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TMI Blog2022 (7) TMI 1401X X X X Extracts X X X X X X X X Extracts X X X X ..... sociated enterprises ('AEs'). 3. Learned AO/ DRP erred in assessing the total income of the Appellant at INR 66,72,07,110, as against returned income of INR 37,61,04,750. 4. Learned AO/ DRP erred in determining a sum of Rs 8,47,74,080 as balance tax payable by the Appellant. Ground of appeal relating to Transfer pricing matters 5. Learned TPO erred in law and in facts, by not accepting the economic analysis undertaken by the Assessee in accordance with the provisions of the Act read with the Rules and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transactions and holding that the Assessee's international transactions are not at arm's length. 6. Adjustment on account of re-determination of arm's length price for the transaction of provision of IT enabled services by the Appellant to its AEs 6.1. Learned TPO/ AO/ DRP erred in law and facts, by incorrectly applying the following quantitative and qualitative filters: a) Rejecting certain comparable companies for having different accounting year/ financial year (i.e. companies having accounting year/ financial year other than March ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited ii) Sundaram Business Services Limited iii) ACE Software Exports Ltd iv) Hartron Communications Ltd. 6.4. Learned AO/ TPO/ DRP erred, in law and facts, by exercising powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes. 6.5. The learned TPO/ AO have erred, in law and in facts, by not making suitable adjustment to account for differences in working capital position of the Assessee vis-à-vis the comparables. 6.6. The learned TPO/ AO have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Assessee visà- vis the comparables. 7. Adjustment on account of notional interest on outstanding receivables 7.1. The learned TPO/ AO grossly erred in determining a transfer pricing adjustment on account of the interest on outstanding receivables amounting to INR 70,32,196. 7.2. The learned TPO/ AO/ DRP have erred, in law and in facts, by recharacterizing the outstanding trade receivables as on 31st March, 2016 as a loan transaction, without appreciating that the outstanding trade receivable fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. In Ground No.6.3(a) assessee seeks exclusion of following 3 comparables only: a) Infosys BPO Ltd. b) Eclerx Service Ltd. c) SPI Technologies India Pvt. Ltd. 3.1 The assessee not pressed exclusion of following comparables, which are dismissed as not pressed. : a) Bhilwara Technologies Ltd. b) One Touch Solutions Pvt.Ltd. 3.2 The Ld. A.R. submitted as follows: (a) Infosys BPO Limited Functionally different 3.3 The company provides a gamut of services in horizontal and vertical areas that comprise of sourcing and procurement, customer services, financial & accounting, legal process outsourcing, sales & fulfilment, analytics, human resources outsourcing, Industry solution, digital business services, financial services, manufacturing, energy and utilities, communication and services etc. 3.4 The company is also engaged in robotic process automation and has been awarded "Market Specialist in Mindfield's Research Report titled Robotic Process Automation - Driving the Next Wave of Cost Realization". These services are not comparable to the services provided by the Assessee. Incurs sub-contracting cost and selling, marketing & brand building expenses 3.5 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment Centre, Circle-I, Gurgaon- ITA No. 443/Del/2021- AY 2016-17 High-end KPO service uncomparable- 1. Rampgreen Solutions private Limited Vs Commissioner of Income tax(ITA 102/2015) 4. The Ld. D.R. stated that on perusal of the annual report by Ld. DRP, he noted that this company is engaged in business process management services to organizations that outsource their business processes. Further, at P.60, under Note 2.25 -Segment Reporting, it is clearly stated that the company's operations primarily relate to providing business process management services, and accordingly revenues represented along with industry classes comprise the primary basis of segmental information. Thus, primary business activity of this company is business process management services, in various verticals such as FSI, MFG, RCL, ECS. At P.63 of annual report, Note 2.33, the report clearly states that as per function wise classification it has income from business process management services. On page 28 of the AR, in para 1.3 it is mentioned that Infosys BPO offers business outsourcing solutions to several clients and span across multiple industry segments. The company's catering to a variet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional and product/services comparability. In many instances, it will be possible to use 'imperfect' comparables, e.g., comparables from another industry sector, possibly adjusted to eliminate or reduce the differences between them and the controlled transaction." 