9911796707
TMI Blog2020 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... rt Cube Ltd., UK. thus companies functionally dissimilar with that of assessee need to be deselected from final list. Computing of operating margins - HELD THAT:- We find that in the case of Fiserv India Pvt. Ltd. . [ 2016 (1) TMI 1276 - DELHI HIGH COURT] after considering that various decisions cited in the order has held the foreign exchange gain/loss to be an operating item and therefore could not be excluded from the computation of the operating margins. - we direct the TPO/ AO to consider foreign fluctuation income to be operating in nature while working out the profit margin of the assessee. Sundry balances written back as part of operating income - HELD THAT:- We find that the Co-ordinate Bench of the Tribunal in the case of Suessen Asia Pvt. Ltd. [ 2017 (10) TMI 1440 - ITAT PUNE] after relying on the various decisions cited in the order, has held that the sundry balances written back to the part of operational item. Before us, Revenue has not pointed out any contrary binding decision in its support. Further, Revenue has also not placed any material to demonstrate that the liabilities written back pertain to capital expenditure. We therefore hold that the income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions to TPO for determining the Arm s Length Price (ALP). Thereafter, TPO vide order dated 22.01.2015 passed under section 92CA(3) directed the AO to enhance the income of the assessee by ₹ 5,52,01,139/- on account of ALP of international transactions relating to ITES services provided by the assessee to its AEs. In the draft assessment order, the AO proposed addition of ₹ 5,52,01,139/- against which assessee filed objections before the DRP. The DRP vide directions issued u/s 144C(5) of the Act dated 14.09.2015 upheld the adjustments proposed by TPO. Consequently, an order was passed by the AO on 19.10.2015 u/s 143(3) r.w.s 144C wherein he determined the total taxable income of the Assessee at ₹ 7,37,56,457/- and income under section 115JB at ₹ 7,10,21,074/-. Aggrieved by the aforesaid order of AO, assessee is now before us and has raised following grounds: 1. That the assessing officer erred on facts and in law in completing assessment under section 144C read with section 143(3) of the Income-tax Act ( the Act ) at an income of ₹ 7,37,56,457/- as against the returned income of ₹ 3,19,590/-. Transfer Pricing 2. That the assessing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant. 2.6 That the DRP/TPO erred on facts and in law in considering following companies in the final set of comparable companies without appreciating that companies with such high turnover does not satisfy the test of compatibility laid down under Rule 10B(2) of the Income-Tax Rules, 1962, for being operating in different market conditions and level of competition: Sr. No. Name of Comparable company Turnover (crores) 1. Infosys BPO Ltd. 1,129.11 2. TCS E-serve Ltd. 1,443,.39 2.7 That the DRP/TPO erred on facts and in law in considering following companies as functionally comparable to the appellant for the purpose of benchmarking analysis, allegedly holding that under TNMM, the standard of compatibility are relatively relaxed and only broad similarities of functions are required. 2.8 That on facts and circumstances of the case and in law, the DRP/TPO erred in not allowing compatibility adjustment on account of underutilization of capacity, arbitrarily holding that adjustments are required to be carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly been allowed since assessment year 2006-07. 3.4 Without prejudice to the above, the assessing officer / DRP erred on facts and in law in not allowing the alternative claim made by the applicant under section 10A of the Act. 3.5 That the assessing officer /DRP erred in not taking cognizance of the review orders passed by the Delhi High Court pursuant to the review petitions in case of Regency Creations and Valiant Communications, wherein the alternate claim under section 10A was held to be allowable. 4. That the assessing officer erred on facts and in law in levying interest under Section 234A, 234B and Section 234C of the Act. The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal. 4. Subsequently Assessee vide application dated 29.10.2018 has also raised an additional ground of appeal which reads as under: The applicant craves leave to raise the following by way of additional ground of appeal: That on the facts and circumstances of the case and in law the impugned order passed by the assessing officer is barred by limitation and therefore, is liable to be caused. