Income Tax Appellate Tribunal - Hyderabad
Ivycomptecs Private Ltd.,, Hyderabad vs Assessee on 24 October, 2013
+IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 667/Hyd/2008
Assessment Year : 2004-05
IVY Comptech Pvt. Ltd., vs. Dy. Commissioner of Income-
Hyderabad. tax, Circle - 2(1), Hyderabad.
PAN: AAAC18884K
(Appellant) (Respondent)
Assessee by : Shri Deepak Chopra and Shri
Ravi Bharadwaj
Revenue by : Shri Harilal Nayak and Shri
Solgy Jose T. Kattaram
Date of hearing : 24-10-2013
Date of pronouncement : 31-10-2013
O RDE R
PER B. RAMAKOTAIAH, A.M.:
This appeal preferred by Assessee is directed against the order of the CIT(A)-III, Hyderabad, dated 31/12/2007 for the assessment year 2004-05.
2. The case was originally heard on 14-10-2013. It was noticed later that Assessee has mentioned in the written submissions that one comparable was deleted by the learned CIT(A), which was not correct. The case was put up for clarification and after discussion with parties, the case was taken as heard.
3. The issue involved in this appeal is with reference to the addition made by the AO on the basis of transfer pricing adjustments 2 ITA No. 667/Hyd/2008 IVY Comptech Pvt. Ltd.
suggested by the TPO vide his order passed u/s 92CA(3) of the Act on 22-12-2006. The AO made the addition of Rs. 5,64,94,497/- in respect of BPO/ITES services and addition of Rs. 46,41,194/- in respect of software services being two segments of Assessee's business under transfer pricing provisions.
4. On appeal, the CIT(A) deleted the addition altogether with reference to the software services and the addition towards BPO/ITES was partly modified by the CIT(A) sustaining the addition to the extent of Rs. 4,94,26,276/-. The adjustment in the software division is not before us as Revenue is not in appeal on that, which was deleted by the CIT(A). The issue before us is with reference to the addition under TP provisions on BPO/ITES services.
5. Assessee, IVY Comptech Pvt. Ltd. is a company primarily engaged in the business of software development and provision for Information Technology Enabled Services. Assessee provides these services to its group companies. Its office is situated in Hyderabad and it is registered as Software Technology Park (STP) with Software Technology Parks of India, Hyderabad. Assessee has entered into international transactions with its group concerns. It has revenues in software development about Rs. 12.85 crores and ITES about Rs. 40.69 crores, totaling to Rs. 53.54 crores. Assessee has arrangement with the group concerns to reimburse at 15% of the actual cost incurred on a cost plus method, accordingly it has offered operating profit on cost at 15.01% on IT enabled services. Assessee adopted in its TP study average two years data of 6 comparable companies, whose operating profit on cost has come to average of 9.33%. Assessee comparables are as under:
1) Ace Software Express Ltd.
2) CS Software Enterprise
3) Max Health Scribe Ltd.3 ITA No. 667/Hyd/2008
IVY Comptech Pvt. Ltd.
4) Northgate BPO Services Ltd.
5) Nucelus Netsoft & GIS India Ltd.
6) Mercury Outsourcing Management Ltd.
6. The TPO vide his order has accepted only two comparables i.e. M/s Nucleus Net Soft and GIS India Ltd, whose operating profit on cost was at 16.87% and M/s Mercury Outsourcing Management Ltd., whose operating cost was ultimately arrived at 5.88%. In addition to the two out of 6 comparables selected, the TPO has selected 5 more comparables.
7. The TPO selected the following 5 companies includible for comparison:
a) Spanco Telesystems & Solutions Ltd.,
b) Vishal Information Technologies Fortune Infotech Ltd.
c) Fortune Infotech Ltd.
d) Tricom India Ltd.
e) W ipro BPO Solutions Ltd.
8. After obtaining Assessee's objections, TPO included them as functionally comparable to Assessee's business activities and arrived at arithmetic mean at 33% of operating profit to the cost. From this average PLI determined, the AO allowed working capital adjustment of 2% and arrived at the revised PLI at 31%. Thereafter, on the operating cost of 34.35, he arrived arm's length price at 46.29 crores and by reducing the price received by Assessee, made an addition of Rs. 5,64,94,497/-.
