reported the trade receivables of Rs. 75,05,40,379/- as an international transaction in its form 3CEB. 36. The TPO accepted the RPM method adopted by the assessee as the most appropriate method to benchmark the transactions under software distribution segment and therefore, no adjustment was proposed. However, he rejected the assessee's TP study with regard to software development segment and ITES segment. As regards the software development segment, the TPO observed the following defects in its choice of filters: S.No Filters used y the taxpayer Remarks of the TPO 1 Use of multiple year data This is not an appropriate filter 2 Companies for which sufficient financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted as comparable 4 Goldstone Technologies (India) Ltd 9.97% Fails export sales/sales >75% filter. Hence rejected 5 R.S.Software 19.59% Accepted as comparable 6 Sankhya Infotech Ltd (Seg.) 4.73% Fails forex filter 7 Ajel Ltd 10.16% Fails forex filter 8 DCM Ltd (Seg.) 0.13% Fails forex filter 9 Prism Informatics Ltd 7.28% Fails forex filter 10 Spry Resources India P Ltd 27.33% Information not available Arithmetic mean 11.02% 39. Thereafter, the TPO conducted fresh analysis and selected 13 companies as comparables including the two companies selected by the assessee and accepted by the TPO. The assessee objected to the companies selected by the TPO. However, the TPO rejected the assessee's objections and selected the following 12 companies as final comparables: S.No Company name OR OC Operating profit OP/OC % 1 SQS India BFSL Ltd 2006078494 1640933805 365144689 22.25 2 Mindtree Ltd 30434000000 2837111000 5415000000 21.64 3 RS Software (India) Ltd 3518820000 2837111000 681709000 24.03 4 e-Infochips Ltd 2056112437 1135989199 920123238 81.00 5 Larsen & Toubro Infotech Ltd 45480371882 36665102339 8815269 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices P Ltd 2.87% Complete set of financials are not available in public domain 2 Caliber Point Business Solutions Ltd (Seg.) 4.74% Different financial year compared to that of taxpayer. Hence rejected 3 Tata Business Support Services 10.25% Fails forex earnings filter 4 Informed Technologies India Ltd 5.96% The company has high non-current investments. Hence, rejected 5 Ultramarine & Pigments Ltd 11.74% This company is functionally different and is not engaged in ITES 6 Jindal Intellicom P Ltd 2.34% The company is into software development, data analytics in a big way than operating as call centre and no segmental information is available. Hence rejected. 7 R. Systems International Ltd (Seg.) 9.61% Different financial year compared to that of taxpayer. Hence rejected. 43. Thereafter, he adopted 8 companies as comparable to the assessee. The assessee submitted its objections to the said comparables. The TPO rejected the assessee's objections and arrived at the following 7 companies as final set of comparables to the assessee: S.No Company name OR OC Operating profit OP/OC % 1 Microgenetics Systems Ltd 22596701. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these companies are treated as allowed for statistical purposes. 50. As regards the exclusion of companies from the final list of comparables companies is concerned, we find that the comparability of Microgenetics Systems Ltd had arisen in the A.Y 2013-14 also and for the detailed reasons given above, this company is directed to be excluded. 51. As regards the comparability of Infosys BPO Services Ltd is concerned, the learned Counsel for the assessee submitted that it is a large company operating at high economies of scale with turnover of INR 2023 crores compared to the assessee having turnover of Rs. 26.25 crores only. Further, it is submitted that it has a brand value and it employs substantial portion of its fixed assets in intangible assets. He submitted that the comparability of the said company had come up for consideration in the assessee's own case for the earlier A.Y 2011-12 and also in 2013-14. In A.Y 2011-12, the Tribunal had directed its exclusion while in 2013- 14, the DRP itself had directed its exclusion and the Revenue has not filed any appeal as against the same. He placed reliance upon the decision of the Hon'ble Delhi High Court in the case of Aginity Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company, we find that at Page 172 of the Paper Book which is the Website printout, it is shown as a "knowledge center". The learned DR had submitted that if the contents of a Website given by a company is taken into consideration, then even the assessee would be falling in the same category i.e. Knowledge Process Outsourcing. The learned DR, except for relying upon his argument that the assessee is also into high-end BPO services, has not been able to point out that Cross Domain Solutions Ltd is not a BPO. Therefore, we direct exclusion of this company also from the final list of comparables. 59. As regards Microgenetics Systems Ltd is concerned, we have already considered the comparability of this company with the assessee in the earlier A.Y 2013-14 and we have directed its exclusion on the ground of its outsourcing activities. For the same reasons given, this company is directed to be excluded. 