Income Tax Appellate Tribunal - Hyderabad
C3I Support Services Private Limited, ... vs Dcit, Circle-1(2), Hyderabad, ... on 25 July, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND
SHRI V. DURGA RAO, JUDICIAL MEMBER
I.T.A. No. 503/HYD/2017
Assessment Year: 2012-13
C3i Support Services Deputy Commissioner of
Private Limited, Vs Income Tax,
HYDERABAD Circle-1(2),
[PAN: AACCC2082P] HYDERABAD
(Appellant) (Respondent)
For Assessee : Mrs. Vandana Bhandari &
Mr. Prashant Khandelwal, ARs
For Revenue : Smt. Pallavi Agarwal, CIT-DR
Date of Hearing : 26-06-2018
Date of Pronouncement : 25-07-2018
ORDER
PER B. RAMAKOTAIAH, A.M. :
This is an appeal by assessee against the order of the Assessing Officer (AO) u/s. 143(3) r.w.s.144C of the Income Tax Act [Act], dated 16-01-2017. Assessee has raised six grounds on various issues, mainly pertaining to Transfer Pricing adjustments.
2. Briefly stated, assessee-company is engaged in the business of IT enabled Services (ITES), filed its return of :- 2 -:
I.T.A. No. 503/Hyd/2017 income admitting total income of Rs. 5,88,76,520/- under the normal provisions and Rs. 5,77,72,106/- u/s. 115JB of the Act. As assessee had international transactions with its Associated Enterprise [AE], the matter was referred to the Transfer Pricing Officer [TPO], who vide the order dt. 30-11- 2016 u/s. 92CA(3) of the Act, proposed adjustment of Rs. 3,68,61,675/-. The Dispute Resolution Panel [DRP] has rejected assessee's objections on TP adjustment and Arm's Length Price [ALP] determined, however, directed the AO to give credit of 30 days while considering the levy of interest on outstanding receivables. AO has consequently passed a revised order, restricting the adjustments on ALP to Rs.2,30,56,229/-. Aggrieved, assessee has raised the grounds mainly contesting certain comparables taken for determining the ALP and levy of interest on the receivables. Ground No. 5 on initiation of penalties and ground no.6 on levy of interest which is consequential, are academic in nature and need not be adjudicated.
3. Ld. Counsel referring to the AE's business activity, submitted that C3i Inc, USA is a specialized sales force automation service provider and it provides services ranging from customer management integration and ongoing support solutions. C3i Inc, USA offers wide range of outsourcing and integration services, which includes Professional Services, Managed Services, End User support Services and Hardware Services. The Professional Services include business consulting, e-business implementation and :- 3 -:
I.T.A. No. 503/Hyd/2017 End User Training etc. It was further submitted that C3i India i.e., assessee-company is a wholly owned subsidiary of C3i Inc, USA and provides technical support services, generally categorized as ITeS to C3i Inc. C3i India is a captive service provider and is compensated on cost+17% and billing is on cost plus basis. It was admitted that for the purpose of bench marking the ALP transactions, assessee chose Transactional Net Margin Method [TNMM] as the basis and PLI is calculated as a ratio of operating profit/operating cost. It was further submitted that assessee has objected to inclusion of certain comparables and rejecting objections TPO has selected 10 companies, whose average ALP has come to 24.96% and after making working capital adjustment of (-) 1.69%, the adjusted margin was determined as 26.65%, as against assessee's PLI of 20.49%. Ld. Counsel made a detailed submissions on the comparables objected to and also on the issue of interest levied on receivables. These contentions are dealt with at the relevant point of time, however, the objection with reference to treating assessee as KPO, whereas it was treated as ordinary BPO in earlier years, has been dealt with before dealing with other issues.
4. Ld. Counsel referred to the order of DRP to submit that the DRP has wrongly considered the activities of the C3i Inc, USA which were extracted in para V(B) by the AO, to state that assessee is involved in a mixed activity of high end and low end BPO services, whereas assessee is only rendering low end BPO services as in earlier years. It was :- 4 -:
I.T.A. No. 503/Hyd/2017 submitted that classification taken by the TPO and DRP are basically not correct and submitted that assessee should be treated as ordinary BPO in analyzing the comparables.
