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TMI Blog2023 (9) TMI 1615X X X X Extracts X X X X X X X X Extracts X X X X ..... threshold. Accordingly, TPO applied R D expenses filter to select comparables incurring R D expenses without specifying any specific threshold. The assessee carried the issue to the ld. DRP. DRP accepted the contention of the assessee as recharacterization of SWD services as contract R D services and directed the TPO to remote the R D filter. This resulted in inclusion of 27 comparables from the TPO s stay which were earlier rejected by the ld. TPO due to application of the R D filter. Being so, there is violation of principles of natural justice while inclusion of additional comparables by ld. TPO without giving opportunity of commenting on this by assessee. Hence, in the interest of justice, we remit the entire issue in ground Nos. 12 13 to the file of ld. TPO/AO for fresh consideration to grant an opportunity of hearing on this issue for inclusion of additional comparables by ld. TPO. Tech Mahindra Business Services Ltd. is engaged in the BPO service provider delivering high end diversification support services and there was presence of significant intangibles and have high grant value.As gone through the financials of M/s. Tech Mahindra Business Services Ltd. Both the assessees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO to consider the above arguments of the assessee s counsel and decide it afresh. Eclerx Services Ltd be excluded from the list of comparables. Suprawin Technolgies Ltd. issue to the file of ld. TPO/AO for fresh consideration in the ITeS segment. Crystal Voxx Ltd and Surevin BPO Services Ltd - As in the case of Prism Networks Pvt. Ltd. [ 2022 (2) TMI 1296 - ITAT BANGALORE] this comparable has been excluded only on the reason that it does not feature in the search matrix. In our opinion, it is appropriate to remit this Crystal Voxx Ltd. issue to the file of ld TPO/AO for conducting fresh TP study and decide the issue accordingly. Selection of MAM - If the assessee is following the same method in respect of MSS segment that cannot be disturbed by the ld TPO/AO in this assessment year under consideration. Accordingly, we direct the ld. AO/TPO to follow the same method of TNMM to benchmark the ALP. Ordered accordingly. Grant actual working capital adjustment while determining the ALP of the international transactions. Ordered accordingly. Disallowance of deduction u/s 80G - We remit the issue to the file of ld TPO/AO to grant deduction u/s 80G of the Act in accordance with law. Nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment order passed by the Deputy Commissioner of Income-tax Central Circle-2(2), Bangalore u/s 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 ['the Act' for short] dated 20.2.2023. 2. The brief facts of the case are as follows: (i) The Assessee, a company incorporated under Software Technology Parks of India scheme, is a subsidiary of VMware International Unlimited Company, Ireland (erstwhile known as VMware International Limited - VIL ) which in turn is an affiliate of VMware Inc., US. (ii) During the previous year relevant to the assessment year 2017-18, the relevant international transactions that took place between the Assessee and its AEs were the provision of SWD services by the Assessee for a price of Rs. 578, 30, 55, 985/-; the provision of ITeS by the Assessee for a price of Rs. 784, 95, 77, 795/-; and the provision of MSS by the Assessee for a price of Rs. 1, 42, 35, 69, 547/- . The Assessee realized a profit margin 1 of 13%, 17% and 8% in respect of the SWD, ITES and MSS segments, respectively. (iii) Upon a reference being made by the Assessing Officer to the TPO, the TPO determined a TP adjustment in respect of each of the above three segments. This was do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s computed by the Assessee: Operating Income Rs. 578, 30, 55, 985/- Operating Cost Rs. 512, 35, 32, 593/- Operating Profit (Op. Income Op. Cost) Rs. 65, 95, 23, 392/- Operating/Net mark-up (OP/TC) 13% A.2. Net mark-up on cost as computed by the TPO: Operating Income Rs. 578, 30, 55, 985/- Operating Cost* Rs. 607, 37, 47, 051/- Operating loss (Op. Income Op. Cost) (Rs. 29, 06, 91, 066/-) Operating/Net mark-up (OP/TC) -4.79% *the TPO added notional cost related to share based compensation ( SBC ) to the cost base. A.3. Filters applied by Assessee in its TP study: Step Description 1. Data for the period between 01.04.2014 and 31.03.2017 selected 2. Companies with sales 0 and other operating income/total sales 50% - selected 3. Companies with ratio of average net fixed assets to sales = 200% - selected 4. Companies having sales = Rs. 1 crore in the previous year- selected 5. Companies with average net worth = 0 selected 6. Companies which have more than 25% related party transactions of the sales- excluded. 7. Companies with ratio of R D expenses to sales =3% - included 8. Companies which are functionally similar- accepted. A.4. Comparables selected by Assessee and the range of weighte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all being adjustment u/s 92CA Rs. 1, 95, 67, 19, 882/- 2.3 DIRECTIONS ISSUED BY THE DRP: The directions of the DRP in brief are as under: 2.3.1 The DRP accepted the contention of the Assessee as regards recharacterization of SWD services as contract R D services and directed the TPO to remove the R D filter. This resulted in inclusion of 27 comparables from the TPO s set which were earlier rejected by the TPO due to application of the R D filter. 2.3.2 However, the DRP rejected the contentions of the Assessee seeking exclusions of the companies. As regards the Assessee s contentions seeking inclusion of comparable companies, the DRP directed the inclusion of (i) Rheal Software Ltd.; (ii) Maveric Systems Limited; (iii) Sagarsoft(India) Limited; (iv) CG VAK Software Exports; and (v) Exilant Technologies Pvt. Ltd. 2. 4 FINAL ASSESSMENT ORDER The Assessing Officer passed the final assessment order incorporating the TP adjustment of Rs. 1, 87, 59, 39, 046/-. 