9911796707
TMI Blog2022 (3) TMI 1635X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ("DRP"). Each of the ground is referred to separately, which may kindly be considered independent of each other and without prejudice to each other. That on the facts and circumstances of the case and in law, Transfer Pricing grounds: 1. The learned AO/TPO/DRP have erred in making an addition of INR 13,050,397 to the total income of the Appellant on account of adjustment in the arm's length price ("ALP") of the international transactions related to IT enabled services entered into by the Appellant with its associated enterprises ("AEs") and notional interest on outstanding inter-company receivables. 2. The learned AO/TPO/DRP have erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("the Rules") and modifying the same for determination of arm's length price ("ALP") of the impugned transaction to hold that the same are not at arm's length. 3. The learned AO/TPO/DRP have erred in a. Not accepting the use of multiple year data, as adopted by the Appellant in its Tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out in TP documentation and purported application of Comparable Uncontrolled Price ("CUP") method. 15. The learned AO has erred in not granting credit for foreign taxes claimed by the Appellant in its return of income and has accordingly computed the tax demand incorrectly. 16. The learned AO has erred in not granting Minimum Alternate Tax ("MAT) credit as claimed by the Appellant in its return of income and has accordingly computed the tax demand incorrectly. 17. The learned AO has erred in charging interest under section 234C of the Act. 18. The learned AO has grossly erred in initiating penalty proceedings under section 271 (1)(c) of the Act. 3. The brief facts of the case: The assessee company is wholly owned subsidiary of Headstrong Services LLC USA, engaged in the business of development of computer software, providing IT enabled services, which are in the nature of accounting support, quality, human resource services, etc. 4. The assessee filed its return of income on 30.09.2012 declaring an income of Rs. 71,47,41,550/- under normal provisions and Rs. 80,48,91,544/- u/s. 115JB of the IT Act. The case was selected for scrutiny and notice under section 143(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has confined the present appeal to determination of arm's length price of provision of BPO services amounting to Rs. 7,74,83,517/- and submitted that no dispute in relation to other international transactions. 9. The Ld. Counsel appearing for the assessee submitted that, the appellant is seeking for inclusion of two Companies viz., Caliber Point Business Solution and R. System International (Appeal Ground No. 5 to 8) and further seeking exclusion of four Companies viz., BNR Udyog Ltd., E-Clerx Services Ltd., Infosys BPO Ltd., TCS E-serve Ltd. (Ground No. 9). The Ld. Counsel further submitted that, if the Grounds No. 5 to 9 are accepted, the other grounds will become academic ones. 10. We have heard the Ld. Counsel appearing for the assessee and also the Ld. DR for the Revenue, verified the records and gave our thoughtful consideration. 11. In so far as Appeal Ground No. 1 is concerned, the same is general in nature, hence need not be adjudicated. 12. The Grounds No. 2 to 4 are not pressed by the assessee since the same are only academic in nature. 13. The Ground No. 5 to 8 are in respect of seeking for inclusion of two comparables Companies which are: (i) Caliber Poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial year is not available. If from the available data on record, the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings." 16. The Ld. Counsel for the Assessee has also relied on the Order of the Coordinate Bench of this Tribunal in the case of BT-eserv India Ltd. Vs. ITO (ITA No. 6690/Del/2016 dated 19/06/2018) and emphasized on the following paragraphs:- "5.6 The assessee has also prayed for inclusion of one comparable i.e. R Systems Ltd. which, although selected by the assessee, was rejected by the AO/TPO on the ground of different financial year ending. We find that this comparable was directed to be included by the ITAT Delhi Bench in assessee's own case for AY 10-11 in ITA No. 565/Del/2015 and the same was followed by the ITAT in AY 11-12 also in ITA No. 99/Del/2016. The relevant observations of the ITAT in its order for assessment year 10-11 are contained in Para 13 and 14 of the order and the same are being reproduced as under: "13. Another comparable M/s. R Systems was included by the assessee in its transfer pricing study; however, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prorate allocation is not accurate enough. Further, the assessee has failed to show how the available data pertaining to the above Company following a different accounting year can be used for comparability analysis. 19. In so far as, R System International, the said company has been held to be not comparable on the ground that, the comparability of an uncontrolled transaction can be analyzed only with the "data relating to financial year" in which the international transaction has been entered into. As the assessee follow the accounting year ending 31st March, the comparables must also have the data relating to the financial year ending 31st March, since the said data is not available, such company cannot be accepted as comparable. The Company having different financial endings has been rejected from the final set of comparables while calculating the average margins of the comparables. 