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TMI Blog2025 (3) TMI 640X X X X Extracts X X X X X X X X Extracts X X X X ..... g cost to the assessee. 4. The facts in brief are that the assessee is an Indian company and engaged in the business of sales & marketing analytics and business consulting services to the pharmaceutical & healthcare industry. The assessee company has two subsidiaries namely Pharma ARC Inc (USA) and Pharma ARC Consulting Services Gmbh (Switzerland). The company during the year has entered various international transactions with its AEs including the provision of IteS Services. The assessee to benchmark such international transaction (provision of ITES services) has adopted the TNMM method as most appropriate method to compute the ALP. The assessee by applying the TNMM method computed its PLI as OP/OC which comes 14.79% and based on TP study claims that the transaction of provision of ITES services is at ALP. 4.1 The TPO, however, was not satisfied with the process of computation of PLI made by the Assessee. As per the TPO, the cost incurred by the AEs relating to ESOP provided to the employee of the assessee company and notional cost/depreciation of assets either tangible/intangible provided by the AEs free of cost to assessee for rendering of services to AEs would also be the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi High Court in the case of M/s Li and Fung India Private Limited (40 taxmann.com 300 (Delhi)) where the Hon'ble Delhi High Court while adjudicating the decision of the Tribunal held that the approach of the TPO and the tax authorities in essence imputes notional adjustment/income in the assessee's hands on the basis of a fixed percentage of the free on board value of export made by unrelated party vendors. The relevant extract of the order is as under: 39. The TPO's determination enhanced LFIL's cost base for applying the operating profit over total cost margin. LFIL's compensation model is based on functions performed by it and the operating costs incurred by it and not on the cost of goods sourced from third party vendors in India. Allotting a margin of the value of goods sourced by third party customers from Indian exporters/vendors to compute the appellant's profit is unjustified. This Court is of opinion that to apply the TNMM, the assessee's net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Textually, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t towards the license fee to Commvault India during the year under consideration. 6.2 In relation to activity of purchase of software for distribution, the Ld. TPO has held that the company is not acting as a distributor but rendering service to its AE by selling licenses on behalf of the AEs. The ld. TPO observed that the AE has supplied products free of cost to assessee for sale in India. This transaction was not reported in TP document as the receipt of products was free of cost and the sales were made to domestic parties. Accordingly, the assessee had treated the same as not falling within the definition of international transaction. The ld. TPO examined the distribution and license agreement dated 01/04/2010 and the terms and conditions agreed upon thereon. From the same, he concluded that even though the cost price as nil, but the product has a price. Therefore, the transaction of purchase is an international transaction with the AE in which the purchase cost is nil. He observed that if no cost is paid towards the licenses, then it can also be assumed that sales are made on behalf of the AE. The ld. TPO observed that the licenses are given free of cost to the company and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (RPM) would be ideal to benchmark the transactions carried out by the assessee with regard to the software distribution activity as against the Transaction Net Margin Method (TNMM) adopted by the ld. TPO and upheld by the ld. DRP. The ld. DR also agreed for adoption of resale price method in the instant case. We find as per 10B(1)(b) of the Income-tax Rules, re-sale price method could be applied where the property or service purchased from Associated Enterprises are resold to an unrelated enterprise. The facts of the assessee's case squarely fit into this parameter as assessee herein has purchased the software free of cost from its AE and had sold it to unrelated parties in India. Hence, we hold re- sale price method should be the most appropriate method in the instant case. Moreover, the re-sale price method is traditional transaction method which would always be preferable to transactional profit method like profit split method and TNMM. 6.6 Yet another excruciating fact which is relevant to be addressed in the instant case is that the arm's length price adjustment should be restricted only to the value of international transaction. Admittedly, the interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. also includes the value in respect of such ESOP as well as cost of administrative and management support services received by its AE and the amount payable for using assets of AE. Regarding the value of ESOP, it is held in various Tribunal orders that it is not a part of operating cost and therefore, the value of ESOP has to be excluded from the amount of Rs. 2.00 Crores worked out by the TPO as cost incurred by the assessee from its AE without paying anything. 8.3 Based on the above, we can safely conclude that the stand of the lower authorities for including the notional cost (discussed above) in calculating the PLI of the assessee in the given facts and circumstances is not sustainable. 