2.5 LIST OF COMPARABLES POST THE DRP S DIRECTIONS: Upon giving effect to the above directions issued by the DRP, the final list of comparables as per the order dated 26.01.2022, giving effect to the DRP directions is as follows: Sl. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pense or restrict the adjustment to only the mark-up. 6. The Hon ble Panel erred in surmising that the Appellant has claimed a corresponding deduction of the notional costs relating to SBC thereby upholding the Learned TPO s action of erroneously computing the transfer pricing adjustment on the entire SBC cost along with a mark-up. 7. The Hon ble Panel erred in failing to adjudicate on the Grounds corresponding to (5) and (6) above raised by the Appellant during the proceedings before the Hon ble Panel. The Appellant has filed a rectification petition before the Hon ble Panel. 4.1. Facts of this issue are that the TPO increased the operating cost base of the Assessee by adding notional share-based compensation ( SBC ) costs. 4.2 At the outset, the ld. A.R. for the assessee submitted that no portion of the expenses pertaining to the share based compensation were incurred by the Assessee , and therefore the same cannot be added to the operating cost base of the Assessee. He submitted that the grant of SBC to the employees of the Assessee is in accordance with VMware Group s global policies, and is extended to qualifying employees of its subsidiaries all over the world and including t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by the customers, and they are not charged for the same. It may be noted that in the case of the third-party taxpayer the remuneration methodology would be different. Companies like TCS, Wipro etc do not provide services based on cost-plus. No third party works on the cost-plus pricing methodology. It may determine a price based on likely expenses incurred, but a high mark-up is applied. Keeping in mind the fact, that depending on the quantum of operating expenses, the profit chargeable to tax will vary. Therefore, he submitted that it is incumbent upon the TPO to work out the correct operating expenses/operating cost while applying the TNMM, and TPO should ensure that no item of expenses is left out in computing the operating costs. Some MNEs do not charge their captive taxpayers for various expenses incurred on their behalf because that will lead to increased profit in the country of the taxpayer and that ultimately will be required to be invoiced to the service recipient by the taxpayer. The cost of Stock Incentive Plan/Employee Stock Option Plan (ESOP) /restricted stock units (RSU) and/or similar plan granted by the AEs to the employees of the taxpayer, is the cost that is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclude ESOPs issued by foreign affiliate to Israeli company. In the instant cases, the foreign affiliate was directly issuing ESOPs to the employees of the Israeli company. The Israeli company did not route the ESOPs cost through P L account due to which these expenses did not appear in the cost base. 15.9 We fail to understand the inference drawn by the Ld.AO/TPO by referring to the above example. The Ld.TPO has not drawn the complete facts of the case and has also not provided complete details of the decision by the Supreme Court of Iserael. The Ld.TPO has recorded that the Israeli company is remunerated at cost plus mark up by foreign affiliate for services. In the present facts, there is no mark up paid by the AE to the assessee. Such abstract reference by the revenue authorities is least expected. 15.10 In our view the Ld.TPO failed to consider the basic fact that, purchase cost of the shares of foreign AE is charged from the employees of the assessee directly and the assessee deducts TDS on the 15% discount received by such employees, who have opted for the scheme. In our view, based on the option scheme and the Employee Information Supplement India , the 15% discount receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd.; iv. Yudiz Solutions Pvt. Ltd.; v. Evoke Technologies Pvt. Ltd.; vi. R S Software Ltd.; vii. E-Zest Solutions Ltd.; viii. R Systems International Ltd (Segmental); and ix. Happiest Mind Technologies Pvt. Ltd. 8.1 With regard to the above grounds, the ld. A.R. submitted that the TPO proceeded to recharacterize the SWD services as being R D in nature. Accordingly, TPO applied R D expenses filter to select comparables incurring R D expenses without specifying any specific threshold. The assessee carried the issue to the ld. DRP. The ld. DRP accepted the contention of the assessee as recharacterization of SWD services as contract R D services and directed the TPO to remote the R D filter. This resulted in inclusion of 27 comparables from the TPO s stay which were earlier rejected by the ld. TPO due to application of the R D filter. Being so, there is violation of principles of natural justice while inclusion of additional comparables by ld. TPO without giving opportunity of commenting on this by assessee. Hence, in the interest of justice, we remit the entire issue in ground Nos. 12 13 to the file of ld. TPO/AO for fresh consideration to grant an opportunity of hearing on this issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i. Tech Mahindra Business Services Ltd. 10.3 The ld. A.R. submitted that the company is functionally dissimilar to the Assessee and cannot be considered as a comparable. It is submitted that Tech Mahindra is a Business Process Outsourcing service provider delivering high end diversified support services across various industries in the nature of voice, chat, email, and social media-based call centre services. The company also held significant quantum of intangibles during the financial years 2014- 15 to 2016-17. Further, considering its expenses in foreign currency towards onsite operations, it is evident that Tech Mahindra BS has a different business model wherein the delivery of the services is undertaken from its Indian as well as overseas offices. He submitted that the Tech Mahindra BS has a huge brand name which commands a higher premium in the market and therefore cannot be compared to a captive service provider such as the Assessee. Thus, Tech Mahindra is liable to be excluded from the list of comparables. 