Income Tax Appellate Tribunal - Hyderabad
Dcit, Circle-17(1), Hyd, Hyderabad vs Excellence Data Research P.Ltd., Hyd, ... on 25 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
I.T.A. No. Asst. Year Appellant Respondent
M/s. Excellence The Deputy
Data Research Commissioner of
93/Hyd/2016 Private Limited Income Tax,
CHENNAI Circle-17(1),
2011-12 [PAN: AABCE4933C] HYDERABAD
The Deputy M/s. Excellence
Commissioner of Data Research
34/Hyd/2016 Income Tax, Private Limited
Circle-17(1), CHENNAI
HYDERABAD [PAN: AABCE4933C]
For Assessee : Shri K.R. Vasudevan &
Shri Dheeraj Lalwani, AR
For Revenue : Shri P. Somasekhar Reddy, DR
Date of Hearing : 08-02-2018
Date of Pronouncement : 25-04-2018
ORDER
PER B. RAMAKOTAIAH, A.M. :
These two are cross-appeals by the Assessee and Revenue for the AY. 2011-12 against the order of the Assessing Officer (AO) u/s. 143(3) r.w.s. 92CA(4) r.w.s. 144C(13) of the Income Tax Act [Act].
:- 2 -: I.T.A.Nos. 93/Hyd/2016
& 34/Hyd/2016
2. Assessee is a company engaged in the business of providing back office data creation, content development, software and web development. Assessee-company filed its return of income for the AY. 2011-12 on 25-11-2011 declaring NIL income. As assessee-company has international transactions with its Associated Enterprise [AE] in compliance to provisions of Section 92E, assessee furnished a report in Form 3CEB. As assessee- company had international transactions, reference to the Transfer Pricing Officer [TPO] for determination of Arm's Length Price [ALP] was made. The TPO vide his order u/s. 92CA(3), dt. 30-09-2014 had selected the following comparables:
i. Accentia Technologies Ltd.,
ii. Acropetal Technologies Limited (Seg)
iii. Cosmic Global Ltd.,
iv. Crossdomain Solutions P Ltd.,
v. e4e Healthcare
vi. eClerx Servies Ltd.,
vii. Informed Technologies Ltd.,
viii. Infosys BPO
ix. Jeevan Scientific Technologies Ltd.,
x. Jindal Intellicome Ltd.,
xi. Mastiff Tech P Ltd.,
xii. Microgenetic Systems Ltd.,
xiii. TCS E-serve Ltd.,
3. The arithmetic mean of the above 13 comparables was arrived at 26.51%, the TPO determined the adjustment u/s. 92CA at Rs. 4,65,43,363/-. The AO in compliance to the order of TPO, issued the draft order vide order dt. 30-09-2014. Assessee :- 3 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 preferred objections before the Dispute Resolution Panel [DRP]. The DRP vide order dt. 28-10-2015 has rejected the following 11 comparables and directed the AO to re-workout the ALP.
i. Accentia Technologies Ltd.,
ii. Acropetal Technologies Limited (Seg)
iii. eClerx Servies Ltd.,
iv. Crossdomain Solutions P Ltd.,
v. Infosys BPO Ltd.,
vi. Jeevan Scientific Technologies Ltd.,
vii. TCS E-serve Ltd.,
viii. e4e Healthcare Ltd.,
ix. Mastiff Tech P Ltd.,
x. Cosmic Global Ltd.,
xi. Microgenetic Systems Ltd.,
4. After giving effect to the exclusion of above 11 comparables, the average margin of remaining two comparable companies was worked out to 14.05%. The AO calculated the Arm's Length Margin at 15.11% considering the negative working capital adjustment of (-) 1.06%. Since assessee's ALP was determined at 16.69%, the AO decided not to make any adjustment under this head.
4.1. Revenue is aggrieved on the exclusion of the following comparables:
i. Accentia Technologies Ltd.,
ii. Acropetal Technologies Ltd., (Seg)
:- 4 -: I.T.A.Nos. 93/Hyd/2016
& 34/Hyd/2016
iii. Cosmic Global Ltd.,
iv. Crossdomain Solutions P Ltd.,
v. eClerx Services Ltd.,
vi. Microgenetic Systems Ltd.,
vii. TCS E-serve Ltd.,
viii. Infosys BPO
ix. Mastiff Tech P Ltd.,
x. e4e Health Care Ltd.,
It raised grounds on various parameters contesting the exclusion.
