Income Tax Appellate Tribunal - Delhi
M/S Cengage Learning India Pvt. Ltd., ... vs Ito, New Delhi on 11 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-1': NEW DELHI
BEFORE SHRI R.S.SYAL, VICE PRESIDENT, AND
SHRI LALIET KUMAR, JUDICIAL MEMBER
ITA No. 5926/DEL/2010
[Assessment Year: 2006-07]
&
ITA No. 1843/DEL/2010
[Assessment Year: 2007-08]
Cengage Learning India Pvt. Ltd Vs. Income-tax Officer
418 FIE, Patparganj Ward 3(2)
Delhi New Delhi
PAN : AACCT 5522B
[Appellant] [Respondent]
Assessee by : Dr. Shashwat Bajpai,Adv
Shri Sharad Agarwal, Adv
Department by : Shri Kumar Pranav, Sr. DR
Date of Hearing : 08.05.2018
Date of Pronouncement : 11.05.2018
ORDER
PER LALIET KUMAR, JM:-
The above two appeals filed by the assessee are directed against two separate orders of the ld. CIT(A)-XX, New Delhi dated 22.01.2014 for A.Y 2007-08 and order of the DRP dated 24.09.2010 for A.Y 2006-07. Since both the appeals pertain to 2 same assessee and were heard together, these are being disposed of by this common order for the sake of convenience and brevity.
ITA No. 5926/DEL/2010 [Assessment Year: 2006-07]
2. At the very outset, it was pointed out by the ld. AR that the DRP while issuing directions had not adjudicated any specific grounds raised by the assessee before the DRP and for that, our attention was drawn towards paras 2 and 3 of the directions and submitted that it was incumbent upon the DRP to decide each and every ground raised by the assessee after giving due opportunity of being heard and pass a reasoned speaking order which has not been done in this case.
3. Per contra, the ld. DR submitted that opportunity was granted to the assessee before the TPO and detailed speaking order was passed pursuant thereto and decision rendered by the TPO were approved by the DRP and there is no requirement for passing speaking order.
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4. We have heard the rival submissions and have carefully perused the relevant material on record. As is clear from the above stated order it is the duty of the DRP to decide the issues raised by the assessee before it dealing with all the contentions of the assessee. In that view of the matter, we deem it appropriate to remand the whole of the matter for A.Y 2006-07 to the file of the DRP with the direction to pass a reasoned and speaking order dealing with all the contentions of the assessee raised in the ground of appeal. Needless to say that while doing so, the DRP shall afford reasonable opportunity of being heard to the assessee. In view thereof, the grounds of appeal raised by the assessee are allowed for statistical purposes.
ITA No. 1843/DEL/2014 [Assessment Year: 2007-08]
5. Briefly stated, the facts of the case are that Cengage Learning India Private Limited (formerly known as Thomson Business Information India Private Limited) (hereinafter referred to as 'Cengage India' or 'Appellant' or 'the Company') is a wholly owned subsidiary of Cengage Learning Holdings BV, The Netherlands. The assessee is engaged in the distribution of academic books, electronic products and 4 software published by Cengage Group entities and reprint of books and publications through a third party vendor, by obtaining rights from the Associated Enterprises ('AEs') and distributing the same in the Indian market.
6. During the year under consideration, the assessee undertook the following international transactions with its AEs where the following transactions were not at arm's length.
Most Appropriate Transfer Pricing
S. No. Particulars Adjustment as per
Method ('MAM')
order of the
1 Provision of Transaction Net Learned Transfer
1,19,79,337
Information Margin Method Pricing Officer
Provision
Technologyof Enabled ('TNMM') ('Ld. TPO')
2 TNMM 17,96,427
Marketing Support
Service ('ITES'")
Service ('MSS') Resale Price Method
3 Distribution Activity 13,17,536
('RPM')
For benchmarking its international transactions of provision of ITES and MSS, the assessee in its contemporaneous Transfer Pricing Documentation ('TP Documentation') selected TNMM as the most appropriate method applying Operating Profit ('OP')/ Total Cost ('TC') as the appropriate Profit Level Indicator ('PLI'). 5
7. The results of the comparable search and the economic analysis undertaken by the Appellant for benchmarking the said international transactions has been summarized below:
S. Particulars Provision of ITES Provision of MSS No. 1 Comparable 12 7 2 companies Average OP/TC 12% 8% 3 Appellant OP/TC 9% 5% The above results provide evidence that the international transactions pertaining to the ITES, Marketing support and Distribution segments are at arm's length as per the Indian TP Regulations. The TPO proposed to substitute the results of the assessee's economic analysis with the results of a fresh search undertaken by him by applying his own set of erroneous quantitative and qualitative filters. The TPO adopted the following approach for benchmarking assessee's international transactions:
• Use of single year (FY 2006-07) financial data and conducting a fresh search for comparables based on the data available at the time of assessment proceedings;
• Use of power under section 133(6) of the Act to obtain information that was not available in the public domain; and 6 • Denying the necessity of appropriate adjustment towards the risk differential on the ground that the assessee bears the single customer risk; hence, the assessee is not a risk free entity.
Economic analysis of the Ld. TPO:
8. The TPO has arbitrarily rejected the filters adopted by the assessee in the TP documentation and imposed additional erroneous filters.
1. Rejection/ modification of the following quantitative filters applied by the Appellant • Selection of companies with service income greater than 50%;
• Rejection of companies with research and development expenses to sales more than 3%;
• Rejection of companies with net worth less than zero; • Rejection of companies with ratio of net fixed assets to sales greater than 200%; and
2. Adoption of following additional filters for screening of comparable companies • Rejection of companies whose data is not available for the current year (i.e. FY 2006-07);
• Rejection of companies whose ITES/MSS income less than 75% of total operating revenues;
7• Rejection of companies with related party transactions (income as well as expenditure combined) more than 25% of operating revenue;
• Rejection of companies with less than 25% of operating revenues as export sales;
• Rejection of companies with diminishing revenues/ persistent losses for the period under consideration; and • Rejection of companies with different financial year ending (i.e. not March 31, 2008) or data of the company that does not fall within the 12 month period i.e. April 1, 2007 to March 31, 2008.
9. Based on the above economic analysis, the Ld. TPO arrived at the following results:
S. No. Particulars Provision of Provision of ITES MISS 1 No. of comparables 26 2 2 Average OP/TC (Working 27.64% 14.41% Capital Adjusted) 3 Appellant OP/TC 9% 5% 4 TP Adjustment 149,79,337 1,796,427
10. Pursuant to the order passed by the Ld. TPO, the Ld. AO issued a draft order dated December 27, 2012, under Section 1440(1) of the Act, wherein he proposed to assess the total income of the assessee 8 in conformity with the ALP determined by the TPO vide his order dated October 29, 2010.
