9911796707
TMI Blog2023 (7) TMI 1337X X X X Extracts X X X X X X X X Extracts X X X X ..... AT BANGALORE] R Systems International Ltd. is remitted to AO/TPO for fresh consideration to verify whether it satisfies all the filters adopted by TPO while selecting comparables. Ordered accordingly. BNR Udyog Ltd. is to be included in the list of comparables to determine the ALP of international transactions. Bhilwara Infotechnology Pvt. Ltd. - remit this issue to the file of AO/TPO to verify whether this company satisfies all the filters adopted by the AO/TPO while selecting comparables. Working capital adjustment - As there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. Treatment to lease equalization cost - Whether be excluded while computing the operating markup of the Appellant? - contention of the ld. A.R. is that the assessee has itself disallowed this expenditure while computing the income and not claimed any expenditure and this cannot be treated as operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technical Support Services 5,21,94,845 Shared services availed 26,15,49,163 Reimbursement of expenses 53,11,04,921 Unbilled revenue 47,00,40,927 Availing of services 3,40,37,129 Trade receivable 4,63,14,712 Trade' payables 24,42,48,809 Purchase of components 4,11,82,640 * Since the TP Officer has made adjustment only towards BPO Services and Technical Support Services (together considered as ITES segment), the other transactions are not discussed in this note being hell to fie.at arm's length by the TP Officer. AS PER TRANSFER PRICING ("TP") STUDY: 3. For the subject AY 2017-18, the Assessee had total revenue from services of Rs. 268,97,90,000/- which comprised of Rs. 263,76,00,000/- from rendering Business support centre services and Rs. 5,21,90,000/- from rendering Technical support centre services. 3.1 Out of the Business support centre services of Rs. 268,97,90,000/-, the Assessee received Rs. 252,19,09,071/- from its AE outside India and the balance amount of Rs. 11,56,90,92.9/- was received from rendering services to the AE in India. The entire revenue pertaining to Technical support services was received from its AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 25 percent of turnover were excluded 3.6 The TP Officer determined the 35th to 65''' percentile at 22.37% to 27.41% with median at 24.37% based on the weighted average operating profit/total cost of the following 13 comparable companies in the ITES segment. S No. Company Name Average of 3 years (OP/OC) 1 Sundaram Business Services Ltd 2.08% 2 Jindal Intellicom Ltd 7.41% 3 Fuzen Software Pvt Ltd 15.93% 4 Microland Ltd (seg) 17.53% 5 Tech Mahindra Business Services Pvt Ltd 22.37% 6 Datamatics Business Solutions Ltd 22.64% 7 Infosys BPM Services Pvt Ltd 24.37% 8 Vitae International Accounting Services Pvt Ltd (seg) 27.13% 9 Manipal Digital Systems Pvt Ltd 27.41% 10 CES Ltd (seg) A 29.00% 11 Ultramarine & Pigment Ltd 34.41%- 12 SPI Technologies India Pvt Ltd 36.95% 13 Inteq BPO Services Pvt Ltd 39.51% 35th Percentile 22.37% Median 24.37% 65th Percentile 27.41% 3.7 The TP Officer did not grant any adjustment towards working capital. The TP Officer however re-computed the profit margin of the Assessee at 7.74% against the margin of 17.24% determined by the Assessee in the TP study. The TP Officer considered pre-operative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover filter and also rejected the claim for grant of working capital and risk adjustment. 3.13 The Assessee had sought exclusion of the following comparables before the DRP. The DRP has rejected the arguments of the Assessee and has upheld the inclusion: (i) Datamatics Business Solutions Ltd (ii). Manipal Digital Systems Private Ltd (iii) SPI Technologies India Pvt Ltd (iv) Vitae International Accounting Services Pvt Ltd (v) Infosys BPO Ltd (vi) CES Limited (vii) Inteq BPO Services Pvt Ltd (viii) Microland Limited 3.14 The ld. DRP further rejected the Assessee's arguments seeking inclusion of the following comparables: (i) R Systems International Ltd (ii) Allsec Technologies Ltd (iii) Cosmic Global Ltd (iv) BNR Udyog Ltd (v) Digicall Teleservices Pvt Ltd (vi) Bhilwara Infotechnology Limited 3.15 The ld. DRP however accepted the following objections of the Assessee and directed the TP Officer to exclude the same: (i) Pre-project expenses Of Rs. 88.48 million considered twice by the TP Officer: The DRP directed the TPO to verify and delete the double disallowance. (ii) Pre-project expenses: The DRP directed the TP Officer to verify the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principal activity of the company is described as IT enabled Services and BPM Service providers deriving income around 87.29%. Therefore, the company is functionally similar to the assessee as it is being predominantly into ITES Company. 