TMI Blog2018 (1) TMI 1351X X X X Extracts X X X X X X X X Extracts X X X X ..... unds of appeal raised by the assessee are reproduced as under: 1 The final assessment order dated 15 December 2014 passed by the Deputy Commissioner of Income Tax, Circle 5(2) New Delhi ('Learned AO ) pursuant to the directions of the Hon ble Dispute Resolution Panel ( DRP ), draft assessment order passed by Learned AO and the order dated 11 December 2014 passed by Additional Commissioner of income Tax, Transfer Pricing Officer-1(3), New Delhi ( Learned TPO ), is bad in law and void-ab-initio. 2 That on facts and in law, the Learned AO has erred in computing the total income of the Appellant at INR 33,20,95,411 as against the returned income of INR 28,10,94,267 by making an upward adjustment of INR 4,89,94,226 and INR 20,06,918 with respect to transfer pricing ( TP ) and corporate tax matters, respectively. Part I - Transfer Pricing Grounds 3 That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for international transaction pertaining to provision of IT back office support services ( impugned transaction ). 4 That on facts of the case and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue trend; and Rejecting companies having export revenue less than 75 per cent of the operating revenue. 9 That on facts of the case and in law, the DRP/ TPO/AO have erred by selecting certain companies which are earning super normal profits as comparable to the Appellant for the impugned transaction. 10 That on facts of the case and in law, the DRP/TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-a-vis the alleged comparables for impugned transaction and in the process inter-alia neglected the Indian transfer pricing regulations, international guidelines on transfer pricing and judicial precedence in this regard. 11 That on facts of the case and in law, the DRP and TPO/AO have erred by not considering that the adjustment to the arm s length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. 12 That on facts of the case and in law, the DRP/ TPO/AO have erred in using single year data for financial year ( FY ) 2009- 10 of alleged comparable companies without considering the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and circumstances of the case. 2. Briefly stated facts of the case are that the assessee company filed its return of income on 17/09/2010, declaring total income of ₹ 28,10,94,267/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short the Act ) was issued and complied with. In view of the international transactions carried out by the assessee with its Associated Enterprises (AEs), the Assessing Officer referred the matter of determination of Arm s Length Price (ALP) of international transactions to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO vide his order dated 20/01/2014 under section 92CA(3) of the Act, computed arm s length price (ALP) of the international transactions by making adjustment of ₹ 21,54,03,221/-. On the basis of the order of the Ld. TPO, the Assessing Officer proposed addition of ₹ 21,54,03,221/-. The Assessing Officer also proposed reduction in deduction of ₹ 20,06,918/- under section 10A of the Act in view of the re-allocation of director s salary amount in STP and non-STP units. The Assessing Officer issued a draft assessment order on 24.03.2014 proposing above two addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt services. According to the assessee, it is a captive contract service provider and compensated on a cost plus markup basis for the services rendered to its Associated Enterprises (AEs). 5.3 The functions performed by the assessee and the CDS with regard to identified transactions, which have been reproduced by the Ld. DRP in their order, are extracted as under: Conceptualization of services The SPL is generally a 3 Phases, multi step process involving the collaboration among Product Management, Marketing and Product Engineering. The 3 phases of Product Engineering are Product Definition, Product Development and Servicing. In the Product Definition (Conceptualization) phase, a value proposition and a product prototype are developed based on customer feedback from the servicing phase, surveys, competitive analysis, the product leader's vision for future and CDS's overall vision for the product category. Then, marketing research is performed to test the value proposition and the marketing feasibility of a product prototype; The product leadership team and product engineers will work with the marketing research team to address software engineering issues a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n instructions/information provided by CDS, the requirements are internally analyzed by Cadence India and converted into functions and features of the intended application. Upon receiving the approval from CDS, the development work is commenced by Cadence India. Coding, testing and documentation Cadence India undertakes code development in accordance with product specifications defined by CDS. The code generated is subsequently tested to ensure that functions performed by the code are in accordance with the protocol design and standard specifications. Cadence India generates and makes available documentation for the software developed and transferred. The software developed by Cadence India is subsequently integrated into the final software product by CDS and other Cadence group entities. Project management Although the day-to-day management of the project is undertaken by Cadence India, CDS is responsible for the overall project management. CDS regularly conducts meetings to analyse the progress and monitors the project plan. Quality control, testing and integration Cadence India is responsible for ensuring that requisite quality/ performance s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith regard to the adjustment made by the Ld. TPO and due to which, entire adjustment made to software research and development service segment stands deleted. 