4.2. Even though no addition has been proposed u/s. 92CA(3), assessee in this appeal has contested the exclusion of the following 4 comparables, as DRP seems to have not given any opportunity before excluding them:
i. Cosmic Global Ltd.,
ii. e4e Health Care Ltd.,
iii. Mastiff Tech P Ltd.,
iv. Microgenetic Systems Ltd.,
5. Another issue for adjudication is with reference to the interest on outstanding receivables of Rs. 23.32 Crores of assessee. The TPO after elaborate discussion, proposed charging of interest @ 12% and arrived at ALP of Rs. 2,79,92,880/-. After the objections of assessee, DRP in its direction asked the AO to adopt interest @ 5% on inter-company receivables as against 12% adopted by the TPO. Consequent to the above direction, the AO arrived at the adjustment for the entire 12 months period at Rs.
:- 5 -: I.T.A.Nos. 93/Hyd/2016
& 34/Hyd/2016
1,16,63,700/-. Assessee is aggrieved on the levy of interest @ 5% and also on the entire period on the amount outstanding at the end of the year, whereas the Revenue is aggrieved on reduction of the rate from 12% to 5%.
6. Next issue for consideration is with reference to negative working capital adjustment proposed by the TPO. This issue is contested by assessee even though there is no addition made under the provisions of Transfer Pricing.
7. The last ground for adjudication in assessee's appeal is with reference to short credit of TDS.
8. We have heard Ld. Counsel and Ld.DR in detail and perused the Paper Books on record.
9. At the outset, it was fairly admitted that the levy of interest on outstanding receivables is considered by the Co- ordinate Bench in assessee's own case. Accordingly, the issue is to be held in favour of assessee and against the Revenue. The Co- ordinate Bench has considered the issue for AY. 2010-11 as under:
"18. As regards Ground Nos. 14 to 17, we find that the assessee has not charged interest on outstanding receivables from its AEs as well as non AEs. The TPO considered the receivables as well as international transactions and made an adjustment of Rs.24,54,328 on account of amount realized with delay during the year and on account of outstanding as on 31.03.2010. It is the case of the assessee that the receivables have become international transactions only by virtue of the amendment made vide Finance Act 2012 and hence making an adjustment for the year 2010-11 is not warranted. Further he also stated that the average database and the cost of the comparable companies is 94 as against the 83 days in the case of the assessee. Therefore, this adjustment is not :- 6 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 warranted in the case of the assessee. Without prejudice to the above arguments, the learned Counsel for the assessee submitted that the TPO has charged interest for the period beyond 31.03.2010 and further that the litigation of interest has been charged on the entire outstanding receivables as on 31.03.2010 without considering the actual delay. In support of his contention that the receivable cannot be equated with capital funds as provided for in the Explanation by the amendment by the Finance Act of 2012, he placed reliance upon the decision of the Coordinate Bench of this Tribunal in the case of Pegasystems Worldwide India Private Limited in ITA Nos.1758 and 1936/Hyd/2014. As regards thecontention that interests can be charged only by the year end i.e. 31.3.2010, he placed reliance upon the decision of the Tribunal at Mumbai in the case of Tecnimont ICB Private Ltd in ITA No.487/Mum/2014. The learned DR however, supported the orders of the authorities below and relied upon the order of the DRP, it held that the TPO is given valid reasons to counter the objections of the assessee.
19. Having regard to the rival contentions, we find that in the case of Pegasystems Worldwide (Supra) wherein the Tribunal at para 17 held as under:
"17. Ground No.7 pertains to interest on outstanding receivables and 8 on incorrect computation of interest. Assessee raised the issue on separate adjustment made for receivables. TPO noticed that Assessee has receivables of Rs. 27,07,53,864/- at the end of the year. Assessee was asked to submit the details of raising the invoice and subsequent receipts. TPO proposed to charge interest at 12% on the outstanding receivables. While replying that assessee is a fully funded entity of the AE and the amounts outstanding are on services but not loan or advances given. 7t also does not have any working capital risk and there is no interest payment also. It relied on the order of the ITAT in the case M/s. Evonik Degussa India Private Limited in ITA No. 7653/Mum/2011, wherein it was held that TP adjustment cannot be done on hypothetical issues. Assessee also further relied on the decision of Logix Micro Systems Ltd v. ACIT [42 SOT 525] (Bang) wherein ITAT held that a reasonable period should be provided as interest free period and no interest should be calculated for such period. However, while calculating the interest of 12%, TPO neither considered the above decisions nor gave any interest free period. Not only that even though Assessee realized the amounts in later year, i.e., after 3J-03-2010, interest was charged for whole of the period. As can be seen from the table in page 45 of the TP order, TPO charged interest for the supposed delay not only during the year but also for the period beyond the assessment year concerned. Thus, he made a proposal to make adjustment of Rs. 1,26,40,592/- as an adjustment u/s. 92CA and total income was enhanced accordingly. Before the DRP, Assessee objected to the same and submitted that:
:- 7 -: I.T.A.Nos. 93/Hyd/2016
& 34/Hyd/2016
• The outstanding receivables relate to the provision of services and not in the nature of any advance/loans. These are closely linked to the provision of services and hence have to be aggregated for the purpose of economic analysis . • The company has been fully funded by its AE since its inception for all its working capital requirements and receivables are running accounts. Any fund requirement being made good by the AEs.