7.1 In this case as ld. DRP pointed out earlier that difference in various segments i.e. low end to high end in ITES services is mainly on account of differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly qualified/skilled also goes up steeply and, therefore, the margins are not much affected. Intact, no evidence has been produced before us to show that margins in the high end segments of ITES services is high compared to low end services. Therefore, ld. DRP was unable to accept the argument advanced by learned AR that the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit arising from such transactions in the open market. Hence, these pleas were rejected by the ld. DRP. 7.5 The ld. D.R. submitted that as per the fixed asset schedule given in the annual report, the value of intangible assets as on 31-3-2017 was only Rs. 256.67 lakhs as against total revenue of Rs. 6544.60 lakhs constituting 3.92% of operating revenue. There is no reference to any IPR or patent owned or developed by the company, in the stand-alone annual report. There is also no acquisition of IPR during the year. The intangibles shown in the Asset Schedule are only computer software acquired for the business. Even the assessee has such computer software to the extent under the head intangible asset. The assessee also did not point to any information in the annual report to indicate that the intangibles have materially affected the profitability of the company as required in clause (i) of sub-rule (3) of Rule 10B. Taking into account all these aspects, we do not find any material difference so as to affect comparability. Hence, these pleas are rejected. 7.6 In view of the above, the pleas of assessee were rejected and selection of this company was upheld by the ld. DRP. 8. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel of the assessee is that assessee's functions are that of ITES which has been duly accepted by the revenue as well as by the ITAT in earlier years. Hence, the recharacterisation of the assessee's functions as knowledge process outsourcing is not sustainable. We are in full agreement with this contention. Furthermore, we find that the ld. CIT(A) has clearly contradicted himself by stating both that assessee is not a KPO and at the same time accepting the comparables selected by the Transfer Pricing Officer from the database for knowledge process outsourcing companies. 13. As regards the rejection of four companies, it is the submission of learned counsel of the assessee that the functions of Eclerx Services Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) has been held to be not comparable to the assessee by the ITAT for the assessment year 2007 - 08. In this regard, we find that ITAT in the aforesaid order has observed as under: 32. As noted earlier the Id AR for the assessee submitted that the assessee submits that Eclerx Services Ltd. has not considered as a comparable in earlier years. Eclerx Services Ltd. is a Knowledge Process Outsour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable viz. Coral Hub Limited (earlier known as Vishal Information Technology Limited) had a business model where services are outsourced, as ' against the business model of the assessee where services are rendered by employing own employees and using one's own infrastructure, on the basis of which we are of the considered view that it can safely be concluded that the said comparable was functionally different, and as such was liable to be excluded from the final list of comparables. That our aforesaid view stands fortified by the aforesaid order passed by the Tribunal while disposing of the appeal of the assesses own appeal for A.Y. 2005-06, as well as the judgment of the Hon'ble High Court of Delhi in the case of : Rampgreen Solutions (P.) Ltd. (supra). Thus as there has been no material shift in the facts involved in the case of the assessee for the year under consideration, as observed by us hereinabove, we are thus of the considered view that as the business model of the aforesaid comparable, viz. Coral Hub Ltd. (supra) is substantially different from that of the assessee, therefore the same cannot be accepted as a comparable and hence is directed to be excluded fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 page 81 of annual report, Note 2.24, the report clearly states that as per function wise classification it has income from business process management services. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas. In view of the above information in the annual report, the ld. DRP did not find any merit in the plea that this company is functionally different, and that it has diversified activities, and hence these pleas were rejected by him. 10.1 The ld. D.R. further submitted that a plea was also raised before the ld. DRP by the assessee that this company is into high end ITES service provider, and hence not comparable. The ld. DRP was unable to accept such plea, as under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis to include uncontrolled transaction involving products that are different, but where similar functions are undertaken. But the OECD guide fines 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 of the comparison and on whether or not more reliable data are available. It is rather clarified that before broadening the search to include a large number of potentially comparable uncontrolled transactions based on similar functions being undertaken, thought should be given to whether such transaction are likely to offer reliable comparables for the controlled transaction. Therefore the Guidelines are unambiguously suggesting that 'comparability factor' do not restrict to 'functional analysis' and the importance of FAR as a major comparability factor can't be over emphasized but one needs to carry out the process again and again till the exactly reliable comparable is found." 