Income Tax Appellate Tribunal - Delhi
Rallison Electricals P. Ltd., New Delhi vs Dcit, Circle-21(1), New Delhi on 18 June, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-1' NEW DELHI
BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER
&
SHRI K.NARASIMHA CHARY, JUDICIAL MEMBER
ITA Nos.-2538/Del/2017
(Assessment Year: 2012-13)
H & S Software vs DCIT, Circle 11(1),
Development and New Delhi.
Knowledge Management
Centre Pvt. Ltd. MVLi
Park Unit No 201 & 502,
5th Floor, Near Red Cross
Society, Sector 15, Part-
II, Gurgaon 122001
AABCH2697E
Assessee by Sh. Manoneet Dalal, Advocate,
&
Sh. Arvinder Singh, CA
Revenue by Sh. Sanjay I. Bara, DR
Date of Hearing 18.06.2018
Date of Pronouncement .06.2018
ORDER
PER K. NARASIMHA CHARY, J.M.
Challenging the order dated 13/11/2016, passed by the learned dispute resolution panel-1, New Delhi in objection No. 210, dated 21-04- 2016, assessee preferred this appeal.
2 ITA No. 2538/Del/20172. Brief facts of the case as could be culled out from the record are that the assessee, namely, M/s. H & S Software Development and Knowledge Management Private Limited had established its business in the year 2003 and out of the total issued, subscribed and paid-up share capital as on 31/03/2010, all the shares except one was held by H&S Inc (HSI) and one share was held by H&S international Inc. The company has been engaged in the business of back-office functions relating to software development and maintenance database support and information research services. It performs the back-office functions related to creation and maintenance of database of prospective employers and candidates who have sent their resumes to Heidrick & Struggles group. This database is @Search Palace@, Heidrick & Struggles group's proprietary software tool, used to perform all of Heidrick & Struggles group's services. HSI is the owner of the intangibles associated with the "Search Palace". It is also responsible for maintaining and developing this software and other related tools. Thus, the activities of assessee are limited to HIS's intangible creation and maintenance activities, especially as it applies to the software tools.
3. For the assessment year 2012-13 the assessee filed their return of income on 19/11/2012 declaring a total income of Rs. 2, 55, 91, 570/-. In view of the International transactions undertaken by the assessee with its Associated Enterprises (AEs), Ld. AO referred the determination of Arms Length Price in respect of international transaction, to the Ld. TPO. Ld. TPO found the major international transactions of the assessee is in respect of provision of back-office support to its AEs, thereby classified the assessee as one providing IT Enabled Services to its CIA's sense the main task of assessee is to provide back-office support to a "Search Palace"
3 ITA No. 2538/Del/2017database that contains the details of the resumes of prospective employers and candidates and AE uses this databasse for its main business of providing placement services.
4. Assessee benchmarked international transaction relating to this ITES using TNMM as the Most Appropriate Method with the ROTC as PLI. In the TP study, the tested party margin was computed at 14.15% and the assessee had taken the average ROTC margin which is 11.92% of Seven comparable companies using multiple year data. Ld. TPO accepted three of the comparables chosen by the assessee, namely, JINDAL Intelli Ltd, Calibre Point Business Solutions and R Systems International Ltd and rejected the other four comparables. Ld. TPO also conducted afresh search and finally prepared the set of comparables with fourteen companies which includes the comparable companies, namely, Eclerx Services Ltd., Infosys BPO Ltd and a TCS E serve Ltd. Finally Ld. TPO made an adjustment of Rs. 1, 55, 13, 273/-, basing on which Ld. AO made similar addition.
5. Assessee filed objections before the Ld. DRP, challenging the inclusion of several companies by Ld. TPO but the major thrust of the assessee's challenge is against the inclusion of three companies, namely Eclerx Services Ltd., TCS E serve Ltd and Infosys BPO Ltd on the ground of functionality similarity and non-comparability.
6. Assessee also contended that Eclerx Services Ltd. is functionally not comparable because of the software development and engineering design services undertaken by Eclerx Services Ltd., extraordinary events resulting in abnormal margins, unreliable data and that this company was rejected in 4 ITA No. 2538/Del/2017 several judicial rulings and also by the Ld. DRP in assessee's own case in the assessment year 2010-11.
7. Assessee further contended that Eclerx Services Ltd. not a good comparable because of its size and presence of brand value. In respect of Infosys BPO Ltd assessee contended that this company had high advertising and marketing expense, high turnover and is possessing huse brand value. Further in respect of Eclerx Services Ltd. and Infosys BPO Ltd there are extraordinary events rendering these two companies non comparable with the assessee.
8. In respect of Eclerx Services Ltd. DRP found that the taxpayer had not discharging the onus to demonstrate or produce evidence to show how the R&D and the IP/intangibles ownership impacted the profit margins and how it can arithmetically become the basis for adjustments. Ld. DRP, therefore, held that the analysis IPR owned by the taxpayers may not impact the profit margins, because brand building comes at a cost hence the significant marketing and selling expenses, but it does not derive revenues or impact PLI.