11. As per the order passed by the TPO, the profile of the assessee as mentioned in para 2.1 is as under:
Nature of transaction Value of
Purchase of traded goods international
74,45,705
Royalty paid 87,08,176
Payment of management fees transaction
12,22,347
IT Enabled Services _ 6,97,98,423
Sales Support Services 2,03,39,673
Reimbursement of expenses 1,80,18,476
Reimbursement of expenses 30,04,528
paid
Legal and professional 8,11,970
received
charges paid
12. Aggrieved with the assessment order, the Appellant filed its objections before the Hon'ble CIT (A) as provided u/s 144C of the Act. In consideration of the detailed submissions put forth by the Appellant, the CIT (A) issued the following directions:
Provision of IT Enabled Services • Exclude Asit C. Mehta Financial Services Ltd from the list of comparable companies on account of different functional profile and relying upon the case of Zavata India Private Limited [2013] 35 taxmann.com 423.
• Exclude Eclerx Services Ltd from the list of comparable 9 companies as the company is engaged in providing data analytics and data process solutions to the customers and relied upon the Market Tools Research Private Limited.
• Exclude Maple Esolutions Ltd. from the list of comparable companies on account of non reliable financial statements as the company's management was involved in a fraud.
• Exclude Mold-Tek Technologies Ltd from the list of comparable companies as the company is engaged in providing high end structural engineering KPO services, which cannot be compared to the functional profile of the Assessee. Reliance was also placed on the case of Symphony Marketing Solutions India Pvt. Ltd.
• Rectify the arithmetical errors in the calculation of margin of R Systems International Limited.
• Exclude Triton Corporation Ltd from the list of comparable companies on account of nonreliable financial statements as the company's management was involved in a fraud. Reliance was also placed on the case of Market Tools Research Pvt. Ltd.
• Exclude Vishal Information Technologies Limited (Coral Hub Limited) from the list of comparable companies on account of different functional profile, compared to the Appellant.10
Moreover, the company has low wages to sales Ratio.
13. In the order passed by the Hon'ble CIT(A), the revised final set of companies to be used to benchmark the Assessee's international transaction of provision of ITES is set out below:
S.No Name of the company Corrected adjusted
(OP/TC)%
1 Accentia Technologies Ltd 29.96%
2 Aditya Birla Minacs Worldwide Ltd. 10.19%
3 Allsec Technologies Ltd. 25.36%
4 Apex Knowledge Solutions Pvt. Ltd 11.62%
5 Apollo Healthstreet Ltd -16.55%
6 Bodhtree Consulting Ltd (Seg.) 2.86%
7 Caliber Point Business Solutions Ltd 5-13%
8 Cosmic Global Ltd. 9.80%
9 Datamatics Financial Services Ltd 3-49%
10 Flextronics Software Systems Ltd -4.02%
(Seg.)
11 Genesys International Corporation 10.92%
(Seg.)
12 H C L Comnet Systems & Services Ltd 36.39%
Ltd
13 I C R A Techno Analytics Ltd (Seg.) 3-39%
(Seg.)
14 Informed Technologies India Ltd 34.09%
15 Infosys B P 0 Ltd 36.97%
11
16 IServices India Pvt Ltd 47.66%
17 R Systems International Ltd (Seg.) 6.41%
18 Spanco Ltd. (Seg.) 17-93%
19 Wipro Ltd. (Seg.) 29.09%
20 Nittany Outsourcing Services Ltd. 9.70%
Mean OP/ TC 15-52%
14. Accordingly the revised adjustment based post Hon'ble CIT(A)'s order is re-computed as under:
Particulars Amount in INR
Operating cost of the Assessee for 64,069,070
Arm's length Margin 15-52%
provision of ITES
Price Charged for international 69,798,423
Amount of Adjustment 4,213,996
transaction
The ld. AR submitted that learned CIT(A) has allowed the working capital adjustment. However despite the communications of the assessee, TPO has not granted the working capital adjustment.
15. Further, the ld. AR submitted that the assessee is entitled to tax holiday under section 10A of the Act. During FY 2006-07, the assessee is entitled to a tax holiday under section 10A of the Act on its profits 12 from the provision of ITES services and MSS services to overseas AEs. Thus, the assessee has no motive to shift profits out of India (and thereby to erode the Indian tax base) by manipulating transfer prices of the international transactions entered into by it.
I. PROVISION OF IT ENABLED SERVICES Selection of non-comparable companies by the Ld. TPO:
16. The CIT(A) has wrongfully included comparable companies selected by the Ld. TPO. The contentions of the assessee in respect of rejection of such comparable companies are depicted clearly by the following chart:
Appellant has rejected the comparable company on the Flextronics Software following grounds:4
Systems Ltd (Seg) • Fails R&D filter
• Diversified Segments
• Information u/s 133(6)
Appellant has rejected the
comparable company on the
HCL Comnet Systems & following grounds:
5 • Fails RPT filter
Services Limited (Seg)
• No data/annual report
available
• Abnormally high margins
13
Appellant has rejected the
comparable company on the
Informed Technologies following grounds:
6
Limited • Super Normal Growth
• Fails RPT filter
• Abnormally high margin
Appellant has rejected
the comparable company
on the following grounds:
Turnover
• is INR
7 Infosys BPO Ltd
649.56 cr as against
Appellant at INR 5-4
cr
• Scale of operations
• Abnormally high margin
Appellant has rejected
the comparable company
on the following grounds:
9 Wipro Limited (Seg.)
• Abnormally high margin
• High scale of operations
• Fails R&D filter
• Information u/s 133(6)
• Business restructuring
• No segmented accounts
10. Bodhtree Consulting Ltd.
available
17. Thus, the ld. AR submitted the said that the companies are not comparable to the assessee's ITES segment and thus, should not be included in the final set of comparable companies for determining the 14 Arm's Length Price of the Appellant's international transaction of provision of ITES.
Selection of RPM as the most appropriate method vis-a-vis TNMM That RPM is an appropriate method for cases involving distributors has been acknowledged (apart from Rule 10C(i) read with 10B(i)(b)(i)) in guidance provided in, the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations by the Organization for Economic Cooperation and Development ('OECD Guidelines'), and paragraphs 19.2 and 19.3 of the Guidance Note Report on International Transactions under Section 92E of the Act issued by The Institute of Chartered Accountants of India. All of the above highlight and emphasize the appropriateness of using RPM rather than TNMM as proposed by the Ld. TPO/CIT (A).
