Income Tax Appellate Tribunal – Bangalore
M/S Indecomm Global Services … vs Deputy Commissioner Of Income Tax … on 28 August, 2019 IT(TP)A No.185(B)/2018 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES : “B”, BANGALORE BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SMT.BEENA PILLAI, JUDICAL MEMBER ITA No.185(Bang)/2018 (Assessment Year : 2012-13) M/s Indecomm Global Services (India) Pvt.Ltd.,
11-12/1, 4th Floor, Maruthi Infotech Center Block A,
Amarjyothi Layout, Off.Intermediate Ring Road,
Domlur, Bangalore
PANNo.AABCB6817E Appellant Vs
The Deputy Commissioner of Income tax,
Cirle-3(1)(1), R.No.227,2nd Floor,
BMTC Building, 80ft Road, 6th Block,
Koramangala,
Bangalore-560 095 Respondent Appellant by : Shri K.R.Vasudevan, Advocate Revenue by : Shri R.N.Siddappaji, Addl.CIT Date of hearing : 17-07-2019 Date of pronouncement : 28-09-2019 ORDER
PER BEENA PILLAI, JUDICIAL MEMBER :

Present appeal has been filed by assessee against order dated
23/11/17 passed by Ld. CIT (A)-3, Bangalore for assessment year
2012-13 on following grounds of appeal:
IT(TP)A No.185(B)/2018
2 The grounds mentioned hereinafter are without prejudice
to one another.

A. Transfer Pricing
1. The learned Assessing Officer (“learned AO”),
learned Transfer Pricing Officer (“learned TPO”) and the
Honourable Commissioner of Income Tax (Appeals)
[“Hon’ble CIT(A)”] has grossly erred in law and facts of
the case in proposing a transfer pricing adjustment under
Section 92CA of the Income-tax Act, 1961(“the Act”)
towards the provision of software development and IT
enabled services by the Appellant.

2. The learned AO/learned TPO/Hon’ble CIT(A) has
erred in rejecting the TP documentation maintained by
the Appellant by invoking provisions of sub-section (3) of
92C of the Act.

3. The learned AO/learned TPO/Hon’ble CIT(A) has
erred in rejecting comparability analysis carried in the TP
documentation and in conducting a fresh comparability
analysis by introducing various filters while determining
the Arm’s Length Price (“ALP”).

4. IT Enabled Services (“ITeS”) Segment:

4.1 The learned AO/learned TPO/Hon’ble CIT(A) has
erred in not considering the previous two years financial data of the comparable companies
while determining the ALP.

4.2 The learned AO/learned TPO/Hon’ble CIT(A) has
erred in not applying the upper limit on turnover while
selecting the comparable companies.

4.3 The learned AO/learned TPO/Hon’ble CIT(A) has
erred in applying different financial year ending filter
while selecting the comparable companies.

4.4 The learned AO/learned TPO/Hon’ble CIT(A) has
erred in completely relying on the unaudited data
requisitioned and consequently obtained by taking
recourse to the provisions of Section 133(6) of the Act.

4.5 The learned AO/learned TPO/Hon’ble CIT(A) has
erred in applying export earning filter of 75% instead of IT(TP)A No.185(B)/2018
3 25% of the total sales, leading to a narrower comparable
set.

4.6 The learned AO/learned TPO/Hon’ble CIT(A) has
grossly erred in not rejecting the following companies
from the list of comparable companies.

 Universal Print Systems Ltd.
 Infosys BPO Ltd.
 TCS E-Serve Ltd.
 BNR Udyog Ltd.
 Excel Infoways Ltd.

4.7 The learned AO/learned TPO/Hon’ble CIT(A) has
grossly erred in rejecting companies that ought to have
been included as comparables:

 ICRA Online Ltd.
 Tech Process Solutions Ltd.
 Cameo Corporate Services Ltd.
 Crystal Voxx Ltd.
 Informed Technologies India Ltd.

4.8 The learned CIT(A) while aptly confirming the
functional similarity of Accentia Technologies Ltd. with
the Appellant, erred in:

 stating that if the comparable company gets
excluded by higher Appellate authorities in the
Appellant’s appeal for AY 2011-12 on the ground of
functional dissimilarity, the same would apply to the
year under consideration and would thereby require
exclusion of the comparable in AY 2012-13.

 not considering the fact that transfer pricing requires
examining the profile of the comparable companies year
on year basis and that the ruling of one Assessment year
cannot automatically apply to another Assessment Year, 4.9 The learned AO/learned TPO/Hon’ble CIT(A) has
erred in allowing negative working capital adjustment to
the ITES segment of the Appellant.