5.8 As regard to IT back-office support services segment, the assessee reported that it has rendered services on cost plus margin of 15%. The assessee had entered into an agreement with CDS under which, the assessee was responsible for providing IT back-office support services comprising of UNIX/WINDOW administration and support; Internal helpdesk services; application document support; Web development and support and customer support. In its transfer pricing study, the assessee accepted TNMM as the most appropriate method and determined Profit Level Indicator (PLI) of operating profit /operating cost (OP/OC) at 15.00% , which was revised by the Ld. TPO to 16.23% in view of allocation of depreciation of Palladium Machine. The assessee selected 10 comparables with weighted averages margin PLI. The comparables selected by the taxpayer are reproduced as under: Sl. No. Company Name OP/OC (%) as calculated by the taxpayer 1 CG Va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S E-Serve Ltd. 7 Infosys BPO 5.11 The comparables finally selected by the TPO under IT back-office support service are as under: SL. No. Company Name OP/OC%) 1 Accentia Technologies 43.07 2 Cosmic Global Limited 18.28 3 Infosys BPO Ltd. 31.46 4 Jihdall Intellicom Pvt. Ltd. 18.67 5 Eclerx Services Ltd. 55.97 6 Fortune Infotech Ltd. 22.8 7 . igate Global Solns. Ltd. 24.54 8 TCS E Serve Intnl. Ltd. 53.8 9 TCS E-Serve Ltd. 63.38 10 e4e Healthcare Business services Ltd. 31.03 AVG 36.30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) Infosys BPO Ltd. and inclusion of the two companies rejected by the Ld. TPO, namely, (i) CG- VAK Software Exports Ltd (Segmental) and (ii) R systems International Limited (Segmental). 5.15 We have heard the rival submission and perused the relevant material on record and accordingly, the grounds of the appeal related to exclusion/inclusion of comparables are adjudicated as under: 6. First we take up the issue of exclusion of companies considered comparable by the Ld. Transfer Pricing Officer (A) TCS E-serve International Ltd. 6.1 Before us, the Ld. counsel relying on the submission made before the Ld. TPO and the Ld. DRP, submitted that due to peculiar economic circumstances, the company need to be excluded. He submitted that pursuant to acquisition by the Tata Group (page 258-259 of the annual report), there is exceptional rise in turnover (173 percent) and profit (283 percent). He further submitted that the company was engaged in providing technical services like software testing, verification and validation of softwares, transaction processing including processing, collection, customer care and payments to corporate and retail clients of Citigroup and vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the PLI of the company. Secondly, the assessee was also using Cadence brand. Further, he referred to page 281 of the compilation of the Annual Reports and submitted that the company incurred only expenses of ₹ 37.38 Lakhs towards Tata brand equity contribution, which is 0.43% of the total expenses only. In view of submission, he stated that action of Ld. DRP in retaining the company as comparable was justified. 6.3 We have heard the rival submission and perused the relevant material on record. The contention of the Ld. counsel to reject the company as comparable on the ground of rise in turnover and profit as compared to last year, is not tenable. Under the transfer pricing provisions of the Act, the company is to be compared on the basis of FAR (functions carried out, assets employed and risk taken). Once the company is found to be comparable in FAR analysis, in our opinion rise in turnover or profit compared to earlier year cannot be a ground enough for its exclusion from the set of comparables. In normal business scenario, there cannot be a fixed rate of growth and fluctuations in the growth is normal part of business activity, which cannot be made a basis for e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in BPO services or ITES. 6.7 In view of the comparison of the services rendered by the assessee and the services rendered by the company , we are of the opinion that the company cannot be rejected on the ground of functional dissimilarity. 6.8 Further, the contention of Ld. counsel to exclude the company on the ground of non-availability of segment information is also not tenable as the company was functioning in one segment of ITES only. 6.9 The contention of the Ld. counsel for exclusion on the ground of deemed RPT is also not acceptable. w.e.f. 01/01/2009, the Tata consultancy services Ltd is the holding company of the company and thus during the entire period under consideration i.e. 01/04/2009 to 31/03/2010, the transactions with Citigroup Companies cannot be held as related party transactions in the case of the company. We agree with the contention of the Ld. CIT(DR), that the assessee has not brought on record any evidence that the assessee company continued to provide services to the city group companies on the basis of agreements contracted prior to 01/01/2009. Even if, we consider that the services were provided under a long-term contract, still it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the services offered by Citigroup to its corporate and retail clients. Technical service involve software testing, verification and validation of software at the time of implementation and date centre management activities. 7.2 Thus, we find that the activities of the company are identical to the activities of TCS e-serve International Ltd., which are held to be in the nature of ITes and functionally similar to the assessee. Accordingly, we hold that the company cannot be excluded on the ground of functional dissimilarity. 7.3 The arguments of the Ld. counsel on the issue of non-availability of segment information, deemed related party transactions and entity having access to Tata brand are identical to the arguments taken in the case of TCS e-serve international Ltd. Thus following our finding in the case of comparable TCS e-serve international Ltd, we reject these arguments taken in respect of TCS e-serve Ltd also. 7.4 In view of the discussion, we uphold the direction of the Ld. DRP in retaining, TCS e-serve limited as a valid comparable. (C) Accentia Technologies Ltd. 8. The Ld. counsel submitted that the company is functionally different from the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in view of the amalgamation during the year under consideration, the figures of current year were not comparable with those of the previous year. 8.5 We have heard the rival submission and perused the relevant material on record. We find that the in assessment year 2009-10 in the case of the assessee itself, the company has been excluded by the Tribunal in ITA No. 2074/Del/2014. The relevant finding of the Tribunal is reproduced as under: 14.3 We have considered the rival submissions and also perused relevant finding given in the impugned order. Accentia Technologies Ltd. has two main business areas namely, health care receivable cycle management services and software products for BPOs. It earns substantial part of its income from coding activities which is primarily related to e-software development. Various streams of income shown in the annual report reflects that it has income from medical transcription, billing and collections, income from coding, etc. It is not in dispute that segmental information for each streams of income are not available, therefore, it would be very difficult to benchmark profit margin with the assessee-company, which is only rendering back offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany was having a turnover of ₹ 1,126.66 crores, whereas the assessee was having revenue of 42.70 crores from provision of IT backoffice support services. He further referred to page 115, 116 and 233 of the Annual Report and submitted that the company has acquired McCamish Systems LLC during the year under consideration, which has impacted the profitability of the company. 9.1 Ld. CIT(DR), on the other hand, submitted that all the activity reported might be in different verticals but the function carried out falls under the category of BPO or ITES only. He submitted that the company in the profit and loss account has reported its revenue from business process management services, which being ITES segment, no separate reporting for different verticals was required ,for selecting the company as comparable. On the issue of high brand value expenses, the Ld. CIT(DR) supported the finding of the Ld. DRP that the assessee has not brought on record any evidence of AMP expenditure incurred by the company resulted into higher profit. On the issue of large scale of operation, the Ld. CIT(DR) submitted that the turnover of the assessee was in the comparable range of the turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 26.38 times the turnover of the assessee. In our opinion, turnover of the company cannot be a ground for rejecting a comparable until and unless, there is wide variation. Accordingly, this contention of the Ld. counsel of the assessee for excluding the company as comparable, is also rejected. 9.5 Further, the Ld. counsel objected the inclusion of the company on the ground of acquisition of Maccamish Systems LLC. Before the Ld. DRP also the assessee failed to adduce any evidence as how the merger had impacted the profitability of the company. Further, we have observed from page 13 of the Annual Report of the company, which reads as under: Consequent to the purchase of Members Interest in McCanmish Systems LLC ( McCamish ), Infosys BPO has become the sole member of McCamish with effect from December 4, 2009. During the period from December 4, 2009 to March 31, 2010 the company generated revenue of ₹ 38.02 Crore with a loss of ₹ 17.67 Croes .. 9.6 Thus, it is evident that acquisition of McCamish Systems LLC has contributed revenue of ₹ 38.02 crores and loss of ₹ 17.67 crores, therefore, there is no increase in exceptional profit due to acquis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given in the impugned order. The main reason for not including this company is that its turnover is less than ₹ 1 crore. So far as exclusion of this comparable on basis of turnover filter criteria of less than ₹ 1 crore, we find that, first of all, it was a comparable chosen by the assessee and at the time of selection process the assessee as stated had not applied any turnover filter for accepting or rejecting the comparables. Once the turnover filter has not been applied at the quantitative level then comparability has to be done on qualitative level based on FAR analysis. If on FAR analysis it is found that there are differences on account of either assets deployed, risk assumed materially affecting the cost or margin then only comparability analysis fails in such cases. Further, under the TNMM, the comparability of an international transaction with an uncontrolled transaction is to be seen with reference to functions performed after taking into assets employed and the risk assumed. While reckoning the comparability analysis under TNMM, the main emphasis is into net margin realized on the transactions undertaken and not the price of the product or services. The trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company has been included as comparable by the Tribunal in assessee s own case for assessment year 2009-10, wherein relying on the ruling of the Hon ble Punjab and Haryana High Court in CIT versus Mercer Consulting India Private Limited (ITA No. 101 of 2015), it is held that if the audited quarterly results can be used to compute margin for the year ending on March 2009, then company should be included in the final set of comparables. 12.1 The Ld. CIT(DR), on the other hand, relied on the finding of the Ld. DRP in para-6.5.2 of their order and submitted that it is very difficult to carryout adjustment, assumptions, classification etc of the comparable to bring the transaction at par with the international transaction and therefore, such comparable should be eliminated from the set of comparables. 