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TMI Blog2022 (12) TMI 923X X X X Extracts X X X X X X X X Extracts X X X X ..... - ITA No.2386/Hyd/2018 - - - Dated:- 19-9-2022 - Shri R.K. Panda, Accountant Member AND Shri Laliet Kumar, Judicial Member Assessee by: Shri Dhanesh Bafna And Chandni Shah Revenue by: Shri Rajendra Kumar CIT-DR O R D E R Per Laliet Kumar, J.M. The appeal of the assessee for A.Y. 2014-15 arises from the order of Deputy Commissioner of Income Tax, Circle 17(1), Hyderabad dated 31.10.2018 involving proceedings under section 143(3) r.w.s. 92CA(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short, the Act ) raising the following grounds : Transfer pricing grounds - IT enabled services segment 1. On the facts and in the circumstances of the case and in law, the Learned Dispute Resolution Panel ('Ld. DRP') erred in upholding the action of the Ld. AO / Transfer Pricing Officer ('Ld. TPO') in making a transfer pricing adjustment of Rs. 11,81,52,927 to the total income pertaining to the international transaction of provision of IT enabled services to the associated enterprise. 2. On the facts and in the circumstances of the case and in law, Ld. AO / DRP / TPO erred in disregarding the separate transfer pricing benchmarking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computing the operating revenue of the comparable companies; and b. considering miscellaneous income as part of operating income while computing the operating mark up on total cost of the comparable companies. 7. On the facts and in the circumstances of the case and in law, Ld. AO / DRP /TPO erred in: a. not granting working capital adjustment; and b. not granting risk adjustment. It is therefore prayed that the Appellant's international transactions be held to satisfy the arm's length principle and the Ld. AO be directed to delete the aforesaid transfer pricing adjustment. Corporate tax ground : 8. On the fact and in the circumstance of the case and in law, the Ld. AO erred in upholding the action of the Ld. AO in adding income of Rs. 10,10,372 to the total income as appearing in Form 26AS, disregarding the fact that such income does not belong to the Appellant and no credit of taxes on such income was claimed by the Appellant. It is therefore prayed that the Ld. AO be directed to delete the aforesaid addition of Rs.10,10,372. 9. On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was enhanced as per 92CA(3) of the Act. Particulars Appellant's margin as per TPSR ALP Margin as per TPO TPO Operating Income 70,62,54,005/- 1,09,47,51,113/- Operating Cost 59,54,95,073/- 82,23,17,369/- Operating Profit (Op. Income - Op. Cost) 11,07,58,932/- 27,24,33,744/- OP. Profit/Op. Cost (OP/TC) 18.60% 33.13% 3. In respect of receivables, it was seen that receivables had been realized in time as per the credit period provided in the intercompany agreement, and the same was accepted. Subsequently, the Assessing Officer, by incorporating the order of TPO, passed draft assessment order u/s 143(3) r.w.s. 92CA(3) of the Act on 21.12.2017 proposing an addition of Rs.11,81,52,927/- on account of transfer pricing adjustment considering entity level margins of the assessee company i.e. including assessee company s business support services segment a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alytics and all these services are included in the definition of IteS given in the Rule 10TA of Income Tax Rules. Hence, the objection of the taxpayer is not acceptable. Therefore, it is functionally comparable to the assessee. 8. Before us, the ld.AR has reproduced the same submissions raised before the TPO / DRP. The submissions made by the assessee before the TPO read as under : 9. Further it was submitted that this company / comparable had been excluded by the Tribunal holding being functionally dissimilar and our attention was drawn to the following decisions : 1) Infor India Pvt. Ltd. Vs. DCIT (2019) 109 taxmann.com. 2) Hyundai Motor India Engineering Pvt. Ltd. Vs. ACIT (2009) 109 taxmann.com 429. 3) Rampgreen Solutions Pvt. Ltd Vs. CIT (2015) 60 taxmann.com 355. 4) PCIT Vs. PTC Software India Pvt. Ltd (2019) 101 taxmann.com 117 (Bom High Court) 5) PCIT Vs. BNY Mellon International Operations (India) Pvt. Ltd. (2018) taxmann.com 363. 6) Agilent Technologies Pvt. Ltd. Vs. ACIT (ITA No.6047/Del/2012) 7) NTT Data Global Delivery Services Ltd. Vs. ITO (ITA No.46/Del/2013). 10. On the other hand, ld.DR for the Revenue had submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf had charactarized as routine contract (ITeS) and contract business service provider. He submitted that if the above profile of the assessee is read with Schedule I of the Support Service Agreement and Business Support Agreement, then it is clear that assessee is not into low end service provider rather it will squarely fall within the realm of Knowledge processing /ITeS as per broader guidelines provided by the CBDT while providing the Safe Harbour Rule. 12. We have heard the rival contentions and perused the material available on record. The profile of the Eclerx Services Limited for the A.Y. 2014-15 has been captured by the co-ordinate Bench of the Tribunal in the case of Hyundai Motor India Engineering Pvt. Ltd (supra) and the co-ordinate Bench of the Tribunal on page 19 at para 17 has held as under : 17. As far as E-Clerx Ltd is concerned, according to its Annual Report, it performs the following services: 12.1 If we compare the profile and services rendered by the assessee with Eclerx Services Limited, then it is clear that both had provided similar services and both will fall within the same broad spectrum of IteS Services. It is a matter of fact that Ec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxmann.com 230 (ITAT BNG). In the case of ITO Vs. Next India Pvt. Ltd TS-722-ITAT-2012-Bng TP, the Hon ble ITAT Bangalore upheld the company with profit margin of 40% holding that in ITES sector this would not constitute extraordinary or super profits. 