9911796707
TMI Blog2023 (9) TMI 1615X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 margin1 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 done inter alia by recomputing the profit margin of each of the segments, by artificially adding to the operating cost base notional expenses towards employee stock option plan. (iv) Initially, a draft assessment order dated 29.03.2022 came to be passed by the Assessing Officer, in which the TP adjustment proposed by the TPO was incorporated. (v) On the corporate front, the Assessing Officer proposed various adjustments. Aggrieved, the Assessee filed its objections before the DRP which, vide its directions dated 30.12.2022, disposed of the objections by granting partial relief to the Assessee. (vi) Since, there were ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. 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 weighted average OP/TC of comparable companies: Sl. No. Company Name Weighted Average in % 1. Maveric Systems Ltd. 0.95 2. Melstar Information Technologies Ltd. 1.21 3. Kireeti Soft Technologies Ltd. 1.44 4. Rheal Software Ltd. 2.66 5. Isummation Technologies Pvt. Ltd. 2.74 6. Sagarsoft (India) Ltd. 3.22 7. Evoke Technologies Pvt. Ltd. 3.68 8. Yudiz Solutions Pvt. Ltd. 4.08 9. E-zest Solutions Ltd. 8.48 10. Happiest Minds Technologies Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sulted 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. No. Company Name Weighted Average in % 1. Rheal Software Ltd. -1.85 2. Kals Information Systems Ltd. 3.62 3. Sagarsoft (India) Ltd. 4.25 4. Maveric Systems Ltd. 6.02 5. Infomile Technologies Ltd. 10.43 6. Harbinger Systems Pvt. Ltd. 14.1 7. CG-VAK Software & Exports Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 the Assessee. Hence, it cannot be construed that the SBC is issued at the discretion of the Assessee. It is submitted that the costs in this regard ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpayer 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 incurred as an incentive to the employee of the taxpayer, and instead of the taxpayer bearing the cost, it is borne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign 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 received by such employees of the assessee cannot be treated as operating in nature. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gies Ltd.; iii. Isummation Technologies Pvt. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nteq BPO Services Pvt. Ltd.; x. Eclerx Services Ltd. 10.1 These grounds are with regard to exclusion of following comparables: i. Fuzen Software Pvt. Ltd. 10.2 This comparable is not pressed, hence dismissed. ii. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resh. iii. Datamatics Business Solutions Ltd. Fails export filter of 75% 12. The ld. A.R. submitted that the company fails the export turnover filter and the computation of the same is as below: Particulars FY 2014-15 FY 2015-16 FY 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 act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the company is functionally similar to the assessee as it is being predominantly into ITES company. As regards, the export revenue as given in Note No. 18, the revenue is around Rs. 50.43 crores as on 31.03.2017 as against total revenue of Rs. 62.70 crores which comes to 80.43%. As the company 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/skil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n criteria and proceeded to select comparables and accordingly made the transfer pricing adjustment. 11. Upon the assessee's appeal, the ld. CIT (A) has accepted that the characterization by the transfer pricing officer of the assessee's functions as knowledge process outsourcing was not correct. Thereafter, the ld. 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has supported the inclusion. The TPO while making benchmarking taking his view that this comparable company is in the business of IT enabled services to overseas markets and included in the list of comparable. The Id. CIT (A) confirmed the action of TPO holding that the TPO conducting benchmarking after calling information under section 133(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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides integrated IT and end-to-end business process outsourcing solutions across a variety of verticals and horizontals. The company caters to industry segment comprising of customers relating to financial services and insurance (FSI), manufacturing (MFG), enterprises in energy, utilities and telecommunication services (ECS) and retail, logistics, consumer product group, life 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 Info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 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 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 he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 discussio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany viz. Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment. 15.1 In view of the above order of the Tribunal, we direct the ld. TPO/AO to exclude this company M/s. Infosys BPM Ltd. from the list of comparables. v. Vitae International Accounting Services Pvt. Ltd. Functional comparability 16. The ld. A.R. submitted that VITAE is a global staffing service provider involved in provision of services related to tax, accounting and audit services which are not similar to the services provided by the Appellant. Thus, he submitted that VITAE is liable to be excluded from 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 Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2015-16 (5.83%) and 2016-17 (12.08%). - Marketing activities: Manipal Digital is engaged in marketing activities, which are not undertaken by the Appellant. The expenses (Total Marketing expenses/Total costs) incurred are - FY 2014-15 (7.08%), 2015-16 (6.20%), 2016-17 (5.08%). 18.2 He also placed reliance on the decision of this Hon'ble Tribunal in the case of Eurofins IT Solutions India (P.) Ltd. v. DCIT [reported in [2023] 147 taxmann.com 471 (Bangalore - Trib.)], for the assessment year 2017-18. Thus, he submitted that the company ought to be excluded. 19. The ld. D.R. relied on the order of ld. DRP. 20. We have 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Hence, the objection on the functional dissimilarity of the company was rejected by the ld. CIT(A). 8.3 As regards lack of segmental information, the ld. CIT (A) observed that 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 the clarificatory 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 giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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: "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 natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 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 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 2017-18 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in Credence Resource Management Pvt. Ltd. Vs. ACIT (ITA No. 133/PUN/2021) vide its order dated 18- 06-2021 has noted that CES Limited is rendering both BPO and KPO services, discussing this issue at page 19 of the order. In view of the fact that the assessee is engaged in rendering only BPO services, CES Limited providing both BPO and KPO services, cannot therefore be held as comparable. We, therefore, direct to delete this company from the list of comparables. 11.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude CES Limited from the list of comparables. 23.1 In view of the above order of the Tribunal, we direct the ld. TPO/AO to exclude this CES Ltd. company from the list of comparables. viii. SPI Technologies India Pvt. Ltd. 24. The ld. A.R. submitted that this company is functionally 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the Assessee in ITes segment." 14.2 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 14.3 Ld. D.R. relied on the order of Ld. DRP. 14.4 We have heard the rival submissions and perused the materials available on record. This company has been considered as not a comparable in the case of Entercoms Solutions Pvt . Ltd. in assessment year 2015-16 in 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/PN/2015 dated 29th March, 2019 observed that the assessee before the Tribunal had first claimed that Accentia technologies Ltd. cannot be selected in the final list of comparables as during the year under consideration, there was an extraordinary event of amalgamation. Thereafter, the Tribunal has analyzed how and what extraordinary event took place in that case and in such scenario, the company cannot be considered as comparable one and the relevant extracts in this regard are as follows: "13. ............. The learned Authorized Representative for the assessee has pointed out that though the CIT (A) says that there is no such amalgamation but his finding is totally incorrect. In this regard, reliance was placed on the ratio laid down by Pune Bench of Tribunal in Dover India (P.) Ltd. v. Dy. CIT [2017] 88 taxmann.com 115 (Pune - Trib.), wherein for assessment year 201011 itself, the said 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said concern were not comparable to the activities of the assessee. 11. The TPO has noted the aforesaid objections of the assessee in para 18.1 of his order and has rejected the same by merely noticing that 75% of the revenue/income of the said concern is from ITES and therefore it is to be considered as a comparable. Before us, the Ld. Representative for the assessee has reiterated the submissions putforth before the TPO in order to justify exclusion of the said concern from the list of comparables. In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. v. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited 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 B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng it, modelling how it works in different scenarios, executing improvements, monitoring the improved process and continually optimizing it. The website of Inteq indicates that within BPM, it is engaged in provision of revenue cycle management (RCM'), claims processing services and document and data processing activities primarily to healthcare industry. Further, he submitted that Inteq is into providing healthcare management support services which requires extensive domain knowledge to render the same. Further, Inteq acts as a revenue enabler to its clients by improving a business process (viz., RCM) by providing endto- end integrated services such as identifying, analyzing, documenting, modifying the claims as per