60. As regards Microland Ltd is concerned, the case of the assessee is that it is into business of rendering hybrid IT Infrastructure and it also undertakes R&D activities and has achieved abnormal growth of 149% during the current A.Y. Without prejudice to the above, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also seeking inclusion of the following companies as comparable to the assessee: i) iSummation Technologies P Ltd ii) Maveric Systems Ltd iii) Akshay Software Technologies Ltd iv) Evoke Technologies P Ltd v) E-Zest Solutions Ltd vi) Goldstone Technologies Ltd vii) Sankhya Infotech Ltd 70. However, at the time of hearing, the learned Counsel for the assessee submitted that the assessee is not pressing for inclusion of iSummation Technologies Pvt Ltd, Akshay Software Technologies Ltd, E-Zest Solutions Ltd, Goldstone Technologies Ltd and Sankhya Infotech Ltd. Therefore, the grounds of appeal for inclusion of these companies in the final list of comparables are rejected. Now only two companies remain for inclusion. They are Maveric Systems Ltd and Evoke Technologies Ltd. As far as Maveric Systems Ltd is concerned, the TPO and DRP have rejected this company on the ground that it incurred significant R&D expenses (6% of its turnover). The learned Counsel for the assessee argued that this company satisfies all the filters adopted by the TPO and hence is functionally comparable to the assessee. 71. The learned DR, on the other hand, relied on the orders of the authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has been considered in the assessee's own case for the A.Y 2007-08 and it is submitted that there is no change of activities of either the assessee or the comparables during the relevant A.Y before us i.e. A.Y 2014-15. 78. The learned DR has not rebutted this contention of the assessee. Therefore, respectfully following the decision of the Coordinate Bench at Mumbai in ITA No.520/Mum/2012 dated 4.12.2018, in the case of Infor Global Solutions India (P.) Ltd. v.Deputy Commissioner of Income Tax, we direct the exclusion of these three companies from the final list of comparables. For the sake of ready reference, the relevant paras are reproduced hereunder: "29. We have considered rival submissions and perused materials on record. The primary and fundamental reason on the basis of which assessee seeks rejection of the aforesaid comparable is, it is also engaged in the development of product and segmental details are not available. Notably, in case of LSI Technologies India (P.) Ltd. (supra), the Co-ordinate Bench while examining the comparability of the aforesaid company to a software development service provider, has rejected this company as a comparable considering the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products and services. The findings of the TPO and DRP are that the entire revenue of this company is only from software services and that the assessee has not established that this company is functionally dissimilar. 80. As regards Infobeans Technologies Ltd is concerned, the argument of the assessee is that it renders high end services like automation engineering which cannot be considered as comparable to the assessee rendering software development services only to its AEs. It is also submitted that it does not have segmental information for products and services and that it has earned abnormal profits during the year under consideration i.e. 42.08%. Without prejudice to these arguments, it is also submitted that the TPO has erred in not computing the correct margin of Infobeans Technologies Ltd i.e. 41.85%. 81. The learned DR, however, supported the orders of the authorities below and submitted that there is no error in the computation of margin of the company and that it passes all filters and hence cannot be rejected merely due to high margin. He also drew our attention to the DRPs finding that the entire revenue derived by this company was from software services only and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regards E-Infochips Ltd is concerned, the contention of the assessee is that it is functionally different as it is engaged to software development of software products and ITeS and that there is no segmental data. The TPO & DRP have rejected the objections of the assessee. The learned Counsel for the assessee has referred to the disclosure of segments explanatory wherein the company has disclosed itself as primarily engaged in software development and ITeS services and products, as reportable as per AS17. Further, at page 897, there is an inventory in the balance sheet and at page 899 there is classification of inventories. However, we do not find any revenue from sale of products. Therefore, it cannot be accepted that this company is into product development. The other objection of the assessee is that it has abnormal profit of 79.76% during the relevant A.Y and therefore, it has witnessed super normal profit of 38% on a year on year basis. This objection of the assessee is acceptable because, in the other cases of Infosys Ltd, L&T Infotech Ltd and Mindtree Ltd, we have held that not only high turnover but even where the comparables have earned super normal profit, they also ahve ..... 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