14. Further, the argument of the assessee that the business mode of Eclerx Services Limited was not matching with that of the assessee as Eclerx Services Limited as this company is providing onsite services to its consumers and therefore, this company should be excluded from the list of comparable, is also required to be rejected, as by providing onsite services, the company would be incurring significant onsite expenditure, which in turn resulted into increase in cost of services and reduction of profit of the company. In that view, this comparable could not be excluded, as this company/comparable is otherwise comparable on the parameters laid down for FAR analysis. In this connection, assessee placed reliance on the decision of ITAT Hyderabad Bench in the case of Infor India Pvt. Ltd. Vs. DCIT wherein at Paras 54 56, it was held as under : 54. As regards Eclerex Services Ltd is concerned, the learned Counsel for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of winding up of the subsidiary company has not been proved to have any bearing on the assessee s profits and that super normal profit may not be a basis for exclusion of this company. However, we find that the Coordinate Benches of the Tribunal nor the Revenue Officers have not brought out functions which are similar to both the companies. The decision of the ITAT for year AY 2011-12 was followed in the AY 2012-13. Therefore, we are of the opinion that these decisions cannot exactly be binding on this Tribunal for the relevant AY, where the AO/TPO have considered the assessee as an ITeS service provider and not as a KPO. Further, as pointed out by the ld Counsel for the assessee, The TPO has 21 himself has not taken E-Clerx Ltd as a comparable for the AY 2013-14. Therefore, we direct the TPO/AO to exclude this company from the final list of comparables to the assessee. 16. The Tribunal in the case of Hyundai Motor India Engineering Pvt. Ltd (supra) has held that Hyundai Motor India Engineering Pvt. Ltd (supra) was into low end ITeS service provider and therefore, it cannot be compared with the Eclerx Services Limited. However, we had pointed out that the Tribunal in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porting. The company is currently organized by business segments, comprising of infrastructure management services and IT enabled services, business segments have been determined based on the system of internal financial reporting to the board of directors and are considered to be primary segments. The secondary segment is identified based on the geographic location of the customer. Segment revenue, segment results, segment assets and segment liabilities include the respective amounts identifiable to each of the segment. Segment revenue resulting from business with other business segments are on the basis of market determined prices and common costs are apportioned on a reasonable basis. The segment information for the year ended March 31, 2014 and 2013 is as follows : Particulars Infrastructure Management Services IT enabled Services Total 2014 2013 2014 2013 2014 2013 Revenues 32,512 22,354 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become probable based on the current contract estimates. Revenue from device management is recognized ratably over the period of the contract and is recognized on basis of devises serviced at the rate applicable for such respective devices. Revenue from maintenance contract is recognized ratably over the period of the maintenance contract and is recognized on a straight-line basis over the specified period. Unbilled revenue, disclosed in the financial statements under other current assets, represents earnings in excess of billings as at the balance sheet date. Unearned income, disclosed on the financial statements under other current liabilities, represents billings in excess of earnings. Amount received towards services are reported as advances from customers under current liabilities until all the conditions of revenue recognition are met. Provision for discounts is recognized on an accrual basis in accordance with contractual terms of agreements with customers. Revenue are stated net of discount. Other Income Interest is recognized using the time-proportion method, based on rates implicit in the transaction. Dividend income is recognized when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting domains which are included in the design of ITeS under Rule 10TA of the I.T Rules. However, the assessee has submitted that besides this company being the KPO, this company is also having high profitability and therefore, this company cannot be considered as a comparable. Our attention was drawn to the decision of the Tribunal in the case of Infor India Pvt. Ltd. Vs. DCIT (2019) 109 taxmann.com (supra). 