8.4 Moving further, it is necessary to take a note of the amendment brought under the Income Tax Amendment Rule 2017, where under rule 10TA in the definition of operating expense, share based compensation has been included in the definition of operating expenses and such amendment was applicable from 1st April 2017 with prospective effect. Regarding the applicability of rule 10TA, we note that such rule is applicable if the assessee opts for safe Harbour rules. But in the present case, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 47 of the TPO order. Consequently, the TPO determined an upward adjustment of Rs.69,18,16,840/- only and added the same to the total income of the assessee. 11. The aggrieved assessee filed an objection before the Ld. DRP, and among other contentions, objected to the comparability of the new set of comparable companies selected by the TPO. The learned DRP, after considering the facts in totality confirmed the order of the TPO after excluding one company i.e. ultra marine & pigment ltd. (SEG) subject to the inclusion two more company namely Cheers Interactive India Pvt. Ltd. And Informed Technologies India Ltd. in the list of comparables. Pursuant to the direction of the learned DRP, the ALP margin was recalculated at 22.90%, as against 24.37% computed by the TPO in the original proceedings. 12. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 13. The learned AR before us reiterated that certain companies should not be considered as comparable as these companies are functionally dissimilar. The companies which are functionally dissimilar are detailed in the subsequent paragraph. 14. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd.) are liable to be rejected as invalid comparable. "As regards the other comparables namely Crossdomain Solutions and Datamatics Financial Services, we find that the Transfer Pricing officer and the Id. CTJ(A) have found their functions to be similar to that of KPO and that of E-clerx and Vishal technologies. Since, the /TAT has duly upheld the rejection of the aforesaid companies, i.e., these two companies are also liable to be rejected. Furthermore, Datamatics Financial Services also fails the export filter of 75% which has been adopted by the transfer pricing officer. Hence, in the background of aforesaid, we hold that following comparable are to be rejected: * Eclerx Services Ltd * Vishal Information Technologies limited * Crossdomain Solutions * Datamatics Financial Services, 7.1 Accordingly, we direct the AO to exclude this company M/s.Datamatics Business Solutions Ltd. from the list of comparables as this company is a KPO company and not comparable to assessee company. 8.1 In view of the above, we direct the AO/TPO to exclude this company Datamatics Business Solutions Ltd. from the list of comparables. 2. Infosys BPM Services Pvt. Ltd.- M/s Exxonmobil S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal Systems Pvt. Ltd. is directed to be excluded from the list of comparables. 13.1 In view of the above, we direct the AO/TPO to exclude this company Manipal Digital Systems Pvt. Ltd from the list of comparables. 4. CES Ltd.- M/s Exxonmobil Services and Technology Pvt Ltd [IT(TP)A No. 958/Bang/20221 - (Case Law PB pg 177 - para 14 onwards) 14. The Id. A.R. submitted that CES Limited ("CES") is functionally different and therefore ought to be rejected Functionally different - engaged in KPO services. 8.2. The Annual report of this company shows that it is engaged in both the IT and /T enabled services. As the company has segmental accounts, the TPO has considered only IT enabled services segment for the purposes of comparability. However, what is important to note in the instant context is that the assessee is rendering only translation services etc., which fall within the overall domain of the BPO services. As against this, CES Limited is engaged in providing both BPO and KPO services as has been reported by it to the Registrar of companies in the requisite form. The Pune Benches of the Tribunal in Credence Resource Management Pvt. Ltd. Vs. ACIT (ITA No. 133/PUN/202/) vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nteq - M/s Deliverhealth Solutions India Pvt. Ltd. [IT(TP)A No. 342/Bang/2022] - (Case Law PB pg 66 - para 5.5 onwards) 5.5 The Ld.AR has submitted that this comparable has been excluded by Coordinate Bench of this Tribunal in case of Mindteck (India) Ltd. vs. DCIT in IT(TP)A No. 21 1/Bang/2022 for A. V. 2017-18 vide order dated 30. 11.2022. He submitted that the assessee in Mindteck (India) Ltd. vs. DCIT (supra) has been considered to be a captive service provider The Ld.AR submitted that the website information of this comparable reveals that it is into medical transcription however there is no segmental details available in respect of the same. He placed reliance on the annual report of this company placed in the paper book at page 377 of the paper book wherein this company has been identified to be carrying out a business process outsourcing that includes computer programming, consultancy and related services. 27.4 "The Ld. D.R. submitted that the Id DRP in his reported observed that the services offered by Inteq SPO are in Revenue Cycle Management, Claims Processing services and Document & Data Processing. The principal business activity of the company at page 5 of the ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the view taken in Mindteck (India) Ltd. vs. DCIT (supra) by Coordinate Bench, we direct exclusion of this comparable from the final list. Accordingly, ground nos. 2.1 and additional ground raised by the assessee stands partly allowed. 