TMI Blog2019 (6) TMI 588X X X X Extracts X X X X X X X X Extracts X X X X ..... any providing services on its own, we set aside the comparability suitability of this comparable company back to the file of the learned assessing officer/transfer pricing officer with a direction to examine the above fact by issue of notice u/s 133 (6) to the comparable company and ascertain whether the sum of INR 437,150,000/- spent on contract for services debited under the General And Administration Expenses are relating to Outsourcing Services or not. If, it is found that these are outsourcing expenditure, then TPO is directed to delete/exclude the above comparable company from the comparability analysis. Even otherwise, it is found that these expenditure are not for the outsourcing services, the learned transfer pricing officer is directed to decide the issue after giving assessee a opportunity of contesting this comparable on this issue of outsourcing model as well as any other issue, and then decide it on merits. Accordingly, we decide the issue of exclusion of each clerk services as above. Infosys BPO Ltd. - Coupled with the fact that the comparable company belongs to an Infosys group, has incurred the expenditure on the brand building and on the annual report i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer for comparability analysis are set aside to the file of the learned transfer pricing officer to consider them for the comparability analysis if they are found functionally comparable, passes all the filters applied by the TPO, and reliable information has furnished by the assessee in the form of quarterly results and annual reports - appeal of the assessee are allowed. - ITA No. 1025/Del/2016 And ITA No. 1022/Del/2017 - - - Dated:- 10-5-2019 - SHRI H. S. SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Shri Nageswar Rao, Adv. And Shri Sandeep S. Karhail, Adv For The Revenue : Shri Sandeep Kr. Mishra, Sr. DR ORDER PER PRASHANT MAHARISHI, A. M. 1. These are the 2 appeals preferred by the assessee, M/s Kaplan India Private Limited for assessment year 2011 12 and 2012 13 involving common transfer pricing issues with respect to the international transactions entered into by the assessee, arm s-length price of which is determined by the learned transfer pricing officer and partly upheld by the learned Dispute Resolution Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable companies on an ad-hoc basis, thereby resorting to cherry picking of comparables to determine the ALP. 6. The learned TPO/AO/DRP have erred in selecting certain companies (which are earning super normal profits) as comparable to the Appellant. 7. The learned TPO/AO/DRP has erred in treatment of operating and nonoperating items while computing the margins of the Appellant and comparable companies. 8. The learned TPO/AO/DRP have erred in not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 9. The learned AO has grossly erred in initiating penalty proceedings under section 271(1 )(c) of the Act. 3. Brief facts of the case shows that assessee is a company engaged in business of providing software maintenance and support services to its associates. Assessee filed its return of income for ₹ 450403/ on 29/11/2011 after claiming deduction under section 10 A of INR 24679018/ . It paid taxes under the provisions of section 115JB of the act. 4. During the year under consideration, asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age and determine ALP at ₹ 135602800/ and proposed an adjustment u/s 92CA of INR 17820911/ . Consequently, the learned TPO passed an order under section 92CA (3) of the Act determining the adjustment of INR 17820911/ . Consequently, the draft assessment order was passed by the learned assessing officer. 8. The assessee aggrieved with the draft of the proposed assessment preferred objection before the learned Dispute Resolution Panel 1, New Delhi, who passed a direction on 13/11/2015, wherein, addition on account of the transfer pricing adjustment was reduced to ₹ 13129292/ . Consequently the assessment order under section 143 (3) read with section 144C of the income tax act was passed on 30/12/2015 by the earned Income Tax Officer, Ward 14 (2), New Delhi determining total income of the assessee at INR 13579695/ against the returned income of ₹ 4050403/ . Therefore assessee aggrieved with the order of the learned AO has preferred this appeal before us. 9. The learned authorised representative firstly submitted that adjustment of INR 13129292/ to the total income of the assessee in respect of the international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in one case, he is excluded for all the cases of that segment. With respect to the exclusion and inclusion of the comparables, He submitted a detailed chart wherein he tabulated the arguments before the lower authorities, their findings, contentions before us, reference to the annual report of the comparable companies and reasons seeking their inclusion or exclusion making reference to the judicial precedents. We will deal with each of the comparables at appropriate time. 12. The learned departmental representative has also made a detailed note on each of the comparables objecting to their inclusion or exclusion as requested by the assessee. He supported order of the learned transfer pricing officer and the dispute resolution panel. 