9. Ld. DRP, therefore, held that a brand may generate sales but may not impact profitability since expenses incurred to build the brand may impact margins, and there is no definite correlation between brand and margins and much depends on facts of each case. Ld. DRP further recorded that if a PLI like OP/capital employed had been used for compatibility then DS that intensity of the taxpayer vis-a viz comparables would be relevant.
10. In respect of TCS EE server, Ld. DRP observed that as per the annual report the 10% decline that was there in profit after tax, is explained on 5 ITA No. 2538/Del/2017 account of expiry of tax holiday under section 10 A of the Act. Further one of the key issues when analysing transfer prices is to the final comparability analysis after matching the functional profile carefully and however the marginal differences in assets (intangibles) owned or risk borne and their impact on margins earned as a result when functions performed are the same are similar, and it has not been effectively demonstrated by the taxpayer. Further the taxpayer has expenditure on brand building of 3.67 crores which is only 0.21% of total revenue.
11. In respect of Infosys BPO Ltd, Ld. DRP observed that in the case of Tata Elixi carrying the same Tata brand name as a TCS E Serve Ltd. the comparable, but, Tata Elixi has much lower margins. Similarly Infosys BPO with a profit margin of 17.86% which is less than the average of comparables shows no correlation of profit margin with the brand the assets owned by the comparable have no bearing on its PLI which is OP/TC under TNMM.
12. By observing so Ld. DRP refused to delete these three companies from the list of comparables. Hence challenging the same the assessee preferred this appeal.
13. At the outset, it is the submission of the Ld. AR that in assesse's own case per the earlier years these three companies were considered and held to be non-comparables. The profile of the assessee and the comparables being similar for all these years, it is but just and proper to follow the same and to remove such companies from the finalist of comparables. He brought to our notice the orders of the tribunal in assessee's own case for the assessment years 2007-08 to 2011-12 in ITA 6 ITA No. 2538/Del/2017 numbers 6455/del/2012, 436/del/2013, 2200/del/2014 and 204/del/2016 respectively wherein these three companies were dealt with. Now we shall proceed further to deal with the aspect of comparability and the desirability of retaining or deleting these 3 companies from the finalist of comparables.
14. It is the submission of the Ld. AR that Eclerx Services Ltd. is a leading Knowledge Process Outsourcing (KPO) company providing data analytics and data processing solutions to some of the largest brands in the world. Further under sales and marketing services, Eclerx Services Ltd. provides web content management and merchandising execution, Web analytics, social media moderation and analytics, search engine analytics and support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price and catalogue competitive intelligence and broader data collections, cleansing, enriching and reporting. It's very evident that these services are a mix of research, advise and operation management.
15. It is further submitted that during the year Eclerx Services Ltd. has acquired the entire shareholding of Agilyst Inc, a closely held US-based company, providing operations and data analysis support to some of the largest cable and telecommunication companies in the world, through its overseas subsidiary Eclerx investment Ltd. The acquisition adds delivery capability of Eclerx Services Ltd. and also adds additional 1000 people.
16. This company is dealt in assessee's own case for all assessment years between 2007-08 and 2011-12. We are carefully gone through the order dated 18/01/2017 in ITA No. 6455/del/2012 in assessee's own case wherein vide paragraph numbers 23 to 27 a Coordinate Bench of this tribunal, 7 ITA No. 2538/Del/2017 having gone through the profile of this company and also the assessee, considered the issue in the light of the decision of a coordinate bench in Copal Research India Private Limited (ITA No. 1713/del/2014), and reached a conclusion that there are functional dissimilarities between the Eclerx Services Ltd. and the assessee.
17. Eclerx Services Ltd. is held to be a knowledge process outsourcing company engaged in providing consulting services, process outsourcing, process re-engineering and automation services which renders this company not comparability assessee. Similarly this company was compared considered in assessee's own case for a subsequent years also and the consistent finding of the tribunal is that Eclerx Services Ltd. is not a good comparable with the assessee.
18. Insofar as TCS E Serve Ltd. is concerned, it is submitted that the operations of this company are broadly comprising of delivering core business process services, analytics and insights (KPO) and support services for both data and voice processes. The risk profile, nature of services revenues, ownership of branded or proprietary products and the expenditure on brand building are all dissimilar to that of the assessee and this company is not a good comparable.
19. Ld. AR submitted that TCS is a part of eminent Tata group and receives support from it in terms of its large-scale operations and clientele. During the year TCS E Serve Ltd. has paid Rs. 4.53 crores to Tata sons Ltd as Tata brand equity contribution. This fact is evident from the contents of page numbers 346, 359 and 388 of the Peperbook. Further, Ld. AR demonstrated before us that there is a change in the profitability of this 8 ITA No. 2538/Del/2017 company between the years 2007-8 and 2010-11 which was 31.76%, 10.05%, 67.58% and 76.82% respectively. The sales turnover of TCS E Serve Ltd.'s 85.13 times more than the assessee.