23. Per contra, the ld.DR had submitted that the financial planning of both the assessee as well as Crossdomain are identical and therefore, this company should not be excluded from the list of comparables. Ld.DR further submitted that the contention of Ld.AR that the financial information of this company were not available in the public domain is not correct. Lastly, it was submitted that the decision in the case of Infor India Pvt. Ltd. Vs. DCIT (supra) was distinguishable on facts and for that purpose, he has drawn our attention to Para 58 of said decision, wherein it was held as under : 58. As regards the services rendered by 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , PCIT Vs. Aptara Technology Pvt. Ltd. (2018) 92 taxmann.com 240 was for A.Y. 2008-09 and therefore, the same cannot be applied to the current assessment year, as availability of financial information varies from year to year. Suffice to say, in the case of Aptara Technology Pvt. Ltd (supra), the Hon ble Bombay High Court has merely upheld the decision of the Tribunal in the A.Y. 2008-09 for the reasons mentioned as under : (a) The impugned order of the Tribunal excluded M/s. Crossdomain Solutions Ltd. from the list of comparable. This after having rendered finding of fact that it was engaged in distinct activities such as payroll activity, Knowledge Process Outsourcing (KPO) service, development of products and routine IT services. Further, the impugned order indicates that differences between the E-learning service and Knowledge Process Outsourcing which would clearly establish that the activities are not comparable. The impugned order also records that M/s. Crossdomain Solutions Ltd. was engaged in payroll outsourcing on a substantive scale. Besides, there was no bifurcation available of profits earned individually on the various diversified activities being carried by M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia) Pvt. Ltd. (Mumbai Tribunal) (ITA No.6098 531/Mum/2018) (Assessment Year 2014-15) 2) Symantec Software India Pvt. Ltd Vs. DCIT (Pune Trib) ITA No.1824/Pun/2018) (Assessment Year 2014-15) 3) FIS Solutions Software India Pvt. Ltd. Vs. ITO (Pune Trib) (ITA No.1756/Pun/2018) (Assessment Year 2014-15) 27. On the other hand, the ld.DR relied upon the order passed by lower authorities. Our attention was drawn to the remarks of the TPO, which are to the following effect : TPO's Remarks: It is objection of the taxpayer that MPS Ltd is functionally different. Business process outsourcing (BPO) is a subset of outsourcing that involves the contracting of the operations and responsibilities of a specific business process to a third-party service provider. Often the business processes are information technology-based, and are referred to as ITES-BPO, where ITES stands for Information Technology Enabled Service. MPS Ltd is providing service to publishing houses located in North America by way of dig!tization of books, content design, helping in designing of books, prepress etc by using its manforce like any other BPO. Indian BPOs [bUsiness process outsourcers] of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of order, it was mentioned as under : 7.1. The brief facts of this issue are that assessee is engaged in providing ITeS services for the in-house consumption of the AEs, primarily in the nature of database management, administration and help desk support services. In order to benchmark the international transactions of ITeS, TNMM was selected as the most appropriate method. The margin of the assessee under ITeS segment is determined as follows: .. 7.1.1. The arithmetic mean of the margins of the 11 comparable companies selected by the assessee in TPSR is 13.85% and accordingly, it was concluded that the international transaction of ITeS were at arm's length. 7.2. The ld. TPO made a TP adjustment in ITeS division to the tune of Rs.6,03,56,767/- as under:- . 7.3. The action of the ld. TPO was upheld by the ld. DRP. 8. Aggrieved, the assessee is in appeal before us. 9. We have heard rival submissions. We find that the ld. AR before us did not contest all the comparables of the assessee which were rejected by the ld. TPO. The ld. AR only prayed for exclusion of two of the comparables selected by the ld. TPO i.e., MPS Ltd., having mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred outsourcing costs which indicate that it follows different business model. d) From the annual report of the said comparable it is noted as under:- ― MPS Ltd., provides content creation production, transformation and technology services to global academic, scientific and educational publishers. The company has a team of more than 2,860 employees based in offices in Bengaluru, Chennai, Gurgaon, Noida and Dehradun in India and at Portland, Oregon, Orlando, Florida, Durham, North Carolina and Effingham, Ittinos in the United States. Established as an Indian subsidiary of Macmillan (Holdings)Ltd., in 1979, the company had evolved over its forty five year history to become one of the most experienced and dominant players in the publishing services outsourcing space. 