21. The assessee placed reliance on the judgment of the Bangalore Bench of the ITAT in the matter of M/s Aztec Software & Technology Service Ltd.[ 107 ITD 141] wherein it has been held that RPM is to be applied when a property purchased or services obtained from an associated enterprise is resold to an unrelated enterprise RPM could be the reasonable method to apply to transactions involving 15 resale of tangible property or in cases where the services are resold without value addition". The above ruling places the burden to select the most appropriate method on the assessee and says that the selection of the most appropriate method by the assessee is to be done objectively, after considering all the facts and circumstances of the case, availability of reliable data and degree of comparability. Further, once the Appellant has selected a particular method as the most appropriate method, the burden of proof shifts to the TPO/AO to provide cogent reasons for rejecting the method followed by the Appellant before substituting and prescribing a new method. In view of the above the ld. AR submitted that the assessee has discharged its obligations and has demonstrated its transaction to be at arm's length and thus, no adjustment is warranted in this segment.
22. The ld. AR also placed reliance on the judgement of the Hon'ble High Court at Delhi in the case of Luxottica India Eyewear Private Limited wherein it has been stated that:
"10.3 ITAT decision to uphold RPM MAM over TNMM to benchmark trading transactions; ITAT had observed that no specific reason was given by TPO/DRP to reject RPM as MAM; ITAT had also held that Appellant cannot be estopped from claiming a particular method as MAM, though in TP study TNMM 16 was adopted as primary method and RPM as secondary method; HC holds "The Court sees no reason to interfere since the adoption of the RPM by the Appellant was indeed found to be the MAM by DRP itself, accordingly dismisses Revenue's appeal"
23. Further reliance was also placed on the judgement of the ITAT in the case of Kobelco Construction Equipment India Limited (TS-299- ITAT-20i7(DEL)-TP wherein it was held:
"13 The aforesaid decision clearly clinches the issue that under the RPM, the focus is more on same or similar nature of properties or services rather than similarity of products and functional attribute is a primary factor while undertaking the comparability analysis under RPM. Further, RPM is mostly applied in the case of a distributor where reseller purchases tangible property and obtains services from the AE and without making any value addition, resells the same to third parties. Under these circumstances and looking to the fact that functions performed by the Appellant is of distributor only, therefore, RPM should be reckoned as the most appropriate method and accordingly, we agree with the learned CIT(A) that on the facts of the present case, RPM should be the adopted as the most appropriate method for benchmarking assessee's international transactions. So far as the two comparables chosen by the TPO apart from assessee's comparables are concerned, we find that, T & I Global Limited 17 has rightly been rejected by learned CIT(A), because this company was manufacturing machinery, therefore, same cannot be compared 15 ITA- 640i/Del/20i2 with the assessee which is purely performing the distribution function. Thus, the final list of comparables, i.e., three chosen by the assessee and accepted by the TPO and one as selected by the TPO and upheld by the learned CIT (A), is sustained for comparing the margins under RPM. As a consequence, we hold that the TP adjustment made by the learned TPO has rightly been deleted by Ld CIT (A). Accordingly, the grounds raised by the Revenue are dismissed."
24. Once the assessee is performing pure distribution functions and the business model is based on distribution of various finished products of its AE, then RPM is to be considered as MAM. In support, he relied upon the following judicial pronouncements:
i. Mattel Toys India Pvt. Ltd. (Mumbai ITAT)- (2013) 158 TTJ 461, wherein it has been held that where the assessee is a distributor and gets the finished goods from its AE and resells the same to independent parties without any value addition, in such a situation, RPM can be the best method to evaluate the transactions whether they are at ALP. Thus in case of distribution activities i.e., import of products and services from the AE and resale to the independent parties without any value 18 addition, the RPM would be the most appropriate method on for determining the ALP.
ii. Danisco (India) Pvt. Ltd. (Delhi ITAT) - [2014] 151 ITD 460- wherein it has been held that first examine whether there as any value addition on imported goods and if the answer is in the negative then apply RPM as a most appropriate method for trading transaction of imported goods.
iii. Star Diamond Group (Mumbai ITAT) - [2011] 141 TTJ 21 (UO) -
RPM is the most appropriate method for determining the ALP with respect to imports by a trader assessee.
iv. Kodak Polychrome Graphics (I) (P) Ltd - (Mumbai ITAT) [2015] 171 TTJ 224 (Mum) - The assessee is, in fact, engaged in distribution activities. In such an activity RPM can be considered to be most appropriate method because bench marking is done at a gross level.
v. ITO vs.Loreal India Pvt. Ltd. (Mumbai ITAT) - ITA No. 5423/Mum/2009- Held - RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AE's which are sold to unrelated parties, RPM is the most appropriate method. In the case before us, there is no dispute to the fact 19 that the assessee buys products from its AEs and sells to unrelated parties without any further processing. vi. Nokia India (P) Ltd. (Delhi ITAT) - [2015] 167 TTJ 243 (Del)- A close scrutiny of the above two sub-clauses along with the remaining sub clauses of rule 10B(1)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of goods from an AE which are resold as such to unrelated parties. Further concluded that RPM is best suited for determining ALP of an international transaction in nature of purchase of goods from an AE which are resold as such to unrelated parties. vii. L'oreal India Pvt. Ltd. (Bombay High Court) - IT Appeal No. 1046 of 2012- RPM is one of the standard method and the OECD (Organization of Economic Commercial Development) guidelines also state in case of distribution or marketing activities when the goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing, then, this method can be adopted.
viii. Swarovski India Private Limited (Delhi ITAT) - ITA No. 562i/Del/20i4- 20 Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of Import of Crystal goods and Crystal components."
25. Further, the assessee also placed reliance on the following judgements:
• Boston Scientific India Private Limited (ITA No. 1062 & io63/Del/20i3) • Airport Retail Private Limited (ITA No. 158& 1762/Mum/2014) Comparability adjustments - Risk Adjustment
26. In this regard, the ld. AR submitted that the assessee is a captive business support service provider to its AEs. Being a captive service provider, the Appellant is devoid of any significant risks relating to its business operations. Significant business and entrepreneurial risks are borne by the AE as it owns all the valuable intellectual property rights (know-how, copyrights etc) and other commercial or marketing intangibles (brand names, trademarks etc) related to the services 21 being provided by the assessee. Accordingly, being a mere service provider, the assessee does not own any interest in these intangibles and provides mere services based on the requirements of the AEs in return for a fixed mark up on cost incurred in rendering of services. For the purpose of the economic analysis, the cost plus mark-up of the assessee is compared against that of uncontrolled companies engaged in similar services. Such independent comparable uncontrolled companies, who operate under uncontrolled conditions, bear risks during the course of its operations including market risk, research and development risk, technology risk, credit risk, currency fluctuation risk, liquidity risk, default risk etc. As a result, the resultant profitability of such comparable uncontrolled companies is directly related to the level of risk borne, which is not so in the case of a captive service provider similar to the assessee as it assumes minimal risks and being an entity with a fixed mark up on the cost earn steady return year on year. The typical risks borne by these companies include market risk, product risk, technology risk, risk of project cost overruns, financial risk and entrepreneurial risk apart from the economic and political risks. However, the assessee being a "captive service provider" have an assured return revenue model, with "lesser economic and business risks. It is a fundamental economic principle 22 that firms which do not take risks can expect to earn a lower rate of return. Therefore, the ld. AR concluded that the assessee's profits would be relatively more consistent from year to year compared to the comparable companies and the comparable companies would be expected to realise higher average profits to compensate for their higher risks. Thus, an adjustment with regard to the risk premia earned by the uncontrolled comparable companies becomes imperative and hence, the captive service provider is expected to earn a lower ROTC compared to the comparable companies. Risk adjustment cannot be denied to the assessee merely because it faces single customer risk. This may be the more pronounced factor in the case of the assessee, however, for independent enterprises it could be factors such as majority of the business emanating from a single market, such as the US. In fact, most Indian software services companies consider this as a major risk area with regard to threat to continuity of business. Several Tribunal Rulings (Mentor, E-gain and Sony Tribunal Rulings amongst others) and OECD Guidelines have underscored the need for risk adjustment. Accordingly, the ld. AR prayed that appropriate risk adjustments should be given to the assessee to account for difference in risk profile of the Appellant and the comparable companies.
