Income Tax Appellate Tribunal - Bangalore
M/S Vwr Lab Products Pt Ltd , Bangalore vs Deputy Commissioner Of Income Tax ... on 25 May, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT
AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
IT(TP)A No.92/Bang/2023
Assessment year : 2012-13
VWR Lab Products Pvt. Ltd., Vs. The Deputy Commissioner
139, 6th Main, BDA Industrial Suburb, of Income Tax,
Peenya Post, Tumkur Road, Circle 7(1)(1),
Bangalore - 560 058. Bangalore.
PAN: AACCV 3080E
APPELLANT RESPONDENT
Appellant by : Shri Aliasgar Rampurwala, CA
Respondent by : Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 24.05.2023
Date of Pronouncement : 25.05.2023
ORDER
Per Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the final assessment order of the DCIT, Circle 7(1)(1), Bangalore passed u/s. 143(3) r.w.s. 254 r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 27.12.2022 for the assessment year 2012-13.
2. The assessee has raised the following grounds:-
"1. On the facts and in circumstances of the case and in law, the assessment order framed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (`the Act') passed by the Assessment Unit, Income-tax Department (learned Assessing Officer' or 'learned AO') dated 27 December 2022, to IT(TP)A No.92/Bang/2023 Page 2 of 29 the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed.
Transfer Pricing (TP) Grounds
2. On the facts and in circumstances of the case and in law, the Hon'ble Dispute Resolution Panel -2, Bengaluru (`Hon'ble Panel' or `DRP') erred in not appreciating that the order of the learned Deputy Commissioner of Income-tax (Transfer Pricing) - 2(2)(2), Bangalore (learned Transfer Pricing Officer' or 'learned TPO') passed under Section 92CA of the Act is contrary to law and thus liable to be quashed.
3. Back Office Support Service segment
3.1. On the facts and in circumstances of the case and in law, the Hon'ble DRP/ learned AO/ TPO erred in making an adjustment of INR 18,792,715 to the transfer price of the Appellant's international transactions in respect of Back office support service segment by way of comparability analysis.
3.2. On the facts and in circumstances of the case and in law, the Hon'ble DRP/ learned AO/ TPO erred in including company Universal Print Systems Limited (`UPS') as a comparable to the Appellant. In doing so, Hon'ble DR / learned AO TPO erred in:
3.2.1. Disregarding that UPS is functionally dissimilar to the Appellant;
3.2.2. Disregarding that UPS fails service revenue filter (i.e., Service Revenue < 75% to be excluded) applied by the Ld. TPO;
3.2.3. Retaining UPS as comparable company even though no response is received by Ld. TPO u/s. 133(6) of the Act on information regarding functionality of UPS;
3.2.4. Ignoring the fact that UPS has unallocated expenses amounting to INR 89.67 lacs which would distort the segmental profits and therefore, the segmental results would not be reliable.
3.3. On the facts and in circumstances of the case and in law, the Hon'ble DRP/ learned AO/ TPO erred in including company IT(TP)A No.92/Bang/2023 Page 3 of 29 BNR Udyog Ltd. (`BNR') as a comparable to the Appellant. In doing so, Hon'ble DRP/ learned AO/TPO erred in:
3.3.1. Disregarding the fact that BNR fails RPT filter of 25%;
3.3.2. Disregarding the fact that BNR fails service revenue filter (i.e., Service Revenue < 75% to be excluded) applied by the Ld. TPO.
3.3.3. using the information under section 133(6) of the Act, which tantamount to choosing secret comparable companies whose information was not available in public domain.
4. Corporate Tax grounds:
4.1. That on the facts and circumstances of the case, the Ld. AO has erred in levying consequential interest under section 234A.
4.2. That on the facts and circumstances of the case, the Ld. AO has erred in granting short credit of taxes paid under protest amounting to INR 53,79,565 on February 17, 2018 and May 11, 2020.
That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal."
3. The crux of ground No.3 is with regard to exclusion of UPS Print Systems Ltd. and BNR Udyog Ltd. from the list of comparables for the purpose of determining the ALP of the international transactions. The facts of the case are that the assessee originally came in appeal before this Tribunal in ITA No.779/Bang/2017 for AY 2012-13. The Tribunal vide order dated 20.9.2019 inter alia remitted the issue with regard to UPS Print Systems Ltd. to the TPO as follows:-
"(a) Universal Print Systems Ltd (segmental) (BPO) Assessee sought to exclude this comparable for the reason that, it fails employee cost filter and has insufficient company information. It is also been submitted that, functionally this IT(TP)A No.92/Bang/2023 Page 4 of 29 company is providing integrated print solution to its customers and does not provides routine ITEs services like that of assessee.