17.1. It is also submitted that company does not bear working capital risk. It relied on the same objections as relied before TPO. DRP however, vide its para 17, rejected Assessee's contentions but accepted alternate plea of charging interest at LIBOR Plus 2 ½ points on the inter-company receivables from the overseas AE. Assessee is aggrieved.
17.2. Ld. Counsel submitted that the issue of charging of interest beyond the period was not adjudicated and DRP reduced the rate of interest from 12% LIBOR plus 2.5 points. It was submitted that Assessee was a debt free company, AE takes care of funding, no interest was charged and there is no liability of interest and therefore, notional interest income cannot be brought to tax. Assessee relied on the principles laid down by Co-ordinate Bench at Mumbai in the case of Lintas India Pvt. Ltd., in ITA No. 2024/Mum/2007 dt. 09-71-2012 and also Mastek Ltd., V.I'. ACIT in ITA No. 3120/Ahd/2010 then referring to the provisions of the Act the explanation brought by amendment in 2012 Finance Act. It was submitted that even though retrospective, it does not cover Assessee's transaction as the word 'capital financing' used there particularly refers to loans or advances given for capital financing, whereas in Assessee's case, these are outstanding services rendered but not capital financing. The words are to be interpreted invoking the principles ejusdem generis and so the outstanding receivables cannot be equated to capital financing as amended by the provisions of the Act. It was further submitted that working capital adjustments are being made while analyzing the operational performance of the companies, therefore, outstanding amount gets adjusted in working capital adjustments and another separate addition is not required under the TP provisions. Thus, it was contended that the outstanding amounts are not to be considered for adjustment.
17.3. We have considered the issue and examined the rival contentions. In the case of Evonik Degussa India P. Ltd., in ITA No. 7653/Mum/2011, it was already held the TP adjustment cannot be made on hypothetical and notional basis, until and unless there is some material on record that there has been under charging of real income. Thus on the facts and circumstances of the case, we are of the opinion that addition on account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case. Even though DRP tried to distinguish the above decision on facts, as seen from the facts in both the cases, we are of the opinion that the above decision will equally apply to Assessee's case. Assessee has outstanding service charges receivables and as seen from the order of TPO, the outstanding is :- 8 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 only from 31-07-2009. There seems to be no such delay in earlier months. Assessee has no interest liability at all so notional interest cannot be brought to tax under the provisions of TP. As rightly pointed out by the Ld. Counsel, the outstanding receivables on account of services cannot be equated with capital financing as provided for in the Explanation by the amendment by Finance Act, 2012 retrospectively. Even otherwise, as rightly held by the Logix Micro Systems Ltd v. A CIT [42 SOT 525] (supra), TPO should have allowed some interest free period for receiving the outstanding service charges. While acknowledging the order of the ITAT, TPO did not even bother to exclude the reasonable period and levied interest not only from the date of invoice to the date of realization during the year but also for the period beyond 31-03-2010 in later year. We were informed that no such addition was made in the later year on Assessee '.I' receivables. We are of the opinion that both on the facts of the case and principles of law, there is no need for bringing to tax the notional interest on the outstanding receivables. Accordingly, we allow the grounds 7 & 8 of Assessee and direct AO/TPO to delete the said addition made".
Since in the case before us, the facts and circumstances are similar and more particularly the TPO has not taken into consideration that the fact that the assessee has also not charged the interest not receivable from the non AE, we comply the assessee's plea on this ground. Accordingly Ground No. 14 to 17 are allowed".