10.4 The ld. D.R. submitted that in the annual report at page No. 510 stated that the principal business activity of the company is information technology enabled services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2016-17 Domestic revenue 16, 21, 27, 000 16, 41, 40, 000 12, 27, 09, 000 Export revenue 33, 05, 25, 000 45, 79, 97, 000 50, 43, 25, 000 Other operating income 4, 18, 42, 000 4, 93, 15, 000 8, 22, 07, 000 Total operating income 53, 44, 94, 000 67, 14, 52, 000 70, 92, 41, 000 % of export to total revenue 61.84% 68.21% 71.11% Functional comparability 12.1 He submitted that Datamatics is involved in diversified activities like provision for marketing services, analytics, strategic research, market intelligence, technology solutions and business process transformation and these services do not fall within the definition of ITeS. Significant advertisement, marketing and sales promotion cost( AMP ) Cost 12.2 He further submitted that Datamatics incurs significant AMP expenses which are not akin to the transactions of the Appellant as a captive service provider. The assessee does not undertake any marketing or advertising activity as the assessee provides contract ITeS under which the AEs are contractually obliged to obtain services from the assessee and therefore the Appellant is guaranteed of regular workflow. Further, he submitted that the marketing and advertising activities carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany is functionally similar and satisfies the filters adopted by the TPO including export revenue filter of more than 75%, the company is considered as comparable. Therefore, the action of the TPO considering the company was upheld by the NFAC. 6.2 In this case as the NFAC has 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. In fact, no evidence has been produced before NFAC to show that margins in the high end segments of ITES services is high compared to low end services. Therefore, NFAC was unable to accept the argument advanced by learned AR that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (A) contradicted himself by stating that the functions of the assessee are in alignment with the knowledge process outsourcing comparable dealt with by the transfer pricing officer. In this regard, the learned CIT appeals relied upon the ITAT decision in the case of Maersk Global Centers (India )(P) Ltd . Thereafter, the learned CIT (A) upheld the assessing officer s action of selection of four of the comparables and accepted the assessee s contention in rejection of two the comparables. 12. Now in appeal before us, the submission of the learned 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (6) and is benchmarking analysis are correct. We have noted that, though the Id. AR has relied upon a number of decisions of Tribunal/co-ordinate bench. We have noted that in a recent decision of Tribunal in Wills Processing Services (I) Pvt. Ltd. (supra) on comparability, the Tribunal held as under: We though in light of our aforesaid observations had partly disagreed with certain grounds as had been averred by the Ld. A.R to facilitate exclusion of the aforesaid comparable, however as observed by us hereinabove that the aforesaid comparable 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sciences and health care enterprises (RCL). The horizontals solutions comprise of Sourcing and Procurement (S P), Customer Service (CS), Finance Accounting (F A), Legal Process Outsourcing (LPO), Sales Fulfilment (S F), Analytics (AT), Business Platform(BP), Business Transformation Services (BTS), Human resources Outsourcing (HRO), Technology Solution Optimization (TSO), while Vertical (Industry) solutions include FSI (Financial Services Insurance), MFG (Manufacturing), ECS (Energy, Utilities, Communication and Services) and RCL (Retail, Consumer packaged goods, Logistics and Life Sciences). These services cannot be compared to the ITeS provided by the Appellant. The company focuses of delivering solutions to its clients which goes beyond rendering routine ITeS. From the above, it is evident that Infosys BPO is engaged in rendering business solutions and consultancy to its customers which is different from the Appellant s functional profile. Significant Brand Value 14.1 Also, he submitted that Infosys BPO enjoys huge brand value and has also made significant investments in creating intangibles and owns significant intangible assets. In view of its substantial brand value, the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odels, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several clients and span across multiple industry segments. 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. 12. The DRP was of the view that just because the company is providing cloud based services over various mainframe computers, the company would not be functionally different as claimed by the assessee and rejected this plea of the assessee. 13. Regarding the plea of the assessee that this company is into high end ITES service provider, and hence not comparable, the DRP held that under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard the DRP relied on the Bangalore Tribunal decision in the case of GE India Technology Centre (P.) Ltd. v. Dy. DIT [2013] 30 taxmann.com 249/141 ITD 245 and other decisions wherein it was observed that TNMM requires only broad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en any major R D initiatives own intangibles. Therefore, the presence of intangible in the form of goodwill, which is also insignificant, as the value is only Rs. 19 crore compared to the revenue from operations of Rs. 3050 crores do not have any impact on the profits of the company. Hence, these pleas were rejected by the DRP. 18. The assessee's contention that this comparable has incurred significant selling and marketing expense was also not accepted by the DRP, since from the perusal of the annual report, the DRP noted that the expenses on this count is only 4.56% of the total expenditure and which is not at all significant to affect the profitability of the comparable. 