9. Assessee objected before the CIT(A) that 4 comparables selected by it were rejected by the TPO without any valid reason. The learned CIT(A) even though mentioned that he was discussing ( out of four comparables selected by Assessee) 3 comparables rejected by 4 ITA No. 667/Hyd/2008 IVY Comptech Pvt. Ltd.
the TPO, ( 4 th one being accepted by Assessee) by however, went on to discuss other comparables also, on which Assessee has not placed its arguments. Ultimately, the learned CIT(A) rejected the comparability of Mercury Outsourcing Management Ltd., which was accepted by the TPO along with Assessee as comparable, on the reason that functional profile of the company is quite different (as discussed in para 6.7.1 of his order in page 19). Thus, out of Assessee's comparables only one company was accepted by the CIT(A).
10. Out of the companies selected by TPO, Assessee objected to the inclusion of Fortune Infoteck Ltd., Tricom India and Wipro BPO Solutions Ltd. while accepting Spanco Telesystems Solutions Ltd. and Vishal technologies. Even though Assessee objected to 3 comparables as can be seen from the submissions before the CIT(A) vide letter dated 12-07-2007 placed in the paper book at page 102 onwards, the learned CIT(A) went on to decide about 4 comparables vide para 6.8.2. He accepted that profits of M/s Fortune Infotech Ltd. cannot be included as comparable because of abnormal variation in profitability on which Revenue is not in appeal. With reference to Tricom India Ltd., he accepted it as a comparable. With reference to Wipro BPO Solutions, Assessee's objection that it has more than 10 times turnover than Assessee and hence not comparable on account of adjustability on the scale of transactions was not accepted by the CIT(A) and included in the list of comparables. However, in para 6.9, the learned CIT(A) has arrived at the average profit margin of only 3 companies i.e. Nucleus Net Soft & Gis India Ltd. (accepted by Assessee and TPO), Tricom India Ltd. and Wipro BPO Solutions, out of the selection of TPO. He left out the comparable Spanco Telesystems & Solutions Ltd. accepted by both the parties without discussing anything and learned CIT(A) did not include the same in the final list prepared by him in para 6.9. He arrived at the final 5 ITA No. 667/Hyd/2008 IVY Comptech Pvt. Ltd.
margin at 32% of operating profit to cost on the basis of three comparables, then gave additional 1% adjustment for minor functional difference and confirmed the addition at Rs. 4,94,26,276/-.
11. Assessee has raised the following grounds of appeal:
"Based on the facts and circumstances of the case, the appellant respectfully submits that the learned CIT(A)-III, Hyderabad erred on the following grounds while determining the arm's length price for the information technology enabled services under Chapter X of the Act at Rs. 455,900,296/- as against the arm's length price of Rs. 406,474,020 as determined by the appellant:
i) erred in not accepting the comparable companies identified by the appellant.
ii) erred in accepting the comparable companies identified by the Addl. CIT (Transfer Pricing), Hyderabad.
iii) erred in rejecting one of the comparables accepted by both the TPO and the appellant
iv) erred in confirming the action of TPO in considering the comparable companies which were not in existence in the public domain at the time of appellant filing its return of income for the purpose of the transfer pricing analysis.
v) erred in confirming the action of the TPO in ignoring the provisions of Rule 10B(4) of the Rules, which authorize usage of multiple year data of comparable companies for the purpose of determination of the arm's length price as defined u/s 92F of the Act.
The appellant craves leave to add, alter, vary, omit, substitute or amend the above ground of appeal, at any time before or at the time of hearing of the appeal, so as to enable the Income- tax Appellate Tribunal to decide this appeal according to law.
6 ITA No. 667/Hyd/2008IVY Comptech Pvt. Ltd.
12. The learned counsel while explaining the facts, however, restricted his arguments to the exclusion by ld. CIT(A) of Mercury Outsourcing Management Ltd., which was accepted by both the parties i.e. Assessee and TPO and has not contested before the CIT(A). He also restricted his arguments to the exclusion of Wipro BPO Solutions Ltd, which has high range of turnover based on the decisions of coordinate benches at Bangalore and Hyderabad and also the decision of Hon'ble Delhi High Court in the case of Agnity India Ltd. He also made submissions on Spaco Telesystems & solutions ltd.