5. We have considered the above. Before adverting to the issue of comparables, it is necessary to examine the functional profile of assessee. As seen from the functional profile stated by the TPO in the order u/s. 92CA(3), the functional profile of assessee is as under:
"M/s. C3i Support Services P Ltd., is engaged in providing technical support to the end user of parent company. It is having technical knowledge and capabilities for providing support services to clients of C3i Inc. The AE is a specialized Sales Force Automation service provider and a trusted service provider for customer management integration and ongoing support solutions with many leading life science companies as its clients. The taxpayer is the wholly owned subsidiary of C3i Inc., USA".
5.1. Whereas in para V(B), in Pg. No. 24 of the TPO order, the functional profile of the C3i Inc has been stated as under:
"C3i Inc has been entrusted with the responsibility of business development including addition to the customer base. The parent company deals with the clients, which are then supported by C3i India for technical problem resolution. The nature of work involves dealing with the sales representative of different countries with different speaking accents. A team of trained people does back end job and keep tracks of volume of calls attended, time taken to resolve the problem, problems remaining unsolved etc"
5.2. DRP has relied on this profile of AE to consider assessee as a KPO. In our opinion, the DRP has mis-read itself in determining assessee as a high end service provider, :- 5 -:
I.T.A. No. 503/Hyd/2017 whereas assessee is only providing ordinary technical support which is categorized as ITeS BPO services provider in earlier years. We are of the firm opinion that there is no change in assessee's profile and so it has to be treated as a BPO providing ordinary support services to its AE, whose services may be high end at their end but not by assessee. Accordingly, the analysis of the company's functional profile and objections on the comparables is considered treating assessee as only BPO.
6. We have heard the Ld. Counsel as well as the Ld.DR on the issues of comparables and the issue of levy of interest on receivables. TPO has selected the following 10 comparables in determining the ALP:
SNo. Company Name OP/OC %
1 Accentia Technologies Ltd., 11.16
2 Datamatics Global Services Ltd., 16.84
3 Eclerx Services Ltd., 61.37
4 e4e Health Care 13.73
5 Informed Technologies India Ltd., 7.10
6 Infosys BPO Ltd., 34.68
7 Jindal Intellicom Ltd., 1.98
8 Microgenetic Systems Ltd., 7.01
9 TCS E-Serve Ltd., (Merged) 65.82
10 Cross Domain Solutions Pvt. Ltd., 29.88
Total 249.59
Average 24.96
Out of these comparables, assessee has objected to TCS E- Serve Ltd., Infosys BPO Ltd., Eclerx Services Ltd., and Accentia Technologies Ltd. These are considered as under:
:- 6 -:
I.T.A. No. 503/Hyd/2017 TCS E-Serve Ltd:
7. The above comparable is objected to on the reason of functional dissimilarity as that company is providing IT consulting, KPO services and other business process management services and due to diversified nature of business, the company was excluded by the DRP in the AY. 2011-12 in assessee's own case. Further it was submitted that the functional profile of the TCS E-Serve Ltd., was also analysed by the Co-ordinate Bench at Delhi in the case of Pr.CIT Vs. B.C. Management Services (P) Ltd., (IT Appeal Nos. 1064 & 1083 of 2017) AY. 2011-12, wherein the Co-ordinate Bench has excluded the above company on the reason of functional dissimilarity. It was further submitted that the company had reaped the benefits of TATA brand and brand equity contribution to business was to the tune of Rs. 3.67 Crores. The Hon'ble Delhi High Court in the case of Pr.CIT Vs. B.C. Management Services (P) Ltd., (IT Appeal Nos. 1064 & 1083 of 2017) for the AY. 2011-12 has upheld the view taken by the ITAT that TCS E-Serve Ltd., cannot be taken as a comparable due to huge brand value. It was further submitted that the Co-ordinate Bench has excluded TCS E-Serve Ltd., during the AY. 2010-11 in assessee's own case on the reason that it was deriving benefit of huge Tata brand value resulting in extraordinary high margins. It was further submitted that scale of operations, assets and employees base results in difference in FAR profile as that company has huge turnover of Rs. 1578.44 Crores as against Rs. 34 Crores of assessee.
