TMI Blog2017 (5) TMI 1563X X X X Extracts X X X X X X X X Extracts X X X X ..... arely covered against the assessee in its own case for assessment year 11 – 12 [2017 (5) TMI 830 - ITAT DELHI] Intercompany receivables arising from provision of services do constitute a separate international transaction under section 92B of the act. - ITA No. 6648/Del/2016 - - - Dated:- 11-5-2017 - Shri Bhavnesh Saini, Judicial Member And Shri Prashant Maharishi, Accountant Member Assessee by : Shri Porus Kaka, Senior Advocate Shri Dinesh Chawla, Adv Revenue by: Shri Amrendra Kumar, CIT DR ORDER Prashant Maharishi, A. M. 1. This is an appeal filed by the assessee [ hereinafter referred to as Appellant‟ also] against the assessment order [ hereinafter referred to as the order‟ also ] of the ld Deputy Commissioner of Income Tax , Circle 16(2), New Delhi [ hereinafter referred to as the AO‟ ] dated 25/11/2016 u/s 143(3)(ii) r.w.s 144C(5) of the Income tax Act [ In short the Act‟] passed in pursuance of direction dated 29/09/2016 by the Learned Dispute Resolution Panel- 2, New Delhi [ hereinafter referred to as The DRP‟] against the draft assessment order dated 14/03/2016 incorporating transfer pricing adjustment determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining only to financial Year ( FY ) 2011 -12 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements 6. The learned TPO / AO / DRP have erred in rejecting certain comparable companies selected by the Appellant in respect of impugned transaction pertaining to provision of R l services, namely: a. Indus Technical Financial Consultants Limited; and b. Certain other companies carrying out functionally similar operations in overseas jurisdiction 7. The learned TPO / AO / DRP have erred in adding certain comparable companies in respect of impugned transaction pertaining to provision of R l services, namely: a. Aditya Birla Capital Advisors Private Limited; b. Axis Private Equity Limited; and c. Credit Information Bureau (India) Limited 8. The learned TPO / AO / DRP have erred in erroneously rejecting the comparable companies selected by the Appellant and adding certain companies to the final set of comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparables to determine ALP of the impugned transaction. 9. The learned TPO / AO / DRP have erred in rejecting certain comparable (which we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn of income declaring income of ₹ 319140070/ on 29/11/2012. Assessee also filed form 3CEB on 29/11/2012 to show that it has entered into international transactions with its associated enterprises for provision of research and information services of ₹ 1788476202/ and provision of IT support services of ₹ 64779181/ . Therefore, the Ld. assessing officer made reference u/s 92CA to the Ld. Transfer Pricing Officer to determine arm‟s length price of the international transaction of the assessee with its associated enterprises. 4. According to the transfer pricing documents maintained by assessee, the international transaction of provision of research and information services as well as of provision of IT support services were benchmarked using the transactional net margin method (TNMM) as the most appropriate method (MAM) and profit level indicator (PLI) was determined as operating profit/operating cost (op/oc). 5. Assessee‟s services are governed by the Master service agreement dated 1/4/2010 with its AE/ Parent company where in assessee is responsible for providing services of research and Information and IT Support services at remuneration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed order under section 92CA of the income tax act 1961 on 29/01/2016 proposing the above addition. Consequently, the Ld. assessing officer passed draft order under section 143 (3)/144C (1) of the income tax act, 1961 on 14/03/2016 determining the total income of the assessee at ₹ 662570090/- against the returned income of ₹ 319140070/ proposing a transfer pricing adjustment amounting to ₹ 343430020/ . Assessee being aggrieved with the order of the Ld. Transfer Pricing Officer as well as the Ld. assessing officer preferred objections before the Ld. Dispute Resolution Panel. The Ld. Dispute Resolution Panel vide direction dated 29/09/2016 rejected the objection of the assessee with respect to exclusion of three comparable companies and accepted the exclusion of one comparable company. Further with respect to the company is rejected by the Ld. Transfer Pricing Officer; it gave direction with respect to the one company for its inclusion and with respect to another company for verification of our on examination of financial data. Pursuant to the direction of the Ld. Dispute Resolution Panel, the Ld. Transfer Pricing Officer vide its order dated 10/11/2016 revise th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparables covered in ground No. 7 of the appeal of the assessee. 10. Coming to the issues in appeal, he submitted that assessee is a company, which provides research and information services to its group associate for assistance in their projects. Its response to the information required to queries request placed by the consultant by accessing various Internet-based databases such as Bloomberg, Reuters , OneSource, Dow Jones, dialogue, and DataStream. He further submitted that assessee operates in two streams of services. First segment is research and information segment and second segment is IT supports services. He submitted that transfer pricing adjustment are proposed with respect to international transaction of 1st segment only and with respect to 2nd segment, the Ld. Transfer Pricing Officer has accepted the benchmarking analysis of the assessee. Therefore, it submitted that first segment of research and information services are further divided in 3 segments such as knowledge on-call group, practice research group and analytics group. He referred to Para No. 3.4 of order of ld. Transfer Pricing Officer wherein the detailed work profile and functional analysis of this s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The Ld. departmental representative, CIT DR, submitted that functional profile of assessee is required to be seen. He referred to order of coordinate bench in assessee‟s