It has been submitted that this company is not a captive service provider like that of assessee and has products sale as well as services sale, which is evident from page 1360 of paper book volume 1 (Index for Annual Reports).
Ld.CIT DR placed reliance upon orders of authorities below and submitted that this comparable is functionally comparable with that of assessee.
We have heard submissions advanced by both sides in light of record placed before us. On perusal of annual report of this company placed in paper book, we are of considered opinion that this comparable is basically into sale of products and services unlike a captive service provider such as assessee, who works on cost plus basis, providing services only to its AE's. It is also observed that this comparable is basically providing BPO services from its Prepress units. In written submission filed, assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions (P.) Ltd. v. ACIT [2019] 101 taxmann.com 292 (Bang. - Trib.), wherein this comparable has been excluded by observing as under:
'10.4 We heard rival submissions and perused the material on record. The issue of comparability of universal Print Systems Ltd. with that of the assessee-company has been duly considered by TPO after referring to information contained in Annual Report. The relevant findings of the TPO had not been countenanced by learned AR of the assessee. However, the issue of comparability of Universal Print Systems Ltd. has also been considered by the co-ordinate bench of this Tribunal in the case of CGI Information Systems & Management Consultants Pvt. Ltd. (supra) wherein it was held as follows:
"47. The next submission of the learned counsel for the Assessee was with regard to exclusion of 2 comparable companies from the list of 7 comparable companies that remain after the order of the DRP. The first comparable company sought to be excluded is Universal Print Systems Ltd. This company was chosen as a comparable company by the TPO. In reply to the proposal of the TPO to include this company as a comparable company, the IT(TP)A No.92/Bang/2023 Page 5 of 29 Assessee vide its letter dated 22.12.2015 had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP TC of this company will be only 51.80%. The Assessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.6% of the total revenue from operations of this company as per its annual report. The .Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue.
48. The TPO at page-20 of his order has dealt with the above objections by observing as follows:
(a) Pre-Press BPO unit provides back office support services.
(b) This company has four major segments viz., Repro, Label Printing, Offset Printing and pre-press BPO. The employee cost of pre-press BPO was more than 25% of the revenue from pre-
press BPO and therefore the employee cost filter is satisfied in the case of this company.
IT(TP)A No.92/Bang/2023 Page 6 of 29
(c) On the service revenue filter viz., the requirement that a comparable company must have revenue from rendering services of more than 75% of its total revenue, the TPO again held that the pre-press BPO segment's entire income is from services and therefore this objection is not to be accepted.
49. On objections by the Assessee before the DRP, the DRP confirmed the action of the TPO. One of the objection before the DRP was that this company did not figure in the list of companies engaged in ITES. On this objection the DRP held that though this company did not figure in the list of companies in 1TES in the main search of capital line and prowess database but on a segmental search these two companies satisfied the requirement of being considered as companies engaged in providing ITES.
Aggrieved by the directions of the DRP, the Assessee is in appeal before the Tribunal. The learned counsel for the Assessee reiterated submissions that were made before the TPO/DRP. In particular it was submitted that the service revenue filter was applied by the TPO himself at the entity level and on such search this company was not regarded as engaged in providing ITES. At this stage the TPO ought to have dropped this company as a comparable company because this filter has to be applied at the entity level and not at the segmental level. The learned DR submitted that if the service revenue filter is applied at the segmental level there can be no objection by the Assessee. She relied on the order of the DRP/TPQ.
50. The requirements of Rule 10B(1)(2) & (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows:
"10B. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: --
(a) to (d)** ** **
(e) transactional-margin method, by which, IT(TP)A No.92/Bang/2023 Page 7 of 29
(i) the net profit margin realised by the enterprise from an international 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 (if) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international 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-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii):
(v) the net profit margin thus established is then taken into account an arm's length price in relation to the international transaction.
(2) For the purposes of sub-rule (1), the comparability of an
(a) the specific characteristics of the property transferred or services provide: either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions
(c) the specific characteristics of the property transferred or services provide: either transaction;
(d) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions IT(TP)A No.92/Bang/2023 Page 8 of 29
(e) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or Implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions:
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale retail (3) An uncontrolled transaction shall be comparable to an international
(i) none of the differences, if any, between the transactions being compared or between the enterprises entering into such transactions are likely materially affect the price or cost charged or paid in, or the profit arising from such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences."