established policies and requirements, medical coding, etc. In view of the above, it is submitted that the services offered by Inteq are high end services, akin to a KPO, requiring highly skilled professionals with higher qualifications in comparison 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 submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Hon'ble High Court of Bombay in PCIT v. PTC Software (I) (P.) Ltd. (reported in [2019] 101 taxmann.com 117 (Bombay)) and PCIT v. BNY Mellon International Operations (India) (P.) Ltd. (reported in [2018] 93 taxmann.com 363 (Bombay)), decision of the Hyderabad Bench of this Hon'ble Tribunal in ADP Pvt. Ltd. v. DCIT (order dated 03.02.2022 passed in ITA Nos. 227&228/Hyd/2021) and the decision of this Hon'ble Tribunal in the case of Global E-Business Operations (P.) Ltd v. DCIT [ reported in [2022] 145 taxmann.com 413 (Bangalore - Trib.)], for the assessment year 2016- 17. 29.5 In view of the above, the ld. A.R. submitted that this company ought to be excluded from the final list of comparables. Thus, Eclerx Solutions Ltd. is liable to be excluded from the list of comparables. 30. The ld. D.R. relied on the order of ld. DRP. 31. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of 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 activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies are therefore not comparable to the Assessee and should be excluded from the list of comparable companies. 7. The Ld. D.R. submitted that the Ld. DRP observed that the TPO has included the Eclerx Services Ltd. (Eclerx) as a good comparable in the list of final set of comparables. The assessee argued that the same is a KPO company and hence, it is not a good comparable. 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. In view of the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. 7.1 Further, this company operates under a single primary segment i.e., data analytics and process outsourcing services and neither the assessee nor the TPO has gone into the verticals/ horizontals and high end or low-end distinction of the comparable compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t." 30. In view of the above order of the Tribunal, we are inclined to direct the Eclerx Services Ltd. be excluded from the list of comparables". 8.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables." 31.1 In view of the above, we direct the ld. TPO/AO to exclude this company M/s. Eclerx Services Ltd from the list of comparables. 32. Ground No. 18 of the assessee's appeal is reproduced as under: 18. The Hon'ble Panel / Learned AO / Learned TPO erred in excluding the following companies in the final list of comparable companies even though such companies are functionally comparable to the ITES undertaken by the Appellant and passes all the filters adopted by the Learned TPO i. Suprawin Technologies Ltd.; ii. Crystal Voxx Ltd; and iii. Surevin BPO Services Ltd Further, the Hon'ble Panel erred in surmising that the companies do not feature in the search matrix of the Learned TPO without appreciating the fact that the Learned TPO did not provide the entire search process to the Appellant. i. Suprawin Technologies Ltd. 32.1 Vide this ground, the ld. A.R. for the assessee is seeking the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground no.7 is treated as allowed for statistical purposes." 33.1 In view of the above, we remit this comparable i.e. Suprawin Technolgies Ltd. issue to the file of ld. TPO/AO for fresh consideration in the ITeS segment. ii. Crystal Voxx Ltd 34. The ld. A.R. submitted that Crystal Voxx is involved in provision of medical transcription, medical billing and coding, accounting, payroll and IT solutions. It offers medical billing, denial management, medical coding, kareo billing, speech recognition, accounting services, EHR/PM development and interface development which fall within the ambit of ITeS. 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. He place reliance in this regard on Prism Networks Private Limited v. ACIT (Order dated 11.02.2022 passed by this Tribunal in IT(TP)A No. 349/Bang/2021). Therefore, he submitted that the company ought to be included in the final list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ld. DRP. 39. After hearing both the parties, we are of the opinion that this issue is to be remitted to the file of ld. TPO/AO for the purpose of computing correct operating mark-up. Ordered accordingly. 40. Ground No. 20 of the assessee's appeal is reproduced as under: MSS Segment: 20. The Learned AO / Learned TPO: 20.1 erred in interpreting the functional profile of the Appellant without taking cognizance of the fact that the functions performed by the Appellant are MSS as specified in the TP documentation; 20.2 erred in law in adopting an adhoc methodology of revenue split without documenting any rationale for the same and not adopting any of the prescribed methods as per Section 92C of the Act; 20.3 erred in adopting a methodology of revenue split without appreciating the fact that the sales made by Associated Enterprise in India have already been subject to tax in India, and such an adjustment proposed by the Learned TPO would result in double taxation of the same amount in India; 20.4 The Hon'ble Panel erred in upholding the same. 40.1 The ld. A.R. submitted vide this ground that the