Income Tax Appellate Tribunal - Hyderabad
Hyundai Motor India Engineering ... vs Deputy Commissioner Of Income Tax, ... on 9 August, 2018
ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' A ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri B. Ramakotaiah, Accountant Member
ITA No.1807/Hyd/2017
(Assessment Year: 2013-14)
M/s.Hyundai Motor India Vs Dy. Commissioner of Income
Engineering Pvt. Ltd Tax, Circle 2(2)
Hyderabad Hyderabad
PAN:AABCH7867C
(Appellant) (Respondent)
For Assessee : Shri K.R. Vasudevan
For Revenue : Shri J. Siri Kumar, DR
Date of Hearing: 24.05.2018
Date of Pronouncement: 09.08.2018
ORDER
Per Smt. P. Madhavi Devi, J.M.
This is assessee's appeal for the A.Y 2013-14, against the assessment order passed u/s 143(3) r.w.s. 144C(5) r.w.s. 144C(13) of the I.T. Act, dated 26.09.2017.
2. Brief facts of the case are that the assessee company, engaged in the business of providing R&D support services in respect of Computer Aided Design (CAD) and Computer Aided Engineering (CAE), has a 100% EOU registered under the STPI. It entered into various international transactions with its AE and for determination of the ALP of such transactions, it adopted TNMM as the most appropriate method for each of the transactions and arrived at the PLI of 8.30% as against the average margin of the Page 1 of 16 ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd comparables at 10.60%. As the PLI fell within +_3% range, the transactions were concluded to be at Arm's Length.
3. Observing that the search process as well as the choice of filters adopted by the assessee are not in conformity with the Transfer Pricing regulations, the TPO rejected the assessee's T.P study and conducted fresh analysis aggregating all the transactions under TNMM. Out of the 7 companies adopted by the assessee as comparables, the TPO accepted only one company i.e. e4e Healthcare Business Services Private Ltd as a comparable to the assessee. Thereafter, he proposed six other companies as comparables. The assessee raised its objections to all the comparables proposed by the TPO. However, the TPO rejected the assessee's objections and finally adopted the following companies as comparables and arrived at the mean margin of 22.30%.
i) Acropetal Technologies Ltd (Seg.) ii) Microgenetics Ltd iii) Infosys BPO Ltd iv) Microland Ltd v) Capgemini Business Services (India) Ltd vi) e4e Healthcare Business Services Pvt. Ltd vii) Hartron Communications Ltd (Seg.)
4. Thereafter, he computed the ALP as under:
Description Amount (in Rs.)
Arm's Length Margin 22.30%
Less: WCA 0.83%
Adjusted Arm's Length Margin 21.47%
Operating Cost (OC) 95,60,44,658
Adjusted Arm's Length Margin(%)(AALM) 21.47%
Arm's Length Price=(100+AALM)*OC 116,13,07,446 Price Received (OR) 103,53,50,002 Adjustment u/s 92CA 12,59,57,444 Page 2 of 16 ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd Less: Voluntary TP adjustment made 8,50,52,572 in the revised return for the A.Y 2013-14 Adjustment to be made 4,09,04,872
5. In accordance with the above TP order, the AO proposed draft assessment order, against which the assessee preferred its objections to the DRP. The DRP confirmed the draft assessment order in accordance therewith, the final assessment order was passed u/s 143(3) r.w.s. 144C(5) r.w.s. 144C(13) of the I.T. Act on 26.09.2017 against which, the assessee is in appeal before this Tribunal by raising the following grounds of appeal:
"1. That on the facts and circumstances of the case, the final assessment order dated 26 September 2017 (and received by the Appellant on 05 October 2017) passed by the Deputy Commissioner of Income-tax, Circle - 2(2), Hyderabad u/s 143(3) read with section 92CA read with section 144((5) read with section 144((13) of the Income-tax Act, 1961 ('Act'), pursuant to the directions dated 28 August 2017 by Dispute Resolution Panel, Bangalore ('DRP') u/s 144((5) of the Act and read with order dated 31 October 2016 issued by Transfer Pricing Officer ('TPO') u/s 92CA(3) of the Act, is bad in law and void abinitio so far as it is prejudicial to the Appellant.
Transfer Pricing
1. That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred in making transfer pricing adjustment of Rs. 3,42,12,559 on account of provision of Information Technology enabled Services ('ITeS') by the Appellant to its Associated Enterprises ('AEs').
