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TMI Blog2021 (9) TMI 1502X X X X Extracts X X X X X X X X Extracts X X X X ..... ;Ld. TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. c) The directions issued by the Dispute Resolution Panel ['Hon'ble DRP' or 'Ld. Panel'] and the order passed by the Ld. AO/ Ld. TPO is without jurisdiction, inter alia, in so far as it purports to give effect to an invalid order of the Ld. TPO. d) On the facts and in circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DRP also erred in upholding / confirming the action of the Ld. TPO in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which is a pre - requisite condition to make any adjustment under the provision of Chapter X of the Act. 2 Determination of arm's length price / Erroneous data used by the Ld. TPO a) The Ld. TPO erred in rejecting the value of international transactions relating to Information Technology Enabled Services ('ITeS Services') as recorded in the books of accounts, as the arm's length price. The Hon'ble DRP erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld. AO, Ld. TPO and the Ld. Panel have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using export sales less than 75% of the total sales. e) The Ld. AO/ Ld. TPO, while applying the turnover filter at the lower limit so as to reject companies having turnovers less than Rs.l crore in financial year 2011-12, erred in not applying the said filter at the upper end so as to reject high turnover companies as well. The Ld. Panel also erred in confirming the same. f) The Ld. AO/Ld.TPO erred in excluding Ace BPO Services Private Limited as a comparable, despite the said company being functionally comparable to the Appellant. g) The Ld. AO/Ld.TPO have erred, in law and in facts, by undertaking a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks with respect to transactions with the Associated Enterprises. The Ld. Panel also erred in confirming the same. 4 Non-allowance of appropriate adjustments to the comparable companies, by the TPO. The Ld. AO/Ld. TPO and the Ld. Panel have erred in law and on facts in not allowing risk adjustments under Rule 1OB. Furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld.TPO on perusal of various information/details filed observed that, assessee had its following international transaction with its associated enterprise: 2.5 The Ld.TPO accepted international transaction in respect of import of hardware and software products, marketing support services and reimbursement of expenses to AE. The only transaction that was disputed was in respect of provision of back-office support services/income received from ITES segment is. 2.6 The Ld.TPO observed that assessee used OP/OC as PLI to compute its margin at 16%. It used following 11 comparables with an average margin of 17.35% and by using TNMM as most appropriate method and held the transaction to be at arms length. 2.7 Dissatisfied with the comparables selected by assessee, assessee used fresh filters and finalised set of following 10 comparables with average margin of 28.11%: 2.8 After making negative working capital adjustment, the Ld.TPO computed proposed adjustment at Rs. 55,17,251/- being the shortfall. 2.9 On receipt of the Transfer Pricing order, the Ld.AO passed draft assessment order by disallowing certain miscellaneous expenses under section 37 of the Act and depreciation on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (v) Kronos Systems is responsible for managing the procurement schedule with respect to the sale of Kronos products in India and plan the product orders in order to meet the customer delivery requirements. Kronos Systems places purchase order with Kronos US and communicates regarding the requirement of products. Kronos US is responsible for providing the required quantity to Kronos Systems, subject to availability of products demanded. Move Functions (vi). Kronos Systems places an order with Krcnos US for delivery of products only after obtaining 'confirmed orders from end customers. Hence, Kronos Systems does not hold any inventory of Kronos products. Once an order has been placed with Kronos US, Kçonos Systems tracks order fulfilment including handling customer queries on the status of orders. Logistics (vii). Kronos Systems imports Kronos products from Kronös US on a CIF basis. The logistics activities 'undertaken by Kronos Systems are supervising customs clearance, freight forwarding on all product sales, clearance of products imported etc.) Warehousing (viii). Kronos Systems places an order with Kronos US for delivery of products only after obta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables are functionally not similar with that of assessee. 