Notional cost adjustment while computing PLI set aside as no such adjustment made in earlier years

IQVIA Analytics Services Pvt. Ltd. Vs ITO (ITAT Bangalore)

ITAT Bangalore held that notional cost on account of tangible/intangible and ESOP while computing PLI not justified since no such adjustment made by lower authorities in earlier years. Hence, adjustment directed to be deleted by applying principles of consistency.

Facts- The assessee is an Indian company and engaged in the business of sales & marketing analytics and business consulting services to the pharmaceutical & healthcare industry. The assessee company has two subsidiaries namely Pharma ARC Inc (USA) and Pharma ARC Consulting Services Gmbh (Switzerland). The company during the year has entered various international transactions with its AEs including the provision of IteS Services. The assessee to benchmark such international transaction (provision of ITES services) has adopted the TNMM method as most appropriate method to compute the ALP. The assessee by applying the TNMM method computed its PLI as OP/OC which comes 14.79% and based on TP study claims that the transaction of provision of ITES services is at ALP.

The TPO, however, was not satisfied with the process of computation of PLI made by the Assessee. Accordingly, the TPO has treated the expenses incurred by the foreign AE as part of the operating expenses. TPO worked the PLI of the assessee at 3.68% and 3.55% as OP/OC and OP/OR respectively. Being aggrieved, the present appeal is filed.

Conclusion- It is necessary to take a note of the amendment brought under the Income Tax Amendment Rule 2017, where under rule 10TA in the definition of operating expense, share based compensation has been included in the definition of operating expenses and such amendment was applicable from 1st April 2017 with prospective effect. Regarding the applicability of rule 10TA, we note that such rule is applicable if the assessee opts for safe Harbour rules. But in the present case, the assessee has not opted such rule, therefore the impugned transaction of share-based compensation cannot be treated as operating expenses in the year under consideration in terms of such rule.

Held that the assessee has also incurred similar cost in the earlier assessment years i.e 2015-16 and 2016-17 but there was no such adjustment made by the lower authorities in the PLI of the assessee. Accordingly, we are of the view that the principles of consistency in the present case also needs to be applied as there is no change in the facts and circumstances of the case in the year under consideration viz a viz the earlier assessment years. Accordingly, we direct the TPO not include the notional cost discussed above while calculating the PLI of the assessee.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This is an appeal filed by the assessee against the order passed by the National Faceless Assessment Centre (NFAC), Delhi, dated 22/02/2022 in ITA No. ITBA/AST/S/143(3)/2021-22/1039978192(1) for the assessment year 2017-18.

2. At the outset the ld. AR for the assessee before us submitted that he has been instructed not to the press the Ground Nos. 1, 2, 4, 5, 6, 7, and 9 raised in the memo of appeal, accordingly, we dismiss the same as not pressed.

3. The first issue raised by the assessee in ground No. 3 is that the ld. DRP/TPO/AO erred in treating services (tangible and intangible) provided by the AE, free of cost, as a part operating cost to the assessee.

4. The facts in brief are that the assessee is an Indian company and engaged in the business of sales & marketing analytics and business consulting services to the pharmaceutical & healthcare industry. The assessee company has two subsidiaries namely Pharma ARC Inc (USA) and Pharma ARC Consulting Services Gmbh (Switzerland). The company during the year has entered various international transactions with its AEs including the provision of IteS Services. The assessee to benchmark such international transaction (provision of ITES services) has adopted the TNMM method as most appropriate method to compute the ALP. The assessee by applying the TNMM method computed its PLI as OP/OC which comes 14.79% and based on TP study claims that the transaction of provision of ITES services is at ALP.

4.1 The TPO, however, was not satisfied with the process of computation of PLI made by the Assessee. As per the TPO, the cost incurred by the AEs relating to ESOP provided to the employee of the assessee company and notional cost/depreciation of assets either tangible/intangible provided by the AEs free of cost to assessee for rendering of services to AEs would also be the part of operating cost. Accordingly, the TPO has treated the expenses incurred by the foreign AE as part of the operating expenses as detailed below:

–

4.2 Finally, the TPO worked the PLI of the assessee at 3.68% and 3.55% as OP/OC and OP/OR respectively which was objected before ld. DRP. The ld. DRP in this regard has issued the following direction:

“2.5.1 Having considered the submissions, The TPO is directed to verify the margin computation and recompute the same if necessary after taking into consideration the arguments of the assessee regarding certain items being non operational.

2.5.2 Assessee’s argument is that notional costs on expenditure like ESOP etc must be computed on the basis of the mark up on such expenditure and not on the basis of 10% ad hoc rate. We find merit in the argument of the assessee and the TPO is directed accordingly.”

5. Being aggrieved by the direction/order of the ld. DRP/TPO/AO, the assessee is in appeal before us.

6. The learned AR before us filed a paper book running from pages 1 to 191 and the written submissions running from pages 1 to 7 and contended that the assessee has not incurred any cost on account of tangible/intangible and ESOP provided by the AEs. Therefore, the impugned cost on notional basis cannot be considered as part of operating expenses while calculating the PLI of the assessee.