5.2 There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of "net profit margin realized by the enterprise from an international transaction" with the "net profit realized from a comparable uncontrolled transaction". Therefore comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Pre-
IT(TP)A No.92/Bang/2023 Page 9 of 29 press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised the Assessee in this regard about lack of information about allied services performed by the pre-press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by the TPO or DRP. Since the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s. 133(6) of the Act, The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO.' Respectfully following the decision, we remand this comparable to the file of the TPO/AO for fresh adjudication on the above lines.' Respectfully following aforesaid decision, we remand this comparable to file of Ld.AO/TPO, for fresh adjudication, on the basis of directions reproduced hereinabove. Needless to say that proper opportunity shall be granted to assessee as per law.
Accordingly we set aside this comparable back to Ld.TPO."
4. Before the lower authorities, the assessee pleaded that UPS Print Systems Ltd. is not functionally comparable to assessee's case and the same is to be excluded from the list of comparables. However the DRP observed that that the functional profile of the company is same as that of the assessee and similar in the sense that the pre-press BPO unit provides IT(TP)A No.92/Bang/2023 Page 10 of 29 back office support services. The ALP in the case of the assessee has been determined by treating TNMM as the most appropriate method. This method requires broad based comparability of the functionality of the comparables. So, in case the company is in ITES/BPO it would not matter as to what kind of customer it serves as the broad range of services remain the same and that is the back end support. So, this objection of the assessee does not have any merit as the company is functionally similar to the assessee.
5. Assessee further contended that the company UPS fails service revenue filter applied by the TPO. As regards to this contention, TPO has stated, "it is pertinent to note here that the company had contended against the service revenue filter and not the employee cost filter. However, given that similar response has been provided against the same contention for BNR, it would be presumed that this mistake is typographical". The DRP upheld the action of the AO.
6. As regards contention of assessee that Employee cost filter to be calculated only at the segment level and not on the entire revenue, the DRP observed that the employee cost is found to be 44% in relation to this segment and the company operates in four major segments viz., Epro, Label Printing, Offset Printing and pre-press BPO and as verified from the P&L A/c of the assessee. It is found from the records that the employee cost of Rs.268.76 (lacs) on a turnover of Rs.611.96(lacs) works out to 44%. Hence this comparable clears the employee cost filter and there was no infirmity in the action of the AO. The DRP on verification of records also upheld the TPO reducing the mark up cost from 52.46% to 51.80%.
7. Accordingly, the objections of the assessee were rejected by the DRP. Against this, the assessee is in appeal before us.
IT(TP)A No.92/Bang/2023 Page 11 of 29
8. The ld. AR submitted that this issue came up for consideration before the Tribunal in the case of Credit Points Services (P.) Ltd. in ITA No.377/PUN/2017 dated 12.3.2019 wherein it was held as under:-
"8. We have perused the case records and heard the rival contentions and have given considerable thought on the records and relevant documents placed before us. From the facts on record and more specifically from the Transfer Pricing Index and report of the assessee, the details of functional structure is provided and after perusal of the orders of the TPO and the Ld. CIT(A), we find that there is no specific findings as to the analysis regarding the functioning of Universal Print Systems Ltd vis a vis the function of the assessee company before holding it to be a comparable company. In the decision of the Bangalore Tribunal in the case of XL Health Corporation India (P.) ltd. (supra) it was held as under :--
C. Universal Print Systems Ltd.:--
This company was selected by the TPO by obtaining information by exercising of the power vested with him under the provisions of section 133(6) of the IT Act. The TPO held that this company satisfies all the filters selected by him. However this company was objected by the assessee-company before the TPO on the grounds of functional differences as it is engaged in the business activities such as printing and allied activities, high profit making company and also fails the employee cost filter, the objections of the assessee-company were over ruled by the TPO by holding as under:
Counter to the objection on Functional Comparability:
The functions of the comparable are similar in the sense that the. Pre-Press BPO unit provides back office support services.
Counter to the objection on High Margins:
Reliance is placed on the decisions of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors and the Delhi Tribunal in Nokia India Pvt Ltd (ITA No. 24210/2010).