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27. We have heard the rival submissions and have carefully perused the relevant material on record. We have given thoughtful consideration to the orders of the authorities below. We find that the comparables selected by the TPO which are objected by the assessee have to be excluded for the reasons given hereinbelow.
I. Flextronics Software Systems Ltd.
28. The ld. counsel for the assessee submitted that this company is not comparable with the assessee as there is no bifurcation of segments of products and services and the R & D activities of the company results in development of IP. The ld. counsel for the assessee further submitted that extraordinary events had taken place during the year under consideration The ld. counsel for the assessee relied on the decision of this bench of the Tribunal in the case of Toluna India Pvt Ltd reported in [2014] 50 Taxmann.com 609, Tata McGraw Hill Education pvt Ltd reported in [2015] 57 Taxmann.com 438 and Nokia Siemens Networks Indi Pvt Ltd reported in [2016] 70 Taxmann.com 236.
29. Per contra, the ld. DR strongly supported the findings of the TPO. 24
30. We find that the coordinate bench of the Tribunal in the case of Toluna India Pvt Ltd [supra] had examined the facts and after examining the profile of this company has excluded this comparable from the list of comparables. In another decision of the coordinate bench of the Tribunal in the case of American Express [India] {P} Ltd vs DCIT reported in [2017] 83 Taxmann.com 345 [Del], it has been held as under:
"The next comparable objected to by the assessee was HCL Comnet Services Ltd contesting that it is functionally dissimilar, follows different financial year, has different policy of revenue recognition and only segmental information received by the TPO u/s 133(6) of the Act was provided.
56. The ld DR submitted that it is also engaged in business of ITES Service provider therefore, it is functionally most comparable.
57. We have carefully considered the rival contentions. The companies accounting year-ends on June 2007, however, the 133(6) data was submitted by the comparable from 01.04.2006 to 31.03.2007. We have also perused the annual report of the American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 company at page No. 57 to 128 of the paper book. The main income stream of the assessee is bandwidth and other services and IT enabled services. The 25 company has also provided segmental information at page No. 101 with respect to its telecommunication services division and IT enabled services division. In its IT enabled services division it provided service of data service management, end user computer services management, managed security services, networking services and tools and process consultant services. In view of this it is apparent that this company is functionally comparable with the assessee. Merely because the company uses one or two words while describing its functions cannot make it un-comparable. However, DRP vide its direction dated 17.12.2014 at page No. 9/29 while discussing the above comparable noted that annual report of the company is given to the assessee for financial year ending on 31.03.2009, instead of 2007, hence, the ld TPO was directed to provide annual report of March 2007. However, the ld TPO vide order dated 14.01.2015 giving effect to the order of the ld DRP has not provided this information and before us to the annual report of the above company was also for June FY ending and not for March ending. A comparable cannot be included in the comparability analysis for comparing the PLI of the assessee without having concise and precise publicly information about the comparable for same financial period. In the present case the comparable is following June as its accounting year, therefore, without having publicly available information about the comparable for the comparative accounting year of the assessee it cannot be selected as comparable. In view of this, we American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007- 26 08 direct the exclusion of above comparable solely for the reason of non-availability of comparable financial information."
31. Respectfully following the findings of the coordinate Benches [supra] we have no hesitation in directing the Assessing Officer/TPO to exclude Flextronics Software Systems Ltd [Seg] from the set of comparable.
32. Likewise, the assessee has objected to the inclusion of HCL Comnet Systems & Services [Seg], Informed Technologies Limited, Infosys BPO Ltd, Wipro Ltd [seg] and Bodhtree Consulting Ltd and submitted that these comparables were considered by the coordinate bench of the Tribunal in the above mentioned case of American Express [India] Pvt. Ltd [supra] wherein from paras 37 to 64 it has also been held as under:
37. The next comparable is Accentia Technologies Ltd which is objected to by the assessee. The above company is selected by the ld Transfer Pricing Officer and further 133(6) notices were issued and it was found that this company is engaged in the medical transcription services and satisfies all the filters applied by the TPO. The assessee objected that this company is engaged in sales of software. The ld DRP rejected the contention of the assessee also.27
38. Before us the ld AR submitted that ld TPO himself has stated that annual report for FY 2006-07 is not available and further no segmental information is provided. It was further argued that this company was formed after amalgamation of Geosoft Technologies, Iridium Technologies Pvt. Ltd.
39. Ld Departmental Representative submitted that ld TPO has correctly applied the filter and also this company is functionally similar. He therefore submitted that above comparable has rightly been included in the comparability analysis.
40. We have carefully considered the rival contentions and noted that stand alone annual financial statement provided of this company American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 for year ended March 2007 shows that revenue model of this company is medical transcription, coding and software development. Out of the total revenue of Rs. 287231664/-, Rs. 165433967/- consist of medical transcription, Rs. 27600281/- is from coding and Rs.
94197416/- from software development. Interestingly on reading note 6 at page No. 634 of the paper book wherein in significant accounting policy it is stated that this company is also engaged in production of a movie titled „Love in India.‟ Furthermore, pursuant to the order of the Bombay High Court the erstwhile subsidiaries of the companies Geosoft Technologies and Iridium Technologies have merged with the company w.e.f. 1st April 2006. Therefore, naturally the profit and loss account and balance sheet also incorporate the financial results of those 28 companies, which makes this year an extraordinary year for this company. In view of the extraordinary events during the year of merger, the functional profile of medical transcription, software development and film production as well as absence of segmental information where the company has only stated that it has only one segment of activity namely healthcare receivable management, we do not have any hesitation in holding that this company is functionally not comparable with the functions performed by the assessee and has extraordinary events and hence, we direct for exclusion of the same.