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables namely Allsec Technologies Ltd., Cyber Media Research Ltd. and ICRA Online Ltd. as comparable companies. As per the Assessee, the average mean profit margin of the comparable companies worked out at ₹ 3.74% as against its profit margin of 7.83%. Since the profit margin of the Assessee was higher than the average profit margin of comparable companies, Assessee considered the international transactions undertaken by it with its AEs to be at arm's length. TPO did not accept the contentions of the Assessee. TPO re-characterized the business of the assessee and held it to be Knowledge Process Outsourcing (KPO) as against the characterization by the assessee of its business as Information Technology Enabled Services (ITES) provider. He thereafter, considering the assessee to be a KPO , considered the following companies to be comparable with that of the Assessee and the margin were worked out as under: Sr. No. Name of the Company WCA Adjusted OP/OC (%) 1. Acropetal Technologies Ltd. (Seg) 14.20% 2. Eclerx Services Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s two processes, viz., secondary and primary processes. This involves a combination of secondary and primary processes to meet the project/client requirements. Below are the steps followed by the appellant while executing the work: SECONDARY PROCESS Steps Work undertaken by the appellant I Understanding the objective of the request through a client call II Scoping out the data and listing the potential data sources, which involves Identifying the required data through TSC subscribed databases III Culling out suppliers from the TSC Internal Database (searching for vendors providing services as per the client s requirements) IV Identifying Potential Suppliers PRIMARY PROCESS I Calling suppliers to verify their contact details such as telephone number, email address, etc. II Issuing questionnaires to the vendors III ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered incomes on account of Foreign exchange fluctuation (₹ 26,87,705/-), Miscellaneous income (₹ 42,610/-) and Sundry Balances written back (₹ 10,02,338/-) as non-operating income. He submitted that the aforesaid incomes have arisen during the normal course of business and are in the nature of operating income and therefore it should be considered while working out the operating margin. With respect to income on account of Foreign exchange fluctuation, he submitted that it is income of operating nature and for which he placed reliance on the following decisions: Fiserv India Pvt. Ltd. vs. DCIT in ITA No.1822/Del/2014. Agilis Information Technologies International Pvt. Ltd. vs. ITO in ITA No.786/Del/2015 PCIT vs. B. C. Management Services Pvt. Ltd. in ITA Nos. 1064 1083 of 2017. 16. He submitted that against the order of the Tribunal in the above cases, Revenue had preferred appeals before the Hon ble High Court and the High Court had dismissed the appeals of revenue in all the aforesaid three cases. He pointed to the copies of the decisions placed in the paper book. 17. With respect to considering the sundry balances written back as ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edical transcription, medical coding and billing. He submitted that the aforesaid order of Tribunal has been upheld by Hon'ble Delhi High Court (ITA No 241/2018). He submitted that the aforesaid company has also been held not comparable on account of functional dissimilarity by the Delhi High Court in a number of decisions. He further relying on the decision of Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT (ITA NO.102/2015) submitted that Hon ble Court has held that in terms of provision of Rule 10B(2)(a), comparability of controlled and uncontrolled transactions shall be judged with reference to specific service/product characteristics. 21. With respect to Eclerx Services Ltd., which has been considered by TPO to be a comparable company, Learned AR submitted that it is engaged in the business of providing Knowledge Process Outsourcing (KPO) services namely web analytics, business intelligence, competition benchmarking and pricing etc and therefore cannot be considered to be a comparable with that of Assessee. He submitted that the Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has clearly made a distinction betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in assessee s own case in AY 2010-11 has had held TCS E-server to be valid comparable. He submitted that despite the fact that the Tribunal has held it to be valid comparable to the Assessee in AY 2010-11 but however subsequently, the Hon ble Delhi High Court in the case of Avaya India Private Limited (ITA No. 532/2019) has held TCS E-serve Ltd. to be not a comparable to a company rendering ITES services for the reasons namely that it has close connection with TATA group of companies, it leverages large client base of TCS, it has high brand value and therefore commands greater profit, the effect of TATA brand on performance of the company cannot be overlooked, the huge turnover as compared to the captive service providers cannot be overlooked. He therefore submitted that though the Tribunal in assessee s own case for A.Y. 2010-11 had held TCS E-serve to be a valid comparable but in view of the latest decision of Delhi High Court in the case of Avaya India Pvt. Ltd. (supra) TCS E-serve Ltd. to be rejected