own case for assessment year 2011 12 wherein from page No. 10 to page No. 21 of that order wherein after considering services of research and information services, ultimately coordinate bench has held that assessee is rendering knowledge process outsourcing services under this segment involving huge expertise and skills. Therefore he submitted that Ld. Transfer Pricing Officer did not have advantage of order of coordinate bench and therefore has accepted functional profile of assessee as it is and therefore now coordinate bench as well as Hon‟ble high court has held that assessee is engaged in services as KPO, therefore now matter should go back to Ld. Transfer Pricing Officer to verify and examine comparability analysis from that angle. He vehemently contested that if matter is not sent back to file of Ld. Transfer Pricing Officer once again then it would lead to deciding case of assessee on incorrect characterization of services rendered by assessee. He further submitted that despite being held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of KPO services. The mandate of provisions of income tax act and rules with respect to comparability analysis are laid down in rule 10 B (2), wherein it is laid down that:- (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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the significant activities undertaken, the assets, or resources used/consumed, the risks assumed. Thus, comparison of activities undertaken/functions performed is important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be apposite to ignore functional dissimilarity only for the reason that its impact may be reduced on account of using arithmetical mean of the profit level indicator. Similar guidelines for also laid down by the Hon‟ble Delhi High Court in case of Li and Fung India (P) Ltd versus CIT in 361 ITR 85 as under:- 34. The OECD Guidelines, which are instructive in such cases, clarify that any attempt to use the transactional net margin method should begin by comparing the net margin which the tested party makes from a controlled transaction with the net margin it makes from an uncontrolled one (an internal comparable ). If this proves impossible, possibly if there are no transactions with uncontrolled parties, then the net margin that would have been made by an independent enterprise in a comparable transaction (an external comparable ) serves as a guide to determine the arm's length price. Here, the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensive analysis requiring expertise in analytical tools and techniques., database management, etc. 17. Our and above examination of the agreement it is also pertinent to examine what services are actually performed by the assessee. We also perused for ascertaining correct function being performed by assessee based on sample copies of service request and its deliverables placed before us at page No. 483 560. At page No. 483 research request is been received by assessee for knowing current top 5 global retail markets as well as top 5 global retail markets in 2015. Further, it was also requested to know top five markets for retail private-label credit cards for same two times. The above services were rendered by assessee, which is placed at page No. 484 of paper book wherein data was sourced from global insight WIS and such data was sorted by assessee based on sales on country and region wise. At page No. 485 to 488 excel sheet is submitted, which has country wise bifurcated retail trade industry with respect to 2005 to 2015. At page No. 491, another request was placed where data was to be sourced from global insight/WMM for all countries regarding import and export. In nutshell, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned by Ld. Transfer Pricing Officer except grievance of assessee that he has looked at website of McKinsey India and not of assessee. In view of this, we do not find it necessary to dwell further on functional analysis of business information and research segment of services of assessee. In addition, therefore it is now necessary to go to comparable straightway. 19. The first comparable contested by assessee is Aditya Birla capital advisors private limited whose adjusted margin is taken by Ld. Transfer Pricing Officer at 27.82%. Before Ld. Transfer Pricing Officer wide letter dated 18/01/2016 assessee has objected for selection of this comparable stating that this company is engaged in business of private equity advisory and investment management for Indian and offshore investors across capital markets, investment management, mergers and acquisitions, performance enhancement, organizational development and shareholder value creation. It was further submitted that this comparable is managing investment of private equity funds of Aditya Birla group in name of fund 1 and Sunrise fund. The assessee further referred to website of company to show that assessee is engaged in business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owth opportunities'. When we view Annual report of this company, a copy of which is placed on page 246 of paper book, it turns out that: The company's focus continues on alternative assets excluding Realty and Hard Infrastructure investments. At current activity levels, Company has raised and managements two sector- agnostic domestic funds, namely, Aditya Birla Private Equity Fund-I and Aditya Birla Private Equity - Sunrise Fund'. Break-up of Revenue from Operations given on page 253 of paper book gives description of nature of its revenues, namely: Management Fees. Thus, it is apparent that nature of business of this company, being raising of funds and deploying the same, is entirely different from what the assessee is doing in this segment, namely, rendering services in the nature of Knowledge on call, Practice research and Analytics. This company is, therefore, directed to be excluded from the list of comparables. { Underline supplied by us} According to us, though comparable is not engaged in business of raising of funds and deploying same, but it is engaged in advising functions of raising of funds and deploying same. Based on work profile of assessee and det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the fundraising exercises completed and fund established. Therefore, it is apparent that it has a different risk profile too. As per the balance sheet Abstract at page No. 482 services of the company are classified as asset management services. Based on the work profile of the assessee and details of services provided as stated in Para No. 17 above, it cannot be stated that the functions performed by the assessee in research and information services are anywhere similar to the functions of a fund manager. In view of our analysis of the functions and risk profile of the assessee vis-a vis comparable, we direct the Ld. Transfer Pricing Officer/AO to exclude Axis private Equity limited for comparability analysis. 