10.3 In case of Aztec Software Technology Vs ACTT [2007] 294 ITR (A.T.) 32 (Bang), the ITAT has observed following with respect to TNMM: "The TNMM requires establishing comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.1 The Ld. A.R. submitted that that Infosys BPO offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. The nomenclature in the profit and loss account indicates that the income is earned from 'Revenue from business process management services' which suggests that the company is engaged in consultancy and management services unlike the Appellant which is involved only in providing ITES as a captive service provider entity. 13.2 Further, Infosys BPO Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (He referred Page 162-163 of the Case Law Compilation, Para 11 - 21). Below is the relevant extract from the order for ready reference: 11. The ld. AR submitted that Infosys BPM Ltd. should be rejected as a comparable because it is functionally not comparable, has diversified activities and lack of segmental data, different business model, brand profits, various revenue models, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a criteria to affect the functional comparability of a company and more so in the facts of this case, wherein the sub-contracting expenses are about 4.45% only. This objection was accordingly rejected. 16. Regarding the lack of segment data to reject it as a comparable, the DRP was of the view that when it has been held that all the services being done by this company falls in the category of ITeS, then the absence of segmental information remains a theoretical argument. 17. The assessee has also argued that this company has significant intangibles and brand and hence not functionally comparable. The DRP noted that the expenditure incurred towards brand was just Rs. 19 crore which is meagre considering its operating revenue of Rs. 3050 crores. Further, the assessee could not point to any information from the annual report to indicate brand has contributed to the revenue growth or profitability. Therefore, the presence of brand, as such, has not affected comparability. Further, there is no information in the annual report to indicate that the company has undertaken any major R&D initiatives & own intangibles. Therefore, the presence of intangible in the form of goodwill, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.5 Ld. D.R. relied on the order of Ld. DRP. 13.6 We have heard the rival submissions and perused the materials available on record. This company has been considered as in the case of ADP Pvt. Ltd. cited (supra and held that this company cannot be included by observing as under:- "16.1 Infosys BPO Ltd.: The ld. AR submitted that this company may be excluded from the final set of comparables for the reason that this company has incurred outsourcing costs for FY 2013-14, FY 2014-15 and FY 2015-16 and the outsourcing cost incurred by this company reflects a different operating model and hence cannot be compared with the assessee company. Further, he submitted that while this company operates under various revenue model as per the assignments i.e., proportional completion method on rendering services, whereas the assessee charges a mark-up on the cost incurred to provide the services. Further, he submitted that since the cost structure and revenue model of this company is different with that of the assessee, this company ought to be rejected as a comparable company. He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables. 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS E-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS e-SERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8.1 Respectfully following the above decision of the Coordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables.' We observe from the financial statements of this company, that this company is functionally dissimilar and use robotics automation and diversified activities. Therefore, following the decision of the coordinate bench, we direct the AO/TPO to exclude this company as comparable for determining ALP. 13.7 In view of the above order of the coordinate bench of Hyderabad, we direct the AO/TPO to exclude this company viz. Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment. ………………………………………………………………………… ………………………………………………………………………… ……………………&hell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and statements with the motive of advertisement and other promotional gains. The functional aspect has to be determined by the information in the annual report which is based on audited financial statements and management reports, for qualitative analysis of comparability. The fact that the company is into ITES segment is corroborated by the corporate information given at page 45 of the annual report where it is lucidly stated that "the main business of the company is to provide information technology enabled services that means pre-press activities mainly to overseas as well as domestic customers". Therefore, the ld. DRP observed that the pleas raised based on information said to be available in the website are liable to be rejected is in limine in view of the information given in the annual report on the functional aspect. 