19. Thus, in view of the discussions held above, all the grounds raised by the assessee were rejected and the action of the AO/TPO was upheld by the DRP. 20. We have heard both the parties and perused the material on record. This comparable has been considered as not comparable in SwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 (Bang. - Trib.) wherein it was observed as under : We have perused submissions advanced by both sides in light of records placed before us. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h in assessee's own case ADP (P.) Ltd. (supra) wherein the coordinate bench excluded this company as comparable. 16.2 The ld. DR, on the other hand, submitted that presence of outsourcing cost/subcontracting cost does not affect functional comparability. Further, it reduces the operating margin of the company, which is beneficial to the assessee. He, therefore, submitted that the TPO/DRP has rightly included this company as comparable. 16.3 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) has excluded this company as comparable by observing as under: '38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: 6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS E-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also. 11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the list of comparables. 16.1 The ld. D.R. relied on the order of ld. DRP. The contention of the ld. A.R. is that this company is global staffing service provider involved in a provision of services related to tax, accounting and audit services, which were not similar to the service provided by the assessee and he drew our attention to the relevant details of that company kept on record at paper book pages 4185, 4200 4208. 16.2 The ld. D.R. submitted that the activities carried on by this company M/s. Vitae International Accounting Services (VITAE) namely book keeping and Accounting services and they are back office operations or support services and they are very much fall under the ITeS segment. 17. After hearing both the parties, we are of the opinion that this argument of ld. D.R. is devoid of merit since in our opinion, the activities carried on by the present assessee are namely Software Development Services including contract and R D services, IT enabled services and marketing services. Accordingly, in our opinion, it is appropriate to remit the issue to the file of ld. TPO/AO to examine whether assessee has carried on any activities like that of VIASP Ltd. The impugned i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave heard the rival submissions and perused the materials available on record. In our opinion, this issue came up for our consideration before this Tribunal in the case of Eurofins IT Solutions India (P) Ltd. Cited (sura), wherein held as under: 8. The ld. A.R. submitted that this company is functionally different. He submitted that apart from ITES services Manipal Digital is also engaged in providing multiple other services such as pre-media services, web-development services and e-book distribution and various publishing services and no segmental information is available. It is engaged in multiple high end services including conceptualization, designing, analytics, etc., which could not be compared with the low end BPO support services provided by the assessee. 8.1 The CIT(A), NFAC having considered issue observed that it was crystal clear from the annual report that the principal business activity of the company is given as IT enabled services which contributes 100% turnover of the company (page 13 of the annual report). On perusal of the breakup of the revenue given at page 41 of the annual report, the revenue earned from IT enabled services is Rs. 23.63 crores out of total rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificatory note No. 27 at page 52 of the annual report that the company was operating under one reportable geographical segment and one business segment. Therefore, disclosure as prescribed under AS 17- segment reporting is not applicable. Hence, the objection on lack of segmental information is not valid and not acceptable by the ld. CIT(A). 8.4 On perusal of the annual report by the ld. CIT(A), it was observed that M/s. Manipal Technologies Limited is the promoter and holding company of the assessee. As per the information given under share holding pattern, it was seen by the ld. CIT (A) that there is no change shown under the head Change in Promoter's holding. On the other hand, during the year under review, Manipal Venture Gmbh and Medien Fabrik GmbH has been merged and named as Medienfabrik GMbH. Under the head material changes and commitments affecting financial position of the company, it was reported as under:- No material changes and commitments affecting the financial position of the Company has occurred between the end of the financial year to which this financial statement related and the date of this report 8.5 In view of the above, the ld. CIT (A) observed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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: 8. The assessee submits that the Manipal Digital Systems Private Limited is functionally different from the assessee which is involved in provision of ITes services. As per the annual report of the company, the activity undertaken by the company is in the nature of pre-press activities which is not comparable to the assessee. That further in the website of the company, it is engaged in the diversified set of activities which involves graphic solutions, packaging brand management, digital publishing and digital content solutions. Therefore, the assessee submits that this company should be rejected from the final set of comparables companies. 