4.10 The learned AO/learned TPO/Hon’ble CIT(A) has
erred in not allowing appropriate adjustment towards
to the risk differential existing between the appellant
vis-à-vis independent comparable companies.
IT(TP)A No.185(B)/2018
4 5.1 The learned AO/learned TPO/ Hon’ble CIT(A) has
erred in re-characterizing the loans & advances and
receivables outstanding as on 31 March 2012 as a loan
given to the AEs by the Appellant.

5.2 The learned AO/learned TPO has erred in arbitrarily
imputing interest on the outstanding balances from the
AEs for more than six months with an interest rate of
16.85 percent.

5.3 The learned AO/learned TPO/learned CIT(A) has
erred in ignoring the fact that the Appellant followed
the same credit/interest policy on the balance
receivable from the Non-AEs as well.

5.4 The learned CIT(A) has erred in imputing interest on
the outstanding balances from the AEs for more than 30
days and in directing the learned AO/learned TPO to
work out the adjustment on account of interest on such
outstanding amounts.

5.5 The learned CIT(A) has erred in ignoring the fact that
the credit period provided in relation to outstanding
receivables as on 31 March 2012 to Non-AEs are greater
than that of AEs.

5.6 Without prejudice to the argument of the Appellant
in Ground no. 4.9 above, the learned AO/learned
TPO/learned CIT(A) has erred in imputing the interest
on receivable outstanding as 31 March 2012 when the
learned TPO had already done the negative working
capital adjustment to the companies proposed as
comparable by adjusting the difference in the credit
period between the Appellant and those comparables.

5.7 Without prejudice to the argument of the Appellant
in Ground no. 4.9, the learned AO/learned
TPO/learned CIT(A) has erred in imputing the interest
on receivable balances specifically arising out of
provision of software development services by
Indecomm India when the learned TPO post
considering the working capital adjusted margins of
comparable companies had already concluded the
operating margin of Indecomm India with respect to
such services is at arm’s length.

6.The learned AO has erred in in levying interest U/s
234B Section 234C of the Act, which is consequential in
nature to the above grounds of appeal.
IT(TP)A No.185(B)/2018
5 The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal.

For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.

