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TMI Blog2020 (11) TMI 651X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee appellant which does not carry on such activity. Naturally the activity of software development and consultancy are altogether different from the functional profile of the assessee. Therefore we direct the learned transfer pricing officer to exclude the above comparable. Eclrex services Ltd - In view of this fact that assessee is not a KPO, the above comparable is required to be excluded. Ld TPO is directed accordingly to exclude this comparable. TCS E serve Ltd - We accept the argument of the assessee that such a large comparable cannot be used to determine ALP of an international transaction of the assessee. Therefore we direct the learned transfer pricing officer to exclude TCS E Serve Limited. Infosys BPO Ltd , which is having the turnover more than 27 times, than the revenue of the assessee. Therefore, for the reasons given by us for exclusion of TCS E Serve Limited we also direct the learned transfer-pricing officer to exclude Infosys BPO Ltd from the comparability analysis. R systems international Ltd with different accounting period compared to the assessee - Though R Systems International Ltd follows calendar year as its accounting year, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O] passed u/s 92CA of the act on 7/1/2015 where the total adjustment was proposed at ₹ 21,113,342/ comprising of arm s-length price of the ITeS services of ₹ 21,053,389 and another adjustment on account of outstanding receivable of ₹ 59,953/ which was subject to the direction of the Dispute Resolution Panel 1, New Delhi (the learned DRP) dated 9/9/2015 after which the ALP of provision of ITeS services of ₹ 141,969, 072/ was determined at ₹ 135,208,614/ which resulted into an adjustment of ₹ 1 95,10,939/ and interest on outstanding receivable was retained at ₹ 59,953/ . Thereby, assessee is aggrieved and has preferred this appeal. 2. The assessee has raised the following ground of appeal:- 1. That on facts and in the circumstances of the case and in law, the Learned Assessing Officer (AO) / Learned Transfer Pricing Officer (TPO) / Hon‟ble Dispute Resolution Panel (DRP) erred in making an addition to the returned income of the appellant by ₹ 1,95,70,892 by recomputing the arm‟s length price (ALP) of the international transactions under section 92 of the Income-tax Act, 1961 (the Act). 2. That on facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO erred in initiating the penalty proceedings u/s 271 (1) (c) of the Act mechanically and without recording any adequate satisfaction for such initiation. 3. Briefly stated the facts shows that assessee is a company engaged in the business of provision of IT enabled services which is resident, registered as an hundred percent export oriented unit Under the software technology Park scheme of the Ministry of information and technology, government of India. Assessee is also operating and managing the activities of BPO delivery centres, call centres and consumer services. It is a wholly-owned subsidiary of a German company and engaged in rendering back-office support services and back end information technology enabled support services. It renders services to both its associated enterprise and Non associated enterprise. 4. Assessee filed its return of income on 29/11/2011 declaring loss of ₹ 7,323,902/ . It has entered into 6 different type of international transactions with its associated enterprise in the form of a. provision of back-office support services of ₹ 132,304,149/ , b. procurement of IT support services of ₹ 6,156,378/ , c. training ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the assessee retained eight comparable companies (2 selected by the assessee and further 6 introduced by TPO) computed that average margin of OP/OC at 31.70% and accordingly proposed an adjustment of ₹ 21,053,389 with respect to the ITeS services provided to the associated enterprise. With respect to the outstanding receivable by the assessee he computed such interest receivable of ₹ 59,953/ . Thereby total adjustment was proposed of ₹ 21,113,342/-. 5. The assessee submitted its objections before the learned DRP which passed on its direction on 9/9/2015 and based on that the learned TPO passed an order on 5/10/2015 giving effect to the directions and computed the working capital adjusted margin of the comparable companies selecting following seven comparables at 30.40 percentage. Serial number name of the company unadjusted margin working capital adjusted margins 1 Accentia technologies Ltd 29.89% 27.29% 2 E4e healthcare business services private limited 9.14% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable and the comparable company has significant amount of brands, IPR and goodwill. The learned authorised representative further referred to several judicial precedents wherein this comparable company was rejected being functionally different, in absence of segmental information as well as on account of ownership of goodwill and extraordinary events that took place in the comparable company in case of assessment and appeals of other assesses. 