9. The TPO was of the opinion that in this company i.e. Manipal Digital Systems Private Limited, 90% of the revenue is earned from ITes which is similar to that of the assessee company. The TPO further observed that most of the information provided by the assessee was from website and it cannot be said reliable source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification 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 view, if upheld, 12. would be contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITes encompasses a wide spectrum of services that use Information Technology based delivery. Such service could include rendering highly technical services by qualified technical personnel involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITes would also include voice based call centers that render routine customer support for their clients. The relevant portion of the judgment is extracted as follows for the sake of completeness: .............Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;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 and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 since absolutely functionally different. The Ld. Counsel also submitted that the TPO should have specifically stated why he has selected this company as comparable with that of the assessee company since the onus is on him to give reason for such inclusion. The logic was shown from the decision of the Pune Bench of the Tribunal in the case of M/s. Tasty Bite Eatables Limited Vs. ACIT, ITA No. 1823/PUN/2018 for the assessment year 2014-15 dated 03.06.2021 wherein it was held that since the comparable chosen by the assessee, the onus is upon it to prove the functional comparability of this company. Extending the same logic, the Ld. Counsel submitted that it was also for the TPO to explain the reasons for inclusion of this company i.e. Manipal Digital Systems Private Limited since it was chosen as comparable by him. 14. We are of the considered view on going through the order of the TPO, findings of the Ld. DRP and the various judicial pronouncements placed on record, first of all the Revenue has sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded from the list of comparables. 9.1 In view of the above, taking a consistent view, we direct the AO/TPO to exclude Manipal Digital Systems Pvt. Ltd. as comparable on the similar lines. 20.1 Accordingly, in view of the above order of the Tribunal, we direct the ld. TPO/AO to exclude this company M/s. Manipal Digital Systems Pvt. Ltd. from the list of comparables. vii. CES Ltd. 21. The ld. A.R. submitted that this company M/s. CES Ltd. is engaged in product engineering activities which includes AI Machine Learning, Mobility, Modernization Cloud and Quality Assurance which is different from the functions undertaken by the Appellant. Further segmental information regarding the services are unavailable. These services (more in the nature of KPO services) are not comparable to the ITeS provided by the Appellant and therefore the company ought to be excluded from the final list of comparables. - Research and development activities . - Significant intangibles : Company owns significant intangibles: FY 2014-15 (13.40%), 2015-16 (14.52%) and 2016-17 (5.12%) - Significant related party transaction : In FY 2014-15 the company has entered into RPT of 31.55%. 21.1 He placed reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctionally not comparable to the Appellant. The company is engaged in data processing and related services, primarily in the typesetting business, including transformation of unedited manuscripts into final print-ready files, supply of structured data for electronic publishing and providing end to end project management services. The services of the company as described on the website are content solutions data processing, customer relationship management, KPO services, etc., which are not entirely comparable to the services of the Appellant. Segmental details as regards the varied services rendered by the company are not available, and therefore the company ought to be excluded from the final list of comparables. He further submitted that the company had abnormal growth patterns- during financial year 2014-15 32.13%, financial year 2015-16 40.70% and during the financial year 2016-17 37.43%, which is not in line with the average industry growth rate. He submitted that the company had substantial amounts of intangibles. The company also had significant expenditure in foreign currency. SPI Technologies trades in certain tangible goods and assumes significant inventory risk as well, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ITA No. 1826/Pune/2019 dated 25.10.2021 wherein held as under:- 8. We find the Hon ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax Vs. PTC Software (I) (P) Ltd. (2019) 101 taxmann.com 117 (Bombay) has held that in case the assessee rendering ITES services to AE, a company in whose case extraordinary event of amalgamation took place during relevant year, could not be accepted as comparable and was decided in favour of the assessee. Similarly in the case of Pr. Commissioner of Income Tax Vs. J.P Morgan India (P) Ltd. (2019) 102 taxmann.com 335 (Bombay) , the Hon ble Jurisdictional High Court on the same issue has held as follows: (iv) Mr. Percy Pardiwalla, learned senior counsel appearing on behalf of the respondent invited our attention to the final decision of this Court in Pr. CIT v. Aptara Technology (P.) Ltd. [2018] 92 taxmann.com 240 and Pr. CIT v. PTC Software (I) (P.) Ltd. [2019] 101 taxmann.com 117 (Bom.). In both the above decisions this Court has taken a view that merger/amalgamation is an extra ordinary event and would have an impact /effect on the financial results of the company. Thus, in both the aforesaid decisions, this Court upheld the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid concern Accentia Technologies Ltd. was excluded being high end KPO service provider. Further, the Tribunal in BNY Mellon International Operations (India) (P.) Ltd. (supra) have noted the extraordinary event of acquisition and also amalgamation of