41. The next comparable contested by the assessee is E-clerx Services ltd. and the assessee is stated that this company provides high end KPO and therefore it is not comparable with the assessee who is ITES service provider. The assessee relied American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 upon the decision of Hon'ble Delhi High Court in case of Rampgreen Solutions Ltd 60 Taxmann.com 355 (Del).
42. The ld DR vehemently objected that it is one of the most ideal comparable as both are doing the same work. He further referred that data analysis is the main function of this comparable which is also done by the assessee. Hence, he pressed for retaining the same.
43. We have carefully considered the rival contentions. The Hon'ble Delhi High Court in 377 ITR 533 in Rampgreen solutions Pvt. Ltd Vs. CIT, has specifically held that this comparable 29 company is engaged in KPO services. Further, the special bench in case of Mersk Global Centre India Pvt. Ltd Vs. ACIT 147 ITD 83 has also held that the comparable is KPO and excluded this company. Therefore, respectfully following the decision of the Hon'ble Delhi High Court we direct exclusion of this comparable.
44. The next comparables objected are Mapple Solutions Ltd and Triton Corp Ltd wherein AR has stated that this company promoters are engaged in Fraud and therefore should be excluded. The ld AR further submitted that though taxpayer consider this company as comparable holding it engaged in call centre services but later on it was found that this company is subject to fraud and hence, the financial information is not reliable. He referred to page No. 650 and 651 of the paper book. He further relied on the decision of the coordinate bench in case of CRM Services Indi. Pvt Ltd. ITA No. 4068/Del/2009.
45. The ld DR submitted that the above company is selected by the assessee as functionally comparable and now the above cited order of the tribunal cannot be used as a precedence. American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08
46. We have carefully considered the rival contentions. The main contention of the assessee is that the owner of the company have committed a fraud and therefore the financial of this company cannot be compared. We have carefully perused vide para No. 70 of that decision of the coordinate bench this 30 comparables are considered. The coordinate bench held as under:-
"17. Ground nos. 5 to 9 are against inclusion of Galaxy Commercial, Maple E Solutions, Triton Corporation, and Nucleus Netsoft and GIS (India) Ltd. as comparable cases by the TPO. In regard to Galaxy Commercial, the objection of the assessee before the TPO has been that it has diversified activities while the assessee is carrying on the business of voice based call centre only. The TPO mentioned that the company is carrying on BPO operation and transport operation. The results of only BPO operation are being considered for the purpose of determining arm's length price. In this regard, the functions are more or less similar.
17.1 Before us, it is submitted that the aforesaid company is engaged in customized BPO services and not in call centre activities. It is carrying on three distinct businesses, namely, -(i) BPO operations, (ii) transport operations and (iii) purchase and sale of shares and units. Although it is mentioned by the TPO that only BPO operations have been considered, but he applied entity-wise profit. Segment-wise profitability is not available in the audited accounts. Therefore, this case has been, wrongly considered as a comparable.
17.2 In regard to Maple E Solutions & Triton Corporation, it is mentioned in the report of the TPO that the first named company is carrying on the business of rendering data process services and BPO services. Objection has been raised that the directors of the company were involved in a fraud. This company 31 is a wholly owned subsidiary of Haryana Fibres Ltd., whose promoters were involved in fraud as per newspaper report and the CBI report. The TPO mentioned that according to CBI bulletin of December, 2008, it was reported that the Rastogi family cheated Government of India to the tune of Rs. 54.00 crore in late 1980s and mid 1990s. Rastogi brothers had floated 14 firms for the purpose of export of bicycle parts to Russia and Hong Kong.
They were arrested by the FBI and U.K. authorities and sentenced to imprisonment for more than 9 years. However, the report nowhere contains the name of this company. According to the data available at Prowess Data Base, it is engaged in the business of call centre activities; it had set up 100% EOU and it holds registration under section 10B. In regard to the second mentioned company, it was submitted that it is engaged in two activities i.e., telecom sector and BPO sector. It is also a company of Rastogi group and, therefore, other objections are the same as in the case of first mentioned company. The TPO mentioned that the company is deriving revenue from ITES activities which are comparable to the American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007- 08 business of the assessee. Thus, both the companies were included as comparables.
17.3 In regard to Nucleus Netsoft & GIS (India) Ltd., it was submitted that its business is functionally different and there are related party transactions to the extent of 21.60%. Its PLI 32 works out to 32.47% against 44% computed by the TPO. In the order, it is mentioned that this company is rendering ITES. The software part is handling of CAD/CAM services, which does not amount to software development. The related party transactions worked out to only 6.07% which is within the permissible range. The working of PLI at 44% is also correct.
17.4 In regard to inclusion of all these companies, the ld. CIT, DR relied on the order of the AO.
17.5 We have considered the facts of the case and submissions made before us. The admitted facts in respect of Galaxy Commercial are that it is carrying on three lines of businesses and segment profitability is not available. Obviously, overall profitability of the company cannot be applied in the case of the assessee as it will amount to comparing incomparable cases. Further, the business reputation of Rastogi group, owning Maple E Solutions and Triton Corporation, is under serious indictment. They are also carrying on the businesses of data processing services and ITES services apart from BPO services. In view of a question mark on the reputation of the owner, albeit for earlier years, it would be unsafe to take their results for comparison of the profitability of the assessee. Similarly, it has not been contested by the ld. CIT-DR before us that related party transaction in case of Nucleus Netsoft & GIS (India) Ltd. amounted to 22.28% against the working of 6.07%. The high figure of 22.28% renders the case incomparable as the tolerable limit of related party transactions would be in the vicinity of 33 10% to 15%. Accordingly, it is held that none of these cases can be taken to be comparable case."
47. On reading the above order it is apparent that fraud has been committed in 1980s and mid 90s and not in the current year. The coordinate bench has also noted that complaint did not name the above company but the tribunal has held that due to question mark on the reputation of the owner for that year though fraud happened in earlier years, it would be unsafe to take their result for comparability. The assessee has placed before us the balance sheet for the year ended on 31.03.2007 which has been audited by the auditor certifying that annual accounts of the company are „true and fair‟. The DirectorAmerican Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 responsibility statement in the Director‟s report also shows that the accounts of the company are prepared according to the applicable accounting standards approved by the ministry of corporate affairs and they are true and fair. On perusal of the profit and loss account also we did not find any impact of fraud on the financial statements including the significant accounting policy and notes on account. None has been pointed out by the ld counsel. In fact it has not been disagreed by the ld AR that this company is functionally not comparable. It is further required to be noted that both these comparables are selected by the tax payer in its TP study report considering them functionally comparable. This fact is evident from para No. 12 of the order of the ld Transfer Pricing Officer. Firstly in both the companies there is no fraud either 34 against or by the company. Secondly there is no impact of any fraud committed before two decades on the financials of the company. Further revenue of both the companies are increasing this year from the last year, therefore I it cannot be also assumed for this year at least that there is some impact of tainted promoters on the financials. Therefore, we do not have any option but to reject the argument of the ld AR for exclusion of the above comparable. Hence, we direct to retain the above both comparables namely Maple Solutions Ltd and Triton Corp Ltd.