13. The contention of Assessee with reference to Mercury Outsourcing Management's whose PLI is at 5.88% was that it was held functionally comparable by TPO and AO, which the CIT(A) cannot reject. The learned counsel, then, referred to the submissions made before the TPO and before the CIT(A) to submit that Mercury Outsourcing Management Ltd. was considered as a BPO and accepted by Assessee (PB-421). Accordingly, both the AO and TPO have accepted it as functionally comparable. He further pointed out to the finding of the CIT(A) that it is functionally different without any valid reason. He contended that the CIT(A) has no role to play in rejecting the same by his analysis. He relied on the decision of ITAT, Mumbai Bench in the case of Carlyle India Advisors Pvt. Ltd. Vs. ACIT in ITA No. 7901/Mum/2011 for AY 2007-08 dtd. 04-04-2012. He pointed out to the finding of the Bench vide para 30 of its order, which is as follows:
"30. The only comparable chosen by Assessee viz., M/S.IDC India Ltd., which has also been relied upon by the TPO now survives for consideration. The comparables chosen by Assessee on the basis of the contemporaneous data for A.Y 2006-07 gives an arithmetic mean of 18.97% which we have already mentioned. This is the highest arithmetic mean of the comparable chosen by Assessee. Even if this arithmetic mean is taken to be reflecting the operating margin of the comparable companies, the same is 7 ITA No. 667/Hyd/2008 IVY Comptech Pvt. Ltd.
within 5% range of the operating margin of Assessee. We find that the TPO has not given any reason whatsoever for rejecting these comparables. As we have already explained the reasons given by the TPO does not any where mentioned as to how the comparables selected by Assessee were not functionally comparable. This Tribunal in the case of Maeserks Global Service Centre India Pvt. Ltd., in ITA No.3774/M/11, has taken the view that if TPO does not reject a comparable on the ground of functional incomparability then neither the AO or the revenue can take a plea of functional in comparability of the comparables chosen by Assessee in its TP Study. We are, therefore, of the view that Assessee's operative margin has to be held as within the range of 5% of the arithmetic mean of 18.97% of comparable companies and the same has to be accepted as ALP. For the reasons given above, the addition made by the AO and confirmed by the DRP is directed to be deleted.
It was his contention that this company is required to be included as comparable.
14. With reference to Wipro BPO Solutions Ltd., Ld. Counsel relied on the coordinate bench decision of ITAT "B" Bench in the case of 24/7 Pvt. Ltd. Vs. DCIT wherein the Wipro BPO Solutions was excluded on the basis of turnover for the relevant period. He, then, relied on the order of the Hon'ble Delhi High Court in the case of CIT Vs. Agnity India Technologies Pvt. Ltd. dated 10-07-2013 wherein the Hon'ble High Court accepted the finding of ITAT where it rejected comparable of Infosys Technologies for the reason that it was a giant company in the area of development of software and it assumed of risks leading to higher profits whereas respondent-assessee captive unit of assessee company assumed only limited risk. He relied on this decision to submit that Wipro's turnover being at 430 crores cannot be compared with assessee's turnover of Rs. 40 crores. Therefore, he submitted that the same is to be excluded from the list of comparables.
8 ITA No. 667/Hyd/2008IVY Comptech Pvt. Ltd.
15. As regards Spanco Telesystems & Solutions Ltd., the learned counsel submitted that this comparable was not discussed by the CIT(A). Assessee in the table provided in Paper Book stated that this comparable was deleted by CIT(A) but when pointed out, the learned counsel admitted the mistake and submitted that the same CIT(A) for the same assessment year in another case has considered and deleted Spanco Telesystems, consequently, the mistake occurred. Then on merits, it was submitted that learned CIT(A) in another case of HSBC Electronic Data Processing India Pvt. Ltd., for the same AY in ITA No. 379/DCIT Cir-2(2)/CIT(A)-III/06-07, dated 18-10-2007 considered and held as under:
(iii) Spanco Telesystems & Solutions Ltd.:-
"The operating profit margin of this company has been shown to be about 40% for the financial year. The appellant has objected to adoption of this company on the ground that it had related party transactions.