2. That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred in rejecting transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 19,62 ('Rules') and undertaking a fresh economic analysis during the course of assessment proceedings and thereby making an adjustment of Rs.3,42,12,559 to the international transactions.Page 3 of 16
ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd Selection of Incomparable Companies
3. That on the facts and circumstances of the case and in law, the TPO/AO/ DRP erred in confirming acceptance of following companies as comparables as selected by the TPO:
a) Capgemini Business services (India) Limited;
b) Infosys BPO Limited and
c) Hartron Communications Limited (Seg).
4. That on the facts and circumstances of the case, the TPO/AO/ DRP erred in accepting companies disregarding the comparability factors such as brand, giant size, scale of operations, having diversified operations, extra-ordinary events etc.
5. That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred in accepting Hartron Communications Limited without appreciating that the auditor has qualified its report on account of non- compliance with Accounting Standard-15 regarding provision for retirement expenses, for which impact on profits is not ascertainable.
Error in computation of margin of comparable companies
6. That on the facts and the circumstances of the case and in law, the TPO/AO/DRP erred in confirming the TPO's stand of treating the provision for bad and doubtful debts as non-operating expenses for the purpose of margin computation of comparable companies as selected by TPO.
7. That on the facts and the circumstances of the case and In law, the TPO/AO/DRP wed in confirming the TPO's stand of treating the bad debts written off as non-operating expenses for the purpose of margin computation of comparable companies as selected by TPO.
Rejection of comparable companies
8. That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred by not including following companies as comparables as requested by the Appellant.
a) Ace BPO Services Limited;
b) Caliber Point Business Solutions Limited (Seg);
c) Informed Technologies Limited;
d) Jindal Intellicom Limited and Page 4 of 16 ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd
e) Crystal Voxx Limited.
9. That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred by not including companies which are functionally comparable and meets the filter adopted by the TPO.
10. That on the facts and circumstances of the case and in law, the TPO/AO/ DRP erred by not appreciating that Informed Technologies Limited and Jindal Intellicom Limited are consi red as comparables by the TPO in earlier Assessment Years ('AY') in Appellant's own case.
11. That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred by not considering the submissions of the Appellant on comparables as per Ground No. 8 while passing the respective orders.
Adjustment should be restricted to the international transactions
12. That on the facts and circumstances of the case and in law, the TPO/AO/DRP has erred in making the adjustment by considering total revenue of the Appellant without appreciating that the transfer pricing adjustment should be restricted only to the value of international transactions with the AE.
Use of Filters
13. That on facts and circumstances of the case and in law, the TPO/AO/DRP erred in upholding the use of different financial year end filter for rejection of comparable companies while undertaking the comparative analysis.
14. That on facts and circumstances of the case and in law, the TPO/AO/DRP erred in upholding the use of service income filter of 75% to sales for the purpose of selecting comparable companies while undertaking the comparative analysis.
15. That on facts and circumstances of the case and in law, the TPO/AO/DRP erred in not applying upper limit for sales turnover filter.
Rejection of use of multiple year data
16. That on facts and circumstances of the case and in law, the TPO/AO/DRP erred in rejecting the use of multiple year data and using data for FY 2012-13 only.
Page 5 of 16ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd Adjustment for risk differences
17. That on the facts and circumstances of the case and in law, the AO/DRP erred in disregarding the risk profile of the Appellant vis-a-vis comparable companies selected by the TPO and not allowing risk adjustment as per the provisions of Rule 10B(1)(e) of the Rules.
Arm's length range of 3%
18. That the AO/TPO be directed to re-work the profit margins of the Appellant vis-a-vis the resultant comparable companies and to allow the benefit of +/-3% range as provided in proviso to Section 92C(2) of the Act.
19. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal".
6. At the time of hearing, the learned Counsel for the assessee submitted that though the assessee has raised 19 grounds of appeal, it does not wish to press grounds 13 to 19. These grounds are accordingly rejected as not pressed. Grounds 1 & 2 are general in nature and hence require no adjudication.
7. As regards grounds 3 to 5 are concerned against the comparability of the 3 companies mentioned therein, we find that the assessee is seeking exclusion of these companies mainly on the grounds of functional dissimilarities. Therefore, each of the comparable is dealt with hereunder:
7.1) Infosys BPO Ltd: The learned Counsel for the assessee submitted that this company is functionally dissimilar as it provides Niche services within ITeS activities and has a very high turnover; and brand value. He drew our attention to the Page 6 of 16 ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd annual report of the said company for the relevant financial year, to drive his point. He also relied upon ITAT order the assessee's own case for the A.Ys 2008-09 to 2011-12, wherein this company was excluded.
