Income Tax Appellate Tribunal - Delhi
Genpact Mobility Services (India) Pvt. ... vs Assessee
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I': NEW DELHI
BEFORE SHRI S. V MEHROTRA, ACCOUNTANT MEMBER
AND
SMT DIVA SINGH, JUDICIAL MEMBER
ITA No. 6184/Del/2012
Assessment Year: 2008-09
Genpact Mobility Services DCIT,
(India) Pvt. Ltd., Delhi Circle-12(1)
Information Technology Vs. New Delhi
Park, Shastri Park
Delhi 110053
PAN AACCG4036D
(Appellant) (Respondent)
Appellant by : Shri Rahul Kr. Mitra, CA
Respondent by: Sri Peeyush Jain, CIT/D. R (TP)
ORDER
PER S. V MEHROTRA The appeal has been filed by the Assessee against the Assessment order passed by Deputy CIT, Circle 12(1), New Delhi dated 29.10.2012 under section 143(3) read with section 144C of Income-tax Act, 1961 for the Assessment Year 2008-09.
2. Brief facts of the case are that the assessee company, in the relevant assessment year, was engaged in the business of managing the global deployment and mobility programme for personnel moving from Genpact group‟s offshore delivery centre in India to the Associates Enterprises („AEs‟). The assessee employed and seconded Page No. 2 ITA No. 6184/Del/2012 the assignees to overseas onsite Genpact entities to fulfill their contracts with respective customer. The assessee had entered into following international transactions:
S. Nature of Total value of Most appropriate No. Transaction transaction Method (MAM) (in INR)
1. Provision of 443,936,257 Transactional Net Secondment related margin Method services („YNMM‟)
2. Reimbursement of 24,138,429 Expenses to AEs
3. Reimbursement of 1,179,634 N. A. Expenses from AEs
3. The assessee had used TNMM as the most appropriate method and operating Profit/Total Cost („OP/TC‟) as its PLI. The assessee had chosen a set of 13 foreign comparables. The average margin, using multiple year data of these comparables was 3.43%. The assessee‟s margin was 5.8%. On this basis assessee considered the international transactions at arm‟s length. The ld. TPO, after detailed discussion, reached at following final set of comparables:
S. Name of Company OP/TC
No. (%)
1. Overseas Manpower Corporation Ltd. 6.55%
(Recruitment segment)
2. Info Edge (India) Ltd. 36.90%
3. EDCIT (India) Limited 10.16%
(Human Resources Development Segment) Prowess-Seg) Average 17.87% Page No. 3 ITA No. 6184/Del/2012
4. He, accordingly, determined the average margin at 17.87% and computed the required adjustment u/s 92CA at Rs. 5,12,05,343/- as under:
Total cost of the Assessee 42,00,74,319 ALP at a margin of 17.87% 49,51,41,600 Price received 44,39,36,257 Adjustment u/s 92CA 5,12,05,343
5. The Assessing Officer issued the draft order on 29.11.2011 against which the assessee filed objections before Dispute Resolution Panel-I, which confirmed the TPO‟s action vide its order dated 31.08.2011. The Assessing Officer, accordingly, passed the order on 29.10.2012 u/s 143(3) read with section 144C of the Income-tax Act, 1961. Being aggrieved with the Assessment Order, the assessee is in appeal before us and has taken following grounds of appeal:
"1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer is bad in law and void ab-initio.
2. The reference made by the Assessing Officer suffered from jurisdictional error as the Ld. Assessing Officer has not recorded any reasons in the assessment order based on which he reached the conclusion that it was necessary or expedient‟ to refer the matter to the Ld. TPO for computation of the Arm‟s Length Price („ALP‟), as is required under section 92CA(1) of the Act.