12.2 Further, the ld. DRP observed that this company operates under a single primary segment. 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, he observed that ITeS services c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pesetting services and proof reading. As per revenue from operations, it includes "Revenue from web development and other services" (INR 2.18 Cr) and "income from e-book Distribution" (INR 69 lakhs), without providing the segmental revenue and profitability with respect to ITES segment. Advertising and sales promotion expenses at 6.50%, 7.19% & 8.78% of total expenditure in FY 2016-17, FY 2015-16 & FY 2014-15 respectively. 12.1.9 Further, the Tribunal in the case of Iron Mountain Services Ltd. in IT(TP)A No. 307/Bang/2022 dated 20.9.2022 has held as under:- 16. "The next company the assessee seeks to exclude is Manipal Digital Systems Pvt. Ltd. In this regard, it was submitted that this company is engaged in provision of multiple high-end services including KPO activity like Design Services, Animation. It was submitted that no segmental details were available in the financial statements on the variety of services provided by this company like Design Services, Animation. Reliance was placed on the decision of the ITAT, Pune Bench in the case of Credence Resource Management Pvt. Ltd., (supra) wherein this company was excluded by the Pune Bench with the following observations: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee took us through the annual report of the company at Volume -II, Page 1279 onwards, Page 1302 having notes of accounts. The Ld. Counsel vehemently submitted that on perusal of the annual report, notes of accounts, nothing can be stated whether at all this company i.e. Manipal Digital Systems Private Limited is engaged in the business of call center or not. The realm of ITes involves various activities and on general principle the Revenue cannot say that since majority of the earning of the said company comes from ITes, it is comparable company with that of the assessee company. 12. Placing strong reliance on the decision of the Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT, ITA No. 102/2015 dated 10.08.2015 copy of which is placed before us, the Ld. Counsel brought to our notice at Para 31 wherein the Hon'ble Delhi High Court observed that the Tribunal had held that once a service falls under the category of ITes then there is no subclassification of segment. Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITes. The Hon'ble Delhi High Court rejecting such view of the Tribunal had held that such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP." 13. The Ld. Counsel for the assessee further submitted therefore, it is clear that merely because two companies are doing ITes services, on general categorization comparability is not permitted and one has to look into the specific services rendered in the spectrum of ITes and for this reason, the said company i.e. Manipal Digital Systems Private Limited is not a comparable company with that of the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th that of the assessee company." 17. Learned DR submitted that the aforesaid decision was in relation to Assessment Year 2016-17 whereas the case of the assessee in this appeal is in reference to Assessment Year 2017-18. Learned Counsel for the assessee submitted that the functional profile of the comparable company as well as the assessee remains the same for both Assessment Years 2016-17 and 201718 and therefore the decisions cited above are applicable to Assessment Year 2017-18 also. 18. We have given a careful consideration to the rival submissions and are of the view that it would be just and appropriate to set aside the question of comparability of Manipal Digital Systems Pvt. Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee and the assessees in the decisions cited by the learned AR remains the same in Assessment Year 2017-18 as it was in Assessment Year 2016-17." 12.1.10 Accordingly, the above comparable i.e. Manipal Digital Systems Pvt. Ltd. is directed to be excluded from the list of comparables." 13.1 In view of the above, we direct the AO/TPO to exclude this company Manipal Digital Systems Pvt. Ltd. from the list of comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. for the AY 2017-18 in IT(TP)A No. 186/Bang/2022 dated 5.1.2023, wherein held as under: "11. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration in the case of Transperfect Solutions India Pvt. Ltd in ITA No. 331/Pun/2021 dated 29.7.2022 for the AY 2016-17 wherein held as under: 8.1 This comparable was also chosen by the TPO. The assessee's objection that this company was engaged in rendering KPO services as well was not approved by the TPO, who went with its inclusion. 