9.1. Respectfully following the same, we allow the assessee's grounds that no interest is chargeable for the impugned assessment year both on facts and on law and therefore, the ground of assessee is allowed.
9.2. Consequent to that, we find no merit in Revenue ground contesting the reduction of interest. Since no interest is leviable, Revenue ground is dismissed.
10. The main issue for consideration is that of comparability of selected companies. Revenue is aggrieved on the exclusion of 10 companies. The findings of the DRP on each of the comparables are as under:
:- 9 -: I.T.A.Nos. 93/Hyd/2016
& 34/Hyd/2016
"Objection regarding the comparables selected by the TPO 3.9 Ground of Objection:9: Accentia Technologies Ltd should be rejected It is submitted that Accentia Technologies Limited ["Accentia" or "the Company"] cannot be considered as comparable considering the presence of the following factors: functionally dissimilar, KPO involves outsourcing of core functions, abnormal growth pattern and has super normal profits, the presence of the intangibles, no segmental data in relation to the software services and products and ITeS which mayor may not give cost benefit to the parent company but surely helps in value addition. The processes which are outsourced to KPOs are usually more specialized and knowledge based as compared to BPOs. Services included in KPO are related to R&D, Capital and insurance market services, legal services, biotechnology, animation and design, etc. are the usual activities that are outsourced to KPOs.
Reliance on Jurisdictional ITATs decision in Assessee's own case for AY 2009-10 (supra): The Assessee placed reliance on the Jurisdictional Tribunals decision in its own case for AY 2009-10 wherein it has held that Accentia is functionally different from assessee and also held that the companies having extra-ordinary events during the year, hence, cannot be accepted as a comparable company. The relevant findings of the Jurisdictional Tribunal given at para 19.2 of the order is produced below for your goodself's reference:
"19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data. we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected.."
Having considered the submissions, on examination of page 25 of the annual report, it is noticed by us that the company is engaged in e- prescription and document management including coding, billing, bills payments management, account receivables management and adhoc reporting. Coding is nothing but a service module in which physicians' diagnosis is fed into the coding module which automatically generates procedures and diagnostics codes, however, as the assessee company is :- 10 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 providing the routine ITeS services which cannot be compared with the function of the above company, The above company was excluded by the Hon'ble ITAT, Hyderabad, in the Assessee's own case due to above functional differences, accordingly, we direct the A.O. to exclude the above company from the comparables.
3.10 Ground of Objection:10: Acropetal Technologies Limited should be rejected Submissions: Acropetal Technologies Ltd. (Acropetal/the Company) cannot be considered as comparable since it is functionally dissimilar, lTES revenue filter applied by the Transfer Pricing Officer (Learned TPO) hence, should be rejected. Extraordinary events during the year in the form of acquisitions which clearly makes it an outright reject as a comparable to the Assessee.
It was submitted that during the course of the transfer pricing assessment proceedings the Assessee submitted the following facts with respect to the aforementioned grounds to the Learned TPO:
• Acropetal provides software development and engineering design services and hence, is functionally dissimilar to the Assessee. • Acropetal fails the ITES < 75% filter applied by the Learned TPO • Extraordinary events during the year in the form of acquisitions which clearly makes it an outright reject as a comparable to the Assessee.
• The margin computation of Acropetal is incorrect.
Therefore, based on the above, the Assessee submitted that Acropetal is not functionally comparable to the Assessee hence, should be rejected.
The Learned TPO rejected the above grounds raised by the Assessee and retained Acropetal in the final set of comparables selected in the TP order based on the following:
• Engineering design services forms part of ITES.
• ITES> 75% filter is applied on companies having more than one segment and not on companies whose only one segment has been considered.
Having considered the submissions, it is noticed by us that the company was directed to be excluded from the comparable due to functional differences by the Hon'ble ITAT, in assessee's own case for A.Y. 2009-10, as the functional profile of the company and assessee remains the same I we direct the A.O. to exclude the above company from the comparables.
3.11 Ground of Objection:11: Eclerx Services Limited should be rejected :- 11 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 It was submitted that the Learned TPO also failed to appreciate the following:
• Company has abnormal growth pattern and has super normal profits and hence ought to be rejected.
• Eclerx fails the filter of companies having peculiar economic circumstances applied by the Learned TPO • Eclerx showing unreliable information in it standalone financial statements.