7. On the other hand, the learned DR vehemently supported the order of the authorities below.

8. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, the controversy arises before us for our adjudication whether the notional cost discussed above is to be treated as part of operating cost of the assessee to work out the PLI of the assessee. In this regard, we find relevant to refer the judgement of Hon’ble Delhi High Court in the case of M/s Li and Fung India Private Limited (40 com 300 (Delhi)) where the Hon’ble Delhi High Court while adjudicating the decision of the Tribunal held that the approach of the TPO and the tax authorities in essence imputes notional adjustment/income in the assessee’s hands on the basis of a fixed percentage of the free on board value of export made by unrelated party vendors. The relevant extract of the order is as under:

39. The TPO’s determination enhanced LFIL’s cost base for applying the operating profit over total cost margin. LFIL’s compensation model is based on functions performed by it and the operating costs incurred by it and not on the cost of goods sourced from third party vendors in India. Allotting a margin of the value of goods sourced by third party customers from Indian exporters/vendors to compute the appellant’s profit is unjustified. This Court is of opinion that to apply the TNMM, the assessee’s net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Textually, and within the bounds of the text must the AO/TPO operate, Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee’s net profit margin for application of the TNMM. Rule 10B(1)(e) recognizes that “the net profit margin realized 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 …” (emphasis supplied). It thus contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear.

40. The TPO’s reasoning to enhance the assessee’s cost base by considering the cost of manufacture and export of finished goods, i.e., readymade garments by the third party venders (which cost is certainly not the cost incurred by the assessee), is nowhere supported by the TNMM under Rule 10B(1)(e) of the Rules. Having determined that (TNMM) to be the most appropriate method, the only rules and norms prescribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded an ALP. The approach of the TPO and the tax authorities in essence imputes notional adjustment/income in the assessee’s hands on the basis of a fixed percentage of the free on board value of export made by unrelated party vendors.

8.1 We also find relevant to refer the order of Hon’ble Mumbai Tribunal in the case Commvault Systems (India) (P.) Ltd. (126 taxmann.com 287) where it was held as under;

6. The ground No. B raised by the assessee is with regard to arm’s length pricing adjustment made in the software distribution activity undertaken by the assessee.

6.1 The Company has started distribution of software products of CommVault Inc from 1st April 2010. Since this year being one of the initial years of distribution activity, the Company has incurred losses. As per the agreement entered between Commvault India and the AE, the AE shall not charge any amount towards cost of license if the operating cost of Commvault India is more than the revenue earned from distribution of software products. Accordingly, the AE has not charged any amount towards the license fee to Commvault India during the year under consideration.

6.2 In relation to activity of purchase of software for distribution, the Ld. TPO has held that the company is not acting as a distributor but rendering service to its AE by selling licenses on behalf of the AEs. The ld. TPO observed that the AE has supplied products free of cost to assessee for sale in India. This transaction was not reported in TP document as the receipt of products was free of cost and the sales were made to domestic parties. Accordingly, the assessee had treated the same as not falling within the definition of international transaction. The ld. TPO examined the distribution and license agreement dated 01/04/2010 and the terms and conditions agreed upon thereon. From the same, he concluded that even though the cost price as nil, but the product has a price. Therefore, the transaction of purchase is an international transaction with the AE in which the purchase cost is nil. He observed that if no cost is paid towards the licenses, then it can also be assumed that sales are made on behalf of the AE. The ld. TPO observed that the licenses are given free of cost to the company and the percentage of profits are to be shared after absorption of the losses for the assessee. He concluded that this arrangement is nothing but in the nature of services rendered. He also observed that if cost of software is nil, the assessee is losing a mark up on such cost and thereby double benefit is accruing to the AE i.e. one being not compensating the assessee on the cost incurred and the other being not owning up the losses and allowing it to remain in India.

6.3 Assessee in response to show-cause notice replied that no cost has been paid for supply of software by the AE and that assessee is only acting as a captive distributor and not distributing on behalf of its AE. It was stated that assessee company has started distribution of software products of Commvault INC for which there is a separate team of 6 employees and the office is located in Mumbai. It was also stated that this being the second year of distribution activity, the company has incurred losses in the said segment. As per the agreement, the AE will not charge any amount towards cost of licenses if the operating cost is more than the revenue earned. It was submitted that the company has started earning profits from F.Y.2013-14 however, AE has not charged any amount towards license in view of the losses incurred by the assessee in the earlier years. In other words, the AE had given time to the assessee to absorb all the losses incurred by it in the distribution segment and thereafter start making payment for the cost of licenses.

6.4 The ld. TPO however, did not heed to the aforesaid contentions of the assessee and proceeded to carryout the fresh search of comparables using public data base and arrive at the arithmetic mean of the comparables at 1.37% of revenue by adopting Profit Level Indicator (PLI) as operating profit divided by operating revenue (OP/OR). The assessee had shown margin at -22.70% in respect of this segment. Accordingly, the ld. TPO made adjustment of Rs. 1,66,53,598/-by working out as under:—

The aforesaid working and the action of the ld. TPO was upheld by the ld. DRP.

6.5 The ld. AR vehemently argued that adoption of re-sale price method (RPM) would be ideal to benchmark the transactions carried out by the assessee with regard to the software distribution activity as against the Transaction Net Margin Method (TNMM) adopted by the ld. TPO and upheld by the ld. DRP. The ld. DR also agreed for adoption of resale price method in the instant case. We find as per 10B(1)(b) of the Income-tax Rules, re-sale price method could be applied where the property or service purchased from Associated Enterprises are resold to an unrelated enterprise. The facts of the assessee’s case squarely fit into this parameter as assessee herein has purchased the software free of cost from its AE and had sold it to unrelated parties in India. Hence, we hold re­sale price method should be the most appropriate method in the instant case. Moreover, the re-sale price method is traditional transaction method which would always be preferable to transactional profit method like profit split method and TNMM.