48. The next comparable contested is Bodhtree Consulting Ltd. the Main contention of the assessee is that this company is engaged in the developing software products and mainly concentration of stabilization of the tools for the e-paper solution. It was further submitted that this comparable is also engaged in software American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 development services. The ld AR referred to page No. 359 to 363 of the appeal set wherein, several arguments are raised for exclusion. In the end the AR relied upon the decision of the coordinate bench in case of NTT Data India ITA No. 1862/Hyd/2012. The ld AR further referred to reply dated 5.02.2010 of the company u/s 133(6) of the Act which shows that the comparable is also engaged in software development. Therefore, he pleaded for its exclusion.
49. The ld DR vehemently objected to the same.
35
50. We have carefully considered the rival contentions and we have perused the annual account of the company at Page 1 to 34 of the paper book. According to the financial information available, this company is engaged in providing open and end-to- end web solutions, software consultancy, design, and development of solution. In response to queries u/s 133(6) enquiry letter of the TPO that it is engaged in the data cleansing services which are provided to a client for whom the company has developed a software application. Using the tool developed by the company it provides data cleansing services by constantly upgrading the application therefore, there is an element of software development in the services provided by the company. From the above information, it is apparent that the comparable is a software developer. We are of the opinion that software developer is a company which passes on technology by developing a specific software applications whereas the assessee is not a software developer. Further, on analysis of the financial of the comparable company it is apparent that it has treated the data cleansing services and software development services as a single American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 segment and therefore, segmental information are not available about software sales and software services. In view of absence of segmental information we are of the opinion that a software developer cannot be functionally comparable with a pure captive service provider. In view of this, we direct exclusion of Bodhtree Consulting Ltd from the comparability analysis. 36
51. The next comparable objected to by the assessee is Informed Technologies India Ltd submitting that it is functionally not comparable as it analyzed data on financial fundamental, corporate governance, director of executive compensation and capital market. It is further stated that it charges business development fee of 20% of the total cost and therefore its revenue model is also dismissed. we further relied on the decision of the coordinate bench in case of Cummins Turbo Technologies Vs. DCIT 53 Taxmann.com 492 (Pune) wherein, para No. 29 the above comparable were excluded.
52. The ld DR vehemently submitted that the comparable is functionally comparable and therefore, it cannot be excluded.
53. We have carefully considered the rival contentions. We have also perused the annual financial statement of the company for year ended on 31.03.2007 at page No. 139 to 178 of the paper book. The company is an IT enabled knowledge based back office processing centre. Company collects and analyses the data on financial fundamental, corporate governance, executive compensation, and capital market. The income of the assessee as per schedule 10 is data outsourcing charges- BPO. Therefore, the functional comparability of this company with the assessee cannot be said to be dissimilar. Further, merely because it has American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 certain type of expenditure which is business development expenditure it cannot be said that its functions become different. Further, the claim of the 37 assessee that it is a persistent loss making company also cannot be considered because during the year the company has earned profit of Rs. 20740984/- against a loss in the previous year of Rs. 4488926/-. It is further submitted that for AY 2004-05 and FY 2005-06 the assessee has incurred loss of 59.07% and 44.21% and in current year the profit is 34.30%. Therefore, this company has fluctuating profits. On the identical reasons the coordinate bench in Cummins Turbo Technologies Ltd Vs. DCIT (supra) considering the decision of the special bench in case of Maersk Global Centers India Pvt. Ltd Vs. ACIT (supra) has excluded this comparable holding as under:-
"8. We have carefully considered the rival stands on this aspect. In the context of the controversy relating to the exclusion of abnormal profit making concerns, a reference has been made to the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 83/43 taxmann.com 100 (Mum. - Trib.). The relevant observations of the Bench are as under :--
"In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the 38 immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction.
Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin." In terms of the aforesaid discussion of the Special Bench, it is quite clear that the concerns earning abnormal high profit margins cannot be excluded from the list of comparables unless appropriate investigations are made. It would be necessary to ascertain as to whether the high profit margins reflect a normal business phenomena or whether it is the result of certain abnormal conditions prevailing in a particular year. In order to determine so, profit margins earned by such concern in the proximate preceding and succeeding years would be required to be considered in order to establish 39 whether the high profit margins reflect a normal business trend or otherwise. In this background of the matter, the appellant has furnished before us the operating margin trends of the said concern over the five financial years i.e. for the three preceding years and one succeeding financial year. Notably, for the financial year under consideration, the margin of the said concern is 34.71% whereas for the preceding three financial years of 2003-04, 2004-05 and 2005-06 it is -6.47%, -69.07% and - 44.21% respectively and for the subsequent financial year of 2007-08, the margin is 3.67%. The aforesaid clearly suggests a wide fluctuation in the margins earned by the said concern over a period of time. In-fact, a further analysis of the financial data for the aforesaid years suggest that there is a wide fluctuation in the revenue generation of the said concern during the financial year under consideration as compared to the past three financial years. For the subsequent financial year, the revenue generation has taken a downward trend which again reflects a wide fluctuation. At the time of hearing, the learned counsel for the assessee has referred to the Annual Report of the said concern for the financial year under consideration to point out that the company has acknowledged a growth of 132.86% in its revenue generation as compared to the immediately preceding financial year. In our considered opinion, there is no material to say that the high profit margin of 34.71% declared by the said concern in the instant financial year is a normal business trend. Ostensibly, the financial results of either the three preceding financial years or of the succeeding financial year do not justify that the margin of 34.71% for the year under consideration is a 40 normal business trend. Thus, in our considered opinion, the inclusion of the said concern in the final set of comparables would not lend credibility to the comparability analysis and therefore it deserves to be excluded. We hold so.