• Exclusion of Eclerx as comparable is upheld by jurisdictional ITAT in assessee own case (lTAT No.159/Hyd/2014).
• The standalone financials of Eclerx are unreliable.
The Assessee submitted that "it is a routine BPO service provider. On the other hand, KPO is a highly specialised and knowledge based. Business Process Outsourcing or BPO is outsourcing of some of the business functions to a third party in order to save money. It usually consists of the back office or front office operations.
The functions performed by Eclerx which is primarily Knowledge Process Outsourcing cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of these Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions. The Assessee, therefore submits that this company should not be selected as a comparable, especially when It performs services which only Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO].
The Assessee also wishes to draw the attention of your goodself towards the high business risk undertaken by the company as evident in its Annual Report.
As held in the M/s Saunay Jewels Private limited, (ITA No. 5758/MUM/2007), Eclerx showing abnormal growth pattern and super normal profits which is beyond the norms and standards of the industry.
Reliance on Jurisdictional ITAT's decision in Assessee's own case for AY 2009-10 (supra) (ITA No.159/Hyd/2014t The Assessee places reliance on the jurisdictional Tribunals decision in its own case for AY 2009-10 wherein it has held that Eclerx is functionally different from assessee and also held that Eclerx can be considered as KPO. Hence, Eclerx cannot be accepted as a comparable commpany. The :- 12 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 relevant findings of the Jurisdictional Tribunal given at para 16.2 of the order is produced below for your goodself's reference:
"16.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services, and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee's services. We therefore, direct the Assessing Officer/TPO to exclude this company."
Further, the assessee would like to submit to the Hon'ble panel that the company is excluded as comparable to the assessee by Hon'ble Dispute Resolution Panel in assessee's own case for AY 2010-11.
The relevant extract of the order of the Hon'ble DRP is produced below for your ready reference:
Decision :- The Panel directs that the TPO should exclude M/s. Infosys BPO Ltd, TCS E-Services ltd. from the list of comparables due to high turnover in these companies. These two companies cannot be compared with assessee-company. Similarly, M/s. e-Clerx Services Ltd also directed to be deleted as the said company has been regarded as KPO by ITAT. Accentia Technologies Ltd. is also directed to the excluded if on verification found extraordinary event of amalgamation during the year which has an impact on the profits of the company. In view of the above, these 4 companies are directed to be excluded from the computation of ALP, subject to verification of facts as directed above.
Based on the above, the Assessee submits that Eclerx be rejected as a comparable.
Having considered the submissions, we are of the view that the company needs to be excluded by functional differences and other extra ordinary facts. Respectfully following the orders of the Hon'ble ITATs decision in Assessee's own case for AY 2009-10 (ITA No.159/Hyd/2014), we direct the AO to exclude this company from the comparables. This view also finds support from the decision of the Hon'ble Hyderabad Tribunal in the case of M/s. Capital IQ Information Systems (India) Pvt. Ltd., Hyderabad vs Dy. Commissioner of Income-tax (Int. Taxation), Hyderabad (ITA No.1961/Hyd/2011) wherein Eclerx has to be rejected as it engaged in providing KPO services and other judicial pronouncements of the Hon'ble ITAT, Hyderabad and the decisions of the Bangalore ITAT in the case of Cognizant Technology Services for the Assessment Years AY 2007-08 and AY 2008-09 [ITA No. 2106 & 1864/Hyd/2011] and Symphony Marketing Solutions India Pvt. Ltd. vs. ITO (IT (TP) A No. 1316/Bang/2012), wherein Hon'ble Bangalore ITAT has based on the similar facts has rejected Eclerx. The company was also directed to be excluded by the Hon Delhi High :- 13 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 Court in the case of Rampgreen Solutions Pvt Ltd (ITA/102/2015). Accordingly, we direct the A.O. to exclude the above company from the comparables.
3.12 Ground of Objection:12: Crossdomain Solutions Private Limited should be rejected Having considered the submissions, we examined the annual report produced by the assessee in which there is no indication that the company is engaged in providing knowledge process outsourcing. On page 2 of the Director's Report, it is only mentioned that 'India continues to be a high quality and low cost destination for outsourcing in health care business services and your Directors are confident of capturing the sizeable business in the coming year: In our view, the functional comparability need to be decided on the basis of information available in the annual report and not based on the web site information which may not be reliable. The Hon'ble ITAT, Hyderabad, in the assessee's own case in (ITA No.159/Hyd/2015) rejected the objection of the assessee for exclusion of the above company from the comparables by observing that "we have seen the annual report and most of the revenue of this company is from service only. The company is in the pay roll service activity. Therefore, we are of the opinion that the company's functions similar to the activities of the assessee company, which is in the ITeS field. In view of this, we are not inclined to exclude this company on the basis of functional disabilities." In our view. there is no change in the functional profile of the above company during the year and therefore, is comparable with the function of the assessee. Accordingly, we do not find any infirmity in selection of the above company as comparable.