On due consideration, I find that although the related party transactions of this company are not very substantial, this company cannot be adopted as a reliable comparable, since it has shown abnormal variations in operating profit over the years. In the last year, its operating margin was only 4.22%, while this year it has shown a profit margin of about 40% which is about 9 times of the earlier year's operating profit margin. In my considered opinion a company having abnormal variation of profit should not be adopted as a comparable in TNMM analysis. I also find that this company was excluded in the comparability analysis of AY 2003-04 also on the basis of functional difference with the appellant. Considering all these factors, I do not consider it appropriate to adopt this company as a comparable for the computation of average profit margin."
16. It is also further submitted that the coordinate bench in the case of M/s Deloitte Consulting India Pvt. Ltd., in ITA No. 1082/Hyd/2010 for AY 2004-05 vide order dated 22-07-12 also considered the same comparable and held vide para 35 as under:
"35. Now, we turn to the issue relating to the selection of Spanco Tele-system as comparable company in the back office 9 ITA No. 667/Hyd/2008 IVY Comptech Pvt. Ltd.
services segment by the TPO. We find that the TPO has applied the criteria of excluding the companies having related party transaction of more than 25% of the turnover form the list of comparable companies. Having done so, the TPO should have excluded the Spanco Telesystem from the list of comparable companies as it is evident form the paper book filed by Assessee company that the percentage of related party transaction in the case of Spanco Telesystem is 28.73% and it fails to satisfy the TPO's own criteria. In view of this matter, we find force in the arguments of the learned counsel for Assessee that Spanco Telesystems should be excluded from the final list of comparable companies. We direct accordingly."
The learned counsel relied on the above to submit that Spanco Telesystems has to be excluded as comparable as it does not satisfy the filters proposed and is functionally different.
17. The learned CIT-DR, however, reiterated the findings of the CIT(A) to support that the order of the CIT(A) is very reasonable and on the basis of facts.
18. We have considered the issue and examined the paper books and documents placed on record. As far as assessee's six comparables are concerned, there is no dispute that 4 comparables selected by Assessee are not comparable either on functional profile or on other parameters as considered by TPO and accepted by Assessee after CIT(A)'s order. There is no dispute with reference to two comparables i.e. Nucleus Net Soft & GIS India, whose operating profit by cost is at 16.87%, which is accepted as comparable by Assessee and TPO. The other company, which is also accepted by Assessee and TPO are Mercury Outsourcing Management Ltd., whose operating profit by cost is at 5.88%. We are of the opinion that when TPO and Assessee accepted a particular company as functionally comparable and when assessee has not agitated before the CIT(A), it cannot be excluded from list of comparables. CIT(A) may have original jurisdiction coterminous with AO, but, when the 10 ITA No. 667/Hyd/2008 IVY Comptech Pvt. Ltd.
issue is not agitated, we are of the opinion that he cannot review the decision of AO/TPO on selection of comparables. Only when contested, he can consider the issue for adjudication but when accepted by both parties, it comes under review as CIT(A) functions as AO only. He does not have power of review or revision on order of AO which was with CIT(Admn.) u/s 263/ 264. Therefore we agree with assessee's contention that the said comparable can not be excluded.
19. Coming to the comparables selected by TPO, Assessee contested the following two comparables, ultimately approved by the CIT(A).
A . Spanco Telesystems & Solutions Ltd.: As briefly stated earlier, this comparable was not contested before the CIT(A) and as stated CIT(A) also has not decided about this, as there is no objection from Assessee before him. The fact is that while ultimately computing the average PLI, the learned CIT(A) did not include this comparable in final list, therefore, this comparable got excluded, more probably by mistake. Before us, the learned counsel's contentions were that this comparable was deleted by the learned CIT(A) in another company and also excluded by the ITAT in the coordinate bench decision in case of Delloite Consulting India Pvt. Ltd. While not disputing the above submissions of Assessee, we however, are not in a position to accept the contentions raised before us. First of all, this company was accepted as comparable before the CIT(A) after TPO has selected it. Therefore, on the same principles as that of the discussion made in the case of Mercury Outsourcing Management Ltd above, we are of the opinion that this comparable cannot be excluded. As seen from the financials also, we do not see any reason to exclude the same. In the case of HSBC Electronic Data Processing India Pvt. Ltd., the learned CIT(A) excluded on the reason of abnormal profit when compared to the earlier year, however, there is no such argument by Assessee in this year. In fact, both TPO and Assessee have agreed that profit margin is reasonable for the year and no specific objection 11 ITA No. 667/Hyd/2008 IVY Comptech Pvt. Ltd.
