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TMI Blog2019 (8) TMI 1465X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO with a direction to allow requisite adjustments on account of the impugned working capital while determining the margins of comparable - we direct the TPO to allow the working capital adjustment to the assessee and recompute the ALP accordingly. - ITA No.2303/Hyd/2018 - - - Dated:- 2-8-2019 - Smt. P. Madhavi Devi, Judicial Member And S. Rifaur Rahman, Accountant Member H. Srinivasulu for the Appellant. Y.V.S.T. Sai, CIT - DR for the Respondent. ORDER Smt. P. Madhavi Devi, This is assessee's appeal for the assessment year 2014-15 against the final assessment order passed u/s 143(3) r.w.s 92CA(4) r.w.s 144C of the Act, dated 29/10/2018. 2. Brief facts of the case are that the assessee, a Private Limited Company, furnished its return of income for the assessment year 2014-15 on 28th November, 2014 electronically declaring total income at ₹ 25,31,47,090/-. The aforesaid return was selected for scrutiny under CASS. Accordingly, notice u/s 143(2) was issued on 28th August, 2015 and information was called for. During the assessment proceedings, the A.O. observed that the assessee-company had entered into the following international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed fresh analysis and arrived at the following 8 companies as comparable to the assessee: Sl No. Name of the Company OP / OC (%) 1 Microgenetics Systems Ltd. 18.06.% 2 Infosys BPO Ltd. 29.53% 3 Microland 20.07% 4. eClerx Services Ltd. 70.75% 5. BNR Udyog Ltd. 24.85% 6. Crossdomain Solutions Pvt Ltd. 21.07% 7. MPS Ltd. 47.57% 8. Hartron Communications Ltd. 51.80% Average 35.46% 5. The average margin of these companies was 35.46%. Thereafter, the TPO observed that the assessee has made Voluntary TP adjustment of ₹ 7,69,41,809 in its Return of Income filed for A.Y 2014-15 on 28.11.2014 and that after such adjustment, the assessees' profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of the case, Hyundai Motor India Engineering 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 144C(5) of the Income-tax Act, 1961 ('the Act') by the Assistant Commissioner of Income-tax Circle 2(2), Hyderabad (hereinafter referred to as the 'Assessing Officer' or 'Ld. AO') in pursuance of the directions issued by the Honourable Dispute Resolution Panel- I, Bengaluru (hereinafter referred to as the Hon'ble DRP) on the following grounds which are without prejudice to one another: ADDITION TO TOTAL INCOME OF ₹ 39,06,63,577/- 1. On the facts and in the circumstances of the case and in contrary to law, the Learned Transfer Pricing Officer i.e. the Deputy Commissioner of Income-tax (Transfer Pricing Officer)-3, (hereinafter referred to as 'the Ld. TPO') and the Ld. AO under the directions issued by Hon'ble DRP, erred in making an addition to the Appellant's total income of ₹ 39,06,63,577 (based on the provisions of Chapter X of the Income-tax Act, ('the Act') a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red significant sub-contracting costs. 3.6. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting eClerx as comparable company though it does not have segmented results. 3.7. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred by not rejecting eClerx as comparable, as exclusion of eCelrx as comparable has been upheld by various ITAT orders. 4. Crossdomain Solutions Private Limited 4.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting Crossdomain Solutions Private Limited ('Crossdomain Solutions') as a comparable company to the Assessee though it is functionally different. 5. Microland Limited 5.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting Microland Limited ('Microland') as a comparable company to the Assessee though it is functionally different. 6. MPS Limited 6.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in accepting MPS Limited ('MPS Ltd.') as a comparable company to the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied. 11. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO, Ld. TPO erred in and the Hon'ble DRP further erred in upholding I 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 captive service provider, providing Information Technology Enabled services (i.e. low end services) to its Associated Enterprises and consequently all companies providing high end services (whether selected by the Appellant or the TPO) ought to have been rejected. 12. On the facts and in the circumstances of the case and in contrary to law, Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in conducting a fresh benchmarking which was erroneous and liable to be rejected since the Ld. TPO: i. Used lower turnover filter without the application of an upper turnover filter, thereby disregarding the importance of turnover in the benchmarking of comparables ii. Selected certain companies wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. LEVY OF INTEREST UNDER SECTION 234B OF THE ACT 17. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. AO in levying interest u/s 234B of the Act and the said levy of interest being wholly unjustified, ought to be deleted. 7. At the time of hearing, Learned Counsel for the Assessee submitted that the assessee is not pressing Grounds No. 4, 5, 7, 14 and 16. These Grounds are accordingly rejected as not pressed. 8. Ground No.1 is general in nature and needs no adjudication. With regard to the other grounds and the comparability of the companies selected by the TPO, the assessee has filed a chart giving the details of the issues involved and as to how they are covered in favour of or against the assessee by various decisions. We proceed to dispose of the appeal on the basis of the contentions in the chart filed by the assessee and the submissions of both the parties. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and technical skill which is required to render KPO services. He submitted that in the case of the assessee, the basic design and database comes from AE and fresh graduates of the assessee renders only the support services. He referred to Rule 10TA(g) of the I.T. Rules which refers to engineering services and design services as a KPO service, to impress upon us that the assessee is not rendering any of such services and therefore, it cannot be considered as a KPO. He also led us to page 972 of the Paper Book being the workflow chart to demonstrate that the assessee is rendering the entire work on the instructions of the AEs. He also led us through the research agreement at pages 967 to 971 of the Paper Book, wherein the assessee is required to provide the computer aided design engineering services. He submitted that the assessee has not rendered the project support services, software development services and research services which are mentioned at page 969 of the Paper Book. He also drew our attention to page 540 of the Paper Book, wherein in its TP study, the assessee has stated that it is primarily involved in advance R D support services focused on project design engineerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, submitted that the services rendered by the assessee company are also similar to the functions performed by the E-Clerx. He submitted that the assessee itself has specified, that it was rendering high end services at page 946 of the paper book and at page 967, it is stated that the services are included but not limited to. He submitted that the above high-end services can be performed only by highly qualified persons and the workforce is to be highly suited for such services and the assessee is also having such skilled workforce. Therefore, according to him, the assessee is not low end BPO, but is a KPO and therefore, E-Clerx Ltd cannot be excluded. 11. As regards non-reliability of the financials of the E-Clerx concerned, the ld DR stated that the assessee has not raised any such objections either before the TPO or before the DRP. He submitted that the ITAT in the AY 2008-09 to 2010-11, has simply followed some other decisions to exclude E-Clerx Ltd and it was only in the AY 2011-12 that to actual services rendered by E-Clerex have been considered and is held to be a comparable. He therefore, placed reliance upon the decisions of the ITAT in the assessee's own case for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Hyundai India and its AE's under IT Enabled Service Risks Hyundai India AEs Market Risk No Yes Service liability risk NO Yes Customer credit risk No Yes Foreign Exchange risk Yes Yes Technology risk No Yes Manpower risk Yes Yes Legal statutory risk Yes Yes 17. As far as E-Clerx Ltd is concerned, according to its Annual Report, it performs the following services: 18. Financial Services eClerfx enables financial institutions to balance these priorities by partnering with them to increase control, execute ongoing functions with a significant reduction in cost and accelerate change initiatives by providing domain :specific engineering expertise, We provide a broad suite of services that allow our clients to operate on a day to today ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,218 6.0 5.076 11.4 4,088 11.1 Operating profit before depreciation 12,527 28.3 11,015 30.0 Depreciation and amortization 1,101 2.5 956 2/6 Operating profit 11,426 25.8 10,059 27.4 Other Income 2,576 5.8 2,215 6.0 Profit before exceptional item and tax 14,002 31.6 12,274 33.4 Dividend income - - 83 02 Profit before tax 14,002 31.6 12,357 33.6 Tax expense 3,808 8.6 3,241 8.8 Profit after tax and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Standalone Consolidated 2014 2013 2014 2013 Income Software services 42,531 35,163 48,305 38,726 Software products 1,810 1,602 1,828 1,626 Total 44,341 36,765 50,133 40,352 24. Thus, it is seen that this company not only into services, but is also into development of software products, Further, we also notice that Infosys BPO Ltd also possesses Intellectual Property Rights as given in the following Schedule 2.8 of fixed assets: Particulars Original Cost Depreciation and amortization Net book value As on April 2013 Additions/ Adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21 10361 3576 1086 20 4642 5719 4425 Intangible assets Intellectual Property Rights 59 - - 59 31 15 - 46 13 28 Total 8001 2381 21 10420 3607 1101 20 4688 5732 4453 Previous Year 7173 1422 535 8060 3112 956 461 3607 4453 At Note 2.16, the income from software services and products is given as under: Particulars Year ended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpense Current tax 2,240.45 1,221.99 Less: MAT credit - (294.14) Excess: provision for tax relating to prior years - (47.63) Net current tax expense 2,240.45 880.22 Deferred tax 9.69 (74.63) Net expenses 2,250.14 805.59 Profit for the year 4,344.44 3,189.02 Earnings per equity share (₹ 10 each) Basic and diluted 31.2 25.82 18.96 28. Inventories: Inventories comprising work in process representing cost of typesetting and data digitization services are valued of the lower of cost and net realizable value on weighted average basis. The cost comprises direct cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, as regards Infosys BPO Ltd, we find that it is also a product development company as seen from its expenses towards products and also income from sale of products. Further, we also find that this company is having Intellectual Property Rights and a brand value. Therefore, we hold this company to be not comparable to the assessee and direct the TPO/AO to exclude this company from the final list of comparables. 34. As regards MPS Ltd, though we find that it has huge Plant Machinery and has incurred huge expenses towards Repairs and Maintenance, we also find that it has described itself as an ITeS service provider, and that its outsourcing cost is ₹ 10.78 crores only. Therefore, it is functionally similar to the assessee and therefore, cannot be excluded. 35. As regards the companies which the assessee wants to inclusion as comparables, we find that the TPO has excluded these companies on the ground that they do not satisfy the filters adopted by the TPO himself whereas the assessee has drawn our attention to the fact that these companies satisfy the filters adopted by the TPO. Therefore, we deem it fit and proper to direct the TPO to reconsider whether these co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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