3. The Ld. DRP and the Ld. Assessing Officer (following the directions of the Ld. DRP), erred on facts and in law in enhancing the income of the Appellant by Rs. 5,12,05,343 holding that the international transactions pertaining to provisions of secondment related services do not satisfy the Page No. 4 ITA No. 6184/Del/2012 arm‟s length principle envisaged under the Act and in doing so have grossly erred by:
3.1 not finding any merit in the objections of the Appellant that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 3.2 disregarding multiple year/ prior years‟ data used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year („FY‟) 2007-08) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation;
3.3 rejecting the Transfer Pricing („TP‟) documentation maintained by the Appellant under section 92D of the Act and Rule 10D of the Rules and disregarding the ALP as determined by the Appellant in the TP documentation;
3.4 concurring to the flawed Functions, Assets and Risk („FAR‟) analysis of the Appellant‟s business operations undertaken by the Ld. TPO purely based on his own conjectures and surmises and thereby concluding that the Appellant assumes significant risks relating to its business operations; 3.5 concluding that the Appellant was undertaking various functions that led to „creation and maintenance of human capital intangible" based on his own conjectures and surmises;
3.6 rejecting the economic/benchmarking analysis undertaken by the Appellant supported by a detailed FAR analysis by merely concluding that the search for foreign comparables undertaken by the Appellant was "unnecessary and inappropriate" thereby ignoring the fact that at the time of conducting the economic analysis, the data for comparable companies in domestic jurisdiction was not available in databses;
Page No. 5 ITA No. 6184/Del/2012 3.7 concurring with the fresh economic/benchmarking analysis undertaken by the Ld. TPO using Indian comparable based on a flawed FAR analysis of the Assessee‟s business operations purely based on his own conjectures and surmises and thus concluding that with respect to the said transaction the Assessee was undertaking various functions that led to creation and ownership of various intangible assets and assuming several risks and in particular; 3.7.1 by rejecting Companies having different financial year ending (i.e. not March 31,2008) or data of the company does not fall within 12 months period i.e. 01-04-2007 to 31-03-2008;
3.7.2 by rejecting two Indian comparable
companies, namely, Adecco Flexione
Workforce Solutions Private Limited ("Adecco") and Ma Foi Management Consultants Limited "Ma Foi") submitted by the Assessee as part of its fresh search and in response to the showcause notice issued by the Ld. TPO on an arbitrary and unreasonable basis; 3.7.3 not complying with the directions of Ld. DRP in case of Adecco Flexione Workforce Solutions Pvt. Ltd. („Adecco‟), wherein the Ld. DRP had agreed that the said company is functionally comparable to the Appellant and directed the Ld. TPO to verify whether the related party transactions of Adecco fall below 25% of the company‟s total sales and accordingly, recompute the ALP of the international transaction entered into by the Appellant by including Adecco in the final comparables set if the related party transactions of the company falls within the 25% threshold;
3.7.4 by using three companies as comparables for determination of arm‟s length margin out of which two companies provide diversified Page No. 6 ITA No. 6184/Del/2012 services and are not comparable to the Assessee;
3.7.5 by including high-profit making companies in the final comparables‟ set for benchmarking a low risk captive unit such as the Assessee (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single-minded intention of making an addition to the returned income of the Assessee;
3.7.6 rejecting comparability analysis undertaken by the Assessee in the TP documentation/ fresh search and conducting a fresh comparability analysis based on his own search strategy for determination of the ALP and rejecting, in particular, the following filters applied by the Assessee in its fresh search:
3.7.7 companies with ration of other operating income (i.e. income other than manufacturing and trading income) to sales greater than 50% were selected;
3.7.8 companies with the ratio of research & development costs to sales less than 3% were selected;
Companies with net worth less than zero were eliminated;
Companies with the ratio of sum of advertising, marketing and distribution expenses to sales less than or equal to 3% were selected.
3.8 holding that the reimbursement of expenses by AE is directly linked to the nature of services provided by the Appellant to its AE and thereby imputing a mark-up on the same and ignoring the business/ commercial reality that Page No. 7 ITA No. 6184/Del/2012 reimbursement of expenses by AEs is a "pass-through", no revenue generating transaction undertaken by the appellant and based on the Transfer Pricing principles, international guidance and recent case laws no mark-up is required to be earned on such pass through transactions; 3.9 misconstruing the business model of the Appellant which is akin to a Professional Employer Organisation and thereby erroneously comparing the business activities of the Appellant with those of a recruitment agency in spite of Appellant‟s strong objection to the same and rejecting the Appellant‟s plea for treating cost of seconded employees as "pass through costs" since the Appellant had not undertaken any value adding function for such costs and thus only a mark-up on the value added expenses should be imputed for determination of an arm‟s length margin.
4. The Ld. Assessing Officer has grossly erred on facts and in law by initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation.