as valid comparable. He further submitted that Hon ble Delhi High Court in the case of PCIT vs. Oracle (OFSS) BPO Services Pvt. Ltd. (ITA No.124/2018) has held that companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S E Serve Ltd, Infosys BPO Ltd, Acropetal Technologies Ltd (Seg)) which have been considered by the TPO are excluded for the reasons stated by him, then the final set of comparable companies as selected by TPO and which is not disputed by Assessee, will be E4e Healthcare Business Services Pvt. Ltd., Jindal Intellicom Ltd., Microgenetic Systems Ltd. He submitted that the average margin of these three companies work out to 10.62% as against the assessee s margin of 7.64% (after including the incomes excluded by TPO as as non operational income). He submitted that since the margin of assessee at 7.64% falls within +/- 5% range of the margin of comparable companies at 10.62%, therefore, no adjustment as made by TPO will be sustainable. 27. Ld AR thereafter submitted that no comparability adjustment on account of idle capacity was granted to the Assessee. He submitted that if further adjustment on account of idle capacity due to (increase in head count ratio by 33%) is allowed, the profit margin of the assessee will work to 18.50% (the details of which are worked out on Page 19 of the synopsis) and therefore, no adjustment would be called for. He submitted that the Tribunal in assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own case for AY 2010-11, and with similar directions, the matter be restored to AO. 32. With respect to the charging of interest u/s 234C, Learned AR submitted that interest u/s 234C is for deferment of advance tax and is on the basis of the returned income. He submitted that the AO be directed to charge interest on the basis of returned income and not assessed income. 33. Learned DR with respect to the transfer pricing issues and on the challenge of re-characterization of the business submitted that assessee is engaged in the business of providing research and analysis services and it itself had characterized its business as KPO in the TP study report. He submitted that in the TP study report it is stated that assessee is engaged in the research and analysis services and is managed by a team of professionals that are specialized in delivering high value and customized research analysis to its AE. He submitted that assessee at various places in the TP report has indicated to its functions performed which clearly suggest that it is a KPO . He further submitted that the TPO during the course of assessment proceedings had asked the assessee to provide list of employees wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation cost vis- -vis increase in total revenue is comparable and quite normal. He submitted that the adjustment, if any, can be considered in the hands of the comparable companies for the purpose of comparability under TNMM method in the case of the assessee but no details or documentary evidence have been provided by the assessee. He submitted that in the absence of any reliable data, assessee could not show that the comparables are not having any excess employee expenses and therefore no adjustment on this account should be granted. 38. With respect to the claim of deduction u/s 10A/10B of the Act, he submitted that assessee is making two contradictory statements. On one hand assessee claims in the approval granted by STPI to be a 100% EOU engaged in manufacturing of Computer Software for which deduction u/s 10B is claimed and on the other hand it is claiming that assessee is into the business of merely data processing/ data feeding . 39. He further submitted that the reliance placed by the assessee on the decision of Regency Creations and Valiant Communications, wherein the alternate claim u/s 10A was held to be allowable are distinguishable on facts and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee is providing routine processing of routine data to its AEs which can be termed as ITES services. 43. We do not agree with the act of re-characterization of the assessee to be a KPO by the TPO in view of the fact that Hon ble Delhi High Court in the case of Rampgreen Solutions P Ltd (supra) has observed that the expression knowledge process outsourcing indicates the involvement of domain knowledge in providing ITeS. Typically, knowledge process outsourcing includes involvement of advance skills; the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management, etc. We further find that Co-ordinate Bench of the Tribunal in assessee s own case for A.Y. 2010-11 has held the characterization of the nature of service rendered by the assessee to be high-end ITES services . We further find that the DRP while deciding the issue for A.Y. 2013-14 has rejected the TPO s contentions of considering the assessee as the KPO service provider and held assessee to be a routine ITES company. Before us, Learned DR has supported the re-characterization made by the TPO and submitted that though the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e before the Hon ble Delhi High Court. Delhi High Court vide order dated 06.01.2016 in ITA No.17/2016 dismissed the appeal of the Revenue. We further find that the similar view was taken in the case of Agilis Information Technologies International Pvt. Ltd. vs. ITO by the Co-ordinate bench of Tribunal and order of the Tribunal has also been upheld by the Hon ble High Court. In view of the aforesaid facts, we direct the TPO/ AO to consider foreign fluctuation income to be operating in nature while working out the profit margin of the assessee. 