9. The plea setup by the CIT(A), and which has been reiterated before us is that the point setup by the assessee would involve consideration of multiple year data of the comparable whereas the transfer pricing analysis is required to be done based on the singular financial year data i.e. financial year data of the comparables relevant to the year in which the international transactions have been entered into. In our considered opinion, the aforesaid plea of the Revenue is untenable having regard to the issue in question. No doubt, sub-rule (4) of rule 10B of the Income Tax Rules, 1962 (in short "the Rules") prescribe that the data to be used in analyzing the comparability of an uncontrolled transaction American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. So however, the aforesaid rule is not absolute inasmuch as proviso thereof permits use of the data relating to other years, subject to the condition that it reveals "facts which could have an influence" on the determination of transfer prices in relation to the tested transaction. We are only pointing out the aforesaid to say that the proposition being canvassed by the Revenue that data of the financial year in which the international transaction has been entered into, alone and 41 alone, is to be used is not an absolute proposition. Needless to say, the objective of carrying out the comparability analysis is to determine the arm's length price of an international transaction by means of examining similarly placed uncontrolled transactions. Therefore, if on facts, it can be established that adoption of a certain comparable would lead to skewed results or that the financial data of a particular comparable is otherwise devoid of credibility, such comparables would deserve to be excluded from the list of comparables even if such an exercise involved examination of data of the comparables for more than one financial year. In the present case, as our discussion in the earlier paras reveal, the profit margin of 34.71% for the year under consideration is an abnormal business trend, and, accordingly the said concern is liable to be excluded.
Therefore, we do not find any force in the plea of the Revenue to retain the said concern in the final list of comparables."
54. In view of the above decision of the coordinate bench, respectfully following it , we direct for exclusion of Informed Technologies India Ltd respectfully following the above decision of the coordinate bench.
55. The next comparable objected to by the assessee was HCL Comnet Services Ltd contesting that it is functionally dissimilar, follows different financial year, has different policy of revenue recognition and only segmental information received by the TPO u/s 133(6) of the Act was provided.
42
56. The ld DR submitted that it is also engaged in business of ITES Service provider therefore, it is functionally most comparable.
57. We have carefully considered the rival contentions. The companies accounting year-ends on June 2007, however, the 133(6) data was submitted by the comparable from 01.04.2006 to 31.03.2007. We have also perused the annual report of the American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08 company at page No. 57 to 128 of the paper book. The main income stream of the assessee is bandwidth and other services and IT enabled services. The company has also provided segmental information at page No. 101 with respect to its telecommunication services division and IT enabled services division. In its IT enabled services division it provided service of data service management, end user computer services management, managed security services, networking services and tools and process consultant services. In view of this it is apparent that this company is functionally comparable with the assessee. Merely because the company uses one or two words while describing its functions cannot make it un-comparable. However, DRP vide its direction dated 17.12.2014 at page No. 9/29 while discussing the above comparable noted that annual report of the company is given to the assessee for financial year ending on 31.03.2009, instead of 2007, hence, the ld TPO was directed to provide annual report of March 2007. However, the ld TPO vide order dated 14.01.2015 giving effect to the order of the ld DRP has not provided this 43 information and before us to the annual report of the above company was also for June FY ending and not for March ending. A comparable cannot be included in the comparability analysis for comparing the PLI of the assessee without having concise and precise publicly information about the comparable for same financial period. In the present case the comparable is following June as its accounting year, therefore, without having publicly available information about the comparable for the comparative accounting year of the assessee it cannot be selected as comparable. In view of this, we American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007- 08 direct the exclusion of above comparable solely for the reason of non-availability of comparable financial information.
58. The next comparable contested by the assessee in Infosys BPO ltd contesting that it is engaged in knowledge process outsourcing and is of huge size. The ld AR referred to various parts of the balance sheet of that company to demonstrate is that same is not comparable.
59. The ld DR relied upon the orders of the lower authorities.
60. We have carefully considered the rival contentions and perused the annual account of the above company at page No. 179 to 281 of the paper book. According to that, this company is engaged in CRM, Finance and Accounting, knowledge services, order management and procurement and human resources for various vertical business undertaking. Further, the ld DRP at page No. 8 of its direction has noted that all the information 44 were provided by the TPO to the assessee obtained u/s 133(6) of the Act and therefore, there is no objection about the functional dissimilarity with the company. Further, it was submitted by the ld AR that this company has operating revenue of Rs. 649 crores whereas the assessee gross revenue is only Rs. 55.94 lakhs, therefore, by mere size this company is required to be excluded. Hon'ble Delhi High Court in case of Pr CIT Vs. Actis Global Services finds merit that size and scale of the operations makes it inapposite comparable. In the present case the difference in the gross revenue from Rs. 649 crores of the comparable itself which is more than 1200 times of the turnover the assessee company. In view of this we direct the exclusion of the Infosys BPO ltd from the comparability analysis.
American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08
61. The next comparable is Wipro Ltd which is contested by the assessee stating that during the year there is an acquisition of the real business therefore, it makes an exceptional year. It was also contended that it has huge intangibles and therefore, there is difference in asset profile of the comparable.
62. The ld DR relied upon the orders of the lower authorities.
63. We have carefully considered the rival contentions. On perusal of the annual account of the company at page No. 22 it mentions following information.
45
"We have continued to pursue the strategy of businesses which complement our service offering, provide access to niche skill sets and expand our presence in select geographies. We have a dedicated team of professionals who identify businesses which meet our strategic requirements and are cultural fit to Wipro. The following businesses have joined the Wipro family during the year
1. US based Quantcch Global Services LLC and the India based Quantcch Global Services Ltd. for a cash consideration, which includes upfront payment of approximately USD 3 million.
2. CMango - Transactions consummated in April 2006 - US based CMango Inc and India based CMango Inc and India Private Limited for cash consideration which includes upfront payment of USD 20 mn.
3. urope based Retail Solutions Provider, Enabler. The consideration included upfront cash payment of approximately Euros 41 million.
4. Finland based Sarawarc Ov, for a cash consideration of approximately Euro 25 million.
5. Middle East and SAARC operations of 3D Networks and Planet PSG for a cash consideration of approximately USD 23 million.
6. In our Consumer Care and Lighting business we acquired North
-West Switches business from North- West Switchgear Ltd., a company in the business of switches, sockets, MCBs etc. for an upfront cash consideration of Rs. 1,022 million.46
7. In our Infrastructure Engineering business, we acquired Hydrauto Group AB (" Hvdrauto") for a cash consideration of USD 31 million.
We partnered with Motorola, a global leader in wireless Communications, to form a joint venture namely WMNETSERV Limited to deliver world-class Managed Services to telecom operators in the area of network operation. "
American Express ( India ) Private Limited V DCIT ITA No 1868/del/2015 DCIT V American express ( India) Private Limited ITA No 1674/Del/2015 A Y 2007-08
64. Further, this company has gross sales of ITES segment as three segments as global IT service and products comprising of IT Services and BPO segments, India and Asia IT Services and Products and consumer care and lighting. However, on the basis of the working submitted by the ld TPO it shows that segmental revenue of Rs. 9797767937/- which is for the reasons stated with respect to exclusion of Infosys BPO squarely applies to this comparable also. In view of this, we direct to exclude Wipro from the comparability analysis."