IT(TP)A No.92/Bang/2023 Page 12 of 29 Counter to the objection on Employee Cost Filter:
The company operates in four major segments viz., Repro, Label Printing, Offset Printing and Pre-press BPO and for our study, only the Pre-press BPO segment has been considered. Therefore, filters are to be applied only on the figures of this segment. The company was specifically asked to furnish the details of employee cost U/S 133(6) of the Act. Vide its' letter dated 18/12/2015, the company has furnished P&L a/c of Pre press BPO segment, from which it is seen that the 'employee cost relating to Pre-Press BPO segment is Rs. 268. 76 (Lacs). The employee cost of Rs 268.76 (Lacs) turnover of Rs 611.96 (Lakhs) works out to 44%. Therefore, this comparable clears the employee- cost filter.
The response received from the company u/s 133(6) of the Act has been attached with this order. (Annexure-G) The TPO has used only current data for the F.Y 2011-12. The corrected margin is 52.46%. The Hon'ble DRP also confirmed the findings of TPO.
(ii) Being aggrieved, the assessee-company is before us. It is contended by the assessee that this company fail revenue filter more than 75% from ITES segment and also functionally not comparable with that of the assessee-company and also fails the filter of earnings from export against 75% of the total revenue and also fails the employee cost filter as employee cost is only 18.56% of the sales.
(iii) We heard the rival submissions and perused the material on record. We have perused the Annual Report of this company placed at pages 352 to 463 of paper book. From the page no. 354 it is stated as under.
"In 2011-12, Your Company faced many challenges ranging from historically steep fuel price increases, non-availability of power throughout the year and high raw material costs.
The Labels and Offset divisions in particular were negatively impacted due to non-availability of power. Tamil Nadu on the whole, faced drastic power outages and restrictions, which were mainly directed at industries in order to keep the vote banks happy. The two divisions saw as much as 6 hours of power cuts IT(TP)A No.92/Bang/2023 Page 13 of 29 in a day in addition to two days of ''power holidays" in a week. Although this situation is expected to ease in the coming months, it has had an adverse impact on operations in 2011-12.
The periodic fuel price increases through our 2011-12 not just ensured high inflation cutting across every input element, but also adversely affected our cost of captive power generation which became the only source of power during certain periods in 2011-
12. In addition, procurement cost of raw materials such as paper, film and ink rose substantially along with, market expectation regarding price reduction of printed products."
From this it is very clear that this company is into the business of printers whereas the assessee-company is into the Business Process Outsourcing. Therefore by no structure of imagination these two companies can be considered to be functionally similar and therefore we direct the AO I TPO to exclude this company from the list of comparables.
9. Therefore respectfully following the decision of the coordinate Bench of Bangalore Tribunal in the aforesaid case, we direct the AO/TPO to exclude the Universal Print System Ltd from the list of comparables with regard to the assessee herein."
9. The ld. AR also relied on the following case laws:-
"GTS e-Services (P.) Ltd. [2019] 108 taxmann.com 604 (Mumbai Trib.) Eaton Technologies (P) Ltd. [2020] 115 taxmann.com 341 (Pune Trib)
10. The ld. DR relied on the order of lower authorities.
11. We have heard both the parties and perused the material on record. As rightly pointed out by the ld. AR, this issue came up for consideration before the coordinate Bench of the Tribunal in the case of GTS e-Services IT(TP)A No.92/Bang/2023 Page 14 of 29 (P.) Ltd. for the AY 2012-13, [2019] 108 taxmann.com 604 (Mumbai Trib.) and the Tribunal held as under:-
"(ii) Universal Print Solutions Ltd.
The Ld. AR disputed the inclusion of this entity on similar ground of functional dissimilarity by drawing our attention to the fact that this entity was an integrated print solution provider and operates in the segment of Repro, Label Printing, Offset Printing and Pre-Press BPO. The Ld. TPO picked up the pre-press BPO segment for the purpose of comparison. In this segment, the entity provides services in the nature of scanning, layouts, trapping, hand-outlined clipping path and image masking & magazine/catalogue publishing. Another point to which our attention is drawn is the fact that this entity has unallocated expenses of Rs. 89.67 Lacs which would distort the segmental profits and therefore, the segmental results would not be reliable.
Upon perusal, we find that Bangalore Tribunal in the case of XLHealth Corpn. India (P.) Ltd. v. Asstt. CIT [2018] 91 taxmann.com 310 for very same AY 2012-13 directed for exclusion of this entity in case of assessee having similar functional profile on the ground that an entity which is engaged in the business of printing could be, by no structure of imagination, be considered as comparable entity. Secondly, as rightly pointed out by Ld. AR, the segmental results of the said entity would not be reliable in view of the fact that it has unallocated expenditure of Rs. 89.67 Lacs which would surely distort the segmental results. Keeping in view the said factors, we direct for exclusion of this entity."