another concern and held that the said concern could not be selected as comparable. The relevant findings of Tribunal are in paras 12 and 13, which read as under: 12. The next concern against which the assessee has raised objections is Accentia Technologies Ltd. on the ground of extraordinary events during the year under consideration. The said concern had acquired IQ group of companies in the United Kingdom and there was amalgamation of Asscent Infoserve Pvt. Ltd. with the said concern and because of these extraordinary events, the margins of said companies should not be included in the final set of comparables. The Pune Bench of Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (2016) 72 taxmann.com 352 (Pune - Trib) and Cummins Turbo Technologies Ltd. v. DCIT (2017) 79 taxmann.com 260 (Pune - Trib) has held that the said concern cannot be accepted as comparable. The Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (supra) held as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited v. DCIT, (2013) 32 taxmann.com 21 (Hyd.). 15. We have considered the submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable. 15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparison to an ITeS provider. In view of the above, he submitted that this company ought to be excluded from the final list of comparables. 27.1 The ld. D.R. relied on the order of ld. DRP. 28. We have heard the rival submissions and perused the materials available on record. In our opinion, in view of the above argument of ld. A.R., it is appropriate to remit the issue to the file of ld. TPO/AO to consider the above arguments of the assessee s counsel and decide it afresh. x. Eclerx Services Ltd.: Functionally different: 29. The ld. A.R. submitted that the company ought to be excluded as it is engaged in providing high end Knowledge Process Outsourcing services, which cannot be compared to routine ITeS rendered by the Appellant. The company provides data management, analytics solutions and process outsourcing services, which are not comparable to the services rendered by the Appellant. Eclerx also offers various products to its customers. However, segmental information as regards the varied products are unavailable. Significant intangibles : 29.1 He further submitted that the company is engaged in developing its own intangible assets. Eclerx has invested significantly in the devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f NTT Data Information Processing Services (P) Ltd. Vs. DCIT in IT(TP)A No. 297/Bang/2021 dated 7.7.2022 wherein held as under: 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 The learned TPO in the order has mentioned that as per Annual Report for FY 2016-17, the HC of Bombay approved the scheme of amalgamation between ACPL and Eclerx with effect from the appointed date of April 01, 2015, which became effective from August 22, 2016 and hence, the resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 more than 301 global Fortune 500 clients, including many of the world s leading financial services firms, online retail and distributors, interactive media, luxury brands and entertainment, high tech and industrial manufacturing, travel and leisure and software vendors, through operational support, data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide this ground, the ld. A.R. for the assessee is seeking the inclusion of Suprawin Technologies Ltd., Crystal Voxx Ltd. and Surevin BPO Services Ltd . The ld. A.R. submitted that Suprawin is involved in provision of business process outsourcing services and IT Infrastructure management services which services are comparable to the services rendered by the Appellant. Business process outsourcing services provides solution for productive legal process outsourcing, content management services and infrastructure management services. IT Infrastructure management services provides IT Infrastructure solutions, maintenance solutions, security solutions, other IT Solutions and services. Further, it is submitted that the company passes all filters applied by the TPO. It is submitted that the exclusion of this company on the sole ground that it does not feature in the search matrix is whole erroneous. Reliance in this regard is placed on Prism Networks Private Limited v. ACIT (Order dated 11.02.2022 passed by this Hon ble Tribunal in IT(TP)A No. 349/Bang/2021). Therefore, he submitted that the company ought to be included in the final list of comparables. 32.2 The ld. D.R. relied on the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e included in the final list of comparables. 34.1 The ld. D.R. relied on the order of ld. DRP. 35. After hearing both the parties we are of the opinion that keeping in view of the decision taken in the case of Prism Networks Pvt. Ltd. Cited (supra) in para 18 of that order, which is reproduced in above para, this comparable has been excluded only on the reason that it does not feature in the search matrix. In our opinion, it is appropriate to remit this Crystal Voxx Ltd. issue to the file of ld TPO/AO for conducting fresh TP study and decide the issue accordingly. iii. Surevin BPO Services Ltd: 36. The ld. A.R. submitted that this company is engaged in providing BPO services (outbound inbound call center services), digital and social marketing, skill development training, etc which are akin to the services provided by the Appellant. He submitted that the exclusion of this company on the sole ground that it does not feature in the search matrix is whole erroneous. In this regard, he placed reliance on Prism Networks Private Limited v. ACIT (Order dated 11.02.2022 passed by this Hon ble Tribunal in IT(TP)A No. 349/Bang/2021). Therefore, he submitted that the company ought to be inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MSS functions performed by the Appellant, and by rejecting the TNMM method and adopting an erroneous method as the most appropriate method. 