3.13 Ground of Objection: 13: Infosys BPO limited should be rejected Assessee relied on orders of the jurisdictional ITAT in Assessee's own case (ITAT No.159/Hyd/2014) for AY 2009-10.
Having considered the submissions, it is noticed by us that the Hon'ble ITAT, Bangalore in the case of Symphony Marketing Solutions India Pvt Ltd (presently merged with Genpact India) [(IT(TP)A No. 1316/Bang/2012, TS-234ITAT-2013(Bang)_TP, ITAT Bangalore) and the Hon'ble Hyderabad ITAT in the case of International Speciality Products (I) Pvt Ltd in ITA No.218/HydI2014 for A.Y. 2009-10, has excluded the company by observing that 'we are of the view that it cannot at all be considered as comparable to the assessee not only because of its size but also due to its brand value, diversified activities and other functional disabilities. Different branches of this Tribunal are consistent in their view that the company cannot be treated as a comparable to a captive service provider like the assessee. Similar view was taken by Hon'ble Hyderabad ITAT in assessee's Own case in ITA No.159/HYd/2014, respectfully following the :- 14 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 above decisions, we direct the assessing officer to exclude the above company from the comparables.
3.15 Ground of Objection: 15: TCS e Serve limited should be rejected TCS e-Serve Limited ("TCS" or "the Company") has to be rejected based on the presence of the brand thereby warranting adjustments are required to eliminate the impact of brand on profits earned. Since it might not be possible, TCS e-Serve is to be rejected as a comparable.
TCS has to be rejected based on the fact that it is an oversized company as compared to the tested party.
TCS fails the filter of companies having peculiar economic circumstances applied by the Learned TPO hence ought to be rejected.
The Learned TPO also failed to appreciate the fact that the Company has abnormal growth pattern and has super normal profits and hence ought to be rejected.
The Learned TPO erred by not rejecting TCS as comparable. even though it has huge turnover and the giant companies are rejected by Jurisdictional ITAT in Hyundai Motor India Engineering Pvt. Ltd (ITAT No.1850/Hyd/2012), case for the AY 2008-09.
Functional Dissimilarity: The Assessee has submitted that TCS is functionally not comparable. The Assessee is a mere service provider involved in providing support services in relation to analysis, content search and projections for all types of business information.
On the other hand, TCS operations broadly comprise of transaction processing and technical services primarily to Citigroup entities globally, which cannot be compared to the functions performed by the Assessee.
Having considered the submissions, on perusal of annual report, it is noticed by us from the schedule to the financial statement that the company is engaged in the business of providing information technology - enabled services/business processing outsourcing service, primary to the Citi group companies introduced globally, the transaction processing include the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citi group to its corporate and retail clients. As per the annual report, the company also provide technical services involving software testing, verification and validation of software at the time of implementation and data centre management activities, which makes the company functionally incomparable with the routine ITeS services rendered by the :- 15 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 assessee accordingly, we direct the assessing officer to exclude the above company from comparables.
Request for retention of comparables selected by the assessee 3.16 Ground of Objection:16: e4e Healthcare Business Services Private Umited should be accepted with correct margin Having considered the submissions, on perusal of annual report, it is noticed that the company is engaged in the forward contracts on that account, the amount outstanding as on 31.03.2011 is USD 11.85 million, such forward contracts have influence on the margin of the assessee company, it is also noticed that there is no consistent approach in regard to accounting of the bad debts which is evident that in the financial year 2009-10, the provision for bad and doubtful debts is created to the extent of Rs. 3,30,69,141/- as against which there is no provision during the year. Further, as against the bad debts written off of Rs. 29,87,000/- in the preceding year, during the year the bad debt written off are to the extent of Rs.1,62,09,146/-, in such inconsistency of accounting, in our view, instead of re-computing margin, it is appropriate to exclude the above company from the comparables.