5. The Ld. Assessing Officer has grossly erred on facts and in law by proposing to compute interest under section 234B and 234D of the Act mechanically and without recording any satisfactory reasons for the same.
6. The Ld. Assessing Officer has grossly erred on facts and in law by disregarding judicial pronouncements in India in undertaking the TP adjustment."
6. At the very outset ld counsel Shri Rahul Kr. Mitra submitted that Tribunal in assessment year 2007-08 vide its order dated 29.03.2012 in ITA No. 4639/Del/2011 has restored the matter to DRP for readjudication and passing a speaking order after considering the assessee‟s contention. Ld Counsel further submitted that out of three comparables selected Ld. TPO, two comparables, viz. Overseas Manpower Corporation (recruitment segment) and Info Edge (India) Ltd., are functionally different Page No. 8 ITA No. 6184/Del/2012 inasmuch as they are recruitment agencies and not a Professional Employer Organization ("PEO") like assessee. Ld counsel submitted that the key difference between PEO and recruitment agencies are as under:-
S. Basis PEO Model Recruitment agency model No.
1. Concept PEO enable prospective A recruitment agency is an employers to cost- organization which matches effectively outsource the prospective employers to management of human prospective employees. The resources, employee concept is to bring together benefits, payroll and the prospective employer workers‟ compensation. based on matching mutual PEO clients focus on their needs of both the parties.
core competencies to The recruitment agency does maintain and grow their not provide any other service bottom line. The PEO in this regard. The model is typically handles the similar to a commission administrative side of model, wherein the employment. commission agent introduces the buyer and seller.
2. Contractual The employment contract Employment contract of the is between the employee personnel to be recruited is (secondee) and the PEO. between the employer and the prospective employee.
The recruitment agency has no role in the employment contract.
3. Revenue PEOs receive a service fee Recruitment companies model for the service provided. receive commission/ income on successfully placing an employee or filling a vacancy for the employer.
4. Costs Employee/ personnel costs Employees recruited by are part of the PEO‟s costs customers are not on the as employees provided to rolls of the recruitment other companies are on its agency. Hence, such payroll. employee costs do not form part of the cost base of recruitment agency.
Page No. 9 ITA No. 6184/Del/2012
7. Ld. Counsel further submitted that the revenue model of a PEO is different from that of recruitment agency as in a PEO model the assessee earns its revenue on fully loaded costs inclusive of the cost of seconded employees vis-à-vis a recruitment agency which does not earn revenue on the cost of employees recommended by it. He submitted that comparing a PEO with a recruitment agency is like comparing a distributor with a commission agent by taking the profit level indicator of operating profit/ total cost. He pointed out that distributor‟s cost is a fully loaded cost including material costs, whereas a commission agent would not have any material costs. The submission is that employees in the case of PEO are like its raw material. Ld counsel, in order to further buttress his arguments, submitted that this aspect become more clear if employee cost is compared with the total cost. He submitted that employee cost to total cost in case of assessee is 68% as compared to Info Edge (India) Limited (46%) and Overseas Manpower Corporation Limited (Recruitment Segment) (24%). He, thus, submitted that assessee‟s employee cost is much more because apart from administrative expenses the employee‟s salary also becomes part of total cost. In sum and substances ld counsel submitted that functional profile of a recruitment agency and a professional employee organisation is entirely different and cannot be compared. Ld counsel has further submitted in its synopsis filed at the time of hearing as under:
"Comparability Analysis The primary contention of the Appellant during this year is against the inclusion of Info Edge (India) Limited („Info Edge‟) and Overseas Manpower Corpn Ltd. (Recruitment Segment) („Overseas‟) in the final comparables set.
Page No. 10 ITA No. 6184/Del/2012 In addition to the difference in model of the Appellant and Info Edge, the Appellant enumerates the following additional ground based on which it contests the inclusion of Info Edge by the Ld. TRO:
Engaged in diversified services such as rendering recruitment, real estate, and matrimonial services. Has a ratio of advertisement, marketing and distribution expenses/ Sales of 26.8% exhibiting the fact that Info Edge owns marketing intangibles. Based on the above, without prejudice to Appellant‟s contention against inclusion of Overseas as a comparable, if Info Edge is excluded from the final comparables set, then the mean margin of comparables work out to 8.35% which is within the 5% range (that works out to 11.25) available to the Appellant.
