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M/s. NCS Pearson India Private Ltd. Versus DCIT (OSD) , CCIT-V, New Delhi And Vice-Versa

2018 (1) TMI 238 - ITAT DELHI

TPA - comparable selection criteria - Held that:- Assessee's services fall under the ambit of IT enabled services (ITes), which are rendered to its AE as an independent contractor and for which it is compensated on the cost plus markup basis of 15%, thus companies functionally dissimilar with that of assessee need to be deselected from final list. - ITA No.5577/Del/2014 And ITA No.5561/Del/2014 - Dated:- 3-1-2018 - SH. AMIT SHUKLA, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER For The Ass .....

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e Appellant respectfully craves leave to prefer an appeal against the assessment order passed under section 143(3) r.w.s. 144C of the Income-tax Act, 1961 ( the Act ) by Deputy Commissioner of Income- tax - (OSD), CCIT -V, New Delhi ( Ld AO ), after considering the adjustment proposed by the Additional Director of Income Tax, Transfer Pricing Officer 11(1) ( Ld. TPO ) for the international transaction pertaining to provision of IT enabled services (hereafter referred to as impugned transaction ) .....

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tly characterizing the Appellant as a high-end service provider without conducting a proper Functional, Asset and Risk ( FAR ) analysis of the international transactions; and 1.2 not considering that the Appellant in engaged rendering in routine coordination, administrative and Information Technology ( IT ) enabled services to its AEs. 2. That on facts and in law, the Ld. AO/TPO/CIT(A) have erred in making an addition of INR13,318,981 to the returned income of the Appellant on account of alleged .....

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on a detailed FAR analysis following a methodical benchmarking process 2.1 in not discharging his statutory onus to establish that the any of the conditions specified in clause (a) to (d) of Section 92C (3) of the Act have been satisfied before disregarding the ALP determined by the Appellant and proceeding to determine the arm's length price himself 2.3 by determining ALP of the international transactions entered into by the Appellant with its AEs using single year data of Financial Year ( .....

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sions of the Act read with the Rules, and making modifications to this analysis in a subjective, arbitrary and inconsistent manner. The Ld. AO/TPO did not provide the detailed accept / reject analysis undertaken by him to arrive at a comparable set of companies to benchmark the impugned transaction. 2.5 in rejecting certain comparable companies identified by the Appellant using turnover of less than INR 1 Crore as a comparability criterion while still comparing the Appellant with companies havin .....

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-hoc basis. The TPO has resorted to cherry picking of comparables to determine ALP for the impugned transaction without due cognizance to the FAR profile of the Appellant vis-a-vis the companies selected as comparable. 2.8 by selecting certain companies which are themselves controlled, having significantly high related parties transactions in excess of 25% of the sales. 2.9 by selecting certain companies which are earning super normal profits as comparable to the Appellant. 3. That on facts and .....

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l debts, miscellaneous expenses, bank charges, provision for foreign exchange derivative loss written back as non-operating in nature. This is in contradiction to the Ld. TPO s own stated approach and also that the said items are accepted as operating expenses in normal business parlance being incurred in normal course of business. 5. That on facts and in law, Ld. AO/TPO/CIT(A) have failed to make appropriate /adjustments to account for differences in working capital employed by the Appellant vi .....

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and without prejudice to each other. The Appellant craves for leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal(s) at any time before or at the time of hearing of this appeal 2. The grounds of appeal raised by the Revenue in ITA No. 5561/Del/2014 are reproduced as under: 1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in directing the exclusion of companies i.e. M/s. Aceentia Technologies Limited, M/s. Coral Hubs Limited and M/s. Mold T .....

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tional entities to effectively carry out online test in India, the NCS, US contracted with various thirdparties in India to act as testing centre(s). The assessee provides administrative assistance and other services to the parent company in carrying out their contractual obligations. 3.1 The Assessee company filed return of income for the year under consideration on 31/08/2008 declaring income of ₹ 1,42,46,880/-. The case was selected for scrutiny and notice under section 143(2) of the Ac .....