3.17 Ground of Objection:17: Mastiff Tech Private limited should be accepted with correct margin Having considered the submission, it is noticed by us that provision for doubtful debts has been made on year to year basis. such provision in F.Y. 2009-10 was Rs.59,65,702/- and in the current year it is Rs. 22,89,927/- which when compared with the total operating income indicates that the company is facing extraordinary situations. Further, due to this provision. if the margin comes down from 21.78% to 2.28% clearly indicates that there is a huge influence on the margin due to uncertainty of the receivables. In such circumstances, in our view, instead of considering provision for bad and doubtful debts as operating in nature, in our view, it is appropriate to exclude the above company from the comparables.
3.21 Comparables retained by the TPO During the course of examination of the facts and submissions made by the assessee and the close scrutiny of the comparables retained by the TPO, we have noticed that some of the companies retained by the TPO do satisfy the required conditions for treating the same as com parables. The same are discussed hereunder:
:- 16 -: I.T.A.Nos. 93/Hyd/2016
& 34/Hyd/2016
Cosmic Global Ltd
On close examination of the back ground and the annual report of the Cosmic Global, we are of the view that payment to the extent of 41% on sub contracting suggests a different working model which may have significant effect on the margin and therefore, cannot be retained as comparable. This view also finds support from the decision of the Hon Delhi High Court in the case of Rampgreen Solutions Pvt Ltd ( ITA/102/2015) in paragraph 38 of the decision wherein it is held that "plainly, a business model where services are rendered by own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing services by ...... would have no bearing on the profitability of the said entity: And also, from the decision of the Hon'ble A.P & Telegana High Court in the case of BA Continuum India Private Limited (ITTA 440 of 2014), Further on the same rationale, the company was directed to be excluded by the Hon'ble Hyderabad ITAT in the case of MIs Excellence Data Research Pvt Ltd in ITA No.159/Hyd/2014. Respectfully following the rationale of the above decisions, we direct the Assessing Officer to exclude the above company from comparables.
Microgenetic Systems Ltd On close examination of the back ground and the perusal of annual report, it is noticed by us that out of the total expenses of Rs. 1,07,91,015/- debited in P&L a/c, the expenses to the extent of Rs. 24,98,323/- have been incurred as medical transcription charges, which indicates that the expenses to the extent of Rs. 23% have been incurred in outsourcing of the medical transcription activity. Therefore, in our view, it will not be appropriate to retain the above company as comparable; we accordingly direct the A.O. to exclude the above company from comparables".
10.1. Even though there is no addition proposed in the assessment order consequent to the order of DRP, assessee is contesting the exclusion of 4 comparable companies. These are considered as under:
Cosmic Global Ltd., :
10.1.i. As can be seen from the order of DRP, DRP has excluded for valid reasons that too following the Co-ordinate Bench :- 17 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 decision in the earlier year. Since we do not find any reason to differ from the findings of the DRP, we uphold the order and reject the contentions of assessee.
e4e Healthcare Ltd:
10.1.ii. This comparable is also selected by assessee in its Transfer Pricing study and TPO also selected company on functional basis. Assessee only asked for retention of the same, but some adjustments are requested for working of the margins.
DRP, however, suo motto excluded the same. Since both assessee and AO wants the above company to be included, we find no reason to deny their request. Further, we also hold that forward contracts does not influence the margins of company as they are part of operations of the company and gain or loss arising out of the sale is operational in nature. Like foreign exchange fluctuations, the forward contracts on foreign exchange transactions also are part of the optional cost and since the comparison is made on Transactional Net Margin Method [TNMM] basis, we are of the opinion that any slight variation in margins will get adjusted in the final analysis. Since both the parties want the above comparable to be included, we direct the AO to do so. Revenue ground to that extent is allowed along with assessee's ground.
Mastiff Tech Ltd:
10.1.iii. This comparable is also taken in the grounds by both the parties for inclusion. The DRP has excluded on the reason that 'the provision of bad debts' have influenced the margins. However, we do not find any working of the influence of bad debts on the :- 18 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 margins nor we have come across any Co-ordinate Bench order where Mastiff Tech. P. Ltd., is excluded on functionality. Since both the parties want the same to be included, we direct so.
However, AO is directed to examine the margins, as there are objections about margin working from assessee before the DRP, after giving due opportunity to assessee.