12. Further, the coordinate Bench of the Tribunal in the case of Software Paradigms Infotech Pvt. Ltd. for AY 2012-13 in ITA No.59/Bang/2023 dated 17.5.2023 held as under:-
"14. We have heard the rival submissions and perused the materials available on record. On earlier occasion, the assessee came in appeal before this Tribunal for this assessment year 2012-13 and on this issue the Tribunal held as under:
IT(TP)A No.92/Bang/2023 Page 15 of 29 "9. We have heard submissions advanced by both sides in light of record placed before us. On perusal of annual report of this company placed in paper book, we are of considered opinion that this comparable is basically into sale of products and services unlike a captive service provider such as assessee, who works on cost plus basis, providing services only to its AE's. It is also observed that this comparable is basically providing BPO services from its Prepress units. In written submission filed, assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Pvt Ltd., vs ACIT reported in (2019) 101 taxman.com 292, wherein this comparable has been excluded by observing as under:
10.4 We heard rival submissions and perused the material on record. The issue of comparability of universal Print Systems Ltd. with that of the assessee-company has been duly considered by TPO after referring to information contained in Annual Report. The relevant findings of the TPO had not been countenanced by learned AR of the assessee. However, the issue of comparability of Universal Print Systems Ltd. has also been considered by the co-
ordinate bench of this Tribunal in the case of CGI Information Systems & Management Consultants Pvt. Ltd. (supra) wherein it was held as follows:
"47. The next submission of the learned counsel for the Assessee was with regard to exclusion of 2 comparable companies from the list of 7 comparable companies that remain after the order of the DRP. The first comparable company sought to be excluded is Universal Print Systems Ltd. This company was chosen as a comparable company by the TPO. In reply to the proposal of the TPO to include this company as a comparable company, the Assessee vide its letter dated 22.12.2015 had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO IT(TP)A No.92/Bang/2023 Page 16 of 29 segment and if that is done then the OP TC of this company will be only 51.80%. The Assessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from nonfinancial service income. The Assessee pointed out that the percentage of income from ITES was only 21.6% of the total revenue from operations of this company as per its annual report. The .Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue.
48. The TPO at page-20 of his order has dealt with the above objections by observing as follows:
(a) Pre-Press BPO unit provides back office support services.
(b) This company has four major segments viz., Repro, Label Printing, Offset Printing and pre-press BPO. The employee cost of pre-press BPO was more than 25% of the revenue from pre-press BPO and therefore the employee cost filter is satisfied in the case of this company.
IT(TP)A No.92/Bang/2023 Page 17 of 29 (c )On the service revenue filter viz., the requirement that a comparable company must have revenue from rendering services of more than 75% of its total revenue, the TPO again held that the pre-press BPO segment's entire income is from services and therefore this objection is not to be accepted.
49. On objections by the Assessee before the DRP, the DRP confirmed the action of the TPO. One of the objection before the DRP was that this company did not figure in the list of companies engaged in ITES. On this objection the DRP held that though this company did not figure in the list of companies in 1TES in the main search of capital line and prowess database but on a segmental search these two companies satisfied the requirement of being considered as companies engaged in providing ITES.
Aggrieved by the directions of the DRP, the Assessee is in appeal before the Tribunal. The learned counsel for the Assessee reiterated submissions that were made before the TPO/DRP. In particular it was submitted that the service revenue filter was applied by the TPO himself at the entity level and on such search this company was not regarded as engaged in providing ITES. At this stage the TPO ought to have dropped this company as a comparable company because this filter has to be applied at the entity level and not at the segmental level. The learned DR submitted that if the service revenue filter is applied at the segmental level there can be no objection by the Assessee. She relied on the order of the DRP/TPQ.
50. The requirements of Rule 10B(1)(2) & (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows:
"10B. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any IT(TP)A No.92/Bang/2023 Page 18 of 29 of the following methods, being the most appropriate method, in the following manner, namely: --
(a) to (d). ******
(e) transactional-margin method, by which,
(i) the net profit margin realised by the enterprise from an international 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 (if) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international 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-clause (i) is established to be the same as the net profit margin referred to in sub-
clause (iii):
(v) the net profit margin thus established is then taken into account an arm's length price in relation to the international transaction.