2. Brief facts of the case are as under:
Assessee filed its return of income on 30/11/12 declaring total
income of Rs.18,86,56,470/-. The case was selected for scrutiny
and notice under section 143(2) was served upon assessee in
response to which representative of assessee appeared before Ld.AO
and filed requisite details as called for. Ld.AO observed that
assessee is engaged in the business of Software Development and
Information Technology Enabled Services and that assessee entered
into international transaction with its associated enterprise.
A reference was accordingly made to Ld.TPO under section 92CA of
the Act. Upon receipt of reference, Ld.TPO called upon assessee to
file economic details of international transaction entered into by
assessee in Form-3CEB. Ld.TPO observed that assessee had
following international transaction:
International Transaction Value (INR) Software and related services 52,82,25,923 IT enabled services 19,75,88,112 Reimbursement of expenses 16,96,997 Recovery of expenses 2,49,64,340 Balance of receivable 36,33,20,298 It has been submitted that Ld.TPO disputed arms length price
determined by assessee for ITeS segment, the details of which are
as under.
IT(TP)A No.185(B)/2018
6 ITeS Segment:
2.1 Assessee used TNMM as most appropriate method with PLI as
OP/OC and determined margin of assessee at 16.39%. Assessee
selected following 9 comparables with an average margin of 12.50%
and thus held the transaction with AE under this segment to be at
arms length. Unadjusted average # Company Name margin – 3 years 1. Informed Technologies India Limited 14.00% 2. Jindal Intellicom Limited 13.27% 3. Accentia Technologies 24.99% 4. ICRA Online Ltd. 24.01% 5. Cameo Corporate Services Ltd. 10.06% 6. In House Productions 10.33% 7. Cosmic Global 11.27% 8. Wisec Global Ltd. 0.14% 9. Techprocess Solutions Ltd. 4.40% Arithmetic Mean 12.50%
2.2 Ld.TPO rejected analysis carried out by assessee and undertook
fresh search by applying various filters and shortlisted following 10
comparables with an average margin of 28.11%:
# Company Name 1. Accentia Technologies Ltd. 11.75% 2. Universal Print Systems Ltd. 52.46% 3. Informed Technologies Ltd. 6.08% 4. Infosys BPO Ltd. 36.30% P5. Jindal Intellicom Ltd. -0.05% 6. Microgenetic Systems Ltd. 19.61% 7. TCS E-Service Ltd. 63.69% 8. BNR Udyog Ltd. 41.58% 9. Excel Infoways Ltd. 29.79% 10. E4E Healthcare Services Pvt. Ltd. 19.85% AVERAGE 28.11% He thus proposed an adjustment of Rs.2,74,17,877/- under ITeS.
IT(TP)A No.185(B)/2018
7 2.3 Ld.TPO further computed interest on receivables exceeding 6
months at 16.85% and proposed adjustment being interest
chargeable at Rs. 39, 72, 148/-.
Thus total adjustment proposed by Ld. TPO was as under
ITES Rs.2,74,17,877/-
Interest chargeable Rs. 39,72,148/-
Total adjustment Rs.3,13,90,025/- 3. Aggrieved by proposed adjustment, assessee preferred appeal
before Ld.CIT (A) who upheld view of Ld.TPO.
4. Aggrieved by order of Ld. CIT (A) assessee is in appeal before us
now.
Ld.AR submitted that Ground No. 1-3 are general in nature and
therefore do not require any adjudication.
Ground No.4 – 4.10 are in respect of in appropriate comparables
excluded/included by Ld. CIT (A). Ld.AR placed before us a chart
wherein assessee seeks to exclude/include following comparables:
Comparables sought to be excluded:
 Universal Print Systems Ltd (segmental) (BPO)  Infosys BPO Ltd  TCS E-Serve Ltd  BNR Udyog Ltd (segment) (medical transcription)  Excel Infoways Ltd (segmental) (IT) (BPO)
Comparables sought for inclusion  Informed Technologies India Ltd
Before we undertake the fact comparable it a analysis it is sine qua
non to understand functions performed assets owned and risk
assumed by assessee under ITeS segment:
Functions IT(TP)A No.185(B)/2018
8 In TP study, it has been submitted that assessee provides back-
office support services to its AE.
Assessee provides routine back and support services in the
mortgage industry vertical. It is recorded in TP study that assessee
is entrusted with job of calculating fees for various zones after
taking into consideration specific regulations of particulars state
and other para meters. The fee calculator is inbuilt in the system
and assessee is required to only input specific para meters into the
system to calculate the fees. The TP study also reports that
mortgage division verifies various deeds and documents required in
mortgage process for clients based in USA. It is submitted that
client sends across scanned documents were verification to AE,
which are then uploaded on server of the AE. Assessee is then
required to login to the server and verify the same. All server and
applications are based out of AEs office in USA. In the tabular form
the TP study reports that assessee carries out executing the work
under guidelines of AE. Assessee is also involved in identification of
manpower requirement, recruitment of manpower.
Assets employed
It has been submitted that assessee do not own any non-routine
intangibles and accordingly does not own trade secrets or
undertake research and development activities on its account that
would lead to development of non-routine intangibles. Intangible
assets employed by assessee are furniture and fixtures vehicles,
case of its equipments, computers and accessories and electrical
fittings etc.
Risks assumed IT(TP)A No.185(B)/2018
9 Assessee provides services on a cost plus model and is not affected
by factors such as non availability of markets of for rendering
services, reliability of customers, fluctuations in demand etc. The
primary risk market lies with the AE, as it is responsible for
providing final services to end customer. Assessee is though
responsible for quality of services to be delivered to its AE and has
to meet specifications laid down by AE in the work order, however
AE bears final responsibility of quality of services towards the
client. Thus, it has been submitted that assessee do not even bear
any service risk.
Thus assessee has been characterised under this segment as a
contract service provider rendering routine back office services and
bearing minimal risk with assured returns from its AE.
Based upon the above FAR analysis of assessee, we shall consider
comparables alleged by assessee for exclusion/inclusion.
Comparables sought to be excluded:
1. 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 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 335 of paper book (Index for Annual
Reports).
IT(TP)A No.185(B)/2018
10 4.1 Ld.CIT DR placed reliance upon orders of authorities below and
submitted that this comparable is functionally comparable with
that of assessee.