Microgenetic Systems Ltd:
10.1.iv. This comparable is excluded by the DRP on the reason that it was incurring expenditure in the outsourcing of medical transcription activity. In case of M/s. Avineon India P Ltd., Vs. Dy.CIT in ITA No. 238/Hyd/2016, dt. 07-07-2017, the Co-ordinate Bench has held as under:
"11. Having regard to the rival contentions and the material on record, and after going through the P&L AI c of the comparable Microgenetics Systems Ltd and particularly Schedule-F thereof placed in Paper Book filed by the assessee relating to production expenses, we find that during the relevant previous year the assessee has incurred Rs.22,03,823 towards medical transcription charges. Though, it is not 23% of the expenses incurred by the assessee as observed by the DRP, the payments were for outsourcing of the activity and hence is involved in a different functional model as compared to the assessee. In view of the same, we do not find any reason to interfere with the direction of the DRP.
Thus, assessee's ground of appeal No.5 is rejected".
Respectfully following the same, we do not find any reason to interfere with the order of the DRP. Hence its exclusion is confirmed.
11. Coming to the Revenue appeal, the Revenue is contesting ten comparables to be included. Some of them are considered above. The balance of comparables on the basis of grounds raised by Revenue are as under:
:- 19 -: I.T.A.Nos. 93/Hyd/2016
& 34/Hyd/2016
These comparables are excluded by giving valid reasons by the DRP. We do not find any reason to interfere with the well reasoned order of the DRP. It is also noticed that DRP followed earlier year's orders in assessee's own case while excluding some of the comparables. The Co-ordinate Bench in the case of Dy. CIT Vs. M/s. Avineon India P Ltd., in ITA No. 257/Hyd/2016, dt. 07-07- 2017 has also confirmed exclusion of eClerx Services Ltd., TCS E- serve Ltd., Infosys BPO and Cosmic Global Ltd.
11.1. Respectfully following the same, we do not find any merit in Revenue grounds on these comparables.
12. AO is directed to re-workout the ALP as per the above and in case the profit margin of assessee vis-à-vis the resultant comparables companies is more, then the benefit of (+)/(-) 5% range as provided in proviso to Section 92C(2) of the Act to be considered. With these directions, the grounds of assessee and Revenue are partly allowed on these issues.
Negative Working Capital adjustment:
13. Assessee has raised Ground No. 12 stating that AO/DRP erred in making a negative working capital adjustment. As seen from the order of DRP, there is no discussion on the issue and there seems to be no objections raised by assessee. However, TPO and AO made negative working capital adjustments. AO in final order made more adjustments than the TPO. This issue is to be considered in favour of assessee as the Co-ordinate Bench of ITAT in the case of Adaptec (India) P. Ltd., Vs. ACIT in ITA. No. 206/Hyd/2014 (AY 2009-10) dt. 25-03-2015, has decided this :- 20 -: I.T.A.Nos. 93/Hyd/2016 & 34/Hyd/2016 issue, wherein it was held that negative working capital should not be made. Therefore, AO is directed not to make any negative working capital adjustment. This ground is considered allowed accordingly.
14. The last issue for consideration is the short credit of tax deducted at source: It was the contention that while granting credit in respect of tax deducted at source, assessee claimed an amount of Rs. 58,03,451/- in the return of income filed, whereas the AO gave credit of Rs. 57,56,800/-. Since assessee did not get any opportunity and the working was not provided. Ld. Counsel pleaded for a direction to AO to give the credit as claimed. Since this requires verification of the TDS claims and the record of the department, we direct the AO to examine and give the credit as claimed after due verification. In case of any variation, assessee should be given an opportunity to explain or modify the claims or to furnish further evidence in support of its claims. AO is directed accordingly.
15. In the result, both the appeals are partly allowed.
Order pronounced in the open Court on 25th April, 2018 Sd/- Sd/-
(P. MADHAVI DEVI) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 25th April, 2018
TNMM
:- 21 -: I.T.A.Nos. 93/Hyd/2016
& 34/Hyd/2016
Copy to :
1. M/s. Excellence Data Research Private Limited, 6th Floor, New No. 165, Old No. 110, Menon Eternity Building, St. Mary's Road, Alwar Pet, Chennai, Tamil Nadu.
2. The Deputy Commissioner of Income Tax, Circle-17(1), Hyderabad.
3. Dispute Resolution Panel (DRP)
4. Director of Income Tax (IT & TP), Hyderabad.
5. Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad.
6. D.R. ITAT, Hyderabad.
7. Guard File.