6.6 Yet another excruciating fact which is relevant to be addressed in the instant case is that the arm’s length price adjustment should be restricted only to the value of international transaction. Admittedly, the international transaction involved in the distribution segment is purchase of software by the assessee from the AE. Since the assessee is not making any payment to its AE for the software supplied to it, the value of international transaction had to be concluded as zero and consequently the transfer pricing adjustment thereon also would be only zero. The arm’s length price adjustment should be restricted only to the value of international transactions and cannot be done at entity level is no longer res integra in view of the decision of the Hon’ble Bombay High Court in the case of CIT v. Phoenix Mecano (India) (P.) Ltd. [2019] 108 taxmann.com 124/265 Taxman 354/414 ITR 704 and in the case of CIT v. Thyssen Krupp Industries (P.) Ltd. [2016] 70 taxmann.com 329/381 ITR 413 (Bom.) and CIT v. Tara Jewels Exports (P.) Ltd. [2017] 80 taxmann.com 117/[2016] 381 ITR 404 (Bom.).

6.7 In any case we find that the issue in dispute is squarely covered by the Co-ordinate Bench of this Tribunal in assessee’s own case for the A.Y.2011-12 in Comm Vault Systems (India) (P.) Ltd. v. Dy. CIT [2018] 92 taxmann.com 350 (Hyd. – Trib.) wherein this Tribunal after examining the nature and terms of the distribution agreement had held that assessee’s functional profile is akin to a distributor and not a service provider. The relevant observations are made in para 10 of the said order which are not reproduced herein for the sake of brevity.

6.8 In view of the aforesaid observations, and respectfully following the judicial precedents hereinabove, we direct the ld. TPO to delete the adjustment made in the sum of Rs. 1,66,53,598/- in the software distribution segment. Accordingly, the various grounds raised in ground No. B are disposed off in the aforesaid manner.

8.2 So far, the cost incurred by the AE for ESOP provided to the employee of the assessee company whether that would be included in the operating cost of the assessee, regarding this we find relevant to refer the order of coordinate bench of This tribunal in the case of M/s I2 Technologies Software Private Limited [ITA(TP) No. 1207/Bang/2014 where it was held as under;

21.The TPO had also alleged that the assessee had not accounted for its cost regarding stock option granted to the employees of the assessee company by its AE and no doubt, the amount of Rs. 2.00 Crores added by the A.O. also includes the value in respect of such ESOP as well as cost of administrative and management support services received by its AE and the amount payable for using assets of AE. Regarding the value of ESOP, it is held in various Tribunal orders that it is not a part of operating cost and therefore, the value of ESOP has to be excluded from the amount of Rs. 2.00 Crores worked out by the TPO as cost incurred by the assessee from its AE without paying anything.

8.3 Based on the above, we can safely conclude that the stand of the lower authorities for including the notional cost (discussed above) in calculating the PLI of the assessee in the given facts and circumstances is not sustainable.

8.4 Moving further, it is necessary to take a note of the amendment brought under the Income Tax Amendment Rule 2017, where under rule 10TA in the definition of operating expense, share based compensation has been included in the definition of operating expenses and such amendment was applicable from 1st April 2017 with prospective effect. Regarding the applicability of rule 10TA, we note that such rule is applicable if the assessee opts for safe Harbour rules. But in the present case, the assessee has not opted such rule, therefore the impugned transaction of share-based compensation cannot be treated as operating expenses in the year under consideration in terms of such rule.

8.5 Going ahead, we also note that the assessee has also incurred similar cost in the earlier assessment years i.e 2015-16 and 2016-17 but there was no such adjustment made by the lower authorities in the PLI of the assessee. Accordingly, we are of the view that the principles of consistency in the present case also needs to be applied as there is no change in the facts and circumstances of the case in the year under consideration viz a viz the earlier assessment years. Accordingly, we direct the TPO not include the notional cost discussed above while calculating the PLI of the assessee. Hence, the ground of appeal of the assessee is hereby allowed.

9. The next issue raised by the assessee in ground No. 8 is that the ld. DRP/TPO/AO erred in considering certain comparables though the same are dissimilar to the activities of the assessee.

10. The assessee to benchmark the transaction relating to ITES segment adopted TNMM method to compute the PLI and selected the 4 comparable companies to determine the ALP. However, the Ld. TPO rejects the comparable companies selected by the assessee, citing the following reasons:

i. The use of non-current year data.

ii. Improper application of the export turnover filter.

iii. Improper application of the employees cost filter.

10.1 Subsequently, the TPO conducted a fresh search for comparable companies using the following filters:

– Companies not having current year data were excluded.

– Companies with incomes of less than ₹1 crore were excluded.

– Companies with revenue from ITES or software development (SWD) less than 75% of total turnover were excluded.

– Companies with export turnover less than 75% of total turnover were excluded.

– Companies with RPT of more than 25% of sales were excluded.

– Companies with an employee cost of less than 25% of turnover were excluded

10.2 Based on these filters, the TPO selected a set of 13 comparable companies. Using the comparable companies’ data, the TPO calculated the PLI of the comparable companies at 24.37% as compared to the margin declared by the assessee at 3.68%. The list of comparable companies and the detailed working of the PLI by the TPO is available on pages 46 and 47 of the TPO order. Consequently, the TPO determined an upward adjustment of ₹69,18,16,840/- only and added the same to the total income of the assessee.