5. 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 IT(TP)A No.185(B)/2018
11 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
21.63% 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.
(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 IT(TP)A No.185(B)/2018
12 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 ITES 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.
50. 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.
51. 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,
(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;
IT(TP)A No.185(B)/2018
13 (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 to arrive at an arm’s length price in relation to the international transaction.
(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:–
(a) the specific characteristics of the property transferred or services provided in 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 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 or retail
(3) An uncontrolled transaction shall be comparable to an international transaction if–
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market;
IT(TP)A No.185(B)/2018
14 or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.”
52. 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 by 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.’ IT(TP)A No.185(B)/2018
15 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.

2. Infosys BPO Ltd.
Assessee objected for inclusion of this comparable primarily on the
basis of functional incompatibility and presence of intangibles. It
has been submitted that this company owns huge brand and not a
fit comparables for company like assessee, who provide captive
service to its AE’s.
Ld.CIT DR opposed the exclusion and placed reliance upon orders
passed by authorities below.
6. We have perused submissions advanced by both sides in the
light of the records placed before us. Assessee placed reliance upon
decision of this Tribunal in case of Zyme Solutions Pvt Ltd., vs ACIT
vide order dated 28/06/19 in ITA (TP) a No. 1661/Bang/2016,
wherein this comparable has been excluded by observing as under:

‘5. We have heard the rival submissions on the comparability of Infosys BPO as a
comparable company. The Delhi ITAT in the case of Baxter India Pvt. Ltd. Vs. ACIT
ITA No.6158/Del/2016 for AY 2012-13 in the case of a company rendering ITES
such as the Assessee, vide order dated 24.8.2017 Paragraph 23 held that Infosys
BPO is not comparable with a company rendering ITES for the following reasons:- “23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, IT(TP)A No.185(B)/2018
16 unlike the assessee. Further it was also submitted that the Infosys BPQ Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd.. We find the submissions of the ld. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPQ Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd. being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based company M/s Portland Group Pty Ltd. during financial year 2011-12. They provide sourcing and category management services in Sydney, Australia. Therefore, this company also failed the TPO’s own filter of rejecting companies with peculiar circumstances. In view of the above i.e. functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that Infosys BPO Ltd. should not be included in the list of comparables. We accordingly direct the Assessing Officer/TPO to exclude Infosys BPO Ltd. from the list of comparables for the purpose of computing the average margin.”
It was also brought to our notice that the Hon’ble Delhi High Court in ITA
No.260/2018 in the appeal filed by the Revenue against the aforesaid order
dismissed the appeal at the admission stage observing that rationale given by the
ITAT for exclusion was correct. In view of the aforesaid decision, we direct exclusion
of Infosys BPO from the list of comparable companies chosen by the TPO.
From above, it is clear that this company is functionally not
comparable with captive service provider.
Respectfully following the same we direct this company to be
excluded from the list of comparables.
3. TCS e-Serve Ltd.
Ld.AR submitted that this company has been objected by assessee
for its functional dissimilarity as it renders both BPO and KPO IT(TP)A No.185(B)/2018
17 services without segmental reporting. It is submitted that this
company owns huge brand of TATA group and has also incurred
brand related expenses and therefore cannot be accepted to be
compared with a captive service provider like assessee.
Ld.CIT DR on the contrary opposed its exclusion and placed
reliance upon orders passed by authorities below.
7. We have perused submissions advanced by both sides in light of
records placed before us. Assessee placed reliance upon following
decisions in support of its argument for exclusion of this
comparable:
 Zyme Solutions Pvt Ltd. vs ACIT (supra)  Baxter India Pvt. Ltd vs ACIT reported in (2017) 85 Taxmann.com  285 (Delhi-Trib)  PCIT vs BC Management Services Pvt. Ltd. reported in TS-948- HC-
 2017 (Del)-TP
It is observed that this comparable has been excluded by this
Tribunal. Assessee placed reliance upon decision of this Tribunal in
case of Zyme Solutions Pvt Ltd., vs ACIT reported in (2019) 101
taxman.com 292, by observing as under:

“11.3 We have heard rival submissions and perused material on record. The issue
of comparability of this company was considered by the co-ordinate bench of
Tribunal in the case of XLHealth Corpn. India (P.) Ltd. (supra). The relevant findings
of the Tribunal are as under:

” . . . We have heard the rival submissions and perused the material on record. From the perusal of the Annual Report of this entity placed at page Nos. 583 to 678 of paper book, at page No. 604 it is stated as under.
“2. COMPANY OVERVIEW IT(TP)A No.185(B)/2018
18 Your Company, along with its subsidiary companies – TCS e-Serve International Limited and TCS e-Serve America Inc., is primarily engaged in the business of providing Business Process Services (BPO) for its customers in Banking, Financial Services and Insurance domain. The Company’s operations include delivering core business processing services, analytics & insights (KPO) and support services for both data and voice processes.
Your Company is an integral part of the Tata Consultancy Services’ (TCS) strategy to build on its ‘Full Services Offerings’ that offer global customers an integrated portfolio of services ranging from IT services to BPO services.
The Company provides its services from various processing facilities, backed t) a robust and scalable infrastructure network tailored to meet clients’ needs. A detailed Business Continuity Plan has also been put in place to ensure the services are provided to the customers without any disruptions.”
Thus, this company is also stated to be a K n o wl e d g e
Process Outsourcing and therefore for reasons stated by us
wh ile dealing with this issue of comparability of the
company Infosys BPO Ltd. shall equally hold good and
th e r e f o r e we d ir e c t th e A O / T P O to e x c l u d e th is c o mp an y
from : list of compar ables.’ Since the appellant company is
into lo w end BPO, it cannot be compared with KPO service
provider.
11.4 Respectfully following the decision of the co-ordinate bench of Tribunal, we
direct for exclusion this company from the list of comparable”.
It has been observed that this company is into high-end KPO
services and an assessee rendering low end BPO services cannot be
compared with it. Further, this company has been excluded due to
absence of segmental information.
Respectfully following aforesaid decision, we direct Ld.TPO to
exclude this company from the list of comparables.
IT(TP)A No.185(B)/2018
19 5.BNR Udyog Ltd. (segmental)
Ld.AR submitted that this company fails RPT filter and also fails
export filter applied by Ld.TPO. It is submitted that this company is
into medical transcription, coding, business support services and e-
governance projects and therefore functionally not similar with that
of assessee.
Ld. CIT DR however contended that this company is compared only
for segment of medical transcription and therefore should not be
excluded. She placed reliance upon decision of this Tribunal in
case of Mobily Infotech India (P) Ltd vs DCIT reported in (2018) 97
taxman.com 2 in support.
8. 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(TP)A No.185(B)/2018
20 It is observed from annual report placed at page 223 of paper book
(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 vs ACIT reported in (2017) 85 Taxmann.com 60, 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, w 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 abov observations. Needless IT(TP)A No.185(B)/2018
21 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 M/s Nielson Sports India
Pvt.Ltd., Vs ACIT in IT(TP)A No.196(B))/2017 vide order 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
6. Excel Infoways Ltd. (segmental)
This comparable selected by Ld.TPO is alleged to be functionally not
comparable with assessee, as it is handling business relations and
managing customer relationships. It has been submitted by Ld.AR
that this comparable fails employee cost filter.