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jections before the Ld. Dispute Resolution Panel (DRP) against the draft assessment order within the stipulated period, the Ld. Assessing Officer passed the final assessment order under section 143(3) r.w.s. 144C of the Act assessing the total income at ₹ 2,75,65,860/-. Aggrieved with the transfer pricing adjustment, the assessee preferred appeal before the Ld. CIT-(A), who partly allowed the appeal of the assessee. Aggrieved with the finding of the Ld. CIT-(A), the assessee and the Revenu .....

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for condonation of the delay was also filed. He, accordingly, requested condoning the delay in filing the appeal. 4.1 The Ld. Senior Departmental Representative (Sr. DR) did not seriously objected for condoning the delay. 4.2 We have heard the rival submission on the issue of condonation of the delay in filing the appeal. In view of the bonafide reason and delay of only one day, we condoned the delay in filing the appeal and the parties were directed to advance their arguments on the grounds ra .....

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the Revenue has challenged exclusion of the comparables, namely, M/s Acentia Technologies Ltd., M/s Coral Hubs Ltd. and M/s Mould Tek Technologies Ltd. Before taking the above grounds for adjudication, we feel it appropriate to reproduce the relevant facts in brief qua the transfer pricing adjustment. 6.1 The assessee claimed that it was engaged in providing services such as collection and remittance of dues, coordination between all the interested entities to ensure that tests are delivered sm .....

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ternational transactions undertaken by the assessee with its associated enterprises as summarized by the Ld. TPO in his order are reproduced as under: No. Nature of transaction Method Value of transaction 1. Provision of collection co-ordination and technical support services TNMM 82,304,290/- 2. Collection on the behalf of AE CUP 104,175,401 3. Reimb. Of cost by AE TNMM 178,836 4. Reimb. Of cost to AE CUP 902,357 6.3 The Ld. TPO accepted the arm s length price of the international transaction e .....

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The assessee selected following comparables in its transfer pricing study without making adjustment for working capital or risk: Sl. No Name of comparable Weighted Average OP/ TC (%) 1. Ace Software Exports Ltd. 20.59 2. Aftech Ltd. (Aftek Infosys Ltd.) 37.13 3. CSS Technergy Ltd. -20.15 4. Datamatics Technologies Ltd. 9.36 5. Eclerx Services Ltd. 54.23 6. MCS Ltd. -10.98 7. Prometric India Pvt. Ltd. 8.05 8. Saraswat Infotech Ltd. 31.85 9. Aditya Birla Minacs Worldwide Ltd. (Transwork Informati .....

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23.3 5 CSS Technergy Ltd. 26.28 6 Eclerx Services Ltd 65.88 7 HCL Comnet Systems & Services Ltd. 37.99 8 Maple Esolutions Ltd 20.73 9 Mold-Tek Technologies Ltd 96.66 10 R Systems International Ltd. (Seg.) 10.34 11 Triton Corp Ltd 23.5 12 Vishal Information Technologies Ltd 50.68 Average 33.61 6.7 The Ld. TPO also rejected the contention of the assessee for providing working capital adjustment to the margin of comparable on the ground that it was not relevant to the service industry. The Ld. .....

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271 6.9 After reducing the price of the transaction shown of ₹ 8,23,04,290/- by the assessee, the Ld. TPO proposed adjustment of ₹ 1,33,18,981 (Rs.9,56,23,271 - 8,23,04,290). 6.10 In the assessment order passed on 08/12/2011, the Ld. Assessing Officer, accordingly made adjustment of ₹ 1,33,18,981/- and assessed total income at ₹ 2,75,65,860/-. 6.11 Aggrieved, the assessee challenged that adjustment made before the Ld. CIT-(A) on various grounds. The Ld. CIT-(A) upheld the .....