11. The aggrieved assessee filed an objection before the Ld. DRP, and among other contentions, objected to the comparability of the new set of comparable companies selected by the TPO. The learned DRP, after considering the facts in totality confirmed the order of the TPO after excluding one company i.e. ultra marine & pigment ltd. (SEG) subject to the inclusion two more company namely Cheers Interactive India Pvt. Ltd. And Informed Technologies India Ltd. in the list of comparables. Pursuant to the direction of the learned DRP, the ALP margin was recalculated at 90%, as against 24.37% computed by the TPO in the original proceedings.

12. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us.

13. The learned AR before us reiterated that certain companies should not be considered as comparable as these companies are functionally dissimilar. The companies which are functionally dissimilar are detailed in the subsequent paragraph.

14. On the other hand, the learned DR before us reiterated the findings contained in the order of the authorities below.

15. We have heard the rival contentions of both parties and perused the materials available on record. It is an admitted fact that the assessee’s TP study for the ITES Segment was rejected by the TPO, who conducted fresh benchmarking after selecting a new set of comparable companies. On subsequent objection, the learned DRP confirmed the majority of selection of comparable companies by the Ld. TPO after some modification. The issue for our consideration is whether companies which is under dispute as pointed out by the ld. AR are functionally dissimilar and these companies are not fitted into the filter criteria selected by the Ld. TPO in the given facts and circumstances.

15.1 In this regard, we find that the ld. AR before us has filed a detailed note stating the above listed companies are dissimilar to the activities of the assessee. The submission of the ld. AR reads as under:

“• Ground no. 8.1 The Ld. NFAC/ Ld. TPO erred in including the following companies as comparable, despite these companies being functionally dissimilar to the Appellant, the Ld. Panel erred in upholding the same:

• Tech Mahindra Business Services Ltd.
• Datamatics Business Solutions Ltd.
• Infosys B P M Services Pvt. Ltd. rte’
• Vitae International Accounting Services Pvt Ltd
• Manipal Digital Systems Pvt. Ltd. • CES Ltd..
• S P ITechnologies India Pvt. Ltd.( • Inteq B P 0 Services Pvt. Ltd

The Appellant prayed for the exclusion of following companies which are covered in the Appellants favour by a plethora of judicial precedents of the Hon’ble ITAT –

<I. Datamatics Business Solutions Ltd. – M/s Exxonmobil Services and Technology Pvt Ltd [IT(TP)A No. 958/Bang/2022] – (Case Law PB pg 153 – para 6 onwards)

6. The Id. A.R. submitted that Datamatics fails the export filter applied by the learned TPO, lacks segmental data and therefore, should be rejected. ^ Fails export earnings filter proposed to be applied by the learned TPO for the two previous years, i.e., FY2015-16 and FY2014-15

^ Functionally different – Engaged in KPO services

^ No segmental details are provided.

14.’According/y, following the aforesaid decision of the tribunal, we hold that the Eclerx Services Ltd and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) are liable to be rejected as invalid comparable. “As regards the other comparables namely Crossdomain Solutions and Datamatics Financial Services, we find that the Transfer Pricing officer and the Id. CTJ(A) have found their functions to be similar to that of KPO and that of E-clerx and Vishal technologies. Since, the /TAT has duly upheld the rejection of the aforesaid companies, i.e., these two companies are also liable to be rejected. Furthermore, Datamatics Financial Services also fails the export filter of 75% which has been adopted by the transfer pricing officer. Hence, in the background of aforesaid, we hold that following comparable are to be rejected:

• Eclerx Services Ltd
• Vishal Information Technologies limited
• Crossdomain Solutions
• Datamatics Financial Services,

7. 1 Accordingly, we direct the AO to exclude this company M/s.Datamatics Business Solutions Ltd. from the list of comparables as this company is a KPO company and not comparable to assessee company.

8.1 In view of the above, we direct the AO/TPO to exclude this company Datamatics Business Solutions Ltd. from the list of comparables.

2. Infosys BPM Services Pvt. Ltd.- M/s Exxonmobil Services and Technology Pvt Ltd [IT(TP)A No. 958/Bang/2022] – (Case Law PB pg 160 – para 9 onwards)

9. The Id. A.R. submitted that lnfosys BPO Limited should be rejected as a comparable company as this company is functionally different and therefore ought to be rejected. Further, Infosys BPO had presence of intangibles, brand value, subcontracting expenses as compared to the Assessee who did not possess the same.

^ Functionally dissimilar- business process management

^ Ownership of intangible assets & lPs

^ Brand Value/Marketing expenses

^ Consultancy expenses in the nature of Sub-contracting charges

11. “In view of the above order of the Tribunal, which is a group company of the assessee, and having same profile of the assessee, we direct the TPO to exclude (i) Infosys BPD Limited, (ii) SP/ Techi; ologies India Private Limited, and (iii) Eclerx Services Limited from the list of comparables and recompute the ALP of the international transaction.”

12. 1.21/n view of the above order of the Tribunal in assessee ‘s own case and having same profile of the assessee, we direct the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables.

11.1 In view of the above, we direct the AO/7TPO to exclude this company Infosys BPM Services Pvt. Ltd. from the list of comparables.

3. Manipal Digital Systems Pvt. Ltd.- M/s Exxonmobil Services and Technology Pvt Ltd [IT(TP)A No. 958/Bang/2022] – (Case Law PB pg 169 – para 12 onwards)

12. The Id. A.R. submitted that Manipal Digital Systems Private Limited should be rejected as a comparable company as it is functionally dissimilar and ought to be rejected. Further the Company did not disclose segmental details with respect to its back-office support services activity and also incurred advertisement/promotional expenditure.