7.2 The learned DR, however, supported the orders of the authorities below.
7.3 Having regard to the rival contentions and the material on record, we find that this Tribunal in the assessee's own case for the earlier A.Ys 2008-09 to 2011-12 has directed its exclusion due to functional dissimilarity and brand value. For the sake of clarity and ready reference, the relevant paras of the order of ITAT in ITA Nos.128 & 216/Hyd/2016 dated for the A.Y 2011-12 are reproduced hereunder:
18.4. Coming to Ground No. 2, we notice that DRP has excluded both Infosys BPO Ltd., as well as TCS E-serve Ltd. Revenue is objecting only one, Infosys BPO that it was wrongly excluded on the ground of high turnover as it does not influence the net margins of the company.
However, there are other reasons also on which the DRP has excluded the above company. The DRP's order with reference to Infosys BPO Ltd., is as under:
"2.13 Ground of Objection 13 Infosys BPO Limited ("Infosys" or "the Company") has to be rejected based on the presence of the brand thereby warranting adjustments are required to eliminate the impact of brand on profits earned. Since it might not be possible, Infosys is to be rejected as a comparable.
Infosys BPO Limited ("Infosys" or "the Company") has to be rejected based on the fact that it is an oversized company as compared to the tested party.
The Learned TPO erred by not rejecting Infosys as comparable, as exclusion of Infosys as comparable is upheld by Jurisdictional ITAT in assessee own case (ITAT No.255/Hyd/2014 &ITA.No.1850/Hyd/2012) for AY 2009-10 and AY 2008-09.Page 7 of 16
ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd It is submitted that the company should be excluded due to the following reasons :-
Functional dissimilarity - Niche Areas That Infosys SPO is backed by Infosys Technologies Limited which supports Infosys SPO to offer an integrated IT-BPO delivery model designed for 'one stop shop' solution model which helps managing the entire outsourcing operational chain of IT and process management services. Infosys BPO's Business Service Centre performs the back office functions for dispersed business units and locations. A pictorial presentation of back office functions is displayed below:
Presence of brand That while considering Infosys BPO as a comparable company, due consideration should be given to the fact that Infosys spa possesses brand value which will tend to influence the pricing policy and thereby directly impacting the margins earned by Infosys spa.
As seen from an extract of the Schedule 200200 (Selling and marketing expenses) to the Profit & Loss A/c of the Annual Report for the FY 2010-11 of Infosys spa, indicates that it is distinguished from the Assessee due to the presence of brand and its associated value.
It is also submitted that Infosys spa has identified the presence of brand in its services/ products and has goodwill as a part of its Fixed Assets Schedule 100600. Following is an extract which provides evidence to the fact stated above.
It is also submitted that :-
• Infosys BPO, being a subsidiary of lnfosys Limited, has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO.
• Presence of a brand is likely to command premium prices that the customers are willing to pay for the branded services/products.
The Assessee wishes to humbly submit that the Assessee does not have any brand associated with it. Hence the Assessee submits that Infosys spa cannot be comparable to the Assessee.
Ratio of sum of advertising and marketing expenses to sales greater than 3% The Learned TPO has failed to appreciate the marketing expenses filter. Since Infosys BPO spends 8.40% of its sales in advertisement, this has generated significant revenue and creation of brand value for Infosys spa as there is a high degree of correlation between advertising and sales.
Size of the comparable The Learned TPO has failed to appreciate the fact that the ITES industry is clearly demarcated based on size and that Assessee cannot be compared to companies having sales disproportionate to the sales generated by the Assessee. If one were to look at the turnover/size of the 13 comparable companies selected by the Learned, TPO and plot it on a scattered diagram, then one could Page 8 of 16 ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd notice that both Infosys is a clear outlier. The scattered diagram of the 13 comparable companies is presented below:
The assessee relied on the decision of the Hon'ble I TAT, Hyderabad in assessee's own case for A.Y. 2009-10 in which the Hon'ble ITAT held that 'We are in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about RS.15.79 crores, as against turnover of Rs.1016 crores of the Infosys. We are also of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys BPO is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, because of its big brand value this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company." The Hon'ble ITAT has taken similar view in A.Y. 2008- 09 also.
Having considered the submission, even though we are in agreement of the exclusion of the above company, due to turnover, however, respectfully following the decision of the Hon'ble ITAT on functional differences, including the influence of the brand value on the margins, we direct the A.O. to exclude the above company from the comparables".