(2) For the purposes of sub-rule (1), the comparability of an IT(TP)A No.92/Bang/2023 Page 19 of 29
(a) the specific characteristics of the property transferred or services provide: either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions
(c) the specific characteristics of the property transferred or services provide: either transaction;
(d) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions
(e) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or Implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions:
d)conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and. capital in the markets, overall economic development and level of competition and whether the markets are wholesale retail (3) An uncontrolled transaction shall be comparable to an international
(i) none of the differences, if any, between the transactions being compared or between the enterprises entering into such transactions are likely materially affect the price or cost charged or paid in, or the profit arising from such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences."
IT(TP)A No.92/Bang/2023 Page 20 of 29 5.2. There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of "net profit margin realized by the enterprise from an international transaction" with the "net profit realized from a comparable uncontrolled transaction". Therefore, comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Pre-press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised the Assessee in this regard about lack of information about allied services performed by the pre-press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by the TPO or DRP. Since the comparability of this company is being remanded to be TPO for IT(TP)A No.92/Bang/2023 Page 21 of 29 consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s. 133(6) of the Act, The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO.' Respectfully following the decision, we remand this comparable to the file of the TPO/AO for fresh adjudication on the above lines. Respectfully following aforesaid decision, we remand this comparable to file of Ld.AO/TPO, for fresh adjudication, on the basis of directions reproduced hereinabove. Needless to say that proper opportunity shall be granted to assessee as per law.
Accordingly we set aside this comparable back to Ld. TPO."
14.1 While giving effect to the order, TPO issued notice u/s 133(6) of the Act vide letter dated 30.12.2021 to M/s. Universal Print Systems Ltd. to furnish the required information on or before 7.1.2022. The requisite information is not received by the TPO. Hence, he passed the order u/s 92CA(3) of the Act on 16.12.2022 by observing as under:
"The company operates in four major segments viz. Repro, Label Printing, Offset Printing, and Pre-press BPO and for our study. only the pre-press BPO has been considered. Therefore, filters are to be applied only on the figures of this segment. The employee cost of pre-press BPO is more than 25% of the revenue from pre-press BPO. Therefore, the employee cost filter is satisfied in the case of this company.
Further, on the service revenue filter, the requirement that a comparable company must have revenue from rendering services of more than 75% of its total revenue, the Pre-press BPO segment's entire income is from services. Therefore, the service income filter is satisfied in the case of this company.
IT(TP)A No.92/Bang/2023 Page 22 of 29 On the issue of export filter being more than 75%, the filter are to be applied only on the figures of this segment. The total revenue from Pre-press BPO segment is from exports only. Therefore. the export filter is satisfied in the case of this company.
On the issue adopting segmental data for applying filter. the Hon'ble ITAT in the case of Zyme Solutions Pvt. Ltd.. vs ACTT reported in (2019) 101 taxman.com 292 itself upheld that if clear segmental information is available the filters can be applied at the segmental level in TNMM. The relevant extracts of the order is reproduced as under:
"5.2 There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of "net profit margin realized by the enterprise from an international transaction" with the "net profit realized from a comparable uncontrolled transaction". Therefore comparison is of similar transaction. When segmental information is available and is not disputed. it cannot be argued that filters have to be applied at entity level. it cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. as we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore, the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP........"
In view of the above. the objection raised regarding failing filters are not acceptable. On the issue of functionally dissimilar:
The TPO has applied TNMM method as most appropriate method to determine the ALP in this case. This method requires broad comparability of the functionality of the comparable. So, in the case. the company is into ITES/BPO, it would not matter as to what kind of customer it serves as the broad range of services remain the same and that is back end support. The functions of the comparable are similar in IT(TP)A No.92/Bang/2023 Page 23 of 29 the sense that the Pre-press BPO unit provides back office support services. As seen from page 70 of annual report of the company for AY 2012-13, the business segregation is provided segment wise:
a). This business segregation forms the basis for review of.
operational performance by the management The Repro business comprises two repro houses which are engaged in PrePress activities.
The Label business comprises a Label printing unit. The Offset Printing business comprises Offset Printing Machine alongwith all standard Finishing Equipments The Pre-press BPO business unit is engaged in Pre-press Services Export As seen from the above. it is clear that the comparable is engaged in pre-press BPO services which is similar as backoffice support services. As seen from the activities of Label and -Offset printing segment. it can be seen that the both the segments supplement the functions performed in the Pre-press BPO segment. Hence, the claim of the taxpayer is rejected and this company is considered as comparable to the taxpayer."