Ld.CIT DR however contended that this company is compared only
for segment of medical transcription and therefore should not be
excluded. She placed reliance upon decision of this Tribunal in
case of Mobily Infotech India (P) Ltd vs DCIT reported in (2018) 97
taxman.com 2 in support.
9. We have perused submissions advanced by both sides in light of
records placed before us. Annual report of this company is placed
at page 273 of paper book (Index for Annual Reports). In the
Significant Accounting Policies reported at page 308 of paper book,
it is observed that these companies operating businesses are
organized and managed separately, according to nature of business
and services provided with each segment, representing different
strategic business unit. Note 15 at page 312 to refers to revenues IT(TP)A No.185(B)/2018
22 from operations under the head information technology/BPO
related services separately. It is observed that the function
performed by this company as reported at page 285 reveals that it
is engaged in business of providing customer care services and
handling client business relations on their behalf by maintaining
relation with customers and also providing services by assisting in
managing the workflow and updating the records. It is observed
that this Tribunal in case of Zyme Solutions Pvt Ltd., vs ACIT vide
order dated 28/06/19 in ITA (TP) a No. 1661/Bang/2016, this
comparable is excluded by observing as under: “The third and last company that is sought to be excluded from the list of
comparable companies is Exclusion of Excel Info Ltd. The Tribunal had retained
this company as a comparable company in its original order. The assessee sought
exclusion of this company on the ground that this company was functionally
different from the assessee company and the employee cost to the revenue was less
than the threshold limit of 25% and that there were peculiar economic
circumstances which impacted the profit margin of this company thereby rendering
this company as not comparable company. The Tribunal while adjudicating of
exclusion of this company in paragraph 14.3 of its order held that on application of
employee cost filter that the Assessee has failed to show as to how the findings of
the TPO and DRP are not correct.
2. The assessee has pointed out certain facts with regard to employee cost and
diminishing revenue of this company which takes it out of the comparability and
these aspects have not been considered by the Tribunal in its order. On the above
objections in the MA, the Tribunal held as follows:- “8. We have examined the contents in the misc. petition and we find that there
has been omission to consider the application of employee cost filter by the Tribunal
though attention of the Bench was invited to relevant pages pointed out in the misc.
petition. We do not however agree with the assessee that functional comparability
of this company has not been examined by the Tribunal in paragraph 14.4. The
Tribunal has come to the conclusion that this company is a ITeS company and that
cannot be reviewed in the misc. application. However there has been omission to IT(TP)A No.185(B)/2018
23 adjudicated exclusion of this company on account of extraordinary events. We
therefore recall the order of the Tribunal to the limited extent of examining of the
employee cost filter and the presence of extraordinary events on warranty exclusion
of this company.”
3. We have heard the rival submissions on the exclusion of this company on the
basis of extraordinary events that occurred during the relevant previous year which
had impact on the profit margin of this company and therefore rendering this
company from being chosen as a comparable company. The Delhi ITAT in the case
of BT e-Serve (India) Ltd. Vs. ITO ITA No.6690/Del/2016 for AY 2012-13 order
dated 19.6.2018 considered the comparability of this company and came to the
conclusion in paragraph 5.4 of its order that there was abnormal volatility of
revenue of this company from 2009-10 to 2014-15 and therefore this company
should not be regarded as comparable company. Respectfully following the
aforesaid decision, we direct exclusion of the aforesaid company from the list of
comparable companies chosen by the TPO.
It is observed from order passed by Ld.TPO at page 10 that
assessee objected this company that employee cost filter being more
than 25% has not been examined by Ld.TPO. It is observed that in
decision of coordinate bench of Delhi Tribunal in case of Baxter
India Pvt.Ltd vs ACIT reported in (2017) 85 Taxmann.com 285 this
comparable failing employee cost filter has been analyzed as under:

Further, from the order of the TPO we find he has obtained the employee cost and
the sale for the ITES segment by exercise of his powers u s. 133(6). wherein the
said company has allocated entire employee cost to IT – BPO segment with no
allocation to Infra Activity segment which accounts to 49% of Excel’s total
revenue. In our opinion. it is highly impractical that no employee has been hired
by Excel for Infra Activity segment. We. therefore. find merit in the argument of
the Id. counsel for the assessee that the information provided as per section
133(6) by Excel Infoways Ltd. is unreliable and should not be used to compute
employ ee cost for ITES segment. The Delhi Bench of the Tribunal in the case of
Motorola Solutions India (P.) Ltd. v. Assts. CIT[2014] 48 taxmann.com 24842015]
152 ITD 158 (Delhi) has held that a company should be rejected as comparable IT(TP)A No.185(B)/2018
24 in case there is contradiction in the facts or data sourced from annual report and
as per the information gathered u/s. 133(6). In view of above discussion, we hold
that Excel Infoways Ltd. cannot be considered as comparable and should be
excluded from the list of comparables. We hold and direct accordingly”.

From the above observation by coordinate bench, objection raised
by Ld.CIT DR stands clarified, as this company for year under
consideration made a statement under 133 (6) regarding allocating
entire employee cost to IT-BPO segment, with no allocation to other
segment, which amounts to almost 49% of its total revenue during
the year under consideration. At this stage, we clarify that, we are
not inclined to express our opinion regarding functional
similarities/dissimilarity of this company with that of present
assessee before us and the same is kept open to be considered in
an appropriate case.
We therefore agree with contention raised by assessee regarding
this comparable not satisfying employee cost filter.
Respectfully following aforestated decision of Delhi Tribunal
reproduced hereinabove, we direct Ld.TPO to exclude this
comparable from the final list.
Comparable sought for inclusion:

7. Informed Technologies India Ltd.
It has been submitted by Ld.AR that this company is functionally
comparable with that of assessee and submits that it passes
through all filters applied by Ld.TPO. It has been submitted that
this comparable was included by Ld.TPO which was acceptable to
assessee. However DRP directed to exclude the same, as there was
no segmental detail available.
IT(TP)A No.185(B)/2018
25 Ld.CIT DR however placed reliance upon order of DRP and
supported its exclusion due to non-availability of segmental
information.
10. We have perused submissions advanced by both sides in the
light of the records placed before us. It is observed that this
comparable has been not disputed for functional dissimilarity by
DRP. However, observation that segmental information are not
available needs to be verified.
We are therefore of considered opinion that, this comparable needs
to be set-aside to Ld.TPO for verification afresh. Needless to say
that assessee shall be granted proper opportunity as per law to
represent its case.
Accordingly we set aside this comparable back to Ld.TPO
Accordingly grounds 4-4.10 stands allowed as indicated above.
Ground 5- 5.7 is in respect of interest on receivables outstanding
amounting to Rs.36,33,20,298/- in relation to transaction with AE.
From TP study, it is observed that payments to assessee are not
contingent upon payment received by AEs from their respective
customers. Further Ld.Counsel submitted that working capital
adjustment undertaken by assessee includes the adjustment
regarding the receivables and thus receivables arising out of such
transaction have already been accounted for. Alternatively, he
submitted that working capital subsumes sundry creditors and
therefore separate addition is not called for.
Ld.TPO computed interest on outstanding receivables at the rate
equal to 13.85 % PLR (SBI base rate) +300 basis points. It has been
argued by Ld.Counsel that authorities below disregarded
business/commercial arrangement between the assessee and its IT(TP)A No.185(B)/2018
26 AE’s, by holding outstanding receivables to be an independent
international transaction.
Ld.Counsel placed reliance on decision of Delhi Tribunal in Kusum
Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79,
deleted addition by considering the above principle, and
subsequently Hon’ble Delhi High Court in Pr. CIT vs. Kusum Health
Care Pvt. Ltd. (2017) 398 ITR 66 (Del), held that no interest could
have been charged as it cannot be considered as international
transaction. He also placed reliance upon decision of Delhi Tribunal
in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6
which subsequently upheld by Hon’able Delhi High Court vide order
dated 21/07/16 in ITA No. 379/2016, also upheld by Hon’ble
Supreme Court vide order dated 21/07/17, in CC No. 4956/2017.
It has been submitted by Ld.Counsel that outstanding receivables
are closely linked to main transaction and so the same cannot be
considered as separate international transaction. He also submitted
that into company agreements provides for extending credit period
with mutual consent and it does not provide any interest clause in
case of delay. He also argued that the working capital adjustment
takes into account the factors related to delayed receivables and no
separate adjustment is required in such circumstances.
11. On the contrary Ld.CIT DR submitted that interest on
receivables is an international transaction and Ld.TPO rightly
determined its ALP. In support of his contentions, he read out
relevant parts of DRP’s direction, in which Panel relying upon
decision of Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT
(2015- TII-347-ITAT-DEL-TP) held that interest on receivables is an
international transaction and the transfer pricing adjustment is IT(TP)A No.185(B)/2018
27 warranted. He stated that Finance Act, 2012 has inserted
Explanation to Section 92B, with retrospective effect from 1.4.2002
and sub-clause (c) of clause (i) of this Explanation provides that:
(i) the expression “international transaction” shall include–
…… (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;….’ .
12. Ld.CIT DR submitted that expression ‘debt arising during the
course of business’ refers to trading debt arising from sale of goods
or services rendered in course of carrying on business. Once any
debt arising during course of business is an international
transaction, he submitted that any delay in realization of same
needs to be considered within transfer pricing adjustment, on
account of interest income short charged or uncharged. It was
argued that insertion of Explanation with retrospective effect covers
Assessment Year under consideration and hence under/non-
payment of interest by AEs on debt arising during course of
business becomes international transactions, calling for computing
its ALP. He referred to decision of Delhi Tribunal in Ameriprise
(supra), in which this issue has been discussed at length and
eventually interest on trade receivables has been held to be an
international transaction. Referring to discussion in said order, it
was stated that Hon’ble Delhi Bench in this case noted a decision