:- 7 -:
I.T.A. No. 503/Hyd/2017 7.1. After considering the rival contentions, we are of the opinion that this company has to be excluded on the basis of functional profile of comparable company with that of assessee. Similar view was taken by the DRP itself in the earlier year i.e., AY. 2011-12 and in AY. 2010-11 ITAT also excluded the same. Following case law also support the view that TCS E-Serve Ltd., cannot be compared to ordinary BPO services being rendered by assessee-company:
i. Pr.CIT Vs. B.C. Management Services (P) Ltd., (IT Appeal Nos. 1064 & 1083 of 2017) AY. 2011-12 - Hon'ble High Court of Delhi;
ii. S&P Capital IQ (India) Pvt Ltd., (200/Hyd/2016) & (435/Hyd/2016) AY. 2011-12;
iii. Infor (India) (P.) Ltd., (IT Appeal No. 113(Hyd) of 2016);
iv. Baxter India Pvt. Ltd., (6158/Del/2016);
v. BC Management Services Pvt. Ltd.,
(ITA No. 6134/Del/2015);
7.2. AO/TPO is directed to exclude the above
company from the list of comparables.
Infosys BPO Ltd.,
8. The objections on inclusion of this company is that the said company is providing diversified services :- 8 -:
I.T.A. No. 503/Hyd/2017 including high end KPO and LPO, product based solutions and BPO services and therefore, functionally not comparable to assessee. It also had extraordinary scale of operations running to Rs. 1129.11 Crores and it has acquired another company during the year which makes it to peculiar economic circumstances. Presence of Infosys brand value and significant expenditure on selling and marketing provides for a different FAR analysis and therefore, the company is not comparable to assessee.
8.1. After considering the rival contentions and also on noticing that the DRP itself had excluded the above company in AY. 2010-11 and ITAT also excluded in the AYs. 2008-09 and 2009-10, we are of the opinion that Infosys BPO Ltd., cannot be compared to the assessee-company on functional profile as well as on extraordinary circumstances. Similar view was also taken in the following cases:
i. Agnity India Technologies (ITA No. 1204/2011) - Hon'ble High Court of Delhi;
ii. Agnity India Technologies (ITA No. 3856 (Del)/2010);
iii. Monster.com (India) (P.) Ltd., (IT Appeal Nos. 1425 (Hyd) of 2015 and 5, 1175 & 1509 (Hyd) of 2016);
iv. Agnity India Technologies (ITA No. 955/Del/2015);
:- 9 -:
I.T.A. No. 503/Hyd/2017 8.2. AO/TPO is directed to exclude the above company from the list of comparables.
Eclerx Services Ltd.,
9. The objections about this company are that this company is full-fledged risk bearing high end KPO, whereas assessee is a captive service provider and provides routine ITeS services to its AE.
9.1. After considering the rival contentions, we are of the opinion that this company cannot be included in the list of comparables as the functional profile of that company is entirely different from that of assessee-company. We noticed that TPO as well as the DRP have reconsidered assessee as KPO, which aspect has been decided earlier and considered that assessee is only captive service provided with routine ITeS services being ordinary BPO. We also notice that DRP itself has excluded the Accentia Technologies Ltd., and Eclerx Services Ltd., on the objections raised by assessee in AY. 2011-12 and ITAT has excluded consistently the above company from AYs. 2007-08 to 2010-11 in assessee's own case. The only reason for inclusion in this year is that assessee was re-categorised as KPO by the TPO and DRP, when there is no change in the functional profile, compared to earlier years. Since we have already held that assessee is only an ordinary BPO, consistent to the decision taken in earlier years, we direct the AO/TPO to exclude the above company from the list of comparables.
:- 10 -:
I.T.A. No. 503/Hyd/2017 Accentia Technologies Ltd.,
10. This company is also objected to on the reason of functional dis-similarity as in the case of Eclerx Services ltd above and DRP itself excluded in earlier assessment year i.e., AY. 2011-12. Consistent to the stand taken by the ITAT from AYs. 2007-08 to 2010-11 and by the DRP in AY. 2011-12, we direct the AO to exclude the above company from the list of comparables.
11. TPO is directed to re-workout the ALP by taking the other six companies and make necessary adjustment if any, as per the provisions of the Act. Grounds are considered allowed on this issue.
Addition on account of the interest on receivables:
12. Another issue which is contested by assessee is on the levy of interest to an extent of Rs. 57,20,073/- on the reason that receivables are separate 'international transaction' and the closing balance of receivables was to the tune of Rs. 14.44 Crores there by providing capital financing. TPO applied the rate of 14.75% on closing balance of receivables and proposed addition of Rs. 1,95,25,119/-. When assessee objected to the same, the DRP allowed part relief directing the AO to apply specified interest rates as confirmed in earlier years after allowing credit period of thirty days.