14.2 Against this the assessee is in appeal before us. In our opinion, Tribunal on earlier occasion given the finding that if the adjustment cannot be made reasonable or accurately, this company M/s. Universal Print Systems Ltd. to be excluded from the list of comparable companies. For this purpose, the TPO should exercise power u/s 133(6) of the Act. Actually the AO issued a notice u/s 133(6) of the Act to M/s. Universal Print Systems Ltd. and no reply has been received from them. Having no option, he considered this company as comparable to the assessee company and included in the lists of comparables. In our opinion, the required information u/s 133(6) of the Act is not made available to the TPO, in such circumstances, T.P. adjustment on this count cannot be made reasonable or accurately made in this regard. Accordingly, this company is to be excluded from the list of comparable companies as reliance placed by this Tribunal while deciding this issue in assessee's own case on the decision of Zyme Solutions Pvt. Ltd. Vs. ACIT (2019) 101 IT(TP)A No.92/Bang/2023 Page 24 of 29 Taxmann.com 292. Accordingly, we direct the AO/TPO to exclude this company M/s. Universal Print Systems Ltd. from the list of comparables."
13. In view of the above order, we direct the AO/TPO to exclude Universal Print Systems Ltd. from the list of comparables. This ground is allowed.
BNR Udyog Ltd.
14. The Tribunal in the first round of appeal set aside the issue of BNR Udyog Ltd. to the TPO with the following observations:-
"We have perused submissions advanced by both sides in the light of the records placed before us.
Assessee is challenging functional dissimilarity of this company with that of assessee as it is into medical transcription. We have our reservation to consider medical transcription services to be one of KPO services. In our considered opinion medical transcription services is basically back-office services provided by graduates who are trained for short period of 6 months to one year. These are short crash courses undertaken by graduates who are trained to understand and speak English. There is no value addition in the services rendered by people in medical transcription. To our understanding, basically these people who carry out medical transcription services are trained to understand language spoken by doctors, outside India to whom medical reports of patience are sent for expert opinion. Medical transcriptionist simply reproduces opinion expressed by Doctor, which is then communicated to the patients.
It is observed from annual report placed at page 745 of paper book Volume (Index to Annual Reports) that this company has segmental information of medical transcription and revenue earned under this segment is Rs.147.40 Lacs. It is also been observed that various other decisions by co-ordinate Benches of this tribunal has remanded this comparable back to Ld.TPO, for proper analysis and fresh consideration. We draw support for same from Indegene (P.) Ltd. v. Asstt. CIT [2017] 85 IT(TP)A No.92/Bang/2023 Page 25 of 29 taxmann.com 60 (Bang. - Trib.), wherein it has been held as under:
"9.3.1 We have heard the rival contentions and perused and carefully considered the material on record including the judicial pronouncements cited. From the details on record we observe that while the assessee has contended that the services rendered by this company M/s TCS E-serve Ltd are high end KPO services, it has not brought out as to which of these are the services that would come under technical services. On the other hand, we also notice that that the TPO has held all the services rendered by the assessee to be BPO services with any proper analysis. In this factual matrix of the case, we find that on similar facts, the co- ordinate Bench o ITAT Bangalore in the case of Indegene (P) Ltd., (supra) has remanded the matter of comparability of this company to the file of the TPO for fresh consideration. In view of the factual matrix of the case on hand, as laid out above and following the decision of the co-ordinate Bench in the case of Indegene (P) Ltd. (Supra) which is also rendered on similar facts, we deem it appropriate to remand the matter of the comparability of this company, TCS E-serve Ltd. To the file of the TPO for fresh consideration in the light of out above observations. Needless to add, the TPO shall afford the assessee adequate opportunity of being heard and to file details/submissions in this regard.
It is also been observed that similar view has been taken by decision of this Tribunal in case of Nielson Sports India (P.) Ltd. v. ACIT [IT(TP) Appeal No.196(Bang.) of 2017, dated 28-06- 2019].
Respectfully following the same, we set aside this comparable back to Ld.TPO for considering it afresh. Needless to say that proper opportunity shall be granted to assessee as per law.
Accordingly we set aside this comparable back to Ld.TPO."
15. In the set aside proceedings, the TPO observed as follows:-
"7.1 The taxpayer has contended that comparable M/s BNR Udyog Ltd. fails the related party transaction ('RPT') filter. The taxpayer has calculated the RPT/Sales by including purchases, IT(TP)A No.92/Bang/2023 Page 26 of 29 sales and services together in the numerator but not included the expenditure in the denominator. Taxpayer contention of RPT failure is not appropriate as applied by the TPO.