2. Vitae International Accounting Services Pvt Ltd- M/s Primera Medical Technologies Private Limited [ITA No. 381/Hyd/2022] - (Case Law PB pg 14- para 14 onwards) 15. In Maersk Global Centres (India) (P) Ltd., vs. ACIT [2014] 43 taxmann.com 100 (Mumbai - Trib.) (SB) the question as to whether for the purpose of determining the arm's length price of international transactions of the assessee company providing back-office support services to their overseas associated enterprises, companies performing KPO functions should be considered as comparable was referred to the Special Bench. In this context, the Special Bench observed that the answer to this question will depend on the facts and circumstances of each case inasmuch as if the assessee company, on the basis of its own functional profile, is found, to have provided to its AE the low end back office support services like voice or data processing services as a whole or substantially the wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules, thereby rendering themselves to be non- comparables to the assessee. We, therefore, direct the learned Assessing Officer/learned TPO to exclude these entities from the list of comparables. Extracts from judicial pronouncement in case of M/s Rage Frameworks India Private Limited [ITA No.674/PUN. /2022]- - (Case Law PB pg 5- para 6 onwards) 6. We now proceed to deal with the assessee's ground no.2. 1 seeking to exclude the foregoing comparable companies in its Information Technology Enabled Services [in short "1 TES"] segment. It emerges during the course of hearing that this tribunal's recent coordinate bench's order in Schlumberger India Technology Centre (P) Ltd. vs. DCIT [2022] 142 taxmann.com 243 (Pune- Tribunal) has already excluded M/s. Manipal Digital Systems Private Ltd., Domes e-Data Private Ltd., and MPS Ltd., i.e., three of the above comparable entities as not functioning in "ITES segment "The other entities included by the learned lower authorities i.e., Vitae International Accounting Services Private Limited, Access Healthcare Services Private Limited and Integra Software Services Private Limited are also found to be not engaged in the assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income of the assessee. 15.5 The assessee raised objections before the learned DRP but did not succeed. Consequently, the DRP upheld the findings of the TPO. 16. Aggrieved by the order of the ld. DRP/ TPO/AO, the assessee has filed an appeal before us. 17. The learned AR before us submitted that the authorities below have erred in treating the delayed receivables as unsecured loan by the assessee to the AE and charging interest thereon which is notional in nature. The Ld. AR in support of his contention relied on the order of Chennai Tribunal in the case of M/s Vestas Technology R&D Chennai private limited in ITA No. 3081/Chny/2016. 17.1 Without prejudice to the above, as per the ld. AR the delayed receivables cannot be treated as separate and independent transaction. As such, the same amount representing the delayed receivables should be merged/aggregated with the principal transaction between the assessee and the AE for determining the ALP. 17.2 The learned AR without prejudice to the above further submitted that the authorities below have erred in applying the SBI- PLR rate for calculating the interest on the delayed receivables ignoring the fact that such transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gher than that earned on transactions with non-AEs entities. Thus, keeping the above finding of fact, we proceed to examine the Revenue's challenge to the impugned order of the Tribunal. The entire exercise of determining the ALP in respect of the AE transaction is to arrive at the price which would be the normal price in competative conditions between non-AEs. In this case, it is only the notional interest which is being computed as in fact no interest is charged by the respondent for delayed payments universally i.e. from AEs and non-AEs. In cases where any business enterprise is required to pay interest on delayed payment, it would examine the cost of interest and if the same is higher then the amount of interest payable on funds obtained locally, it would take a loan from local sources and pay the amounts payable for exports and expenses within time. Therefore, extending of credit beyond the normal period of 60 days is in substance a granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay within the perod of 60 days. The aforesaid finding of ours also finds support from the question of law at Sr. No.2 as proposed by the Revenue. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. At the outset, we note that the issue raised on hand stands covered in favour of the assessee by the order of the ITAT cited above in the own case of the assessee. The relevant extract of the order of the ITAT is reproduced as under: 9. We have given a careful consideration to the rival submissions. We are of the view that the decision of the ITAT Bangalore Bench in the case of CAE Flight Training (I) Pvt. Ltd. (supra) supports the plea of the assessee for allowing deduction on interest paid on CCDs. In the aforesaid decision, the Tribunal in para 23 held that the fact that the RBI under its Foreign Direct Investment Policy mandates conversion of debentures into equity and such mandate will not make any difference to the allowability of interest on debentures u/s. 36(1)(iii) of the Act. The Tribunal held that till date of conversion, CCDs are in the nature of debt and interest paid on CCDs cannot be disallowed on the ground that CCDs will later on be converted into equity. The Tribunal thereafter in para 24 examined the decision rendered in Ashima Syntex Ltd. (supra) and concluded that the issue therein was regarding expenses incurred on issue of convertible debentures an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees' contributions- which are deducted from their income. They are not part of the assessee employer's income, nor are they heads of deduction per se in the form of statutory pay out. They are others' income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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