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TMI Blog2019 (7) TMI 1584X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, the assessee has classified its international transactions as ITES and had conducted its comparability analysis by applying TNMM as the Most Appropriate Method (MAM). 2.2 For Assessment Year 2014-15, the assessee filed its return of income on 30.11.2014 declaring an income of Rs. 53,30,22,220/-. The case was selected for scrutiny for this Assessment Year. A reference under section 92CA of the Act was made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) for determination of the Arms Length Price (ALP) of the international transactions entered into by the assessee with its AEs in this year. The TPO passed an order under section 92CA of the Act dated 30.10.2017 proposing a Transfer Pricing (TP) adjustment of Rs. 15,11,87,300/- in respect of the ITES rendered by the assessee to its AEs. After receipt of the TPO's order, the AO passed a draft order of assessment under section 143(3) r.w.s. 92CA of the Act dated 22.12.2017, wherein the assessee's income was determined at Rs. 68,64,27,760/- in view of, inter alia, the aforesaid TP adjustment of Rs. 15,11,87,300/- proposed by the TPO. 2.3 Aggrieved by the draft order of assessment dated 22.12.2017 for Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble companies. 8. The learned AO/learned TPO/Hon'ble DRP erred in collating the information that are not publicly available using powers under section 133(6) of the Act. 9. The learned AO/learned TPO/Hon'ble DRP has erred in the comparability analysis used for determination of the ALP 10. The learned AO/learned TPO/Hon'ble DRP has grossly erred in not rejecting the following companies from the list of comparable companies: 1. Infosys BPO Ltd. 2. Microland Ltd. 3. BNR Udyog Ltd. 4. Crossdomain Solutions Pvt. Ltd. 11. The learned AO/learned TPO/Hon'ble DRP has grossly erred in rejecting companies that ought to have been accepted as comparable: 1. Allsec Technologies Ltd. 2. Caliber Point Business Solutions Ltd. 3. Informed Technologies Ltd. 4. Ace BPO Services Pvt. Ltd. 5. Crystal Voxx Ltd. 6. Jindal Intellicom Ltd. 7. Sundaram Business Services Ltd. 12. The learned AO/learned TPO/Hon'ble DRP has erred in not allowing appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independentcomparable companies. 13. The learned AO/learned TPO/Hon'ble DRP erred in not allowing appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company Name OP/OC (in %) 1. Infosys Systems Ltd., 27.43 2. Microgenetic Systems Ltd., 18.06 3. Microland Ltd., 20.07 4. BNR Udyog Ltd., 25.08 5. Cross domain Solutions Pvt. Ltd., 21.07 Average 22.34% 4.3 In view of the above, the TPO computed the TP adjustment to the transactions in the ITES segment of the assessee company as under:- Arm's Length Mean Margin on cost 22.34% Operating Cost 3234500000 Arm's Length Price (ALP) of operating revenue (@ 122.34% of OC) 3957087300 Price Received 3805900000 Variation in Price 151187300 3% of price received 114177000 Shortfall being adjustment 151187300 4.4 The above TP adjustment proposed by the TPO was incorporated in the draft order of assessment for Assessment Year 2014-15 dated 22.12.2017. The assessee filed its objections thereto before the DRP who issued its directions under section 144C(5) of the Act on 31.08.2018. Pursuant thereto the AO passed the final order of assessment dated 18.09.2018 for Assessment Year 2014-15 against which the assessee is in appeal before the Tribunal. 4.5 In the course of proceedings before us, the learned AR for the assessee put forth both oral and writt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possess any intangible asset. III Brand Value 'Infosys' has brand value; having incurred Rs. 5 Crores for its brand building and advertisement, as can be seen from pages 24, 29, 47, 58 and 64 of its Annual Report; whereas the assessee does not have any brand. IV Sub-contracting Infosys operates on a different business model as it has incurred Rs. 157 Crores towards cost of technical sub-contractors. 7.2.2 In support of the assessee's contentions, the learned AR submitted and took us through the relevant pages of the Annual Report of 'Infosys'. It was submitted that for the reasons given above, it has been consistently held by various benches of the Tribunal over the years that this company cannot be considered as a comparable to companies leading ITES. In this regard, the learned AR placed reliance on the following decisions:- (i) CGI Information Systems & Management Consultants (P.) Ltd. v. Asstt. CIT [2018] 94 taxmann.com 97 (Bang. - Trib.). (ii) Mobily Infotech India (P.) Ltd. v. Dy. CIT [2018] 97 taxmann.com 2 (Bang. - Trib.). 7.3 Per contra, the learned DR for Revenue supported the orders of the authorities below. 7.4.1 We have considered the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e excluded from the final set of comparables. We hold and direct accordingly. 8. Microland Ltd., ('Microland') 8.1 This company 'Microland' was selected as a comparable company by the TPO despite the objections to its inclusion in the final list of comparables both before the TPO and DRP. 8.2.1 Before us, the assessee has objected to the inclusion of this company 'Microland' on the following grounds:- (i) that it is functionally different as it provides cloud computing related services; which services relate to private cloud, desk top virtualization, cloud migration, hybrid cloud migration, server management, etc. (ii) It fails the service Income filter of 75% as the ITES Revenues as a percentage of total revenue is 5.68%. (iii) It fails the RPT filter of 25%. 