^ Functionally not comparable

^ No segmental details are available.

^ Advertising and sales promotional expenses

18. “We have given a careful consideration to the rival submissions and are of the view that it would be just and appropriate to set aside the question of comparability of Manipal Digital Systems Pvt. Ltd., to the TPO/AO to examine as to whether the Junctional profile of the assessee and the assesses in the decisions cited by the learned AR remains the same in Assessment Year 2017-18 as it was in Assessment Year 2016-17”

12. 1 10 Accordingly, the above comparable i.e., Manipal Digital Systems Pvt. Ltd. is directed to be excluded from the list of comparables.

13. 1 In view of the above, we direct the AO/TPO to exclude this company Manipal Digital Systems Pvt. Ltd from the list of comparables.

4. CES Ltd.- M/s Exxonmobil Services and Technology Pvt Ltd [IT(TP)A No. 958/Bang/20221 – (Case Law PB pg 177 – para 14 onwards)

14. The Id. A.R. submitted that CES Limited (“CES”) is functionally different and therefore ought to be rejected

^ Functionally different – engaged in KPO services.

8.2.” The Annual report of this company shows that it is engaged in both the IT and /T enabled services. As the company has segmental accounts, the TPO has considered only IT enabled services segment for the purposes of comparability. However, what is important to note in the instant context is that the assessee is rendering only translation services etc., which fall within the overall domain of the BPO services. As against this, CES Limited is engaged in providing both BPO and KPO services as has been reported by it to the Registrar of companies in the requisite form. The Pune Benches of the Tribunal in Credence Resource Management Pvt. Ltd. Vs. ACIT (ITA No. 133/PUN/202/) vide its order dated 18-06-2021 has noted that CES Limited is rendering both BPO and KPO services, discussing this issue at page 19 of the order. In view of the fact that the assessee is engaged in rendering only BPO services, CES Limited providing both BPO and KPO services, cannot therefore be held as comparable. We, therefore, direct to delete this company from the list of comparables.”

16.1 In view of the above, we direct the AO/TPO to exclude this company CES Limited from the list of comparables.

5. SPI Technologies India Pvt. Ltd.- M/s Exxonmobil Services and Technology Pvt Ltd [IT(TP)A No. 958/Bang/2022] – (Case Law PB pg 179 – para 17 onwards)

17. The Id. A.R. submitted that SPI Technologies India Pvt. Ltd is functionally dissimilar and ought to be rejected. He further submitted that the company had presence of extraordinary events, presence of intangibles and therefore ought to be rejected. ^ Functionally dissimilar – KPO services

^ No segmental details are available.

^ Existence of extraordinary event

Presence of intangibles

18. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of NIT Data Information Processing Services Pvt. Ltd. in /T(TP)A 297/Bang/2021 dated 772022, wherein held as under:

“We have heard the rival submissions and perused the materials available on record. The main contention of the Ld. A.R. is that TPO rejected the NPS Ltd which is engaged in the business of providing publishing solutions namely typesetting, data digitisation commission for overseas publisher and support international publisher through every stage of the author to reader publishing process and provides the digital first strategy for publishing contents, production and transformation, delivery and customer support. Thus, NPS Ltd. Has been rejected based on functional incomparability. Hence, on the same logic SPI Technologies Ltd. to be excluded.”

18.1 In view of the above, we direct theAO/TPO to exclude this company SPI Technologies India Pvt. Ltd. from the list of comparables.

The Appellant submits that all of the above companies have also been excluded in the case of M/s. Deliverhealth Solutions India Pvt. Ltd. [IT(TP)A No. 342/Bang/2022]

Further, the Appellant also prayed for the exclusion of following companies –

Inteq BPO Services Pvt. Ltd. Inteq – M/s Deliverhealth Solutions India Pvt. Ltd. [IT(TP)A No. 342/Bang/2022] – (Case Law PB pg 66 – para 5.5 onwards)

5.5 The Ld.AR has submitted that this comparable has been excluded by Coordinate Bench of this Tribunal in case of Mindteck (India) Ltd. vs. DCIT in IT(TP)A No. 21 1/Bang/2022 for A. V. 2017-18 vide order dated 30. 11.2022. He submitted that the assessee in Mindteck (India) Ltd. vs. DCIT (supra) has been considered to be a captive service provider The Ld.AR submitted that the website information of this comparable reveals that it is into medical transcription however there is no segmental details available in respect of the same. He placed reliance on the annual report of this company placed in the paper book at page 377 of the paper book wherein this company has been identified to be carrying out a business process outsourcing that includes computer programming, consultancy and related services.

27.4 “The Ld. D.R. submitted that the Id DRP in his reported observed that the services offered by Inteq SPO are in Revenue Cycle Management, Claims Processing services and Document & Data Processing. The principal business activity of the company at page 5 of the annual report is business process outsourcing (BPO). However the assessee stated that business activities of the comparable company are more in the nature of business process management in the form of revenue cycle management, claims processing. It cannot be compared to Assessee Company which is rendering IT enabled services. In this regard, the contention and understanding of the assessee on the functional aspect of comparable company vis-a-vis IT enabled services is not correct. Information Technology Enabled Service (ITES) is defined as outsourcing of processes that can be empowered with information technology and covers diverse areas like finance, HR, administration, health care, telecommunication, manufacturing etc. Armed with technology and manpower, these services are provided from e-enabled locations. This radically reduces costs and improves service standards. Some of the services offered include Medical Transcription, Document Processing, Data Entry and Processing, Data Warehousing, IT Help Desk Services, Application Development, Enterprise Resource Planning and Telecommunication Services. ITeS is a type of Outsource services which involves IT in various fields like Insurance, Finance & Banking, and so forth. These soft skills are mainly utilized in KPO (Knowledge Process Outsourcing) and BFO (Business Process Outsourcing) and LPO (Legal Process Outsourcing), rear office job and phone centres. Therefore, the functional profile of the comparable company is very much in the domain of ITES only. Therefore, the contention of the assessee that the functional profile of the company is dissimilar is that of company is not acceptable to the Id DRP”