40.2 He submitted a brief of the services rendered by the Appellant which are set out as under: a. Description of overall Value Chain of VMware Group for sale of products ● VMware US is responsible for managing the company's global sales and marketing efforts for all VMware product offerings. The most important part of the marketing process is the development of VMware's global marketing strategy, product focus and identification of customer/market segments by the global marketing team. The US global marketing team along with the APAC and EMEA regional marketing teams are responsible for developing marketing policies, programs, activities related to market research, product/brand management, product development and pricing which are designed to increase products sales growth and expand market share. ● The most important part of the sales process is development of central pricing guidelines aimed at optimizing sales and the management of relationships with channel partners to ensure on time delivery of products to end custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of VMware in India. The Appellant is not engaged in distribution functions as alleged by the TPO as VMware Group undertakes sales through authorized Distributors and Partners (collectively referred to a VMware Partner Network or Channel Partners ). The channel partners purchase software licenses and software related services from VMware Group for resale to end-user customers directly or via resellers. Channel partners are also responsible for maintaining primary relationship with the end-user customers. The corresponding profits related to this distribution function in the value chain are captured by these third party distributors and/or Channel partners. The diagram below represents a typical route to market for VMware products to end-user: Hence, he submitted that the Appellant is not engaged in distribution activities but only provides the following services: ● General administrative, marketing, and promotional services relating to facilitating of sale process for Channel Partners, providing an understanding of the VMware products to customers, etc. ● Assist in developing and expanding the customer base in India, for VMware products. ● Liaison between custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e services from the channel/training partners, Appellant would raise a purchase order on the channel/training partners. Upon completion of the services, the channel/training partners would raise an invoice on the Appellant. ● In case of direct sale by VIL, the training requirement is outsourced to the Appellant. Based on the availability of resources, the training would be imparted by the Appellant to the customers of VIL based in India. In case of non-availability of the resources, the Appellant sub-contracts the work to the channel/training partners. ● The entire cost incurred by VMware India towards training services provided in-house or through sub-contracting to channel/training partners forms part of the cost base for these training services, and is remunerated by VIL with requisite mark-up in accordance with service arrangement. Typical process 40.7 The ld. A.R. submitted the step-by-step truncation flow between the customers, channel partners, VIL and Appellant, alongwith sample documents, as below: ● Step 1A/B Indian customer requests channel/training partner or VIL for training services. ● Step 2 The channel/training partner would reach out to VIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h adopted the TPO is contrary to the provisions of the Act and unsustainable. ● The TPO has used certain data from the financials of VIL and VMware Group (consolidated financials) to derive certain percentages which have been relied upon to compute the adjustment under MSS segment of the company. The Appellant submits that the said approach is erroneous for the following reasons: a. This methodology has altogether disregarded the role of Partner Channel Network (third party Channel Partners/ Distributors) and VMware Group s support to India territory sales in the supply chain thereby assigning profits related to distributions to the Appellant. b. The TPO has not appreciated that Appellant does not make / facilitate any sales to third party customers on behalf of VMware Group and is merely involved in rendering certain marketing support services. c. The TPO has not brought any evidence on record to demonstrate that the Appellant is undertaking activities in excess of what has been stated in the TP Study. The TPO has indirectly alleged that the Appellant is making sales in India on behalf of the Group, which is not a true fact. d. Further, the specific component - Payment towar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in law, the Learned AO and the Hon ble DRP erred in not appreciating the fact that there is no restriction specified under the Act to claim deduction under Section 80G of the Act made out of contributions towards Corporate Social Responsibility ( CSR ) provided the payments are made to eligible entities as listed in Section 80G of the Act. 45.1 The ld. A.R. submitted that during the year under consideration, the Appellant had contributed an amount of Rs. 2, 27, 69, 309/- to various charitable organizations towards its CSR obligation. The said amount was added back to the taxable income in terms of the provisions of the Act and since the donations were made to certain institutions which were eligible for deduction under 80G of the Act, 50% of the donation amounting to Rs. 1, 13, 84, 655/- was claimed as deduction. The Assessing Officer disallowed the claim and the DRP upheld the disallowance. 45.2 He further submitted that in terms of the Explanation 2 to Section 37 of the Act, deduction of donation under section 80G of the Act is to be determined independent of Explanation 2 to section 37 of the Act. The Explanatory Memorandum to the said Explanation also states that the CSR expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in nature. 