8.2 The Annual report of this company shows that it is engaged in both the IT and IT enabled services. As the company has segmental accounts, the TPO has considered only IT enabled services segment for the purposes of comparability. However, what is important to note in the instant context is that the assessee is rendering only translation services etc., which fall within the overall domain of the BPO services. As against this, CES Limited is engaged in providing both BPO and KPO services as has been reported by it to the Registrar of companies in the requisite form. The Pune Benches of the Tribunal in Credence Resource Management Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page No. 75. In addition there is no indication from the annual report that the company is activities are more akin to KPO services. Nevertheless, the ld DRP observed that that there is a thin line of difference between BPO and KPO services. KPO is termed as an upward shift of the BPO industry in the value chain. Thus, BPO trying to upgrade itself as KPO is likely to render both BPO as well as KPO services in the process of evolution and therefore, such an entity cannot be considered strictly as either BPO or KPO. The comparability of transaction or the selection of comparables in our view has to be examined in terms of the rules framed in this regard. The Rule 10B (2) provides that the comparability of international transaction with uncontrolled transactions has among other things to be judged with the reference to characteristics of services provided, functions performed, asset employed and risk assumed. It has therefore to be insured that functions of the comparables and characteristics of services rendered are similar. Viewed from this angle, ld. DRP observed that all companies which are in ITES segment are providing similar services and difference is in the internal working w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded from the comparability list on this ground alone. In fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. 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. Accordingly, the ld. DRP reject this plea of the assessee. 17.3 In view of the above factual information available in the annual report regarding the ITES activities performed by the company the contentions of the assessee that it is not clear from annual report extracts as to what services does the company engage in is totally baseless and factually incorrect. Accordingly, the company is functionally comparable. 17.4 The ld. DRP further observed that as regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the ITES activities only. This is further supported by clarificatory note No. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich comes to around 1.94% of the total revenue. This is a very insignificant compared to the turnover of the company and will not influence the profit margin. Further, the intangibles are internally developed intangible which have not been seem to have any potential deriving any substantial benefit. The company, as per information does not own any significant IPRs. Further, the ld. DRP observed that the assessee has failed to demonstrate its significant positive impact on the financials of the company. Further the ALP margin is determined with reference to the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. It will not be proper to reject a comparable only on account of intangibles which otherwise is functionally comparable. 17.8 Therefore, all these objections were rejected by the ld. DRP and this company was upheld to be a comparable. 18. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of NTT Data Information Processing Services Pvt. Ld. in IT(TP) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistent losses filter by excluding companies with operating losses in at least two out of three years. The assessee however, had adopted the filter of excluding companies with operating losses in all the three years. The DRP upheld the action of the TPO. The assessee submitted that the ITAT in its own case for AY 2016-17 in IT(TP)A No. 252/Bang/2021 dated 11.07.2022 [Page 1713 to 1746 of compilation filed on 02.09.2022] has held that a company can be rejected as a comparable only if it has losses in all the 3 financial years forming part of the search matrix. In other words, it held that if the company has profits in any one financial year, it should be considered as a comparable. He extracted the relevant observations of the Tribunal recorded at para 20 (internal page 21-22) of the order are as follows: 20. The next company that the assessee seeks to include is Sagarsoft India Ltd. As far as inclusion of this company is concerned, the learned Counsel for the assessee placed reliance on decision of ITAT, Mumbai Bench of the Tribunal in the case of Redhat India Pvt. Ltd., Vs. NFAC (2022) 132 taxmann.com 52 (Mumbai Tribunal). In the present case, the AO rejected this company for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussed above, this company has not included in the search matrix conducted by the AO/TPO. Being so, at this stage, it is not possible to include this company in the list of comparables. Hence, it is rejected for exclusion from the list of comparables." 