27.5 “We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this comparable came for consideration in the case of Vee Technologies Pvt. Ltd. cited (supra), wherein held that this company is involved in business process management services and cannot be considered as a comparable to a company providing ITeS such as the assessee. Being so, we direct the AO/TPO to exclude Inteq BPO Services Pvt. Ltd. from the list of comparables. Directed accordingly.’

5.5.4 Nothing contrary to the above has been brought on record by the Ld.DR. We therefore do not find any reason to interfere with the above observations. Respectfully following the view taken in Mindteck (India) Ltd. vs. DCIT (supra) by Coordinate Bench, we direct exclusion of this comparable from the final list. Accordingly, ground nos. 2.1 and additional ground raised by the assessee stands partly allowed.

2. Vitae International Accounting Services Pvt Ltd- M/s Primera Medical Technologies Private Limited [ITA No. 381/Hyd/2022] – (Case Law PB pg 14- para 14 onwards)

15. In Maersk Global Centres (India) (P) Ltd., vs. ACIT [2014] 43 com 100 (Mumbai – Trib.) (SB) the question as to whether for the purpose of determining the arm’s length price of international transactions of the assessee company providing back-office support services to their overseas associated enterprises, companies performing KPO functions should be considered as comparable was referred to the Special Bench. In this context, the Special Bench observed that the answer to this question will depend on the facts and circumstances of each case inasmuch as if the assessee company, on the basis of its own functional profile, is found, to have provided to its AE the low end back office support services like voice or data processing services as a whole or substantially the whole, the company is providing mainly high end services by using their specialized knowledge and domain expertise cannot be considered as comparables. It further observed that the purpose of attaining a relatively equal degree of comparability can be achieved by taking into consideration the functional profile of the tested party and comparing the same with the entities selected as potential comparables on broad functional analysis taken at ITeS level. The principal functions performed by the tested party should be identified and the same can be compared with the principal functions performed by the entities already selected to find out the relatively equal degree of comparability, and that if it is possible by this exercise to determine that some uncontrolled transactions have a lesser degree of comparability than others, they should be eliminated. In this sort of cases, in the case of Rampgreen Solutions (P.) Ltd., vs. CIT [20151 60 taxmann.com 355 (Delhi), Hon’ble Court observed that the quality and nature of services of each entity cannot be undermined by using the broad classification of ITeS sector and the selection of comparables should be done by taking a conscious call.

16. It, therefore, makes the things clear that considering all the entities that are selected by using the broad classification of ITeS, which takes within its fold various types of services with completely different content and value will undermine the peculiarity of services/products offered by various entities under such classification, and, therefore, a conscious selection as to the quality and nature of content of service has to be taken into account in finalizing the list of comparables. As observed by the Hon’ble Delhi High Court Rule 1OB(2)(a) of the Income Tax Rules, 1962 (“the Rules”) mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics.

17. Going by this view taken by the Special Bench in the case of Maersk Global Centres (India) (P) Ltd., (supra) and Hon’ble Delhi High Court in the case of Rampgreen Solutions (A) Ltd., (supra), we find that the functions performed by Vitae Internationa/Accounting Services Pvt. Ltd., Domex E- Data Pvt. Ltd, and MPS Ltd., fall broadly in the class of ITeS, but those are akin to the functions enumerated in clause (iv) to (vii) of Rule 10TA(g) of the Rules, thereby rendering themselves to be non-comparables to the assessee. We, therefore, direct the learned Assessing Officer/learned TPO to exclude these entities from the list of comparables. Extracts from judicial pronouncement in case of M/s Rage Frameworks India Private Limited [ITA No.674/PUN. /2022]- – (Case Law PB pg 5- para 6 onwards)

6. We now proceed to deal with the assessee’s ground no.2. 1 seeking to exclude the foregoing comparable companies in its Information Technology Enabled Services [in short “1 TES”] segment. It emerges during the course of hearing that this tribunal’s recent coordinate bench’s order in Schlumberger India Technology Centre (P) Ltd. vs. DCIT [20221 142 taxmann.com 243 (Pune- Tribunal) has already excluded M/s. Manipal Digital Systems Private Ltd., Domes e-Data Private Ltd., and MPS Ltd., i.e., three of the above comparable entities as not functioning in “ITES segment “The other entities included by the learned lower authorities i.e., Vitae International Accounting Services Private Limited, Access Healthcare Services Private Limited and Integra Software Services Private Limited are also found to be not engaged in the assessee’s segment since they have been carrying-out their business activities and deriving revenues from accounting, healthcare services and e-publishing services, respectively and, therefore, do not have even broader comparability in the segment in issue before us. This is indeed coupled with the fact that M/s. Integra Software Services Private Limited had undergone a merger scheme with M/s. Integra /nfotech Private Limited as per the National Company Law Tribunal’s [in short “NCLT’J order to this effect in the relevant previous year Faced with the situation, we direct the learned Transfer Pricing Officer [in short “TPO”] to exclude all the instant six comparables and compute the assessee’s arm’s length price [in short ALP] adjustment accordingly.