3.2 On the contrary the Ld.Sr.DR placed reliance on observations passed by authorities below. We have heard submissions advanced by both sides in light of record placed before us. On perusal of annual report of this company placed in paper book, we are of considered opinion that this comparable is basically into sale of products and services unlike a captive service provider such as assessee, who works on cost plus basis, providing services only to its AE's. 3.3 We note that under identical circumstances coordinate bench of this Tribunal by order dated 20/09/2019 in case of VWR Labs Products Pvt. Ltd. vs ACIT reported in [2020] 116 taxmann.com 244 observed and held as under: 7. (a) Universal Print Systems Ltd (segmental) (BPO) Assessee sought to exclude this comparable for the reason that, it fails employee cost filter and has insufficient company information. It is also been submitted that, functionally this company is providing integrated print solution to its customers and does not provides routine ITEs services like that of assessee. It has been submitted that this company is not a captive service provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allocated to BPO segment and if that is done then the OP TC of this company will be only 51.80%. The Assessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.6% of the total revenue from operations of this company as per its annual report. The .Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: - (a) to (d)** (e ) transactional-margin method, by which (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (if) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Pre-press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the following reasons:- "23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Further it was also submitted that the Infosys BPQ Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd.. We find the submissions of the ld. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPQ Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd. being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. (supra), by observing as under: "11.3 We have heard rival submissions and perused material on record. The issue of comparability of this company was considered by the coordinate bench of Tribunal in the case of XL Health Corpn. India (P.) Ltd. (supra). The relevant findings of the Tribunal are as under: '. . . . We have heard the rival submissions and perused the material on record. From the perusal of the Annual Report of this entity placed at page Nos. 583 to 678 of paper book, at page No. 604 it is stated as under. "2. COMPANY OVERVIEW Your Company, along with its subsidiary companies - TCS e-Serve International Limited and TCS e-Serve America Inc., is primarily engaged in the business of providing Business Process Services (BPO) for its customers in Banking, Financial Services and Insurance domain. The Company's operations include delivering core business processing services, analytics & insights (KPO) and support services for both data and voice processes. Your Company is an integral part of the Tata Consultancy Services' (TCS) strategy to build on its 'Full Services Offerings' that offer global customers an integrated portfolio of services r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raduates who are trained to understand and speak English. There is no value addition in the services rendered by people in medical transcription. To our understanding, basically these people who carry out medical transcription services are trained to understand language spoken by doctors, outside India to whom medical reports of patience are sent for expert opinion. Medical transcriptionist simply reproduces opinion expressed by Doctor, which is then communicated to the patients. It is observed from annual report placed at page 745 of paper book Volume (Index to Annual Reports) that this company has segmental information of medical transcription and revenue earned under this segment is Rs.147.40 Lacs. It is also been observed that various other decisions by co-ordinate Benches of this tribunal has remanded this comparable back to Ld.TPO, for proper analysis and fresh consideration. We draw support for same from Indegene (P.) Ltd. v. Asstt. CIT [2017] 85 taxmann.com 60 (Bang. - Trib.), wherein it has been held as under: "9.3.1 We have heard the rival contentions and perused and carefully considered the material on record including the judicial pronouncements cited. From the deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med by the DRP. It was submitted that Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee however does not bear any risk and has no working capital contingencies. The Assessee has not incurred any expenses for meeting the working capital requirement. The Assessee is running the business without any working capital risk as compared to the comparables. The Assessee does not bear any market risk as the services are provided only to Tavant US. Therefore, requirement for adjustment of negative working capital does not arise. 4.1. The Ld.AR placed reliance on decision of coordinate bench of this Tribunal in assessee's own case reported in (2020) 120 com 122 and Lam Research India (P.) Ltd. v. Dy. CIT in [IT Appeal Nos. 1473 & 1385 (Bang) of 2014, dated 30-4-2015], Tivo Tech (P.) Ltd. v. Dy. CIT [2020] 117 taxmann.com 259, and Dy. CIT v. Software AG Bangalore Technologies (P.) Ltd. [IT Appeal No. 1628 of 2014, dated 31-3-2016], where it has been held that negative working capital adjustment shall not be made. 4.2. The Ld.CIT DR placed reliance on orders passed by authorities below. 4.3. We have considered the riva ..... X X X X Extracts X X X X X X X X Extracts X X X X
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