13. We have carefully considered the rival contention and perused the orders of the lower authorities. Though we agree with the contention of the learned authorised representative, that if the issue about the exclusion or inclusion of the comparable has been decided in one of the cases for the same year, then it should be followed for inclusion or excision of that comparable, with a rider that there was a complete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital in the market, overall economic development and level of competition and whether the markets are wholesale or retail. Therefore, for the purpose of the comparability all these factors are of paramount importance. Hence, before relying upon any judicial precedent for exclusion or inclusion one has to cross the threshold of rule 10 B (2) of IT Rules, to ensure that the conditions specified therein are similar as decided by the honourable court. In view of this, the argument of the learned authorised representative cannot be accepted at the threshold itself that the comparables challenged by the assessee before us should be excluded based on judicial precedents without looking at the functional identity of assessee vis a vis comparable 14. Now we come to the functional profile of the assessee with respect to the content support services and the provision of back-office support services as recorded by the assessee in its transfer pricing study report which is not disputed by the learned transfer pricing officer. 4.3 Provision of content support services 4.3.1. Nature and terms of the internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... KIPL is not exposed to business risk since it provides back office support services only to its AE and is assured of a specified return on its costs. ► Market risk Since KIPL is a captive unit, therefore it is not exposed to any direct market risk. ► Capacity utilisation risk KIPL is compensated on a cost plus mark up basis by the AE and is, accordingly, assured of recovery of costs of any underutilised/ unutilised resources. Thus, it is not exposed to any utilisation risk. ► Service liability risk Since the services rendered by KIPL are used by the AE for its internal purposes; therefore there is no contractual liability of these entities with the end customers for the services rendered. Further, KIPL is responsible for ensuring that requisite quality/ performance standards are met while rendering services. In case the services are not as per the standards set by the AE, KIPL would rework on the deliverables to align them with the group's standards. However, since KIPL renders services only to its AE and is compensated on a cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to its AE. ► Marketing and business development Being a captive unit, KIPL does not undertake any marketing or business development functions. All activities pertaining to solicitation of customers and development of business are performed by the AE itself. ► Project management KIPL is responsible for project management and the various services to be provided to the AE. Since it provides back office support services for internal use by the AE, therefore the ultimate responsibility of the work undertaken by KIPL rests with the AE. ► Human resources KIPL undertakes the recruitment/ hiring process and is responsible for day-to-day supervision and control of its employees. It is also responsible for training of employees with necessary inputs from the AE. ► Quality control In respect of the aforementioned services, KIPL is responsible for ensuring that requisite quality/ performance standards are met while rendering services. KIPL would also ensure that the services are ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is responsible for ensuring that requisite quality/ performance standards are met while rendering services. In case the services are not as per the standards set by the AE, KIPL would rework on the deliverables to align them with the group's standards. However, such re-work cost is also recoverable from the AE. Therefore, service liability risk along with re-work risk is not borne by KIPL. ► Credit and collection risk KIPL does not bear any credit and collection risk since it only invoices its AE. ► Foreign exchange risk KIPL invoices its AE for services in USD, which is different from its functional currency, INR. To that extent, KIPL is exposed to foreign exchange risk arising from any adverse movement in the exchange rate. Further, the functional currency of its AE is USD. Accordingly, it is not exposed to foreign exchange risk in this transaction. Briefly tabulated below are the risks, which are faced by KIPL and its AE in relation to provision of back office support services by KIPL to its AE. Type of risks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned DRP in para number 5.1 of its direction considered the functional profile of the assessee. It is mentioned in para number 2 at page number 34 of the direction that assessee was directed to file a copy of the agreement however assessee filed incomplete copies despite repeated opportunities granted to assessee. On the basis of the incomplete copy of the agreement the learned DRP recorded the functions performed by the assessee for this segment. The learned dispute resolution panel noted that the learned transfer pricing officer has aggregated the 2 segment of content support services and ITeS whereas the assessee has given separate information. Such aggregation was not disputed before the learned dispute resolution panel as well as before us. The learned dispute resolution panel further noted that whether the assessee is in this aggregated segment is a BPO or a KPO and the selection of the comparables will depend upon that. On the basis of the consideration of the function as well as the safer rules the learned dispute resolution panel reached at the conclusion that the aggregated segment consist of content support services of INR 86,900,000 and back office support servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, he submitted that there is a basic difference between the business modalities of the assessee as well as this comparable company as a comparable is engaged in getting work done through outside contract work. To support his contention, he relied very heavily on the decision of the coordinate bench in B C Management Services (P) Ltd vs Deputy Commissioner Of Income Tax (2017) 83 taxmann.com 346 (Delhi) (Tribunal) dated 25/05/2017 wherein this comparable company was considered and coordinate bench excluded it. He further submitted that that the comparable company is a high-end knowledge process outsourcing unit where the assessee is not carrying on the functions of the knowledge process outsourcing. He further submitted that the comparable company has assumed the significant risk whereas the assessee is a risk and ensure to entity. The next argument on this comparable was that it has a super not profit. It was further contended that it is a high turnover and it is revenue being 29 times higher than the assessee it should be excluded. He further h submitted that revenue of the comparable company has increased at the rate of 33% whereas the industry growth rate was nearly 14%. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g used for imparting knowledge in such reputed educational institutions abroad does not require knowledge and expertise for its design and development. It cannot be argued that KIPL develops its content by plagiarism or violation of copy rights or other intellectual property rights. Therefore, it follows that subject/domain knowledge as well as technical expertise (to make it oniine with proper graphics and media elements) is an imperative in designing and developing online educational content. Therefore, the functional profile of the assessee itself, as noted in its own TP study, establishes that assessee is into providing value added services. Hon'ble DRP has noted that the assessee had provided incomplete copy of its agreements with AEs (paper book vol-1, page 175 to 185) in respect of 'Content Development Services' and Back Office Support Services', that too after repeated opportunities given to assessee (para 5.1(2) of DRP order). After considering the agreement and all the relevant facts of the case DRP has concluded that the assessee is also providing value added services and hence can be compared with a company providing K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployee cost and the turnover. More revenue means more employees cost. Variable costs (of which employee cost is a major portion) increases with turnover. e. Increase in company's revenue being higher than industry average: This is same as saying that the company earned super profits and hence this issue has been dealt as above. This issue has also been dealt in the orders of TPO and DRP in detail and I rely on the same. f. E Clerx outsourced its work: This is a new ground being raised for the first time. Ld AR argued, by referring to Page 67 of Paper Book Vol-ll wherein an amount of ₹ 437.15 million was mentioned against 'Contract For Services , that e Clerx had outsourced its work whereas the assessee used its own employees for delivering the services. This is not born out of the facts as discussed below: i. As per P L account of e clerx (Page 59 of Paper Book Vol-ll) the employee related expenses were ₹ 1189.62 which is sufficient enough to conclude that the company had used its employees to render services. ii. Page 32 of the annual report of the company (Page 34 of Paper Book Vol- ll) g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this argument doesn't stand as the company had passed employee cost filter of 25% used by TPO, upheld by DRP and not objected to by the assesse in respect of this comparable. So, even if it is presumed that expenses under this sub-head are related to employee cost, the fact remains that its much lower than the employee cost of ₹ 1189.62 million. Therefore, this insignificant amount of 'hypothetical outsourcing' doesn't change the FAR of the company so as to vitiate the comparability. vii. There is no mention, at all, of outsourcing model in the Annual Report of the company. 21. In rejoinder, the learned authorised representative vehemently opposed all the arguments raised by the learned departmental representative. He submitted that the legal grounds can be raised at any time. Even otherwise he stated that now this issue cannot be sent back to the file of the learned transfer pricing officer to give him a 2nd inning and this comparable itself is required to be excluded here by the coordinate bench itself. For this proposition he relied on the decision of the honourable Gujarat High Court in Rajesh Babubhai Damania vs Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resources. Whence, in the case of E-clerx, substantial work has been outsourced to various parties, as compared to the assessee, where the entire back office support services have been provided by the assessee itself, then on this ground alone, it would be very difficult to put E-clerx in the comparable basket. Another important fact which is borne out from the annual accounts is that, E-clerx is performing financial services as well as sales and marketing services for which there is no separate segmental information. It reflects only one primary segment which is data analytics and process outsourcing services. Sales and marketing activities again is a different function altogether which cannot be compared with the assessee which is performing purely back office support services. Under these circumstances also it would be very difficult to find out as to what is the profit margin from the sales and marketing services which is entirely a different from the functions carried out by the assessee. Further before us, the learned counsel has relied upon catena of decisions of this Tribunal and also High Courts, wherein E-clerx has been held to be incomparable with the companies providi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut either the assessee or the revenue in any inconvenience. No doubt in schedule L In General And Administrative Expenses grouping the comparable company has incurred the expenditure of ₹ 437,150,000 towards contract for services . Therefore now it is important for us to note that whether the contract for service expenditure incurred by the comparable company are whether for outsourcing expenditure or any other expenditure. On careful analysis of schedule K, which is employee compensation and related expenditure, the comparable company has incurred ₹ 1,189,620,000 towards the employee cost. Therefore it is now apparent that assessee has incurred the huge employee cost which is 3 times more than the contract for services, therefore, even if the contract for services is outsourcing expenditure, it is only 25% of the employee cost. Then we looked at the schedule to the financial statements, wherein related party transactions are mentioned. On careful analysis. It was found that assessee has paid ₹ 192,120,000 as a contract for services to its United Kingdom associated enterprises. It was further noted that ₹ 222,300,000 were paid as contract for services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing the decision of the coordinate bench, wherein a ratio has been laid down stating that a comparable company carrying on its services through outsourcing model substantially is not comparable with a company providing services on its own, we set aside the comparability suitability of this comparable company back to the file of the learned assessing officer/transfer pricing officer with a direction to examine the above fact by issue of notice under section 133 (6) of the act to the comparable company and ascertain whether the sum of INR 437,150,000/- spent on contract for services debited under the General And Administration Expenses are relating to Outsourcing Services or not. If, it is found that these are outsourcing expenditure, then TPO is directed to delete/exclude the above comparable company from the comparability analysis. Even otherwise, it is found that these expenditure are not for the outsourcing services, the learned transfer pricing officer is directed to decide the issue after giving assessee a opportunity of contesting this comparable on this issue of outsourcing model as well as any other issue, and then decide it on merits. Accordingly, we decide the issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demonstrate how the profit margin of 17.86%, which is less than the average of the comparable, is influenced by brand profits. The learned DRP has simply rejected the argument of the assessee stating that this comparable was selected by the assessee and has been accepted by the TPO. 26. The assessee contested the above comparable on the same arguments which were raised before the learned TPO. 27. Ld DR vehemently opposed the arguments of the ld AR . It was submitted that this was a comparable selected by the assessee itself after considering all the grounds being raised, in its own TP Study. Moreover, assessee had never objected to its inclusion before TPO. Assessee shouldn't be allowed to delete this comparable, unless of course the entire search process of assessee is declared invalid and unreliable and de novo search for New comparables are undertaken by this Tribunal ( either itself or by issuing such direction to TPO). 28. We have carefully considered the rival contentions for exclusion of the above comparable. Assessee has submitted the copy of the annual report of Infosys BPO Ltd, which is placed at page number 129 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices Ltd. Behind the above comparable company, there is a Tata brand. On the perusal of schedule to the profit and loss account there is a payment of towards the Tata brand equity contribution. For this reason that it belongs to Tata group and has also contributed to Tata brand which is one of the largest brand in the information technology segment, there is a definite impact on the pricing capacity of the comparable which the assessee lacks. Hence, we find that TCS E serve Ltd deserves to be excluded. Accordingly we direct the learned TPO - AO to exclude the above comparable. 33. Now we come to the comparable CG Vak software and exports Ltd where the assessee contends that it should be included in the comparability analysis. The learned authorised representative submitted that it is functionally comparable and therefore the comparability analysis is paramount hence same should be included. 34. The learned departmental representative vehemently opposed the argument of the assessee and submitted that segmental details given at page 396 of P3 I and page 26 of annual report 2010 shows that it has persistent losses in this segment in past three year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36. Further R system International Ltd is also rejected by the learned transfer pricing officer stating that it has a different financial year ending. 37. The ld AR submitted that it is functionally comparable and quarterly results are available in public domain. He also supported it with several judicial precedents. 38. The ld DR vehemently opposed its inclusion submitting that assessee is seeking inclusion of this comparable though this company is into products and ITES sector constitutes only 20% of its revenue(Page 12 of the annual report), it says that this company has three groups/sectors, namelyPage i. 15V or Independent software vendors: contributes 55% of revenue. ii. Product Group: contributes 25% of revenue. iii. BPO/ITES group: contributes the remaining 20% of the revenue. He submitted that it may be seen that there is a full fledged product group which consists of a suite of Lending Solutions for retail loans for banks and financial institutions. Company also sells its own Supply Chain Management Solutions. Under iSV sector also the company has developed fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP itself is regarded as an improvement. In respect of case laws relied upon by the assessee it is submitted that none of the judgments being relied upon by the assessee have been given in assessee's own case. A judgment decides as per the facts of that case. Since assessee was not a party to any of the judgments being relied, assessee's FAR was not compared with any of the comparables discussed in these judgments. AS per the scheme of the Act and Rules relating to TP analysis as upheld by Hon'ble Delhi High Court, in the case of ST Microelectronics (copy submitted during hearing), blind reliance on judicial precedent without looking at the FAR comparability is not lawful. Therefore, FAR comparability of the assessee with the comparables, in the relevant year, has to be seen before accepting or rejecting a comparable. 39. We have carefully considered the rival contentions. It is true that by application of only the filter of different financial year this comparable is rejected. Therefore it is clear that all other filters have not been tested on this comparable. Further the functional analysis of this comparable is also not made by TPO. However, it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned transfer pricing officer for comparability analysis are set aside to the file of the learned transfer pricing officer to consider them for the comparability analysis if they are found functionally comparable, passes all the filters applied by the TPO, and reliable information has furnished by the assessee in the form of quarterly results and annual reports. 45. In the result ground number 1 8 of the appeal of the assessee are allowed. 46. The ground number 9 of the appeal of the assessee is against the initiation of penalty proceedings u/s 271 (1) ( C ) of the act. The above ground of appeal is premature and therefore same is dismissed. 47. In the result appeal of the assessee for assessment year 2011 12 in ITA number 1025/del/2016 is partly allowed. ITA No 1022/Del/2017 AY 2012-13 48. Both the parties submitted that facts in the present case are similar to the facts in AY 2011-12. Their arguments in the form of a chart for inclusion and exclusion of the comparable are also similar. It was also pleased that there is no change in the functional profile an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. The learned TPO/AO/DRP have erred in selecting certain companies (which are earning super normal profits) as comparable to the Appellant to benchmark the impugned transaction. 7. The learned TPO/AO/DRP have erred in treatment of certain operating and non operating items while computing the margins of the Appellant and comparable companies in respect of the impugned transaction. 8. The learned TPO / AO / DRP have erred in not making suitable adjustments to account for differences in risk profile of the Appellant vis-a-vis the comparable companies in respect of the impugned transaction. 9. The learned AO has grossly erred in initiating penalty proceedings under section 271 (1 )(c) of the Act. 10. The learned AO has erred in not granting the relief available to the Appellant in view of directions passed by the Hon ble DRP while passing the final assessment order. 11. The learned AO has erred in not granting the Minimum Alternate Tax ( MAT ) credit available to the Appellant in terms of section 115JAA of the Act and also erred in charging consequential interest under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it involves the identifying the generic name and trade name of the various drugs. That can be done only after reference to the pharmacology reference books which should always be a part of the library of a medical transcription profession. Further medical coding has also been explained by way of a flowchart. The company says that it has a sizeable number of certified coders which is assigning codes to diagnosis and procedures which help in financial reimbursement from insurance companies and government companies etc. It is further stated that medical coders are specialized in coding after thorough training program and certification. Further the assessee has contended that it has a significant amount of brands and software for providing IT services. For this proposition we look management discussion and analysis it is submitted that it is the one of first company to offer SaaS[ Software as s service ] model in MHRC service segment. There are also references to the various products at page number 28 42 of the annual accounts. It is also entering into the legal process outsourcing segment. It is also using Immaculate business process outsourcing management solutions for healthcare, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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