18.5. In view of the detailed reasons given by the DRP in excluding the company, not only on the basis of the high turnover but also with reference to the brand value etc., we do not see any reason to interfere with the findings of the DRP. In fact the ground raised is not covering all the issues on which the DRP has rejected the above said company. In view of this, we do not find any merit in considering the Revenue's ground. Accordingly, ground 2 is rejected".
7.4 Respectfully following decision of Coordinate Bench, we direct the AO/TPO to exclude this company from the final list of comparables.
8. Capgemini Business Services (India) Ltd. The learned Counsel for the assessee submitted that this company is functionally dissimilar as it is involved in BPO services, Cloud Page 9 of 16 ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd Services, Business Information Management Services and other I.T related services as against the support services provided by the assessee which have been categorized as ITeS. On perusal of the Annual Reports of the said company at pages 863 and 865 of the Paper Book filed by the assessee, we find that the Company Capgemini Business Services (India) Ltd is not only to ITeS in Financing & Accounting but has also widened the scope of services in Supply Chain, Procurement, Technical Publication Services and has shown the intention to diversify the portfolios. We find that it is also providing services in relation to the operational control system and for compliance with the provisions of the Sarbanes Oxley Act, 2002 and that it also stated that the company has strategically expanded its new services by including Non Sox related activities like I.T Risk Assessment, SAS 70, Assurance and Risk Management to many companies. Further, we find that the assessee has reported income only from the sale of services. Thus, we are inclined to agree with the learned Counsel for the assessee that the activities of Capgemini Business Services are much more diversified than the activities of the assessee and unless and until a suitable adjustment can be made, the said company cannot be taken as a comparable. It has been held in a number of cases that where a comparable is into diversified activities, the same can be taken as a comparable provided the segmental results are available. As seen from Page No.1015 of the Paper Book, segmental results are not available for ITeS services. Therefore, we are of the opinion that Capgemini Business Services is to be excluded from the final list of comparables.
Page 10 of 16ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd
9. As regards Hartron Communications Ltd is concerned, the learned Counsel for the assessee submitted that this company is also functionally dissimilar as it provides multiple services like BPO, LPO, Back Office Software Development, Technical Solutions, Medical Building, etc., and that the segmental information is not available. It was also brought to our notice that the Auditor has clarified about the non-compliance regarding provisions for retirement benefits and impairment of the assets. Further, he submitted that the assessee has taken the objection about this company before the DRP, but the DRP has not discussed the same and has simply confirmed the order of the TPO.
10. Having regard to the rival contentions and the material on record, we find that before the TPO, the assessee had only taken an objection that the said company is functionally dissimilar. Before the DRP also, the assessee had also stated that in addition to the BPO, LPO and ITeS services, this company is also engaged in providing Intellectual Property Services in the nature of patent search, patent protection, and obtaining the trade-mark services, IP Management and further in software development services such as Web page Application, Standalone software Application, Distributed Applications, Desktop/Laptop Applications and Mobile Applications. The assessee had relied upon the Annual Report as well as Website information of the said company to submit as above and pleaded that no segmental information is available. However, the DRP has summarily rejected the assessee's contention and has confirmed the assessment order. Since the facts mentioned by the assessee Page 11 of 16 ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd about Hartron Communications need to be verified, we deem it fit and proper to remit this issue to the file of the AO for verification of the assessee's contentions and if it is found to be in diversified activities and no segmental information is available, then we direct that this company cannot be taken as a comparable. Thus, grounds of appeal Nos. 3 to 5 are partly allowed for statistical purposes.
11. As regards Grounds 6 and 7 are concerned, they are against treating the provision of bad and doubtful debts, as non- operating expenses for the purpose of margin of the comparable companies selected by the TPO. We find that this provision for bad and doubtful debts is available only in the case of Capgemini Business Services (India) Ltd and Infosys BPO Ltd and since we have directed that these companies are to be excluded from the final list of comparables, the adjudication of these grounds at this stage would only be an academic exercise. Therefore, we do not adjudicate grounds 6 & 7 and are accordingly rejected.
12. As regards Grounds 8 to 11 are concerned, it is for inclusion of certain companies as comparables. The learned Counsel for the assessee submitted that Ace BPO Services Ltd was taken by the assessee as a comparable, but the TPO has held it to be functionally not comparable and the DRP has also confirmed the rejection on the ground that no information about the RPT filter is available in the Annual Report. It is submitted that the said company is also engaged in ITeS services as per its Annual Report and the Company's Website and the RPT data is available in the Annual Report.