20.1 In view of the above, this comparable R Systems International Ltd. is remitted to AO/TPO for fresh consideration to verify whether it satisfies all the filters adopted by TPO while selecting comparables. Ordered accordingly. (II) BNR Udyog Ltd. 21 The ld. AR. submitted that the Learned TPO has erred in rejecting BNR Udyog Limited ("BNR") on the ground that it fails the export revenue filter of 75% to total income. He submitted that BNR is functionally comparable and qualifies the TPO'S export revenue filter. • Application of export revenue filter • Functionally comparable • Qualifies all of the other filters applied by the learned TPO 21.1 The ld. DR submitted that the ld. DRP observed in his report that the TPO has applied the filter that minimum 75% of operating revenue should be from exports. The ld. DPR found that the Indian Law supports the use of export sales/ total sales as a fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity of the company is business support services and for purpose of export turnover filter the total revenue has to be considered. Hence, the ld. DRP came to the conclusion that it is rightly rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO. As a result, this objection was found unacceptable by the ld. DRP. 22. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of NTT Data Information Processing Services Pvt. Ld. in IT(TP)A No. 297/Bang/2021 dated 7.7.2022, wherein held as under: "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 segmenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO before the issue is decided by the TPO. 15.1 In view of the 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." 22.1 In view of the 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. (III) Bhilwara Infotechnology Pvt. Ltd.: 23. The ld. A.R. submitted that Bhilwara Infotechnology Limited should be accepted. He submitted that the ld. TPO has erred in not considering this company as a comparable company on the grounds of functional dissimilarity despite the Assessee's detailed submissions seeking for inclusion of the same. He submitted that this comparable is functionally comparable and qualifies the filters applied and therefore should be accepted. • Functionally comparable • Bhilwara passes all filters applied by the ld. TPO 23.1 The ld. D.R. submitted that the ld. DRP has observed in his report that the above companies do not figure in the search matrix of the TPO. The ld. DRP has already upheld the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3.2023, wherein held as under: "7. The ld. counsel submits that the assessee had made claimed for grant of working capital adjustment before the TPO and DRP. But the revenue authorities had discarded the claim of the assessee. The assessee relied on the order of the jurisdictional Coordinate Bench of the ITAT in case of Huawei Technologies India (P) Ltd. vs. JCIT reported in (2019) 101 taxmann.com 313 (Bangalore) and in another case of Altimetrix India Pvt. Ltd. vs. Assessing Officer, National e-Assessment Centre, Delhi in IT (TP) A No. 477/Bang/2021 order dated 27.07.2022." 8. In the argument, the AR has taken Ground No. 12 is related to grant of working capital adjustment. The AR relied on the order of the Coordinate Bench in the case of Huawei Technologies India Pvt. Ltd.(2019) 101 taxmann.com 313 (Bang). 8.1. In our considered view the trade terms of payment of debtor is 60 days. So, the price of goods should equate to the price for immediate payment plus 60 days of interest on immediate payment price. For making working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparable for which is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout prejudice, the learned AO/learned TPO/Hon'ble DRP failed to take cognizance to the fact that the amount of lease equalization cost of INR 3,60,96,753/- was not claimed as a deductible business expenditure in the return of income of the Appellant for AY 2017-18 ad thereby the same ought to have been excluded while computing the operating markup of the Appellant." 27.1 The contention of the ld. A.R. is that the assessee has itself disallowed this expenditure while computing the income and not claimed any expenditure and this cannot be treated as operating item while computing the operating mark-up of the assessee in determining the ALP while applying the TNMM method. For this purpose, he drew our attention to the computation of income at page 220 volume 1 of the paper book. 27.2 The ld. D.R. relied on the order of the ld. DRP. 28. We have heard the rival submissions and perused the materials available on record. In our opinion, it is appropriate to remit the issue to the file of AO/TPO to examine whether assessee has claimed any deduction towards lease equalization cost of Rs. 3,60,96,753/-. If assessee itself has disallowed this expenditure while computing the total income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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