21. With respect to the third comparable the claim of the assessee is that credit information bureau India Ltd is a company, which is engaged in the business of credit rating and for this reason only, the functions of this company compared with the assessee company are quite distinct. The next argument of the assessee was that this company is earning super normal profit is 63.87% is the PLI determined of the company. Assessee further objected that the annual report o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier years have excluded one of the credit rating companies from the comparability analysis on functional dissimilarity. Therefore, in view of the combine facts of non-availability of the information of the relevant year, the order of the coordinate bench in earlier years holding a credit rating company dissimilar to the assessee functionally, we do not have any option other than that to direct the Ld. Transfer Pricing Officer to exclude this comparable. We direct accordingly. 22. In view of this ground No. 7 of the appeal of the assessee is allowed. 23. As we have allowed. Ground No. 7 of the appeal of the assessee, consequently, we dismiss ground No. 1 to 6, 8, 9 and 11 to 13 of the appeal of the assessee are dismissed. 24. Ground No. 10 of the appeal of the assessee is that gains losses arising out of foreign exchange fluctuation while computing operating margins of the comparable companies shall be considered as part of operating profit or losses. This issue is squarely covered in the favour of the assessee by the order of the coordinate bench in assessee‟s own case for assessment year 2011 12 as under:- McKinsey Knowledge Centre India Pvt. Ltd V DCIT D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... differently from sale proceeds. 67. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT (2013) 32 taxman.com 196 has also laid down to this extent. 68. The reliance of the ld. DR on Safe Harbour rules to contend that foreign exchange gain or loss be taken as non-operating, is not sustainable. There is no doubt that in such rules, forex gain/loss has been treated as non-operating. However it is relevant to note that such rules are not applicable to the assessment year under consideration. Even the reliance of the ld. DR on certain decisions taking cognizance of safe harbour rules for the period anterior to their insertion in other contexts does not improve the case of the Department because the Hon'ble Delhi High Court in Pr. CIT VS. Cashedge India Pvt. Ltd., vide its judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has come up in appeal before us. 57. The ld. AR submitted at the outset that the Delhi bench of the tribunal in Ameriprise India Pvt. Ltd. vs. ACIT in ITA No.2010/Del/2014 (authored by the AM of this order) has held such interest on receivables as an international transaction. He submitted that in certain other orders, a contrary view has been taken. It was, therefore, contended that a reasonable view be taken. In the opposition, the ld. DR supported the impugned order. 58. We have heard the rival submissions and perused the relevant material on record. It is seen that similar issue cropped up in the case of Ameriprise (supra) and also Techbooks International Pvt. Ltd. vs. DCIT in ITA No.240/Del/2015. In the former case, the bench, after taking note of the view taken in Techbooks (supra) noted that the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 1.4.2002. Clause (i) of this Explanation, which is otherwise also for removal of doubts, gives meaning to the expression 'international transaction' in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, which is relevant for our purpose, provides as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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? 61. While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. 62. The foregoing discussion divulges that non-charging or under- charging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. 63. The Delhi Bench in Ameriprise (supra) and Techbooks (supra) did not approve the reasoning about such interest subsuming in working capital adjustment. It found that the working capital adjustment is in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oice will not be receivable as at the end of the financial year on 31st March. As such, this receivable would not have an impact on the working capital adjustment in any manner, but would call for addition on account of the late realization of invoice value for a period of six months. Following the orders in Ameriprise (supra) and Techbooks (supra), we uphold the view taken by the TPO on this issue. Interest on late realization of invoices is directed to charged in line with the directions given in the above orders of the Delhi Bench of the tribunal. Ld. departmental representative could not controvert the above decision. Hence, respectfully following the decision of coordinate bench, we decide ground No. 14 of the appeal of the assessee against assessee holding that intercompany receivables arising from provision of services do constitute a separate international transaction under section 92B of the act. In the result ground No. 14 of the appeal of the assessee is dismissed. 27. Ground No. 15 of the appeal of the assessee is against initiation of the penalty proceedings under section 271 (1) ( C) of the act. We are of the opinion that this ground is premature at this stage. He ..... X X X X Extracts X X X X X X X X Extracts X X X X
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