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rom the list of final comparables, but in view of the fact that it was considered by the assessee itself as comparable, the Ld. CIT-(A) directed to retain the company as comparable in the final set of comparables. 6.13 The finding of the learned CIT-(A) on the issue of comparables is reproduced as under: 6.5 As discussed above, the AO/TPO is directed to exclude HCL Comnet Systems & Services Limited, Mold-Tek Technologies Limited, Coral Hubs Limited and Accentia Technologies Limited from the .....

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paragraph of this order on the applicability of + /-5% as per proviso to section 92C(2) of the IT Act. 6.14 Further, the Ld. CIT-(A) rejected the contention of the assessee for allowing benefit of +/- 5% adjustment. The learned CIT-(A) also rejected claim for risk adjustment and working capital adjustment. 6.15 The exclusion/inclusion challenged by the assessee and Revenue respectively of comparables is adjudicated as under: e-Clerks Services Ltd. (ESL): 7. This company was selected by the asse .....

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knowledge process outsourcing (KPO) service and, thus functionally dissimilar to the assessee. He submitted that company has been categorized as KPO in the case of Rampgreen Solutions Private Limited Vs. CIT (ITA No. 102/2015) for assessment year 2008- 09 and thus, cannot be compared with the assessee, which is akin to a Business Procees Outsourcing (BPO). According to the Ld. Counsel, during the year the company acquired Ignentica Travel Solutions Ltd. , which being the extraordinary event duri .....

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TPO. He referred to page 32-37 of the paper book, which is a copy of agreement between the assessee and the AE and submitted that trademark/intellectual property generated in the process was to be transferred to the AE without any remuneration. He submitted that normal BPO cannot generate intellectual property and therefore, the assessee cannot be categorized as BPO. The Ld. CIT(DR) further submitted that the acquisition process has not affected the PLI of the company and therefore, there is no .....

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n record. The assessee submitted details of services rendered to its AE as under: * Coordination and liaisoning between test centres and NCS US. * Provide IT enabled support services on phone and on ground, to test centres to ensure smooth functioning of the tests. * Resolve technical problems at the test centres as per the test centres guides provided by the AEs. * Collect information on the vendors interested in operating as test centres and * Collection and remittance of fees collected on beh .....

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but during the year no intellectual property has been created. The services rendered by the assessee are of routine nature low-end ITes services. 7.8 On perusal of the page 2 to 4 of the annual report for financial year 2007-08 of e-Clerks Services Ltd., we find that company has categorized itself as a KPO. The relevant part of annual report is reproduced as under: We are a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to some of the largest bra .....

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eting support, product data management, revenue management and data analytics are some of our offerings to Retail and Manufacturing clients. To our Financial Services clients, we offer real-time capital markets, middle and back office support, portfolio risk management services and various critical data management services. (Page 4 of Annual Report FY 2007-08) Today, we employ over 1500 domain specialists working for our clients, working as them. Chairman s Message (Page 6 of Annual Report FY 20 .....

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cing efficiencies and by providing valuable insights that empower better decisions. 7.9 It is evident from above that the company is engaged in high-end KPO activities and functionally dissimilar to the assessee. 7.10 Further, according to the page 14 of the annual report for financial year 2007-08, which is reproduced as under, the company has acquired a UK-based company: Acquisitions made during the year eClerx has acquired UK-based Igentica Travel Solutions Limited ( ITS ) on July 27, 2007. T .....

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g space. 7.11 In view of this extraordinary event happened during the year the company cannot be used as comparable to the assessee. 7.12 Further, as per the page 40 of the annual report, which is fixed assets Schedule, the company owns significant intangible assets i.e. computer software, which is approximately 11% of the total assets of the company. Whereas, the assessee does not own any intangibles and merely operates as a contract service provider. Thus, it cannot be compared with the compan .....