Appellant is challenging the action of the TPO in determining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties and specific marketing via presentations or demos. The Appellant operates as a liaison between third party end customers and the third party Channel Partner, and provide appropriate contact and support to the customers, including attending to enquiries on VMware products and services. ● The Appellant provides coordination between VMware Group and the Partner Channel Network and facilitates the rendering of the services. VMware India is not entitled or authorized to negotiate or conclude sales and contracts of VMware products and services. As such, the Appellant does not recognize any India territory revenue and does not bear any contractual and non-payment risks. The Channel Partners are entrusted and authorized for undertaking sales to customers in India and assuming all corresponding risks. ● The Appellant provides periodic update and feedback to VMware Group in the form of reports or statistics on local condition and customer needs. ● Upon VMware's Group request, the Appellant provides limited technical assistance, consulting and software integration services related to VMware products to VMware's customers. 40.4 Based on the above, the ld. A.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking the 'distribution' functions for the VMware products in India and earning the corresponding compensation for those functions. Further, the Appellant submits that the income earned by VIL in India is subject to withholding taxes in India, and revenues/ profits earned by the Channel Partners and Distributors are taxable in India. In line with the functional roles, the TPO would appreciate that the AE's determine the go to market strategy plan and the targets to be achieved. VMware India has no/ limited say on this matter, and accordingly the taxpayer is shielded from the risks associated with the VMware go to market strategy. Given the above, the ld. A.R. submitted that it is a contract service provider; and therefore, it would not be appropriate to classify the Appellant as a distributor. 40.6 (b) Additional functions of training services ● The Appellant, as a part of its MSS activities also provides training services as may be sub-contracted by VIL. Upon receipt of request from the customers of VIL for training services, the reseller communicates the requirement to VIL. VIL in turn, outsources the work of the Appellant for overall facilitation and supervisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l/ training partners) is revenue earned by channel/ training partners and liable to tax in India. 40.9 He submitted that training services is not a separate segment, but rather a part of marketing support services rendered by the Appellant to its AE i.e., it is subsumed in the MSS segment as the purpose of rendering such training services is to increase the user base of VMware products. 40.10 Further, TPO in the order has accepted the factual position that the Appellant is not the legal selling entity, but rather a marketing service provider. 40.11 The ld A.R. further submitted that the TPO in the order has proceeded on the erroneous footing that the income in the financial statement is reflected as management services, when in fact the income in the financial statements is rightly reflected as income from marketing services. 40.12 (c) Ad-hoc methodology of revenue split without providing any rationale for the same ● It is submitted that the TPO has determined the adjustment without applying any method prescribed under the Act. The revenue split method applied by the TPO to artificially allocate revenue to the Appellant cannot even be construed as 'other method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missible. 41. The ld. D.R. relied on the order of ld. DRP 42. We have heard the rival submissions and perused the materials available on record. In our opinion, we find force in the argument of ld. A.R. 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. 43. Next ground No. 21 of the assessee's appeal is reproduced as under: Working Capital adjustment 21. The Hon'ble Panel/ Learned TPO erred in not allowing a working capital adjustment for determining the arm's length price while determining the mark-up of comparable companies. 43.1 After hearing both the parties, we direct the ld TPO/AO to grant actual working capital adjustment while determining the ALP of the international transactions. Ordered accordingly. 44. Ground No. 22 of the assessee's appeal is not pressed and hence dismissed as not pressed. 45. Ground Nos. 23 & 24 of the assessee's appeal are reproduced as under: Disallowance of deduction under section 80G of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... triction in Section 37 of the Act cannot be read into the provisions of section 80G of the Act. In view of the above, he submitted that the said amount is eligible for deduction under Section 80G of the Act as long as the conditions specified in the said Section have been fulfilled. He placed reliance on the following decisions: ● Goldman Sachs Services Pvt. Ltd. v. JCIT (Order dated 15.06.2020 passed by this Tribunal in IT(TP)A No. 2355/Bang/2019) ● First American India Pvt. Ltd. vs. ACIT [Order dated 29.04.2020 passed by this Tribunal in ITA No. 1762/Bang/2019] 46. After hearing both the parties, we remit the issue to the file of ld TPO/AO to grant deduction u/s 80G of the Act in accordance with law. Ordered accordingly. 