8.2.2 The learned AR submitted this company 'Microland' is primarily rendering Infrastructure Management Services and ITES as stated at pages 14 and 80 of the Annual Report of the company. The website extract of 'Microland' was submitted to contend that it renders services like Virtualization Cloud Computing, Infrastructure Management and IT modernization services. According t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments are different and distinct from each other. In our view, the TPO/DRP have not brought on record any evidence to support their contention that both the aforesaid segments are rendering ITES only. If that were so, there was no reason whatsoever for the company to show Infrastructure Management Services as different and distinct segment from the ITES. 8.4.3 From an appraisal of the details submitted, it is seen that the services rendered by 'Microland' under Infrastructure Management services are Server Management, Database Management, storage management, Archival Management, Network Management, etc., which has been classified as different from the back office processing services rendered by companies like the assessee in the case on hand. In our view, there is no basis for the TPO to contend that the aforesaid services rendered by 'Microland' are ITES, when the company itself has classified these services as different from ITES and characterized the same as a different business segment. In these factual circumstances, we are inclined to concur with the contention of the learned AR that the Infrastructure Management services segment of 'Microland' is dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .7% and therefore fails the service income filter applied by the TPO. 10.2 Before us, the learned AR for the assessee contended that this company 'Informed' is functionally comparable to the assessee as it is an ITES provider and qualifies the service income filter of 75% applied by the TPO. It was submitted that the entire service income of 'Informed' at Rs. 2,58,53,362/- is from rendering of ITES only and the TPO/DRP have wrongly considered "other income" of Rs. 1,22,85,303/- as "Service Income". In support of this contention, the learned AR drew the attention of the Bench to the relevant portion of the Annual Report of 'Informed' (placed at pages 391 to 443 of Paper Book). In this regard, reliance was placed on the decision of the Co-ordinate Bench of this Tribunal in the case of CGI Information Systems & Management Consultants (supra) wherein this company 'Informed' was held to be comparable to companies rendering ITES. It was prayed that, in the light of the above, this company 'Informed Technologies Ltd.,' be included in the final set of comparables in the case on hand. 10.3 Per contra, the learned DR for Revenue supported the orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this information is not available and therefore this company 'Crystal' is rejected. 11.2 Before us, it was contended that this company 'Crystal' is functionally comparable to the assessee in the case on hand as it is operating as a BPO Company which is a ITES provider. According to the learned AR, it is very evident from a perusal of the Annual Report of this company 'Crystal' that the income in foreign currency amounting to Rs. 3,23,08,386/- is out of export of services. In support of this contention, the learned AR took us through the relevant pages of the Annual Report of this company, 'Crystal', which is placed at pages 474 to 497 of the paper book. 11.3 Per contra, the learned DR for Revenue supported the orders of the authorities below in not including this company, Crystal Voxx Ltd., in the final set of comparables. 11.4 We have considered the rival contentions/submissions and perused the material on record. We have carefully perused the Annual Report of this company, 'Crystal'. At Note 3 of the Notes forming part of the accounts, at page 491 of the paper book, it is stated that the operations of the company predominantly relate to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of CGI Information Systems & Management Consultants (P.) Ltd. (supra), wherein this company 'Jindal' was held as comparable to companies rendering ITES. 12.3 Per contra, the learned DR for Revenue supported the orders of the TPO/DRP in not including this company 'Jindal' in the final set of comparables. 12.4.1 We have considered the rival contentions/submissions put forth and perused the material on record. We have also perused the Annual Report of this company, 'Jindal'; which is placed at pages 498 to 975 of the paper book. At page 130 of the Annual Report (i.e., page 627 of the paper book), it is mentioned that the company is engaged in providing call centre services, both in the overseas and domestic market; export of call centre services forming a major part of its business activities. In these circumstances, the observation of the DRP that this company 'Jindal' is engaged in software development services and ITES and segmental information is not available is not a factually correct observation; as borne out from the Annual Report of this company. Further, at page 160 of the Annual Report (i.e., page 657 of the paper book), it is seen that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013-14 and its inclusion for those assessment years has not been objected to by the Assessee either. Moreover, it is consistently figuring in the list of comparables in companies providing ITES. We therefore direct inclusion of this company in the list of comparable companies. 12.4.3 In respect of the assessee in the case on hand also, the facts are similar to the cited case (supra). It is also seen that this company, 'Jindal' was chosen/accepted by the TPO as comparable to the assessee in the case on hand both in the earlier Assessment Years 2011-12 and 2012-13 and again in the immediately subsequent Assessment Year 2015-16. In this view of the matter, as discussed above, we are of the view that the above cited decision in the case of CGI Information Systems & Management Consultants (P.) Ltd. (supra) would apply to the facts and circumstances of the case on hand also being similar; as seen from the acceptance of the company 'Jindal' by the TPO in both earlier and subsequent Assessment Years. Therefore, taking into consideration the factual matrix of the case as discussed above, Revenue's stand of accepting this company as a comparable both in earlier Assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of Huawei Technologies India (P.) Ltd. (supra) has discussed all the reasons on the issue and held that working capital shall be allowed; holding as under at paras 10 to 18 thereof- 10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT (A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act insofar as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows; Determination of ami's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a).** ** ** (e) transactional net margin method, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in. or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A reading of Rule 10B(l)(e)(iii) of the Rules read with Sec. 92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 12. Chapters I and III of the OECD Transfer Prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts in suppliers" 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if - (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, ende ..... 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