9.2. We find that the ld. TPO however did not appreciate the contentions of the assessee and held that this comparable is functionally comparable with that of the assessee in ITeS segment. The ld. DRP on perusal of the annual report of the MPS observed that the said comparable operates in only one segment of providing publishing solutions and it does not sell any software based services to its cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that this company is also to be excluded from the list of comparables. 9.3. In view of the above, we hold that the comparable chosen by the ld. TPO, M/s. MPS Ltd., is functionally not comparable with that of the assessee and accordingly, we direct the ld. TPO to exclude the same from the list of comparables. 29. We observe that the co-ordinate Bench of Mumbai Tribunal in the case of Emerson Electric Company (supra) had examined the profile of Emerson (supra) with the profile of MPS Ltd and thereafter, the coordinate Bench had excluded this company as comparable. However, if we examine the functions performed by the assessee with MPS Limited, we find both fall in the same bandwidth of ITeS with minor difference. Both are into digital publishing of data, besides that assessee is also monitoring and enforcing its policy with the help of Artificial Intelligence and its specialized software designed for said purposes. In fact, the assessee is publishing information, advertisement, and messaging with the help of its unique software and technology, these activities/ functions performed were very much akin to the activities of MPS Ltd. 30. In our view, even outsourcin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s wrongly excluded this company on account of the persistent loss-making company and the learned DRP has also not included this company on account that this company fails on export turnover. 33. The ld.DR relied upon the order of lower authorities. 34. We have heard the rival contentions of the parties and perused the material available on record. We have perused the order of the lower authority. TPO has not examined the functional profile of this company with that of the assessee and the TPO had merely rejected it on account of a persistent loss-making company. The paper book shows that the assessee has earned profit during the year under consideration (Page 1165 of the paper book) and further, this company also satisfies the export turnover filter of 25%. In view of this, we remand the issue of inclusion of this comparable to the file of TPO/Assessing Officer with a direction to find out whether this company is functionally comparable with that of assessee or not. While doing so, the TPO shall keep in mind the financials of the company, the profit earned during the year and also the export turnover. Needless to say, the AO shall give one opportunity of being heard to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process management services offered to its global clients as evident from the annual report. The taxpayer has further pointed out that Infosys BPO is providing cloud based services. A cloud service is any resource that is provided over the Internet. Use of internet over the conventional telecommunication systems is very common in ITES industry. Just because cloud is used as a platform over various mainframe computers, the company would not become functionally dissimilar. The taxpayer has pointed out that Infosys BPO provides services to Government of India. The Government of India is like any other customer which contracts out work on a competitive bidding. Research development activity: From the perusal of the annual report of the company it is observed that there is no R D expense incurred by the company during the year. The taxpayer in his submission has merely quoted some general excerpts from the annual report related to research activities of the company. It has not been demonstrated how this research has had a material impact on the operating profits of the company during the year. Hence, the objection of the taxpayer is not acceptable. Presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,372/- to the income of the assessee, treating the same as undisclosed income and the finding of the Assessing Officer was mentioned at Para 11 of the assessment order, which reads as under : 11. During the course of scrutiny proceedings u/s 143(3) r.w.s. 92 CA(3) of the IT Act, 1961, it was observed that there are credits in form 26AS to the extent of Rs.10,10,327/- but the same are not offered to tax. When asked to explain the same, assessee claimed that the credits does not belong to the company and hence same are not accounted for in books of accounts. But no documentary evidence in support of its claim is produced by the assesse. In view of this, an amount of Rs.10,10,327/- is treated as undisclosed income and added to the returned income. The assessee company has raised objection before DRP on this issue. The Hon'ble DRP vide its order dt. 05.09.2018 directed the assessee company to submit the necessary evidence before the AO to prove that whatever appearing in 26AS is not its income within 10 days of receipt of this order. However, the assesse company failed to furnish any such evidence in support of its claim. In view of the above discussion, an amount of Rs.10,10, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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