12.2 We have heard the rival submission and perused the relevant material on record. We find that the Ld. DRP in para-6.5.2 of their order has given finding on the principle whether comparable having different financial year should be considered or not. The relevant finding of the Ld. DRP is extracted as under: 6.5.2 DRP Findings: The issue of Comparables maintaining accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the data pertaining to the period prior to the accounting year or subsequent to the accounting year are integrated with the relevant portion of the accounting year of the comparable, the same gives a lopsided picture of the accounts so far as the financial year data is concerned. Since, there is no requirement as per company law or as per accounting standards that the data pertaining to a particular quarter needs to be closely compartmentalized by providing for various provisions etc. for each quarter, the validity of such data for the purpose of comparability will be a matter of question mark. Also, some of the companies provide for depreciation at the end of the accounting period. Apportionment of such depreciation on prorata basis to a particular quarter or month will be a difficult proposition. 4. Most important many of the companies maintaining accounts other than on financial year basis do not keep such data in public domain. Such inaccessibility of vital information in public domain may not render the comparison the warranted judicious effect creates a hurdle wherein the effort required to search for such comparables data for the financial year is not commensurate with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting from January to December (i.e. calendar year). Though a comparable company following a different financial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period is available then it cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Ld. Counsel before us submitted that the audited accounts of R- Systems for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.03 2009 can easily be deduced. If there are no major incident of factors disturbing the profit margin in that quarter, whose results are b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esults for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- 10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus, so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R-Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2008-09 in ITA No. 39/Del/2013 order dated 20/05/2016, wherein the matter has been remanded back to the file of the AO for fresh examination. 15.1 We have gone through the decision of the Tribunal and the relevant finding, and find that this precise issue has been dealt by the Tribunal in assessee s own case. We also find that the Tribunal in assessment year 2009-10 in ITA No. 2074/Del/2014 following the decision of the Tribunal in assessment year 2008-09 has restored the matter back to the file of the Assessing Officer. The relevant observation of the Tribunal in ITA No. 39/Del/2013 for assessment year 2008-09 is reproduced as under: 26.1 After going through the decision of the Tribunal and the relevant finding given in the impugned order, we find that this precise issue has been dealt by the Tribunal in the assessee s own case. The relevant observation of the Tribunal is reproduced hereunder:- 14. In support of the grounds i.e. Ground Nos. 6 to 8, the Learned AR submitted that the Assessing Officer has erred in not correctly verifying the record submitted during the course of assessment proceedings contrary to DRP directions. He was not justified in disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act made by the assessee and it has been allowed in earlier years and in subsequent remaining two assessment years, i.e. 2009-10 and 2010-11. Before the ITAT, as discussed above, the Learned AR has tried to meet out the objections raised by the Assessing Officer in making the disallowance of the claimed deduction. In brief, the submission of the assessee against the objection of the Assessing Officer that the assessee has intentionally debited directors' salary to non-STP units to reduce its taxable income, the submission of the assessee remained that the assessee maintains its account in a manner that costs relating to STP and non-STP units are booked in the respective units; MD responsible for establishing/leading strategic R D partnership and R D central operations functions for NOIDA site where major portion ofR D work was carried out; director financed responsible for finance and accounting, legal, tax and company secretarial compliance functions at Noida; STP unit at Bangalore since has its own core management staff and each person is responsible for their areas, the cost of such personnel are debited to their undertaking only; and appellant operates own cost plus model ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a cost plus model invoice on such cost was raised already in financial year 2007-08; etc. The grievance of the assessee in this regard also remained that the Assessing Officer has not followed DRP's directions. It was submitted that as per directions issued by the DRP, the Assessing Officer was directed to rectify the details of accounts submitted by the assessee with regard to additions in the computer account and differed Revenue. Keeping in view these material submissions of the assessee, we set aside the matter to the file of the Assessing Officer to verify the above submissions and decide the issue afresh in view of the decision of Hon'ble Bombay High Court in the case of CIT vs. Western Outdoor Interactive Pvt. Ltd. (supra). The ground Nos. 6 to 8 are thus allowed for statistical purposes. 26.2 Thus, respectfully following the earlier year s precedence, we also remand back this issue to the file of the Assessing Officer with similar directions and to be decided in the same manner. Accordingly, grounds No. 20 to 22 are treated as allowed for statistical purposes. 15.2 Thus, respectfully following the earlier years precedence, we accordingly set aside the di ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