27. That, without prejudice, on the facts and in circumstances of the case and in law, the Learned AO and the Hon ble DRP failed to acknowledge and appreciate that computer peripherals cannot be used independently and hence, depreciation should have been allowed at a rate of 60% as prescribed under the Act both for AY 2017-18 as well as for AY 2016-17, instead of the rate of 15% as allowed by the Learned AO. 47.1 The ld. A.R. submitted that during the assessment year 2017- 18, the Appellant had incurred an amount of Rs. 4, 59, 47, 571/- towards purchase of Computer peripherals and accessories, which it claimed as an expenditure under Section 37 of the Act. The Assessing Officer disallowed the same, by holding it to be in the nature of capital expenditure. 47.2 In this regard, he submitted that said amount was incurred in relation to purchase of such computer accessories and peripherals, which cannot be used independently, and is for the purpose of the business of the Appellant. Such expenses formed part of the cost base of the Appellant on which applicable mark-up has been charged. The expenses so incurred is revenue in nature and not towards creation of any asset. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Appellant. The said claim was allowed by this Hon ble Tribunal in Appellant s own case for assessment year 2009-10. For assessment years 2010-11 and 2011-12, the Commissioner of Income-Tax (Appeals), Bangalore had relied on the order of this Tribunal and upheld the adjustment for the said years. Further, the aforementioned decision has not been contested before the higher appellate authorities. Subsequent to orders of the appellate authorities, the office of the assessing officer had issued the order giving effect factoring the above orders. 50.2 In this regard, he submitted that for assessment years 2009- 10 to 2011-12, the authorities had concluded that the assets are eligible for depreciation and the Revenue authorities till date has not contested these decisions. As such, the ruling has been accepted by the Appellant as well as by the Revenue authorities. In such a situation it is imperative that the depreciation claim should be granted to the Appellant based on Explanation 5 of Section 32 of the Act, pursuant to which depreciation allowance is mandatorily available whether the assessee claims it or not. In view of this, the ld. A.R. requested this Tribunal to grant d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54, 064/- was also considered once again while computing the assessed income resulting in double disallowance to the extent of Rs. 54, 064/-. In this regard, the ld. A.R. prayed that the Assessing Officer may be directed to give effect to the directions of the DRP by deleting the disallowance. 52.3 The ld. D.R. relied on the orders of ld. DRP. 53. After hearing both the parties, we remit this issue to the file of ld TPO/AO for fresh consideration after giving an opportunity of hearing to the assessee. 54. Next ground Nos. 32 33 of the assessee s appeal are reproduced as under: Addition of income towards sub-lease rental income 32. That on the facts and in circumstances of the case and in law, the Learned AO erred in incorporating the addition of INR 5, 93, 90, 936 towards sub-lease rental income as made in the intimation issued under section 143(1) of the Act, although, the Appellant had already offered the same to tax in the return of income under the head Income from other sources, and therefore there is double taxation to that effect. 33. That the Learned AO erred in making the addition for the first time in the final assessment order, without proposing the same in the draft as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the draft assessment order. 56.1 The ld. A.R. submitted that the Appellant had paid an amount of Rs. 5, 20, 107/- towards professional fees in connection with the amalgamation. Since the said amount was in the nature of capital expenditure, the Appellant suo moto disallowed the entire expense under Section 37 of the Act. In this regard, he submitted that the in view of the Appellant already having disallowed the expenses, the impugned action of disallowing the same once over again has resulted in double addition, which is wholly impermissible. Therefore, it is prayed that the disallowance made may be directed to be deleted. That apart, he submitted that the action of the Assessing Officer in making the disallowance for the first time in the final assessment order, without proposing the same in the draft assessment order is wholly without jurisdiction and unsustainable. 56.2 The ld. D.R. relied on the order of ld. DRP. 57. After haring both the parties, we remit this issue to the file of ld TPO/AO to verify whether there is a double disallowance on this count and decide accordingly. 58. Ground No. 36 of the assessee s appeal is reproduced as under: Non-consideration of the consolid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection to give correct advance and TDS credit. Ordered accordingly. 62. Ground Nos. 39 to 41 of the assessee are reproduced as under: Others (Interest and penalty) 39. That the learned AO has erred in levying interest under section 234B of the Act amounting to INR 1, 12, 68, 31, 273. 40. That the Learned AO has erred in levying interest under section 234C of the Act amounting to INR 1, 87, 315. 41. That the Learned AO has erred in levying interest under section 234D of the Act amounting to INR 3, 27, 268. 62.1 The ld. A.R. submitted that the Assessing Officer has erred in charging interest under Section 234B of the Act amounting to Rs. 112, 68, 31, 273/-, interest under Section 234C of the Act amounting to Rs. 1, 87, 315/- interest under Section 234D of the Act amounting to Rs. 3, 27, 268/-.Therefore, the ld. A.R. humbly prayed that this Tribunal may direct the Assessing Officer to delete the interest levy. 62.2 The ld. D.R. relied on the order of ld. DRP. 63. After hearing both the parties, we are of the opinion that these grounds are consequential and mandatory in nature and interest is to be charged accordingly. Ordered accordingly. 64. In the result, the appeal of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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