4.2 Reliance was also placed before Ld. DRP in the case of Pino Bisazza Glass Pvt. Ltd. Vs. ACIT, C5, Ahmedabad 2005-06 & 2007-08, ITA No.1690 & 1622/Ahd/2010 & 3201/Ahd/2011 wherein acceptance of broad comparables was upheld. The relevant extract has been reproduced below: "- 12 - Although the selection of "Industry Segment" is the start point but it is a broad selection, particularly if a finer or more close selection is available. We are aware about Para 1.41 of OECD guidelines which prescribes that it is acceptable to broaden the scope of the comparability analysis to include uncontrolled transaction involving products that are different, hut where similar functions are undertaken. But the OECD guide lines have not stopped there and said that the acceptance of such an approach depends on the effects that the product differences have on the reliability on the comparison and do whether or not more reliable da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice services. This noting itself makes this comparable not functionally similar with that of assessee. Accordingly we direct this comparable to be excluded from finalist." 5.1 In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables to determine the ALP. (b) Eclerx Services Ltd. ('Eclerx") Functionally different 6. The company provides a wide range of activities including financial services (contract risk review, consulting services etc.), digital marketing (web analytics, CRM and business intelligence etc.), digital branding (content creation, digital asset management etc.) and cable and telecom services (tiered technical support). Eclerx was also the 2015 MAKE [Most Admired Knowledge Enterprise] winner for both Asia and India. Eclerx is a specialist KPO company and also India's first publicly listed KPO company Extraordinary events 6.1 Eclerx has been amalgamated with Agilyst Consulting Private Limited ("ACPL") with effect from 01 April 2015. As per RPT schedule, the services of all employees and other employee benefits of ACPL have been transferred to Eclerx w.e.f 01 April 2015 6.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. 7.1 Further, this company operates under a single primary segment i.e., data analytics and process outsourcing services and neither the assessee nor the TPO has gone into the verticals/ horizontals and high end or low-end distinction of the comparable companies. Finally, under TNMM only broad comparability is required. Further, the profit margins of various comparables will be averaged and a variation of 3% is also permitted. These aspects take care of some differences which are bound to be there between various comparables. In view of the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. It is a fact that this company falls in the category of ITeS and hence, the objection is rejected. 7.2. The Annual report of the comparable mentions that Eclerx is a specialist KPO/BPO (Knowledge and Business Process Outsourcing) company providing critical business operations services to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of providing publishing solutions viz., type setting and data digitization services for overseas publishers and supports international publishers through every stage of the author-to-reader publishing process and provides a digital-first strategy for publishers across content production, enhancement and transformation, delivery and customer support. " MPS Limited has been rejected basis functional incomparability. KPO service company basis response received u/s 133(6) 9.2 Basis the response received u/s 133(6) of the Act from SPI Technologies, the company has claimed that it is "operating in knowledge process outsourcing..". Considering that SPI technology provides KPO services, the same is uncomparable to the Assessee's business of routine BPO services. Sub-contracting cost 9.3 The company incurs subcontracting charges which indicates it outsources part of its activity. The cost of such subcontracting charges is INR 20.88 crores for FY 2015-16 hence, SPI's business model is different from NTT Data IPS as it does not outsource its work. Presence of inventories 9.4 SPI has inventories for INR 68.69 crores (which works out as 20.43% of turnover) in its Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant than product similarity. 10.2 As discussed by the TPO, the company in response to the notice u/s 133. (6) of the Act, has stated that the company and Lambda tent Pvt 1,1d had entered into a scheme of amalgamation with effect from 1 September 2017. This amalgamation also does not pertain to this year and do not have any impact on the profits of the company. 10.3 The company is engaged in providing, only data processing services and hence the margin is completely at the entity level. On page 163 of the Annual report, the company has, disclosed that the entire revenue is from data processing and related services only. 10.4 Therefore, all these objections are to be rejected and this company is to be a comparable. 11. We have heard the rival submissions and perused the materials available on record. The main contention of the Ld. A.R. is that TPO rejected the NPS Ltd. which is engaged in the business of providing publishing solutions namely typesetting, data digitisation commission for overseas publisher and support international publisher through every stage of the author to reader publishing process and provides the digital first strategy for publishing contents, production a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue of 0.55% of total revenue from operations. Hence it is rightly rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO. Therefore, this company is not functionally comparable as it fails the export revenue filter of 75% adopted by the TPO. As a result, this objection is to be dismissed. 15. We have heard the rival submissions and perused the materials available on record. The contention of the Ld. A.R. is that when segmental information is available and not disputed, it cannot be argued that filters have to be applied at entity level. We find that this proposition accepted by this Tribunal in the case of CGI Information Systems and Management Consultants Pvt. Ltd. In IT(TP)A No.586/Bang/2015 and No.183/Bang/2017 dated 11.4.2018, wherein held as under: "52. There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of "net profit margin realized by the enterprise from an international transaction" with the "net profit realized from a comparable uncontrolled transaction". Therefore, comparison is of similar transaction. When segmental information is available and is not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) Informed Technologies India Ltd. 2) Sundaraam Business Services Ltd. 3) ACE Software Exports Ltd. 4) Hartron Communications Ltd. 16.1 The Ld. A.R. submitted that the DRP's direction to reject the below mentioned companies in the final list of comparables is incorrect in law and on facts for the following reasons: (a). Hartron Communications Limited Functionally comparable 16.2 The company is engaged in 3 business segments namely, Rent Income, Office back-up operations and Real estate. The office back up operations segment of the company is functionally comparable to the Assessee Segmental data to be considered for filters 16.3 DRP has rejected the comparable stating that it fails the core service revenue >75% filter. However, the filter has been applied by the TPO/DRP on an entity-wide basis despite clear segmental information being available. The Hon'ble Bangalore ITAT's judgement in the case of CGI Information Systems and Management Consultants Private Limited [IT(TP)A No. 586/Bang/2015 and 183/Bang/2017], holds that "when segmental information is available and not disputed, it cannot be argued that filters have to be applied at entity level. Segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivate Limited c) Tech Mahindra Business Services Ltd. d) Hartron Communications Limited e) Ace Software Exports Ltd f) Sundaram Business Services Limited g) Informed Technologies India Limited h) B N R Udyog Ltd 20.1 Since the Assessee's margin would be within the arm's length range of margins of the remaining comparables, the international transaction of provision of IT enabled services by the Assessee to its AEs would be at arm's length. 20.2 The argument of Ld. D.R. is that the assessee has not produced the physical copy of annual report and hence it has not been considered by the lower authorities. 20.3 We have heard the rival submissions and perused the materials available on record. In our opinion, if all the filters are satisfied, these comparables to be included. Accordingly, this issue remitted to the file of the AO/TPO with a direction to the assessee to furnish the annual report copy and if it is furnished, the AO/TPO to apply the filters at segmental level to decide accordingly. Accordingly, these comparables remitted to file of AO/TPO for fresh consideration. 21. Ground No.7 is with regard to not giving adjustment on account of notional interest on ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is necessary in this regard. Outstanding receivables cannot be treated as a separate international transaction 21.2 The assessee has provided IT enabled services to its AEs and amount outstanding as trade receivables merely represent the dues which are to be received by the Assessee against the services provided. As a business practice, the Assessee did not charge any interest on delayed realisation of invoice from AEs nor paid any interest on delayed payables. 21.3 Early or late realization of service proceeds is incidental to the transaction of sale/ service, and not a separate transaction in itself. In other words, these represent the consequence of an international transaction and not an international transaction per-se. If the ALP in respect of an international transaction of service is determined, then there can be no question of treating non-receipt of interest in such transaction as separate international transaction warranting any further adjustment. Once ALP is determined in respect of the sale/ service transaction, it would be deemed to be covering all the elements and consequences of such transaction of sale/ service. Aggregation approach - all service related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional interest is imputed considering a credit period of 30 days in spite of our submission that as per the inter-company agreement, the credit period allowed by the Assessee is 60 days. 21.9 As per the Hon'ble DRP's directions, the notional interest computation must be made on an Invoice-by-Invoice basis. The Hon'ble DRP directed the Assessee to furnish the TPO with InvoiceIT( wise details of period of delay for the computation of notional interest which was submitted with the TPO vide submission dated 23 April 2021. However, the TPO has not provided any workings for computation of the notional interest on delayed receivables to determine whether the directions of the DRP to compute interest on a Invoice-by-invoice basis has been followed and accordingly the Issue is remitted to AO/TPO for fresh consideration. Working capital adjustment appropriately takes into account the delayed/ outstanding receivable; separate TP adjustment is unwarranted 22. The assessee requests that where working capital adjustment is granted, receivables amount gets adjusted in working capital adjustments and another separate addition is not required under the TP provisions. In view of above, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd relevant material on record. At the outset, we note that allowing a credit period on receivable from AE is not an independent international transaction however, it is part of the main international transaction of providing software development services by the assessee to its AEs. There are series of decisions wherein the Tribunal has considered this transaction as part of the main international transaction between the assessee and its AE and therefore the treatment of the same at the time of determining the arm's length of the international transaction has to be given in the shape of allowing the necessary adjustment in the comparable prices on account of working capital adjustment. We find that the Jigastbai Bench of the Tribunal in the case of Goldstar Jewellery Lit in ITA No.6570/Mum/2012 vide order dt.14. 1.2015 as well as Delhi Bench of the Tribunal in the case of Kusum Healthcare Pot Ltd Vs. ACTT in ITA No.6814/Del/2014 vide order & 3132015 has taken this view that allowing the credit period. over and above normal credit period prevailing in the industry is certainly relevant and part of the main international transaction of sale or purchase between the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, in view of the expanded meaning of the international transaction as contemplated under clause (1) (e) of explanation to section 92B(1), the delay in realization of dues from the AE in comparison to non-AE would certainly falls in the ambit of international transaction. However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be examined independently but has to be considered along with the main international transaction being sale to the AE. As per Rule 10A(d) if d number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregate and clubbing of closely linked transaction are permitted under said rule. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on AE. When the assessee is not making any difference for not charging the interest from AE as well as non AE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the average period multiplied by the outstanding amount of the AE is at arm's length in comparison to the average period of realization and multiplied by the outstanding from non AEs then no adjustment can be made being the transaction is at arm's length. The third aspect of the issue is that the arm's length interest for making the adjustment. Both the TPO and DRP has taken into consideration the lending rates, however, this is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan is available. Accordingly, we direct the Assessing Officer/TPO to re-do the exercise of determination of ALP in terms of above observation." 12. Thus, it is clear that the Tribunal has taken a view that the transaction of allowing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/ profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted. Rs. 9. The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was also submitted with the Ld. 77'0. A snapshot of the result is provided below: Segment Name Appellant's Margin (OP/T9 Working capital adjusted margins of comparables (OP/TC) Manufacturing Activity 46.33% 11.84% Trading Activity 17.44% 8.36% 10. The above analysis empirically demonstrates that the differential impact of working capital of the vis-a-vis its 'comparables has already been factored in the pricing/profitability of the assessee which is more than that working capital adjusted margin of the comparables. Hence, any fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered accordingly."
22.2 In view of the above order of the Tribunal, we remit this issue to the file of AO/TPO on similar directions.
23. The next ground raised by the assessee in ground No.8.1 is with regard to the Corporate Tax. The ground is reproduced as follows:-
Without prejudice to the above grounds, while computing the taxable income in the assessment order, deduction under section 10AA of the Act claimed in the return of income (ROI) has erroneously been omitted by the learned AO, although in the computation sheet of even date, attached to the final assessment order, assessable income has been computed after allowing deduction under section 10AA of the Act.
23.1 We have heard both the parties on this issue. In our opinion, the claim of assessee to be verified by the AO/TPO in accordance with the return of income filed by the assessee. Accordingly, we direct the AO/TPO to consider claim of assessee u/s 10AA of the Act in accordance with law. The issue remitted to AO/TPO for fresh consideration,
24. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 7th Jul, 2022 X X X X Extracts X X X X X X X X Extracts X X X X
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