20. Ld. AR submitted that this company was considered by a coordinate bench of this tribunal in assessee's own case for the assessment years 2010- 11 and 2011-12 in ITA numbers 5 and 6/del/2015 and ITA No. 204/del/2016 respectively. Copies of the orders are produced before us.
21. We have gone through the orders of the Coordinate Bench of this Tribunal relied upon by the Ld. AR. Vide paragraph numbers 17 to 21 in ITA No. 516/del/2015 a Coordinate Bench of this tribunal dealt with the question of comparability of this company with the assessee, in the light of the decision of this tribunal in Ameri India Private Limited in ITA No. 70 14/del/2014 for the assessment year 2010-11 and reached a conclusion that the TCS E Serve Ltd. is not a valid comparable qua the assessee, which is into providing back-office services relating to maintenance and data base working on a minimal risk having meagre turnover of Rs. 14.15 crores. Similar was the finding further other AY also.
22. Now turning to Infosys BPO Ltd, it is the submission of the Ld. AR that the revenue of Infosys BPO is abnormally higher than the industry average, the turnover of Infosys BPO is Rs. 1, 312 crores as compared to the assessee's turnover of Rs. 18.53 crores. Because of diverse and larger nature of operations Infosys BPO can leverage its resources and has better economies of scale as compared to the assessee which does not have the similar advantages as Infosys. Adverting to the risk profile, nature of services, revenue, presence of brand and advertisement expenses of Infosys 9 ITA No. 2538/Del/2017 BPO vis-a viz the assessee, Ld. AR submitted that the Infosys BPO possesses brand value which tends to influence the pricing policy and thereby directly impacting the margins allied by the Infosys BPO, during the year under consideration, Infosys BPO acquired an Australian-based company that is M/s. Portland Group Pty Ltd and the Ld. TPO had completely ignored the establish an industry report and economic rationale in using an upper limit. It is the further submission of the Ld. AR that the assessee cannot be compared to the Infosys BPO either in terms of economics of scale or in terms of the revenues generated.
23. Ld. AR further submitted that the compatibility of this company with the assessee was considered by a coordinate bench of this tribunal in assessee's own cases for the assessment years 2007-08 and 2008-09 in ITA numbers 6455/del/2012 and 436/del/2013 respectively.
24. We have gone through the findings of the coordinate bench of this tribunal in the above cases. Vide paragraph No. 33 to 34, the Coordinate Bench of this tribunal considered the compatibility of this company with the assessee and having considered the decisions in Calibrated Healthcare Systems India Private Limited in ITA 5271/del/2012 and the judgement of the Hon'ble jurisdictional High Court in CIT versus Agnity India Technologies Private Limited 219 Taxman 26 (Delhi), the Tribunal reached a conclusion that the assessee does not have any substantial intangible assets and the assessee is not undertaking any Research Development activity whereas Infosys BPO has large and substantial research government Centre. It was further found that the assessee is a minimal risk taking company whereas Infosys BPO is a full-fledged risk-taking company 10 ITA No. 2538/Del/2017 having diversified businesses. Further Infosys BPO is a giant company and cannot be a valid comparable with the assessee company. By recording these reasons, the Tribunal deleted the Infosys BPO Ltd from the list of comparables.
25. Argument of the Ld. DR in respect of all the three companies is a similar one. According to him the subtle difference between BPO and KPO is insignificant insofar as the companies are involved in the back office services or operations. According to him since the assessee is also engaged in the back office operations and services, Eclerx Services Ltd. TCS E Serve Ltd. and Infosys BPO Ltd which are performing similar back-office functions are good comparables.
26. On a perusal of the profile of the assessee as well as the three comparables, namely, Eclerx Services Ltd., TCS E Serve Ltd. and the Infosys BPO Ltd as could be seen from the order of the Ld. TPO and the annual report of the comparable companies, incorporated in the Paper book, we are of the considered opinion that the FAR profile of these companies fairly remained the same all over the years. Further there is no denial of the fact that the Eclerx Services Ltd. and Infosys BPO Ltd had many acquisitions in the year under consideration which impacted the margins. For these reasons, the findings of the coordinate bench of this tribunal in assessee's own case in respect of the assessee as well as the comparable companies are fairly applicable to the facts of this year also. Facts being similar, while respectfully following the findings of the Tribunal in assessee's own case for the earlier assessment years, we find that these three companies, namely, Eclerx Services Ltd., TCS E Serve Ltd., and 11 ITA No. 2538/Del/2017 Infosys BPO Ltd are not valid and good comparables with the assessee. We, therefore, direct the Ld. TPO to delete these three companies from the final list of comparables for benchmarking the international transaction of IT Enabled Services of the assessee.
27. The appeal of the assessee is accordingly allowed.
Order pronounced in the open court on June, 2018
(R.S. SYAL) (K. NARSIMHA CHARY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: .06.2018
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