Thus, the Appellant submits that above companies ought to be excluded from the final list of comparable.”

15.2 Based on the above findings of the ITAT in the case of different companies being comparables, we are inclined to set aside the issue to the file of the TPO for fresh adjudication in the light of above discussion and as per the provisions of law. It is pertinent to note that there was no submission filed by the ld. AR for the exclusion of the comparable namely Tech Mahindra Business Services Ltd. Nevertheless, in the interest of justice and fair-play, we also set-aside the issue to the file of the TPO for fresh adjudication as per the provisions of law. Hence, the ground of appeal of the assessee is partly allowed for statistical purposes.

15.3 The interconnected issue raised by the assessee in ground No. 10 is that the learned DRP/AO/TPO erred in confirming the addition of ₹9,09,83,702 on account of notional interest to be charged on overdue receivables from the AE.

15.4 During the proceedings, the TPO observed that the assessee had reported receivables of Rs. 167,44,48,423.00 from associated enterprises, which appeared to represent interest-free loans disguised as delayed receivables. According to the TPO, such receivables from associated enterprises constitute an international transaction that must be determined at arm’s length price under the provisions of section 92CA of the Act. Consequently, the TPO computed the arm’s length interest on the outstanding receivables at ₹₹9,09,83,702.00 using 14% rate of interest being SBI-PLR for the AY 2016-17 and made an upward adjustment to the total income of the assessee.

15.5 The assessee raised objections before the learned DRP but did not succeed. Consequently, the DRP upheld the findings of the TPO.

16. Aggrieved by the order of the ld. DRP/ TPO/AO, the assessee has filed an appeal before us.

17. The learned AR before us submitted that the authorities below have erred in treating the delayed receivables as unsecured loan by the assessee to the AE and charging interest thereon which is notional in nature. The Ld. AR in support of his contention relied on the order of Chennai Tribunal in the case of M/s Vestas Technology R&D Chennai private limited in ITA No. 3081/Chny/2016.

17.1 Without prejudice to the above, as per the ld. AR the delayed receivables cannot be treated as separate and independent transaction. As such, the same amount representing the delayed receivables should be merged/aggregated with the principal transaction between the assessee and the AE for determining the ALP.

17.2 The learned AR without prejudice to the above further submitted that the authorities below have erred in applying the SBI- PLR rate for calculating the interest on the delayed receivables ignoring the fact that such transaction represents in foreign currency and therefore the SBI PLR rate cannot be adopted in the given facts and circumstances.

18. Conversely, the learned Department Representative supported the findings of the authorities below.

19. We have gone through the records in the light of the submissions made by either side. The first question before us arises as to whether or not the outstanding receivables is an international transaction. This issue is no longer res integra. Hon’ble Bombay High Court took a view in the case of CIT Patni Computer Systems [2013] 33 taxmann.com 3/215 Taxman 108 (Bombay), on the amendment to Section 92B of the Act by way of Finance Act, 2012 with retrospective effect from 01/04/2002 that, the interest on outstanding receivables is an international transaction, and it certainly requires separate benchmarking.

19.1 Now, coming to the issue in respect of the rate of interest, we find relevant to refer the judgment of Hon’ble Bombay High Court Principal Commissioner of Income-tax-13, Mumbai v. Tecnimont (P.) Ltd reported in [2018] 96 taxmann.com 223 (Bombay) wherein it was observed that in cases where any business enterprise is required to pay interest on delayed payment, it would examine the cost of interest and if the same is higher, then the amount of interest payable on funds obtained locally, it would take a loan from local sources and pay the amounts payable for exports and expenses within time. Therefore, extending of credit beyond the normal period of sixty days is in substance a granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay within the period of sixty days. On this premise the Hon’ble High Court upheld the Tribunal computing interest at LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE by observing that the same cannot be faulted. The relevant extract of the judgment reads as under:

7. We note the finding of fact by the Tribunal that no interest is charged by the respondent assessee from its AEs as well as its non-AEs for delayed payment of export receivable and expenses. Further finding of fact that operating margin earned by the respondent assessee in respect of its transactions with AEs is higher than that earned on transactions with non-AEs entities. Thus, keeping the above finding of fact, we proceed to examine the Revenue’s challenge to the impugned order of the Tribunal. The entire exercise of determining the ALP in respect of the AE transaction is to arrive at the price which would be the normal price in competative conditions between non-AEs. In this case, it is only the notional interest which is being computed as in fact no interest is charged by the respondent for delayed payments universally i.e. from AEs and non-AEs. In cases where any business enterprise is required to pay interest on delayed payment, it would examine the cost of interest and if the same is higher then the amount of interest payable on funds obtained locally, it would take a loan from local sources and pay the amounts payable for exports and expenses within time. Therefore, extending of credit beyond the normal period of 60 days is in substance a granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay within the perod of 60 days. The aforesaid finding of ours also finds support from the question of law at Sr. No.2 as proposed by the Revenue. Thus, in these circumstances, in the facts of this case order of the Tribunal computing interest at LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE cannot in these facts be faulted as it is in line with the decision of this Court in Tata Autocomp Systems Ltd. (supra).

8. In the above view, the two questions of law as proposed do not give rise to any substantial question of law. Thus, not entertained.

19.2 In view of the above, we hold that the PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate and the PLR rates are not applicable to loans to be re­paid in foreign currency. Respectfully following the judicial opinion stated supra, we are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points, by applying the credit period of thirty days or as per agreement or invoice. Accordingly, we direct the learned Assessing Officer/ learned TPO to re-compute the same. Hence, the grounds of appeal of the assessee is hereby allowed for statistical purposes.

20. The next issue raised by the assessee in ground No. 11 is that the learned DRP/TPO/AO erred in disallowing the interest expenses incurred on the CCD on the reasoning that such CCD represents the investment in the equity of the company.

21. The assessee in the year under consideration has claimed interest expenses on the CCD issued to the AE amounting to Rs. 14,42,29,801.00 which was disallowed by the TPO treating the CCD as investment in the equity of the company. The view taken by the TPO was subsequently upheld by the learned DRP.

22. Being aggrieved by the direction/order of the learned DRP/TPO/AO, the assessee is in appeal before us.

23. The learned AR before us submitted that the identical issue was raised in the own case of the assessee for the assessment year 2015-16 in ITA No. 1549/Bang/2019 which was decided by the ITAT in its favour vide order dated 19-06-2020. Thus, the learned AR submitted that the issue on hand stands covered in favour of the assessee.

24. On the other hand, the learned DR vehemently supported the order of the authorities below.

25. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that the issue raised on hand stands covered in favour of the assessee by the order of the ITAT cited above in the own case of the assessee. The relevant extract of the order of the ITAT is reproduced as under:

9. We have given a careful consideration to the rival submissions. We are of the view that the decision of the ITAT Bangalore Bench in the case of CAE Flight Training (I) Pvt. Ltd. (supra) supports the plea of the assessee for allowing deduction on interest paid on CCDs. In the aforesaid decision, the Tribunal in para 23 held that the fact that the RBI under its Foreign Direct Investment Policy mandates conversion of debentures into equity and such mandate will not make any difference to the allowability of interest on debentures u/s. 36(1)(iii) of the Act. The Tribunal held that till date of conversion, CCDs are in the nature of debt and interest paid on CCDs cannot be disallowed on the ground that CCDs will later on be converted into equity. The Tribunal thereafter in para 24 examined the decision rendered in Ashima Syntex Ltd. (supra) and concluded that the issue therein was regarding expenses incurred on issue of convertible debentures and not interest paid on CCDs for the period before conversion and therefore the decision of Special Bench will not be of any application to the facts of the cases where deduction u/s. 36(1)(iii) of the Act is claimed. The Tribunal also discussed the RBI Master Circular on Foreign Investments in India dated 2.7.2007 and 1.7.2008 and held that those circulars will have no effect and the debentures till its conversion will retain its character as loan or borrowings.

10. In the light of the aforesaid decision of the Tribunal, we are of the view that the deduction claimed by the assessee has to be allowed. We may also clarify that the Thin Capitalisation principle was neither invoked by the AO or the CIT(Appeals) in the present case nor were those rules part of the statute for the relevant AY in this appeal.

26. At the time of hearing, the ld. DR has not brought anything contrary to the findings of the ITAT in the own case of the assessee discussed above. Similarly, the ld. DR has not brought anything on record suggesting that the finding of the ITAT discussed above has either been overturned or stayed by the higher judicial forum. Accordingly, we of the view that the issue on hand stands covered in favour of the assessee for the reason given above. Hence, the ground of appeal of the assessee is hereby allowed.

27. The next issue raised by the assessee in ground No. 12 is that the learned DRP/AO erred in confirming the disallowance of Rs. 80,93,484/- representing the delayed contribution under the PF Act.

28. At the outset, the learned AR for the assessee before us fairly agreed that the issue on hand stands covered against the assessee by virtue of the judgement of Hon’ble Supreme Court in the case of Checkmate Services Private Limited Vs Commissioner of Income Tax reported in 143 com 178 (SC) wherein it was held as under:

54. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer’s obligation to deposit the amounts retained by it or deducted by it from the employee’s income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees’ contributions- which are deducted from their income. They are not part of the assessee employer’s income, nor are they heads of deduction per se in the form of statutory pay out. They are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for deduction.

29. In view of the above, we do not find any merit in the ground of appeal raised by the assessee and accordingly we decline to interfere in the finding of the authorities below. Hence, the ground of appeal of the assessee is hereby dismissed.

30. The issue raised by the assessee in ground No. 13 is that the AO erred in not granting the benefit of TDS in toto. At the outset, the Ld. counsel for the assessee before us submitted that the assessee is entitled for the benefit of the TDS amounting to Rs. 75,17,699/- whereas the assessee has given the benefit for the sum of Rs. 70,65,743/-only which is short of the actual amount of TDS for which the assessee is entitled. Accordingly, the Ld. AR before us prayed to issue a direction to the AO to grant the benefit of TDS as per the provisions of law after necessary verification. On the other hand, the learned DR could not submit anything contrary to the arguments advanced by the ld. counsel for the assessee. In view of the above, we direct the AO to verify the claim of the assessee for the credit of the TDS amount and allow the same as per the provisions of law. Hence the ground of appeal of the assessee is hereby allowed for statistical purposes.

31. The issues raised by the assessee in ground Nos. 14 and 15 relate to the levy of interest under section 234B and the penalty under section 270A of the Act which are consequential and premature to decide at the stage. Accordingly, we dismiss the same as infructuous. Hence, the grounds of appeal of the assessee are hereby dismissed as infructuous.

32. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

Order pronounced in court on 18^th day of December, 2024