45. With respect to sundry balances written back as part of operating income, We find that the Co-ordinate Bench of the Tribunal in the case of Suessen Asia Pvt. Ltd. (supra) after relying on the various decisions cited in the order, has held that the sundry balances written back to the part of operational item. Before us, Revenue has not pointed out any contrary binding decision in its support. Further, Revenue has also not placed any material to demonstrate that the liabilities written back pertain to capital expenditure. We therefore hold that the income arising out of sundry balances written back needs to be considered an operating item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR s plea of exclusion of ICRA Techno Analytics Ltd as a comparable company is concerned, learned AR has pointed that it is engaged in a diverse set of activities. As per its annual report, the company is engaged in the business of software development and consultancy, engineering services as well as business analytics. The aforesaid contentions of the Ld AR has not been controverted by Revenue. We find that the Coordinate Bench of Tribunal in the case of B. C. Management Services (P.) Ltd. (supra) for AY 2011-12 has held it to be not a comparable on account of functional dissimilarity and on account of non availability of segmental data. Against the order of Tribunal, the matter was carried by the Revenue before the Delhi High Court. Hon ble Delhi High Court dismissed the appeal of Revenue [(2018) 89 Taxmann.com 68 (Del)]. Before us, Ld DR has not placed any contrary binding decision to support the action of AO/TPO. In view of these facts, we direct the AO/TPO to exclude ICRA Techno Analytics Ltd on account of functional dissimilarity. 49. As far as the Ld AR s contention for excluding Infosys BPO Ltd as a comparable company is concerned, we find that the aforesaid company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the reasons stated therein and therefore having regard to the latest decision of the Jurisdictional High Court, he seeks its exclusion. We though find that the Hon ble Delhi High Court in the case of Avaya India Pvt. Ltd. (supra) has rejected TCS E-serve as a comparable but at the same time it is also a fact that in assessee s own case for A.Y. 2010-11, the co-ordinate bench of Tribunal has held it to be a valid comparable. Before us no material has been placed by the Learned AR to demonstrate that the order of Tribunal in Assessee s own case in AY 2010-11 holding it to be a valid comparable has been set aside/overruled/stayed by higher judicial forum. In view of the settled law that even if the principle of res judicata does not apply to tax matters, but consistency and certainty of law would require that a uniform position be taken in the absence of change in facts and/or law. In view of the aforesaid facts, we are of the view that the TCS E-serve should be considered to be a comparable company. Thus, we are upheld the order of the TPO in considering it to be a comparable company. 52. Before us, assessee has sought the adjustment on account of idle capacity. We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble jurisdictional High Court held as follows: We have carefully considered the records and submissions. It appears that the assessee had claimed the benefit of Section 10A. Therefore, AO must in fairness consider the documents on the basis of the claim and ascertain whether they are proper and after verifying them, pass appropriate order as to whether the benefit of Section 10A can be granted. Almost similar was the finding of the Hon ble Jurisdictional High Court in the case Valiant Communications Ltd. (supra). 13. In the preceding paragraphs, while following the decisions of the Hon ble High Court, we held that it is open to the assessee to put forth claim for non-taxability of the escaped income in view of Section 10A of the Act, while respectfully following the decision of Hon ble jurisdictional High Court in Regency Creations Ltd. and Valiant Communications Ltd. (supra), we deem it just and proper to direct the learned AO to examine the claim of the assessee for deduction u/s 10A of the Act by affording an opportunity to the assessee. Accordingly, we set aside the matter to the fine of the AO to consider the case of the assessee u/s 10A of the Act. 4.4 Sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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