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s a comparable to the companies providing BPO / low end services / ITES having supernormal profit. Coordinate Bench of the Tribunal in Macquarie Global Services (P.) Ltd. vs. DCIT (supra) ordered to exclude Eclerx by returning following findings 24. We have perused the Annual report of this company, a copy of which s available on pages 494 onward of the paper book, It can be seen that it is a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to globa .....

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fferent from that of the asses see company, which is basically of providing accounts payable services and general accounting services to its AEs alone. Not only that, this company has significant intangibles which its uses for the purposes of rendering KPO services. As the assessee is a captive unit rendering services to its AEs without any intangibles, there can be no comparison between the assessee and Eclerx Services Pvt. Ltd. We, therefore, order for the exclusion of this company from the fi .....

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re companies through its pricing and profitability service which makes it functionally dissimilar with the taxpayer. So, in view of the matter, we order to exclude Eclerx from the final set of comparables. 7.14 In view of above discussion, we direct the Ld. AO/TPO to exclude above company from the final set of comparables. 7.15 Thus, ground No. 2.7 of the appeal of the assessee is allowed. Acentia Technology Ltd. 8. Inclusion of this company was objected by the assessee on the ground that it was .....

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TPO has observed that this company should be considered as a comparable because its revenue from ITES is more than 75% of total revenue. The appellant has submitted that the TPO has considered Billing and Coding as part of the ITES revenue and the revenue from ITES is only 63.80 percent and it does not pass the 75% revenue filter applied by the TPO. The appellant has stated that on perusal of the Annual Report of the company for the FY 2007-08 it is observed that Accentia earns software revenue .....

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enmed Transcription Services Inc. and Accentia FZE. The restructuring undertaken by the Accentia is an exceptional circumstance and should accordingly be rejected. The Appellant relied on the decision of the Hon ble Hyderabad ITAT in case of Capital IQ Information systems (India ) Pvt. Ltd.(ITA No. 1961/Hyd/2011)wherein it has been held Accentia Technologies Ltd………… It is the submission of the assessee that this company cannot be treated as a comparable because of unc .....

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er, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de- merger will have an effect the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, th .....

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de this company from the final set of comparables. 8.1 The Ld. CIT(DR) referred to page 53 of the Ld. TPO and submitted that the Revenue of the company from ITes was 80.87% of the total revenue and thus it passed the 75% revenue filter and accordingly, the Ld. TPO was justified in including the said company as one of the comparable. He referred to page 909 of the assessee s paper book, which is part of annual report of the company, according to which the company acquired Thunga Software Private .....

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al on record. The learned CIT-(A) has held that revenue from ITes was only 63.80% and, therefore, the company fails 75% revenue filter applied by the TPO. The Ld. CIT(DR) has not controverted this fact. In view of the substantial activity of software development and in absence of segmental data, the company cannot be compared with the assessee which is providing low-end ITes services. Further, learned CIT-(A) has brought on record list of the companies merged/amalgamated with the company. It is .....

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ed by the assessee on the ground that working model of the company is outsourcing based and therefore it cannot be compared with the assessee. The Ld. CIT-(A) directed the AO/TPO to exclude the company with observation as under: 6.4.2 As regards Coral Hubs Limited ( CORAL ), the appellant has stated that le employee cost of CORAL is only 4.39 percent of its operating cost and it has substantial vendor payments, hire charges etc. for ₹ 21.82 crores (i.e. 87 percent of its total expenditure) .....

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n held that 48. Insofar as the cases of Tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded The appellant has also relied on the decision of the Hyderabad bench of Hon ble ITAT in case of M/s Capital IQ Information Systems (Ind .....

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Ld. counsel, on the other hand, relied on the order of the Ld. CIT-(A). 9.3 We have heard the rival submission and perused the relevant material on record. In view of the employee cost as low as 4.39% of the operating cost, and 87% of the total expenditure for vendor payments, hire charges etc., it is evident that company has outsourced most part of its work and thus, the business model of the company is different from the assessee, which is carried out by recruiting employee. In such circumsta .....