Page 12 of 16ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd
13. The learned DR, however, supported the orders of the authorities below.
14. Having regard to the rival contentions and the material on record, we find that from the Annual Report of Ace BPO Services Ltd, at Page Nos. 1318 and 1368 of the paper book, this company is into BPO services and the transactions with related parties are also reported. Therefore, we are of the opinion that this company needs to be considered as a comparable. The AO is directed to verify the information filed by the assessee and if it satisfies the RPT filter, then the same should be considered as a comparable.
15. As regards Caliber Point Business Solutions Ltd (Seg.) is concerned, the learned Counsel for the assessee reiterated the submissions made before the authorities below. However, on going through the material and the Annual Report of the company, we do not find it to be a comparable to the assessee. Therefore, the exclusion of the company from the list of comparable is confirmed.
16. As regards Informed Technologies Ltd is concerned, the TPO had rejected the same on the ground that it is functionally not comparable while the DRP stated that it fails income from ITeS more than 75% to total operating revenue filter. The learned Counsel for the assessee submitted that the said company is engaged in ITeS services as per the Annual Report and was accepted as a comparable in the assessee's own case for the A.Ys 2011-12 and 2012-13. With regard to the DRP's finding Page 13 of 16 ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd that it fails income from ITeS more than 75% to total operating revenue filter, he submitted that neither the TPO nor the assessee have made such comment or submission. The learned DR was also heard who relied on the orders of the authorities below.
17. On going through the material on record, particularly on page Nos. 1407, 1427 an 1477 of the Paper Book, we find that the said company is also providing ITeS and back office BOP services and as seen from Page 1425 in the column of segmental reporting, it is stated that the company is provisionally engaged in the business process outsources which is only reportable as per AS-17 standard issued by the Institute of Chartered Accounts of India on segmental reporting. Thus, we find that this company can be considered as a comparable. Further, the TPO has not mentioned about the filter of operating revenue being more than 75%. Therefore, the DRP is clearly in error in considering the same. The TPO is directed to consider this company as a comparable after verifying the details furnished by the assessee.
18. As regards Jindal Intellicom Ltd is concerned, the TPO had rejected the same on the ground that it is not functionally comparable and the DRP has confirmed the same. The assessee has submitted that this company was taken as a comparable and accepted by the TPO in the assessee's own case for the A.Ys 2012- 13 and 2011-12. Upon considering the rival contentions, we deem it fit and proper to remit the issue of comparability of this company to the file of the TPO and if it is found that the said company was accepted to be a comparable company in the earlier A.Ys, then the AO/TPO shall consider the same as comparable for Page 14 of 16 ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd the relevant A.Y, unless there is a difference in the services rendered by both the companies in the relevant A.Ys before us.
19. As regards Crystal Voxx Ltd is concerned, the TPO has rejected this company on the ground that it did appear in the search analysis of the TPO and the DRP has confirmed the same. The learned Counsel for the assessee has drawn our attention to the Annual Report of the company to submit that this company is also a BPO Company and there is only a single segment and hence should be considered as a comparable.
20. As seen from the Paper Book filed by the assessee, the Annual Report of the company is available in the public domain and the assessee had submitted the same during the assessment proceedings. Since Crystal Voxx Ltd is engaged in only segment, BPO, and it also satisfied the other filters adopted by the TPO, we deem it fit and proper to direct the TPO to verify the comparability of this company. Therefore, the matter is remitted to the file of the TPO for fresh analysis.
21. In the result, grounds of appeal Nos. 8 to 11 are treated as partly allowed.
22. As regards Ground No.12, it is settled position that only the international transactions are to be considered for the ALP adjustment and for this purpose, only the operating revenue and operating cost of the international transaction is to be considered. Therefore, the AO is directed to consider the operating Page 15 of 16 ITA No 1807 of 2017 Hyundai Motor India Engg. P Ltd revenue and the operating cost of the relevant international transactions only for the ALP adjustment. Ground No.12 is accordingly treated as allowed for statistical purposes.
23. In the result, assessee's appeal is partly allowed for statistical purposes.
Order pronounced in the Open Court on 9th August, 2018.
Sd/- Sd/-
(B. Ramakotaiah) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 9th August, 2018.
Vinodan/sps
Copy to:
1 M/s. Hyundai Motor India Engg. Pvt. Ltd, Survey No.5/2 & 5/3, Opp: Hitech City Railway Station (MMTS) Hyderabad 500084 2 Dy.CIT, Circle 2(2) 5th Floor, Signature Towers, Kondapur, Hyderabad 3 Pr.CIT -2 Hyderabad 4 Chief Commissioner of Income Tax (International Transaction)(SZ) Bengaluru 5 The DR, ITAT Hyderabad 6 Guard File By Order Page 16 of 16