12.1. It was the objection of assessee that credit period of 180 (One Hundred and Eighty) days is laid for collection of :- 11 -:
I.T.A. No. 503/Hyd/2017 receivables as per work orders between assessee and its AE and further when working capital adjustment has been made, wherein impact of receivables was already been factored in, separate addition on account of receivables does not arise. Ld. Counsel relied on the following case law in support:
i. Pr. CIT Vs. Kusum Healthcare Pvt Ltd., (ITA No. 765/2016, dt. 25-04-2017) - Hon'ble High Court of Delhi;
ii. Kusum Healthcare (Delhi ITAT);
iii. Xchanging Solutions Ltd (Bangalore ITAT - ITA No. 1294 (Bang) of 2012 & 166 (Bang) of 2014);
iv. Dell International Services Pvt Ltd., (ITA (TP) No. 308/Bang/2015);
12.2. It was further contended that assessee has no borrowed funds and it has no actual interest liability and has not paid any interest to creditors. Therefore, disallowing of notional interest does not arise. It relied on the following case law:
i. Bechtel India Pvt Ltd., (SC);
ii. Bechtel India Pvt Ltd., (Hon'ble Delhi High Court);
iii. Bechtel India Pvt Ltd., (Delhi-ITAT) (ITA No. 1478/Del/2015);
:- 12 -:
I.T.A. No. 503/Hyd/2017 iv. Bain Capability Centre India (P) Ltd., (IT Appeal No. 404 (Delhi) of 2017);
12.3. It was further submitted that allowance of thirty days credit period by the DRP is arbitrary when RBI allows one year period for realization of receivables if foreign exchange is involved. Ld. Counsel relied on the decision of the Co-ordinate Bench at Hyderabad in the case of GSS Infotech Ltd., Vs. ACIT in IT Appeal No. 497/Hyd/2015. It was further submitted that outstanding receivables on account of the services cannot be equated with 'capital financing' as provided for in Explanation by the Amendment Act, 2012 and relied on the case of Pega Systems Worldwide India Pvt. Ltd., Vs. ACIT in ITA No. 1758/Hyd/2014, dt. 16-10-2015.
12.4. We have considered the rival contentions. As seen from assessee's contentions, assessee is not charging interest of any of the receivables outstanding. Assessee is providing 180 (One Hundred and Eighty) days credit period on the amount receivable and is consistent with the RBI guide lines on foreign exchange receivables. RBI allows a period of one year for the amounts to be realized if they are in foreign exchange. In our view, putting a limit of one month of credit itself by the DRP is arbitrary. Further, as seen from the calculation, AO also calculated the interest wrongly particularly from Sr. No. 34 onwards. Upto Serial No. 1 to 33 in the table given in assessment order, AO has correctly gave thirty days credit period, whereas subsequently, the credit :- 13 -:
I.T.A. No. 503/Hyd/2017 period varied and it has arbitrarily determined, the rationale of which is not forthcoming from the order. Moreover, as relied upon by the Ld. Counsel, the impact of receivables is already been factored in the working capital adjustment by the TPO and as there are no borrowed funds or actual interest liability charging of interest does not arise. We are of the opinion that the six months period granted by assessee is reasonable and so no interest can be levied just because the amounts are shown as outstanding in the balance sheet at the end of the year. The various case law stated above will support assessee contentions. Consequently, we cancel the interest levied and allow assessee's contentions. Grounds are considered allowed.
13. In the result, the appeal of assessee is considered allowed.
Order pronounced in the open court on 25th July, 2018 Sd/- Sd/-
(V. DURGA RAO) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 25th July, 2018
TNMM
:- 14 -:
I.T.A. No. 503/Hyd/2017
Copy to :
1. C3i Support Services Private Limited, 2nd Floor, ORION Block, Plot No. 17, Vanenburg IT Park, Software Units Layout, Madhapur, Hyderabad.
2. Deputy Commissioner of Income Tax, Circle-1(2), Hyderabad.
3. Dispute Resolution Panel (DRP)
4. Director of Income Tax (IT & TP), Hyderabad.
5. Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad.
6. D.R. ITAT, Hyderabad.
7. Guard File.