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Ld. CIT-(A) also directed to exclude this company from the list of final comparable on the ground of functional dissimilarity. The finding of the Ld. CIT-(A) on the issue in dispute is reproduced as under: 6.4.3 As regards Mold-Tek Technologies Ltd. ( Mold-Tek ), the appellant has explained that Mold-Tek provides high end structural engineering KPO services to various clients and also has an inhouse software development team, quality control training and trouble-shooting facilities, whereas NCS .....

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(P.) Ltd Vs ACIT [2014] 43 taxmann.com 100 (Mumbai - Trib.) (SB) the Special Bench of the Hon ble ITAT Mumbai has held that *In so far as the case of Mold-Tek Technologies Ltd. is concerned, it is observed from the annual report of the said company for the financial year 2007-08 placed at page 139 to 151 of the paper book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients .....

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ign and development costs of civil, structural, mechanical and plant design by 30-40% and delivered technologically superior outputs to match and exceed expectations. It is claimed to have inhouse software development team, quality control training and troubleshooting facilities. M/s Mold-Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, de .....

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e appellant. Accordingly, the AO/TPO is directed to exclude it from the list of final comparables. 10.1 Before us the Ld. CIT(DR) submitted that activity of the assessee was also more or less like KPO and, therefore, the company is comparable to the assessee and should not be excluded from the final set of comparables. 10.2 On the contrary, learned counsel relied on the finding of the Ld. CIT-(A) on the issue in dispute and submitted that the company was engaged in the Structure Engineering Cons .....

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of the paper book, we find that the company was engaged in providing structural engineering services. The annual report has also mentioned that acquisition of the U.S. based structural engineering KPO has created scope of growth for the company in the near future. In our considered opinion, the activity of consultancy in structural engineering cannot be compared with routine services of coordination, administrative support and other IT enabled support services rendered by the assessee to its AE .....

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ting the Ld. AO/TPO for excluding the above company from the final set of comparables. 10.4 The ground of the Revenue in relation to the three companies is accordingly dismissed. 11. The ground No. 5 of the appeal of assessee relates to not allowing appropriate adjustment to account for differences in working capital employed by the assessee as well as companies selected as comparable. 11.1 The Ld. CIT-(A) rejected objection of the working capital adjustment with his observation as under: 6.7 Th .....

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monthly average of payables, receivables and inventory and not on the basis of yearend figures. While these daily and monthly figures may be available in the taxpayer's case, the same are not available in the case of comparable companies. Further, in the case of taxpayer as well as comparable companies there are issues of segmental data. Segmental data may be available for P&L account but the same may not be available for Balance Sheet items. Hence, calculation of reasonably accurate adj .....

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r has not been able to demonstrate with evidence that the difference in the working capital deployed is making a difference in the margin earned by the taxpayer and the comparables. Accordingly, the objection in respect to working capital adjustment is dismissed. 11.2 Before us, the Ld. counsel of the assessee referred to page 470 of the paper book and submitted that lower authorities has not allowed the working capital adjustment despite specifically requested before them. He also referred to p .....

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b) to support his proposition that working capital adjustment can be allowed to service industry also. 11.4 On the contrary, Ld. CIT(DR) relied on the finding of the lower authorities. 11.5 We have heard the rival submission and perused the relevant material on record. We find that the Tribunal in the case of Mercer Consulting (India) Private Limited (supra) on the issue of working capital adjustment has observed as under: 16.2 Having heard the rival submissions and perused the relevant material .....

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iod available to it to pay back its suppliers which lowers the interest cost and accelerates profits. To have a level playing field, it is sine qua non that the working capital adjustment should be carried out to bring two otherwise comparable cases at par with each other. We are unable to comprehend any reason or rhyme to restrict the grant of working capital adjustment only in the case of manufacturers or traders. What is true for these categories of businesses, is fully true for a service pro .....

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