S. Company Name OP/TC No.
1. Overseas Manpower Corporation Ltd. (Recruitment 6.55% Segment)
2. EDCIT (India) Ltd. (Human Resource Development 10.16% Segment) Average 8.35% Further, the Appellant presents below its additional contentions against the inclusion of Overseas in the comparables set:
Has a ration of advertisement, marketing and distribution expenses/ Sales of 14% exhibiting the fact that Overseas owns marketing intangibles.
Based on the above, if Info Edge and Overseas are excluded form the final comparables set, then the mean margin of comparables work out to 10.16% which is within the 5% range (that works out to 11.25) available to the Appellant.
Page No. 11 ITA No. 6184/Del/2012
S. Company Name OP/TC
No.
1. EDCIL (India) Ltd. 10.16%
Human Resource Development Segment) Average 8.35% The above is in line with the approach followed by the Ld. TPO in immediately succeeding Assessment Year 2009-10, wherein the Ld. TPO has determined the Arm‟s Length Margin ("ALM") using only EDCIL (India) Ltd.‟s (Human Resource Development) Segment. The copy of the TPO order for Assessment Year 2009- 10 forms part of the compendium enclosed herewith.
Appellant's contentions against rejection of its comparables Ld. TPO‟s disposition of the companies selected by the Appellant is reproduced below for you Honour‟s case reference:
S. Name of the Company OP/TC Disposition of Ld. TPO No.
1. Adecco Flexione Workforce 0.01% Rejected-Related Party Solutions Private Limited Transaction ("RPT") details not available.
2. Ma Foi Management 4.28% Rejected-Company accounts Consultants Limited available in the public domain are of Dec 2007 and not Mar 2008
3. EDCIL (India) Limited 10.16 Accepted (Human Resource % Development Segment) Mean 4.82% The Ld. TPO has wrongfully rejected the Appellant comparable Adecco Flexione Workforce Solutions Private Limited ("Adecco") stating the related party details the same are not available. Further, the Ld. TPO has not adhered by the directions of the Ld. DRP wherein it held that:
Page No. 12 ITA No. 6184/Del/2012 Quote
1. Adecco Flexione Workforce Solutions Pvt. Ltd.
In view of the DRP it is functionally comparable and the TPO is directed to verify if RPT is below 25% and if yes to include it as a comparable and recomputed the ALP accordingly.
Unquote However, in this regard, the Appellant submits the following related party snapshot form the annual report of the comparable company (The same was submitted by the Appellant before the Ld. TPO vide its submission dated September 19, 2011 (please refer pg 448 of the paperbook II) and before the Ld. DRP in Form 35A submitted vide dated January 6, 2012 (please refer pg 68 of the paperbook I)) Adecco Flexione Workforce Solutions Limited Schedules of the accounts- Year ended March 31, 2008
16. Notes of Accounts (B) Related party transaction Particulars Holding company Total Transactions for the year March 31, March 31, March 31, March 31, ended 2008 2007 2008 2007 Purchase of services NIL 118,723 NIL 118,723 Interest received 4,216,067 - 4,216,067 - Advances given to the 9,630,767 15,336,123 9,630,767 15,336,123 holding company for sharing of expenses, net of expenses incurred by the Holding company Amount outstanding as at year end Loans and Advances 39,110,996 29,480,229 39,110,996 29,480,229 Debtors - 1,231,609 - 1,231,609 It is clear from the above snapshot that the company does not have any reportable related party transactions which have a bearing on the operating profits of the company. However, on a without prejudice basis, even if transaction pertaining to „interest received‟ was considered for the computation, then the related party transaction would amount to 0.1 % (i.e. Rs. 0.42 Page No. 13 ITA No. 6184/Del/2012 crores/ Rs. 375.21 crores) of the revenue, which is below the threshold considered by the Appellant and the Ld. TPO. Rejection of Ma Foi Management Consultants Limited ("Ma Foi") by the Ld. TPO stating the company accounts available in the public domain are of December 2007 and not March 2008: Further, the Appellant would like to bring to your Honous‟ notice that Ld. TPO/DRP had rejected Ma Foi on account of significant related party transactions in Assessment Year 2007-08, although the Appellant demonstrated that RPT for Assessment Year 2007-08 was only 4.95% of sales. However, the Ld. TPO for Assessment Year 2008-09 has rejected the company as a comparable on the ground that the company has financial year ending December and not March. Accordingly, the Ld. TPO did not consider the financials for year ended December 2007 available in the public databases. In doing so the Ld. TPO has failed to notice that the Ma Foi data for December 2007 has substantial portion i.e. 9 months data that falls within the FY 2007-08. Comparable companies draw up their financial statements for statutory purposes under the Companies Act, 1956, which are considered for comparability. The financial statements may be independently drawn up for tax purposes as of March 31. The Companies are free to adopt different statutory year-ends, which may or may not coincide with the March year end. The fact that a company has a statutory year-end on December 31, 2007 as against the financial year end for tax purposes of March 31, 2008 does not by itself render that company incomparable, for the reason that the financial information is very much contemporaneous and falls within the period permitted by the Income Tax Rules, 1962. However, the Appellant submits below two approaches based on which Ma Foi‟s financials can be calculated for the period April 2007 March 2008.