was raised either on the operating profit margin on the related party transactions, which were decided in another case. Since Assessee has not specifically raised any objection on this comparable before the learned CIT(A), we do not see any reason to exclude the same from the list of comparables ultimately approved by the TPO. We direct the AO to include this comparable as it was mistakenly excluded by the CIT(A), without any discussion.
B. Wipro BPO Solutions Ltd: Next comparable objected to by Assessee is W ipro BPO Solutions Ltd. on the basis of turnover filter. It is true that coordinate benches of ITAT have considered turnover filter as one of the valid reasons to exclude a comparable. In the case relied upon by Assessee in the case of Agnity India Ltd. (supra), the Hon'ble Delhi High Court has considered the principle of turnover parameter as one of the consideration and has accepted the said company as not comparable with the assessee company. However, in Asessee's case applying this comparable filter for excluding Wipro BPO Solutions Ltd. cannot be accepted as Assessee has accepted other comparables in the case of lower turnover filter. For example, one comparable, which Assessee has selected and has not objected before TPO or before CIT(A) is Nucleus Net Soft and GIS India Ltd., whose operating profit on cost was accepted at 16.87% and the turnover in this case as reported in various statements was about 1.95 crores only as against Assessee's turnover of Rs. 53.54 crores.( Ratio of 1:26 approx) Likewise, in the case of Mercury Outsourcing Management Ltd., even though the annual report showing the turnover of Rs. 17.24 lakhs, in other statements, the turnover was considered at Rs. 1.08 crores. (Ratio of 1: 52 approx). When Assessee has no objection for inclusion of Nucleus Net Soft and GIS India Ltd. and Mercury Outsourcing Management Ltd. as comparables, which have almost meager turnover when compared to Assessee's turnover, why Assessee raised objection to the turnover of Wipro BPO Solutions, which is at 430 crores and the same is about 12 ITA No. 667/Hyd/2008 IVY Comptech Pvt. Ltd.
10 times higher than the Assessee's turnover could not be understood. When on functional parameters, companies are considered similar in business profile, considering the turnover alone for exclusion of comparable is not correct. In fact, the coordinate bench in the case of Simontec Software Solutions Pvt. Ltd. Vs. ACIT, 46 SOT 48 (Mum) (Trib.) held that if there is nothing to show that the difference in turnover made that comparables non-comparable, these cannot be excluded on the basis of difference in turnover. Likewise, in the case of Capgemini India Pvt. Ld. Vs. ACIT, 33 Taxman.com 5(Mum.) (Trib.), it was held that economy of scale was not relevant in the case of service company. Under Rule 10B(2) comparability of international transactions with uncontrolled transactions has to be judged with reference to functions performed, assets employed and risks assumed. Assessee has not contested that due to any of the above, such company is functionally not similar. Its objections are only on the basis of high turnover. It would not be appropriate to apply turnover filter, when in fact Assessee has accepted very low turnover company as comparable. Assessee even contested before us the exclusion of company, (Mercury Outsourcing management) whose turnover is also so low, it required to be excluded on the same basis. Assessee can not blow hot and cold at the same time. Principle has to be applied uniformly. Since Assessee is in the service sector, scale of operations do not have any effect on margins unlike in manufacturing companies. This filter can only be considered in the light of the facts and cannot be applied in every case uniformly on the basis of decisions in other cases. In the case of Wiliis Processing Services (I) (P.) India Ltd. Vs. DCIT, [2013] 30 Taxmann.com 350 (Mum. - Trib.), it has discussion the turnover criteria as under:
"On turnover it is held that in the case of Genisys Integrating Systems (India) (P.) Ltd. V. DCIT, [2012] 20 Taxmann. Com 715/53SOT 159 (Bang.-Trib) (URO) it has made a classification of company having turnover of 1 crore to Rs. 200 crores as the comparable range of size of companies and further from Rs. 200 crores to Rs. 2000 crores as another slab of turnover. This classification is based on Dun & Bradstreet having given 13 ITA No. 667/Hyd/2008 IVY Comptech Pvt. Ltd.
different ranges of size of companies i.e. large, medium and smaller. Such classification by Dun & Bradstreet was not made in the context of comparables under TP Regulations.
