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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 ..... 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 costs are embedded in the remuneration received from the AEs - It is to be appreciated that where companies are aware of the fact that customer will take longer than the agreed time to pay the outstanding dues, the same is factored in the price/ mark-up charged for the services rather than to levy of actual interest when the payment is eventually made by the customer. The principle of aggregation is well established rule in the transfer pricing analysis. This principle seeks to combine all functionally similar transactions wherein arm's length price can be conducted for a number of transactions taken together. The said principle is enshrined in the transfer pricing regulation itself. As per the Hon ble DRP s directions, the notional interest computation must be made on an Invoice-by-Invoice basis. The Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 31 or companies whose financial statements were for a period other than 12 months). b) Applying incorrect modified related party transaction ( RPT ) filter to reject companies, which included application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned 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- -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 vis - 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 from the AE is not an international transaction within the meaning of term as per section 92B of the Act; 7.3. Without pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 The company has incurred subcontracting charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer, E-Assessment 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TANIM requires only broad functional 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 compariso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices that are different from routine back-office 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 ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch an entity cannot be considered strictly as either BPO or KPO. 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. 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 speciali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t comparable to the services rendered by the Assessee. 9.1 Further, the learned TPO in the order has rejected MPS Limited which is engaged in the 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. 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. 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 ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he annual report, it was seen from disclosure in Profit and Loss account and Annual Report for the A.Y. 2015-16 that earnings in foreign exchange is Rs. 0.46 crore whereas the total revenue from operations is Rs. 8.33 crore. Therefore, it has an export 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above order of Tribunal, taking a consistent view, we direct the AO/TPO to include BNR Udyog Ltd. In the list of comparables to determine the ALP of international transactions. 16. Ground No.6.3(c) assessee wants inclusion of following comparables:- 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. In our opinion, th TPO/AO is required to consider these comparables afresh and decide. Accordingly, these comparables are remitted to AO/TPO for fresh consideration. FINAL SET OF COMPARABLES 20. On acceptance of the afore-mentioned submissions, the final list of comparables would be as follows: a) Bhilwara Infotechnology Limited b) One touch Solutions India Private 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld. A.R. submitted that the assessee wishes to submit that the delayed / outstanding receivables should not be considered as a separate international transaction. Further, it is humbly submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of intercompany transactions of provision of services has been already determined and no separate adjustment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces being in foreign currency and receivable from foreign debtors, the appropriate rate for imputing notional interest on delayed receivables would be LIBOR. The Hon ble DRP has erred in directing the ld. TPO to use SBI short-term deposit rates. Incorrect computation of notional Interest on delayed receivables 21.8 Without prejudice to our contention that outstanding receivables is not an international transaction, we wish to submit that the notional 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel for the assessee as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that this issue has been considered and decided by this Tribunal in a series of decisions including the decision in the case of M/s. Dell International Services India Pvt. Ltd. Vs. JCIT in ITA No.308/Bang/2015 Dt.17.6.21)16 wherein the Tribunal has considered this issue in para 7 as under : 7. We have considered the rival submissions and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the nonAE would constitute international transaction. We are of the view that after the insertion of explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business fall under the expression international transaction as per explanation. Therefore, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)J, Mentor Graphics (Noida) Private Limited [109 ITD 1011 Egain communication (P) Ltd. [ITA No. 1685/PN/2007J Sony India (Pvt.) ltd. [2011-T7I-43-ITAT-DEL-TPJ Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences 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. ₹ 9. The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was also submitted wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in comparable price. In case after giving the necessary adjustment the international transaction of the assessee is found at arm's length then there is no question of separate adjustment on account of allowing credit period on receivable from the AE. 7.2.1Taking a consistent stand, we direct the AO / TPO to redo the transfer pricing analysis in respect of interest on outstanding receivables by taking into account the directions of the Tribunal in assessee's own case for assessment year 2008-2009 (supra). It is ordered 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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