8. The learned departmental representative referred to paragraph number 16.2 of the direction of the learned dispute resolution panel wherein it is stated that the above company is functionally similar. He referred that the transfer pricing officer has held that the assessee itself is a KPO. 9. We have carefully considered the contentions of the parties with respect to the above comparable. In the paper book at page number 25 103 assessee has submitted the audited financial statement of the above comparable company for the year ended on 31st of March 2011. The fact shows that the learned transfer pricing officer has looked at the standalone balance sheet of the comparable company. Therefore, we also look at only the standalone balan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g standard. With respect to the claim of the assessee that the comparable company is having significant amount of brand/intellectual property rights and goodwill. For this we perused the schedule 4 of the fixed assets. The first heading of the fixed assets shows that there are goodwill/brands on/intellectual property rights. Goodwill is one of the assets which has been accounted for at the time of acquisition of the other companies by the comparable company. Further we do not find that such goodwill has made any impact on the profit earning capacity of comparable company. Further from the annual accounts produced before us it is not shown that comparable company owns any intellectual property rights or other brands other than goodwill. In view of this, we reject this argument of the assessee. No other arguments with respect to exclusion of the above company were raised before us. 10. With respect to the several judgments relied upon wherein this comparable is rejected on functionally being different and absence of any segmental data as well as occurring of any extraordinary events as discussed above did not happen in the case of this comparable for this year. In view of this, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh-end clients and various awards and accolades one by that company makes its functionally dissimilar. It was stated that that company works with over 30 global Fortune 500 clients including many of the words leading high tax industrial manufacturing companies and distributors, online retailers. The comparable has won many awards and accolades being ranked as number one financial services KPO. 15. The DR referred paragraph number 16.3 of the direction and stated that when the assessee is held to be a KPO therefore functional dissimilarity is not correct it is further stated that the company operates in a single segment. Therefore, it is a valid comparable. 16. The assessee has submitted the copy of the annual report of the above comparable company which is placed at page number 199 3 27 of the paper book, standalone financial statement of the above company is available at page number 56 onwards of the annual report which is at page number 254 281 of the paper book. We have carefully perused the same. We have perused note number III Notes to Accounts (19) wherein the reference to quantitative details is mentioned (page number 79 of the annual report and 280 of the paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt, we can have some clue. In (381 ITR 216) CIT versus Pentair water Ltd Honourable Bombay High Court held that a comparable company having a turnover of ₹ 260 crores (HCL commet Ltd] cannot be compared with the assessee having only ₹ 11 crores turnover. Thus, the honourable Bombay High Court upheld the exclusion of the comparable which is having turnover 23 times of the assessee. Here we are pitched to compare a comparable which is having turnover 34 times larger than the assessee. Therefore on this ground, we accept the argument of the assessee that such a large comparable cannot be used to determine ALP of an international transaction of the assessee. Therefore respectfully following the criteria laid down by the honourable Bombay High Court, we direct the learned transfer pricing officer to exclude TCS E Serve Limited. 20. With respect to INFOSYS BPO LTD A ssessee submitted that it is engaged in diverse and nicht area of business of providing business process management services, it has presence of high brand value and goodwill, it subsidiary of Infosys technology hence has an element of brand associated with it. Further the turnover of that comparable com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly financial results. Several coordinate benches have taken this view therefore, we also direct the assessee to reconstruct the financial results of this comparable by producing credible information with respect to eliminating and includible quarter before the learned transfer-pricing officer.Ld TPO is directed to examine the same and if found in order, include this comparable in the comparability analysis. 26. There is no dispute with respect to any other comparables. Accordingly ground number 6 of the appeal is partly allowed. 27. Ground number 1-5 were either general grounds or are with respect to the transfer pricing issues other than comparables which are not pressed by the assessee. Therefore those are dismissed. 28. Ground number 7 is with respect to treating the overdue receivable from associated enterprise as an international transactions however looking to the order of the learned transfer pricing officer after the direction of the learned Dispute Resolution Panel that working capital adjusted margin were considered with respect to all the comparables, therefore, we do not find any reason to further sustain any adjustment on account of interest on outstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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