of the Hon’ble Bombay High Court in the case of CIT vs. Patni
Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), which
dealt with question of law:
IT(TP)A No.185(B)/2018
28 (c) `Whether on the facts and circumstances of the case and in law,
the Tribunal did not err in holding that the loss suffered by the
assessee by allowing excess period of credit to the associated
enterprises without charging an interest during such credit period
would not amount to international transaction whereas section
92B(1) of the Income-tax Act, 1961 refers to any other transaction
having a bearing on the profits, income, losses or assets of such
enterprises?’
He pointed out that while answering the above question, Hon’ble
Bombay High Court noticed that amendment to section 92B has
been carried out by Finance Act, 2012 with retrospective effect
from 1.4.2002. Setting aside view taken by Tribunal, Hon’ble
Bombay High Court restored the issue to file of Tribunal for fresh
decision in light of legislative amendment. It was thus argued that
non/under-charging of interest on excess period of credit allowed
to AEs for realization of invoices, amounts to an international
transaction and ALP of such international transaction has to be
determined by Ld.TPO. In so far as charging of rate of interest is
concerned, he relied on decision of the Hon’ble Delhi High Court in
CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding
that currency in which such amount is to be re-paid, determines
rate of interest. He, therefore, concluded by summing up that
interest on outstanding trade receivables is an international
transaction and its ALP has been correctly determined.
We have perused the submissions advanced by both the sides in
the light of the records placed before us.
This Bench referred to decision of Special Bench of this Tribunal in
case of Special Bench of ITAT in case of Instrumentation Corpn.
IT(TP)A No.185(B)/2018
29 Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15-
7-2016, held that outstanding sum of invoices is akin to loan
advanced by assessee to foreign AE., hence it is an international
transaction as per explanation to section 92 B of the Act. We also
perused decision relied upon by Ld.Counsel. In our considered
opinion, these are factually distinguishable and thus, we reject
argument advanced by Ld.Counsel.
Alternatively, it has been argued that working capital adjustment
subsumes sundry creditors. In such situation computing interest
on outstanding receivables and lones and advances to international
transaction would amount to double taxation. Hon’ble Delhi
Tribunal in case of Orange Business Services India Solutions Pvt.
Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated
15.2.2018 has observed that:
“There may be a delay in collection of monies for supplies made, even
beyond the agreed limit, due to a variety of factors which would have
to be investigated on a case to case basis. Importantly, the impact
this would have on the working capital of the assessee would have to
be studied. It went on to hold that, there has to be a proper inquiry
by the TPO by analysing the statistics over a period of time to discern
a pattern which would indicate that vis-à-vis the receivables for the
supplies made to an AE, the arrangement reflected an international
transaction intended to benefit the AE in some way. Similar matter
once again came up for consideration before the Hon’ble Delhi High
Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120
(Del). Following the earlier decision in Kusum Healthcare (supra), it
was observed that there are several factors which need to be
considered before holding that every receivable is an international IT(TP)A No.185(B)/2018
30 transaction and it requires an assessment on the working capital of
the assessee. Applying the decision in Kusum Health Care (supra),
the Hon’ble High Court directed the TPO to study the impact of the
receivables appearing in the accounts of the assessee; looking into
the various factors as to the reasons why the same are shown as
receivables and also as to whether the said transactions can be
characterized as international transactions.”

In view of the above, we deem it appropriate to set aside the
impugned order on this issue and remit the matter to the file of the
Assessing Officer/TPO for deciding it in conformity with the above
referred judgment. Needless to say, the assessee will be allowed a
reasonable opportunity of being heard in such fresh proceedings.
Accordingly these ground raised by assessee stands allowed for
statistical purposes.

Ground No. 6 is in respect of interest under section 230 4B and C
which is consequential in nature and therefore do not require
adjudication.

13. In the result appeal filed by assessee stands allowed partly
for statistical purposes.

Order pronounced in the open court on 28-08-2019 Sd/- Sd/-
(J.SUDHAKAR REDDY) (BEENA PILLAI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: the 28th August, 2019.
*am IT(TP)A No.185(B)/2018
31 Copy of the Order forwarded to:
1.Appellant;
2.Respondent;
3.CIT;
4.CIT(A);
5. DR
6. ITO (TDS)
7.Guard File By Order Asst.Registrar

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