It is pertinent to note that as per this classification of the company on the basis of turnover from Rs. 1 crore to Rs. 200 crores, an entity having Rs. 1 crore can be compared with an entity having Rs. 200 crores turnover; but at the same time, an entity having Rs. 200 crores turnover cannot be compared with the entity having Rs. 201 crores turnover. Thus, this classification gives unrealistic result as far as the comparability of two entities having difference of Rs. 1 crore only cannot be compared. For the purpose of comparing the profit margin of functionally similar entity the classification of such slab range is not practically workable. Therefore, as it is apparent from this classification that two entities can be compared having difference in the turnover upto Rs. 199 crores; but at the same time, cannot be compared even if the difference of turnover of one crore, it was rejected the classification of comparables on the basis of fixed slabs of turnover.
It was also noted that there is no relation between the turnover and margin of an entity as it shows that the highest margin of the entity having Rs. 50 crores turnover and the lowest margin in case of the turnover upto Rs. 200 crores. There is not much difference in the margin of the various entities having turnover upto Rs. 940 crores as the average margin of the entities upto the turnover of Rs. 50 crores is 41.36%; whereas the margin of the entities having turnover upto Rs. 940 crores is 30.74%/ Thus, there is not much difference in the margin whereas there is vast difference in the turnover. The turnover is not a criteria as prescribed under the Rule 10B(2) for selecting comparables.
When the assessee has not made out a case as how the high or low turnover has influenced operating margin and on the contrary there is no direct relation between the turnover and margin as clear from the details and graphic chart reproduced, then a comparable cannot be rejected solely on the basis of high turnover. Even otherwise, the larger turnover and size of the entity may have an impact of economical cost of production in the manufacturing industry due to huge cost of fixed asset but not in service sector."
Following the principles laid down in the above decision and keeping in mind that Assessee has accepted comparables of even 1 crore turnover, we are of the view that exclusion of Wipro BPO Solutions, whose operating profit over the cost is less than the companies 14 ITA No. 667/Hyd/2008 IVY Comptech Pvt. Ltd.
accepted as comparables by Assessee, is not proper. In view of these facts, we are not in a position to accept Assessee's objections with reference to exclusion of Wipro BPO Solutions on the basis of the turnover alone. We uphold the order of CIT(A) wherein the CIT(A) also opined that "as far as the issue of profitability vis-à-vis scale of operations/turnover is concerned, I agree with the view expressed by the TPO that it will not have significant effect on the profitability of a company, as far as the BPO sector is concerned." Accordingly, we consider it appropriate to include the above company as comparable for the purpose of determining the average PLI in the relevant assessment year.
20. The AO is directed to work out the addition accordingly. However, we make it clear that the addition ultimately resulted should not exceed the amount confirmed by the learned CIT(A) as Revenue has not contested the deletion of part of addition made by the TPO. So, this order should not result in enhancing the addition, so confirmed by the learned CIT(A). W ith these directions, Assessee's appeal is considered as partly allowed.
21. In the result, appeal of Assessee is partly allowed.
Pronounced in the open court on 31 st day of October, 2013.
Sd/- Sd/-
(SAKTIJIT DEY) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 31 st October, 2013.
kv
15
ITA No. 667/Hyd/2008
IVY Comptech Pvt. Ltd.
Copy to:-
1) IVY Comptech Pvt. Ltd., 5 th Floor, Divyasree Omega Block - B, Plot No. 13/E, Survey No. 13 (post) Kondapur, Hyderabad
- 500 081.
2) DCIT, Circle 2(1), Room No. 804, 8 th Floor, IT Towers, AC Guards, Hyderabad.
3) CIT(A)-III, Hyderabad.
4) CIT-II, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.