47. Ground Nos. 25 to 27 of the assessee's appeal are reproduced as under: Disallowance of expenditure under section 37 of the Act 25. That on the facts and in circumstances of the case and in law, the Learned AO and the Hon'ble DRP erred in making a disallowance of the sum of INR 4, 59, 47, 571 incurred towards purchase of computer peripherals debited in the Profit and Loss account under section 37 of the Act as capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure. 47.4 Without prejudice, he further submitted that the computer peripherals and accessories such as RAM, mouse, keyboards, CD, DVD, pen drives, headphones, etc are integral parts and therefore they form part of peripherals of the computers. Therefore, depreciation on computer peripherals and accessories ought to be granted at 60% as against 15%. 48. The ld. D.R. relied on the order of ld. DRP. 49. We have heard the rival submissions and perused the materials available on record. In our opinion, the claim of the assessee is justified and accordingly, we direct the ld. TPO/AO to grant depreciation at 60% or at applicable rates. Ordered accordingly. 50. Ground No. 28 of the assessee's appeal is reproduced below: Non-grant of depreciation on the disallowances made in the preceding previous years 28. That on the facts and in circumstances of the case and in law, the Learned AO and the Hon'ble DRP erred in not granting depreciation under section 32 of the Act amounting to INR 84, 805 on purchase of monitors and desktops, which was disallowed in the AY 2009-10, AY 2010-11 and AY 2011-12, treating it as capital in nature. 50.1 The ld. A.R. submitted that during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowance for the reason that the Appellant had made the payment within the due date as prescribed under the statutory laws. 30. That action of the Learned AO in making the disallowance under section 36(1)(va) of the Act towards employees' contribution to labour welfare funds in violation of the directions issued by the Hon'ble DRP and hence, the same deserves to be deleted. 31. That the Learned AO failed to appreciate that sustaining the disallowance made by the Learned CPC has resulted in a double disallowance of INR 54, 064 towards delayed payment of employee's contribution to labour welfare funds under section 36(1)(va) of the Act. 52.1 The ld. A.R. submitted that the Central Processing Centre ('CPC') vide its intimation made a disallowance of Rs. 51, 49, 036/- on account of delay in remitting the employees' contribution to provident fund by the due date specified under the Employees' Provident Fund and Miscellaneous provisions Act, 1952 under Section 36(1)(va) of the Act. In the draft assessment order, the Assessing Officer upheld the said disallowance without providing any opportunity to the Appellant to submit its contentions against such disallowance. Upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal expenses of equivalent amount was claimed as deduction under Section 57 of the Act. However, the CPC vide its intimation made an addition of the said amount without considering the expenditure claimed which was suo moto disallowed, which is incorporated in the final assessment order. In this regard, it is submitted that in view of the Appellant already having offered the relevant income to tax, the impugned action of bringing the income to tax once over again has resulted in double addition, which is wholly impermissible. 54.3 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. Therefore, he prayed that the disallowance made may be directed to be deleted. 54.4 The ld. D.R. relied on the order of ld. DRP. 55. After hearing both the parties, we remit this issue to the file of ld. TPO/AO for verification and decide accordingly. 56. Ground Nos. 34 & 35 of the assessee's appeal are reproduced as under: Disallowance under section 40(a)(ia) of the Act 34. That on the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. 58.2 The ld. D.R. relied on the order of ld.DRP 59. After hearing both the parties, we remit this issue also to the file of ld TPO/AO to consider revised return of income in accordance with law. Ordered accordingly. 60 Ground Nos. 37 & 38 of the assessee's appeal are reproduced as under: Short grant of credit of Advance tax and TDS 37. That on the facts and in circumstances of the case and in law, the Learned AO erred in allowing the credit of advance tax in the final assessment order to the tune of INR 77, 00, 00, 000 instead of INR 81, 25, 00, 000 claimed by the Appellant in the return of income. 38. That on the facts and in circumstances of the case and in law, the Learned AO erred in allowing the credit of taxes deducted at source (TDS) in the final assessment order to the tune of INR 59, 39, 098 instead of INR 61, 71, 170 claimed by the Appellant in the return of income. 60.1 The ld. A.R. for the assessee submitted that the Appellant had claimed Rs. 81, 25, 00, 000/- in the return of income towards credit of advance tax paid. However, the Assessing Officer, while passing the Final Assessment Order has erroneously allowed Rs. 77, 00, 00, 000/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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