20. In order to deal with the above issue regarding exclusion of the above said companies from comparables, it is inevitable to visit the relevant Rules framed under the Income Tax Rules 1962 ("the Rules" for short). 21. The Rule 10B of the Rules deals with the Determination of Arm's length p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; (c) cost plus method, by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising to that enterprise from the international transaction [or the specified domestic transaction]; (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: [Provided further that the first proviso shall not apply while analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction, entered into on or after the 1st day of April, 2014.] [(5) In a case where the most appropriate method for determination of the arm's length price of an international transaction or a specified domestic transaction, entered into on or after the 1st day of April, 2014, is the method specified in clause (b), clause (c) or clause (e) of sub-section (1) of section 92C, then, notwithstanding anything contained in sub-rule (4), the data to be used for analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be,- (i) the data relating to the current year; or (ii) the data relating to the financial year immediately preceding the current, if the data relating to the current year is not available at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary for application of the method; (d) the degree of comparability existing between the international transaction [or the specified domestic transaction] and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method." As per Rule 10C(2)(c) of the Rules, it is mandatory that in selecting the Most Appropriate Method as specified in sub-rule (1), one of the factors shall be taken in to account is the availability, coverage and reliability of data necessary for application of the method; In other words if there is no availability and reliability of the data, the same shall not be taken into consideration for determination of Arm's Length Price of the international transaction. 23. By going though the Rule 10 B(4) and 10C(2)(c) of the Rules, there are 2 condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue's argument that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included in the list of comparables selected for benchmarking the international transaction". On the other words, nothing has been shown to the Hon'ble High Court which supports the revenue's argument that, if a comparable is following a different financial year then the same cannot be included in the list of comparable selected for bench marking the international transaction. Further, we find the Rule 10B(4) and Rule 10C(2)(c) of the Rules were not brought to the notice of Hon'ble High Court in the said Judgment cited by the Assessee. 27. We have also gone though the Order of the Co-ordinate bench of this Tribunal in BT-eserv India Ltd. Vs. ITO (ITA No. 6690/Del/2016 dated 19/06/2018), wherein the Rule 10B(4) and Rule and Rule 10C(2)(c) of the Rules have not been discussed or examined. 28. The various High Courts and the Supreme Court time and again held that, a decision not expressed, not accompanied by reasons and not proceeding on a conscious consideration of an issue cannot be deemed to be a law declared to have a bindi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utcome, the decision is not an authority on point B. Point B is said to pass sub silentio. 12. In Gerard v. Worth of Paris Ltd. (k). ((1936) 2 All ER 905 (CA)), the only point argued was on the question of priority of the claimant's debt, and, on this argument being heard, the court granted the order. No consideration was given to the question whether a garnishee order could properly be made on an account standing in the name of the liquidator. When therefore, this very point was argued in a subsequent case before the Court of Appeal in Lancaster Motor Co. (London) Ltd. v. Bremith Ltd. ((1941) 1 KB 675), the court held itself not bound by its previous decision. Sir Wilfrid Greene, M.R., said that he could not help thinking that the point now raised had been deliberately passed sub silentio by counsel in order that the point of substance might be decided. He went on to say that the point had to be decided by the earlier court before it could make the order which it did; nevertheless, since it was decided "without argument, without reference to the crucial words of the rule, and without any citation of authority", it was not binding and would not be followed. Precedents sub sil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amining international transaction with the associate enterprises. We have also placed reliance on the following case laws with regard to stern use of Financial Year to Financial Year comparison. i. ACIT vs Birlasoft Ltd. 47 SOT 437, wherein it is held that, expression employed in Rule 10B(4) of the Rules makes it abundantly clear that the current year data of an uncontrolled transaction is to be used for the purpose of comparability while examining international transaction with the associate enterprises. ii. ACIT Vs. Exxon Mobil Company India (P) Ltd. Vs. DCIT 46 SOT 294, wherein it is held that, the data relating to the current year has to be considered for determining transfer pricing. If an assessee wants to take previous years data, then burden is on the assessee to demonstrate that previous year's data contained certain facts which would influence determination of transfer pricing. iii. Symnetac Software Solutions Pvt. Ltd. 46 SOT 48, wherein it is held that Rule 10B(4) manifest that generally data of financial year in which international transaction has been entered into to be used for analyzing comparability of uncontrolled transaction in order to determine ALP. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the TPO, it is also the assessee's contention that this company was functionally dissimilar to the assessee company as this company was providing medical transcription service. We find that, undisputedly, BNR Udyog Ltd. is carrying out medical transcription, medical billing and coding whereas the assessee is a captive service provider. ITAT Delhi Bench had the occasion to consider the comparability of another company providing medical transcription service i.e. Accentia Technologies Ltd. with the assessee company in assessee's own case for AY 11-12 in ITA No. 99/Del/2016 by holding that the functions of medical transcription are not at all comparable to the functional profile of the assessee company. The relevant observations of the co- ordinate Bench in assessee's own case for AY 11-12 are as under: "12. We have carefully considered the rival contentions and perused the annual accounts of the Accentia Technologies Limited submitted at page No. 1 to 108 of the paper book. As per page no 42 of the annual report the nature of services performed by this company are functions of medical transcription. 'Medical transcription' services are IT enabled services that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired to be carried out by well- trained persons who must be knowledgeable in the field of pharmacology. Further the comparable company has considered all the 3 segments as one segment. On perusal of page No. 78 of the annual report of the company it is noted that w.e.f. 1st April 2008 the company which is engaged in the similar line of business has been amalgamated with this company. However, we do not find any reason to exclude this company for the reasons of amalgamation because the functions performed by the amalgamated company and amalgamating company are similar. But on comparison of the functional profile of the comparable with assessee company, which provides corporate services, marketing and business development services etc which are of routine administrative nature, we find that functions of the assessee company are not at all comparable with the medical transcription function of the comparable company. But same cannot be said with respect to the medical coding and medical billing activities of the comparable company which are almost similar to the support functions performed by the assessee. However, in absence of segmental information available in case of comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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." 41. Further, the above Company has been excluded as Eclerx holding it to be a KPO Company which is not comparable to ITeS Services Provider in BT-eserv India Vs. ITO (ITA No. 6690/Del/2016 dated 19/06/2018 wherein it is held as follows:- "5.2 Eclerx Services Limited With respect to this company, it has been again submitted that this company was functionally different from the assessee company as this company was engaged in Knowledge Process Outsourcing (KPO) services and was engaged in providing financial services like trade processing, reference data services like web content management and merchandising execution, web analytics, social media etc. It has also been submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing officer to exclude the above comparable from the comparability analysis." 5.3.1 In view of the above and respectfully following the order of the co-ordinate Bench in assessee's own case, we direct the AO/TPO to exclude this company from the final set of comparables." 42. For the discussion above made, we found that the E-Clerx Services Ltd. becomes non comparable while computing ALP by applying the principal laid down in the above case. 43. (iii) Infosys BPO Ltd. The Infosys BPO Ltd. has been held to be suitable comparable, though there was a difference in risk profile, but the assessee could not show how any such difference affected profitability so as to make a material difference, brand value in a service industry may drive its revenues but may not affect the profitability of a company. Further the TPO has observed that, any brand come with the cost i.e. huge expenses are required to be incurred to build brand value. 44. On verification of the P&L of the Infosys BPO Ltd., would show that, the Company has incurred subcontracting charges attracting the same disqualification as detailed in the context of Eclerx as the business model is different and would result i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly impacting the margins earned by the Infosys BPO Ltd. We find the submissions of the ld. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPO Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd. being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based company M/s. Portland Group Pty Ltd. during financial year 2011-12. They provide sourcing and category management services in Sydney, Australia. Therefore, his company also failed the TPO's own filter of rejecting companies with peculiar circumstances. In view of the above i.e. functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that Infosys BPO Ltd. should not be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hanism for physician to clearly communicate with other health care providers accessing the patient's records to advise them on the state of the patient's health and past, current treatment and assure continuity of care. Further it is mentioned that a medical transcriptionist must be aware of the latest drugs introduced in the concerned market. This can be done with the pharmacology reference books which should always be part of its library. It is further mentioned that because of the diverse nature of the activities concerned the medical transcription profession is considered a skilled work which can be done only after undergoing 6 to 8 months of rigorous training. The next service that is being provided by this company is medical coding. The above company has already developed a sizeable number of certified coders deployed in outsourced medical coding work. It is further mentioned that as the margin from medical coding is on a higher side compared to medical transcription, medical coding is also known as insurance coding because it is assigning codes to diagnose and procedures which help in financial reimbursement from insurance companies and other government organizations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a technologies from the comparability analysis." 46. By respectfully following the above order of the Coordinate Bench, we are of the opinion that the TPO has committed an error by including Infosys BPO Ltd. as comparable while computing ALP. 47. (iv) TCS E-serve Ltd. The TCS E-Serve Ltd. has been held to be suitable comparable on the ground that, the services offered by the said company are in the nature of IT enabled services only as the same falls within the list of services published by the CBDT. As per the audited financials, the company has stated that, it is engaged in BPO (transaction processing) services to the banking and financial services industries which are considered as single segment. Further, the TPO opined that high turnover doesn't have any co-relation to the high profit earned by any of the comparable company. 48. The above Company deserves to be excluded, which provides KPO Services in the nature of core business processing services analytics and insides as well as support service for both data and voice process, therefore, the same is not a comparable. We placed reliance on the order of the Cr-ordinate Bench in the case of BT-eserv India Ltd. Vs. ITO ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . dispute resolution panel in assessment year 2010 - 11 on account of being functionally dissimilar to the assessee. He further relied on the decision of the coordinate bench in case of capita India private limited versus ACIT and Act is global services private limited versus ITO. 41. The Ld. departmental representative vehemently contested the arguments of the Ld. authorized representative and submitted that above comparable is functionally carrying on the same activities and therefore has rightly been included by the Ld. transfer pricing officer for comparability analysis. 42. We have carefully considered the rival contention and also perused the orders of the lower authorities with respect to this comparable. We also perused the direction given by the Ld. dispute resolution panel for assessment year 2010 - 11 in case of the assessee dated 30-11-2014 at page No. 26 of the direction with respect to this comparable. It has been held by the Ld. dispute resolution panel in case of the assessee that the comparable companies is involved in both high end services including transaction processing, technical services involved software testing, verification and validation of software a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate international transaction warranting any further adjustment and once ALP is determined in respect of the sale/service transaction, it would be deemed to be covering all the elements and consequences of such transaction of sale/services. 53. The above issue has been already settled in the various judicial pronouncements and apart from the same, as removal a of doubt, by way of Finance Act, 2012 an Explanation to Section 92B has been inserted to the Income Tax Act with retrospective effect from 01.04.2002, which clarifies the expression 'international transaction' as follows: Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, bra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Delhi High Court, vide order dated 25.04.2017 in the case of Kusum Healthcare, dismissed the appeal of the revenue against the decision of the Tribunal and that (i) The inclusion in the Explanation to Section 92B of the Act of the expression "receivables" does not mean that de hors the context every item of "receivables" appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterized as an international transaction and (ii) With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterized the transaction. In the appeal filed by the assessee in the case of Mckinsey Knowledge, the Hon'ble High Court vide order dated 07.02.2018, while admitting the appeal on the other issue, remitted the issue of interest charged on outstanding receivables to ITAT, following their decision in the case of Kusum Healthcare. 58. However, vide order dated 09.08.2018, the Hon'ble High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