7.2 Taxpayer contention that comparable fails the service revenue filter is not accepted as the service revenue filter should be applied only to the specific segment's revenue not on entire company's revenue.
7.3 Taxpayer contention that comparable is functionally incomparable as it has significant inventories is not accepted as inventories are for obvious reasons not linked to ITES segment. Moreover the presence of inventory is not relevant and it does not affect margins of ITES segment."
16. The DRP observed as follows:-
"4.4 The BNR Udyog retained after the order of the DRP which the Assessee seeks to exclude is BNR Udyog Ltd. As far as this company is concerned, it was the objection of the Assessee before the TPO that the TPO ought not to have selected this company as comparable company for the reason that the related party transaction of this company at the entity level was 49.60% of the total revenue and that this company has less than- 75%-of its revenue from providing TTES. The TPO rejected the above contention by holding that this company has 3 major business segments and the segmental results of medical transcription business which is providing ITES alone was considered for the purpose of comparison. When the segmental results are considered the related party transaction is nil. 100% of the segmental income was from providing ITES, i.e., IT(TP)A No.2297/Bang/2016 medical transcription and therefore 75% revenue is from providing ITES and therefore the company passes the test of income from providing ITES being more than 75% of the total income. The DRP accepted the view of the TPO.
4.5 The, submission of the Assessee was identical as were made before the TPO and DRP. We have while deciding the objection with regard to excluding Universal Print Systems Ltd., already held that when clear segmental information is available then there is no bar in applying filters at the segmental level. The reasons given while coming to the above conclusion will equally IT(TP)A No.92/Bang/2023 Page 27 of 29 apply to including BNR Udyog Ltd., as a comparable. Since this company passes RPT filter as well as income from providing ITES being more than 75% of its revenue, this company has to be regarded as comparable company. No other arguments were advanced for exclusion of this company. Hence this company is held to be comparable with that of the Assessee.
4.6 We found BNR Udyog Ltd., is providing IT enabled services of more than 75% of its revenue and whereas the learned AR could not substantiate with evidence in respect of other filters. Therefore, we are not inclined to interfere with the action of the AOITPO in including the comparable company for transfer pricing adjustment. Accordingly, the ground of objection is therefore rejected."
17. Against this, the assessee is in appeal before us.
18. We have heard both the parties and perused the material on record. The main argument of the ld. counsel is that this company fails RPT filter and also fails the functionality test. Regarding functionality test, this has already been decided by the Mumbai Bench of the Tribunal in the case of GTS e-Services (P.) Ltd. (supra) where it is held as under:-
"(iii) BNR Udyog Ltd.
Similar arguments of functional dissimilarity have been raised for this entity by drawing our attention to the fact that this entity was engaged in medical transcription, medical coding and medical billing etc. As observed by us in the case of Accentia Technologies Ltd., the low-end support services, in our opinion, could not be compared with services in the nature of medical transcription services, medical coding, medical billing etc. which are services of specialized kind. This is further fortified by the fact this Tribunal in Maersk Global Centers (India) (P.) Ltd. (supra) has observed that this entity has been excluded by Ld. DRP on functional dissimilarity. Further, Delhi Tribunal in BT e- Serv (India) (P.) Ltd. v. ITO [2019] 101 taxmann.com 275 in case of assessee having similar functional profile directed for exclusion for aforesaid entity on the ground that medical transcription would not be, at all, functionally similar to BPO IT(TP)A No.92/Bang/2023 Page 28 of 29 service provider. Keeping in view the said factors, we direct for exclusion of this entity."
19. In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company as it fails the functionality test since the assessee is engaged only in trading, distribution of laboratory products and chemicals, strategy sourcing, ITeS, etc. This ground is allowed.
20. The ground regarding levy of interest u/s. 234A is consequential.
21. The assessee has raised a ground regarding short credit of taxes paid of Rs.53,79,565. The AO is directed to verify the same and give credit of taxes in accordance with law.
22. The other grounds are general in nature.
23. In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 25th day of May, 2023.
Sd/- Sd/-
( MAHAVIR SINGH ) ( CHANDRA POOJARI )
VICE PRESIDENT ACCOUNTANT MEMBER
Bangalore,
Dated, the 25th May, 2023.
/Desai S Murthy /
IT(TP)A No.92/Bang/2023
Page 29 of 29
Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore.
By order
Assistant Registrar
ITAT, Bangalore.