33. It was submitted by the ld. AR that the profile of the assessee in the present case is similar to the profile in the case of American Express [India [P] Ltd [supra] and therefore, respectfully following the 47 decision of the coordinate benches, we direct the Assessing Officer /TPO to exclude these companies from the set of comparables.
34. In respect of marketing support services, the assessee's primary contentions reiterated those as provided for the approach followed by the TPO with respect to the quantitative and qualitative filters applied for making adjustment to the assessee's provision of ITES segment (supra above).
35. In addition to the above, the assessee contended that on one of the comparable companies i.e. M/s Reliance Communications Infrastructure Ltd. (Marketing & Commission segment) selected by the Ld. TPO in his TP order for determining the Arm's Length Price of the assessee's international transaction of provision of marketing support services. The ld. AR further submitted that the Annual Report of the abovementioned company states that it is ENGAGED INTO DIVERSIFIED SERVICES as it recognizes its service income from various sources such as Internet Service Provision ('ISP'). Internet Data Centre Services ('IDC'). Provision of Infrastructure, Commission and Marketing Income. Therefore, the ld. AR submitted that the said company is functionally not comparable to the assessee's MSS segment and thus, 48 should not be included in the final set of comparable companies for determining the Arm's Length Price of the Appellant's international transaction of provision of marketing support services. It was further submitted that aforesaid comparable is involved in multifarious activities, and there is no segmental account available as such, aforesaid comparable cannot be adopted as comparable. This Company includes COMMISSION INCOME as part of its MSS segment. Lastly and most importantly, the total receipt under the sales and marketing income is of Rs. 295.32 crores which includes a sum of Rs. 96.68 crores from the related party which is equivalent to 32.7% of the total receipt. In such, circumstances, without prejudice to the other contentions of the appellant, aforesaid comparable since has significant related party transaction, and as such, aforesaid comparable cannot be adopted as comparable.
36. The ld. DR relied on the orders of the authorities below.
37. We have heard the rival submissions and have carefully perused the relevant material on record. It is clear from the Revenue Recognition that the company recognises service income from internet service provision [ISP] Internet Data Services [IDC] Provision of 49 Infrastructure commission and marketing income on accrual basis. The company includes commission income as part of its MSS. The total receipts under the sales and marketing income includes a sum of Rs. 96.68 crores from the related party which is equivalent to 32.7% of the total receipts. In our considered opinion, in the absence of any segmental date for Revenue earned by Reliance Infrastructure on account of commission income, this comparable cannot be adopted as comparable. Moreover, we are also in agreement with the ld. AR that the RPT of this company is very high at 32.7%. In the light of the above, we direct the exclusion of this company from the list of comparables.
DISTRIB UTION SEGMENT
38. The ld. AR submitted that the TPO/ CIT(A), rejected the economic analysis conducted by the assessee in its TP documentation with respect to its distribution activity by rejecting the assessee's use of the RPM as the most appropriate method and selection of TNMM for determining the ALP of the said transaction. The ld. AR further submitted that the TPO himself has allowed the use of RPM Method in the next AY 2008-09 and has made no TP adjustment. 50
39. The Most Appropriate Method is a method which, under the facts and circumstances of the transactions under review, provides the most reliable measure of an arm's length result. Rule 10C of the Income Tax Rules, provide:
(1) For the purpose of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and the circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction.
(2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:
i. the nature and class of the international transaction;
ii. the class or classes of associated enterprises entering into the transaction and the functions performed, assets employed arid 7'isks assumed by such enterprises;
iii. the availability, coverage and reliability of the data necessary for application of method;
iv. the degree of comparability existing between the international transaction and the uncontrolled transaction and 51 between the enterprises entering into such transactions;
v. the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between enterprises entering into such transactions;
vi. the nature, extent and reliability of assumptions required to be made in application of a method.
While selecting the most appropriate method, it is important that most of these conditions be satisfied, so as to be able to effectively apply the method. Based on the above, it can be summarized that 'the Most Appropriate Method' is that method which, under the facts and circumstances of the transaction under review, provides the most reliable measure of an arm's length result. In determining the reliability of method, the two most important factors to be taken into account are (i) the degree of comparability between the controlled and the uncontrolled transactions, and (ii) the coverage and the reliability of the available data.52
40. The ld. AR further vehemently submitted that the Indian TP regulations do not give preference to any particular method. The selection of the pricing method used to test the arm's length character of a controlled transaction must be made under the MAM rule. The flexibility for choice of the most appropriate method has been given to the assessee. The Most Appropriate Method is a method which, under the facts and circumstances of the transactions under review, provides the most reliable measure of an arm's length result. In determining the reliability of method, the two most important factors to be taken into account are (i) the degree of comparability between the controlled and the uncontrolled transactions, and (ii) the coverage and the reliability of the available data. As per the Indian TP legislation, other factors such as nature and class of international transactions, conditions prevailing in the market, extent and reliability of adjustments that can be made, and the extent and reliability of assumptions that may be required in applying the method, shall also be taken into account. As the selection of "the Most Appropriate Method" involves a test of relative merit, a method that may not be perfect is not rejected unless some other method can be shown to be more reliable or provide a better estimate of an arm's length result. 53
41. Per contra, the ld. DR has submitted that the agreement which the assessee was reprinting and distributing books and it was not mere seller of product imported by it. Therefore, RPM was not appropriate method and the TPO has rightly applied TNMM for bench marking the distribution activity.
42. We have heard the rival submissions and have carefully perused the relevant material on record. The agreement entered into by the assessee with AE clearly provides cope of activities of the assessee which includes reprinting of books received by the assessee from AE in E format. In our considered opinion, reprinting of books needs deployment of assets, employment of employees and risk involved in publishing and selling and therefore, the parameters as required for resale method are not applicable as other value addition and application of technology and assets were made by the assessee for the purpose of reprinting, publishing etc. In view thereof, we do not find any infirmity in the order passed by the CIT(A) as well as the TPO on this count. Accordingly, we do not find any merit in this ground which is rejected.
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43. We may like to point out that as we have allowed and directed to exclude various comparables in the ITS and Marketing segment, we deem it fit to direct the TPO to recomputed the ALP on all three segments after giving due adjustments to the working capital as determined by the ld. CIT(A) with respect to the comparables remaining after excluding comparables indicated hereinabove.
44. In the result, the appeal of the assessee is partly allowed.
The order is pronounced in the open court on 11.05.2018.
Sd/- Sd/-
(R.S. SYAL) (LALIET KUMAR)
VICE - PRESIDENT JUDICIAL MEMBER
Dated: 11th MAY, 2018
VL/
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR Asst. Registrar,
ITAT, New Delhi