1. Average of December 2007 and December 2008 data Particulars Dec-07 Dec-08 Average Sales 367.31 498.76 433.04 Total Cost 352.25 490.82 421.54 Operating Profit 15.06 7.94 11.50 OP/TC 4.28% 1.62% 2.73% Page No. 14 ITA No. 6184/Del/2012
2. Proportionate Adjustment to financial ( 9 months from April 2007 to December 2007 and 3 months from January 2008 to March 2008) Particulars Dec-07 9 months Dec-08 3 months TY 2007-
08
Sales 367.31 275.48 498.76 124.69 400.17
Total Cost 352.25 264.19 490.82 122.71 386.89
Operating 15.06 11.30 7.94 1.99 13.28
Profit
OP/TC 4.28% 1.62% 3.43%
As can be seen from the above analysis, even if your Honours‟ were to consider either of the above approach then margin of Ma Foi is reduced. Accordingly, it does not have an adverse effect on Appellant‟s arm‟s length analysis."
8. Ld. Counsel further submitted that ld DRP summarily disposed of all the assessee objection as under:
"3. Info Edge India and Overseas Manpower Corporation According to assessee both are recruitment agencies and their business model is different from PEO model of the assessee and PEO performs many more services as the employment contract is between employee seconded and PEO while once employee is recruited by the agency for the client there is no further action.
There is no difference, in view of DRP, between Personal Employer Organisation (PEO) and recruitment agency functionally. The revenue model may be different but that is an accounting issue, functionally there is no difference. So we concur with the findings of TPO and these tow comparables are accepted. Also TPO‟s logic in rejecting foreign comparables is accepted by the DRP. The reason for recruitment from India is to avail, the services at a particular price. Assessee looks at prices prevailing in domestic market and taking locational advantage into account recruits manpower, so the comparables must be domestic. Objection is rejected."
Page No. 15 ITA No. 6184/Del/2012
9. He, therefore, submitted that no reasons have been assigned by Ld DRP for arriving at its conclusion.
10. Ld DR submitted that since Ld. DRP has considered the assessee‟s objections, therefore, the matter need not be restored back to the file of ld DRP as was done in Assessment Year 2007-08.
11. We have considered the rival submissions and have perused the record of the case. We have noted the detailed objections raised by ld counsel for the assessee and find that ld DRP has not considered the objections of the assessee and merely held that Info Edge (India) Ltd. and Overseas Manpower Corporation Ltd. are functionally same as the assessee. We find that in Assessment Year 2007-08 the matter has already been restored back to the file of the ld DRP and, therefore, keeping in the view the entire conspectus of the case and in the light of the submissions made by ld counsel for the assessee and the findings recorded by the ld DRP, we are of the considered opinion that in the interest of justice the order of the ld. DRP/AO be set aside and matter be restored back to the file of ld DRP for readjudication and passing a speaking order after considering the assessee‟s contention. We direct accordingly.
In the result the assessee‟s appeal is allowed for statistical purposes.
Order pronounced in the open court on 19.07.2013
-Sd/- -Sd/-
(DIVA SINGH) (S. V MEHROTRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Page No. 16 ITA No. 6184/Del/2012
Dated 19/07/2013
A K Keot
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi