Income Tax Appellate Tribunal - Bangalore
M/S Zyme Solutions Private Ltd.,, ... vs Asst.C.I.T., Bangalore on 28 April, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH, 'C', BANGALORE
BEFORE SHRI A.K GARODIA, ACCOUNTANT MEMBER
SHRI LALIET KUMAR, JUDICIAL MEMBER
IT(TP)A No.85/Bang/2016
(Asst. Year - 2011-12)
M/s Zyme Solutions Pvt. Ltd.,
No.459, Laksha Towers,
Ashoka Pillar Road, 2nd Block, Jayanagar,
Bangalore. . Appellant
PAN No.AAACZ2465R.
Vs.
The Asst. Commissioner of Income-tax,
Ward-7(1)(2),
Bangalore. . Respondent
Appellant by : Shri Padamchand Khincha, C.A
Assessee by : Shri Sanjay Kumar, CIT
Date of Hearing : 21-03-2017
Date of Pronouncement : 28 -04-2017
ORDER
PER LALIET KUMAR, JUDICIAL MEMBER
IT(TP)A No.85/B/16 2 This appeal by the assessee is directed against the order passed by the Asst. Commissioner of Income-tax, Bangalore dated 31/12/2015 pursuant to the directions by the DRP dated 23/11/2015 for the assessment year 2011-12.
2. The grounds of appeal raised by the assessee are as under:-
General Grounds:-
"1. passing the Order which is bad in law and disregarding the principles of natural justice. Grounds relating to Transfer Pricing :-
2. making transfer pricing adjustment of Rs. 4,03,93,455/-.
3. making a reference to Transfer Pricing Officer for determining arm's length price.
4. not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition under Chapter X is bad in law.
IT(TP)A No.85/B/16 3
5. passing the order without demonstrating that the Appellant had motive of tax evasion.
6. Re-computing the TP adjustment at Rs. 4,03,93,455/- in the final assessment order pursuant to the directions of the Honourable DRP, without giving basis of computation in the final Assessment Order.
7. The honourable DRP has made enhancement to the TP adjustment and therefore total income, without giving notice of enhancement.
Grounds related to computation of ALP Since computation of TP adjustment pursuant to DRP directions is not given in the final Assessment Order, the Appellant is raising all the following grounds:
8. The lower authorities have erred in:-
a. rejecting the transfer pricing analysis undertaken by the Appellant on unjustifiable grounds;
b. conducting a fresh transfer pricing analysis despite absence of any defects in the transfer pricing analysis submitted by the assessee;
c. rejecting comparables selected by the Appellant in IT(TP)A No.85/B/16 4 the TP study and additional comparables proposed by the Appellant on unjustifiable grounds;
d. adopting inappropriate filters for selecting comparables;
e. Selecting inappropriate comparables and selecting companies as comparables even though they are not comparable in respect of functions performed, risks assumed, assets utilised, size, turnover, unusual business circumstances, high margin and which are not functionally comparable to the Appellant;
f. treating provision for bad debt and bad debts written off as non-operating in nature while computing the margin of the comparables; g. not appropriately computing the working capital adjustment while computing the ALP; h. not making proper adjustment for enterprise level and transactional level differences between the Appellant and the comparable companies; and i. not making proper adjustment for risk differentials between the Appellant and the comparables.
9. The lower authorities have erred in not appreciating that the law does not compel adopting IT(TP)A No.85/B/16 5 many (or any minimum) companies as comparables and that the Appellant could justify the price paid/charged on the basis of any one comparable only.
10. The lower authorities have erred in not allowing the benefit of the +1-5% range mentioned in the proviso to section 92C (2).
Other Grounds
11. The learned AO has erred in levying a sum of Rs. 60,05,520/- under section 234B. On the facts and in the circumstances of the case, interest is not leviable. The Appellant denies its liability to pay interest u/s 234B.
The Appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another.
The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law."
IT(TP)A No.85/B/16 6
3. The assessee is a private limited company. The assessee is a subsidiary of Zyme Solutions Inc., USA. The assessee is a captive service provider rendering services on cost plus mark up basis to its parent company. The services provided are in the field of data processing services pertaining to support to data management services with minimal application of knowledge and limited to nil analytical and technical skills. Associated enterprise receives sales data from the channel distributors of its customers who are based across the world. This data needs cleansing and formatting before it can be sent to the customers. The assessee undertakes the data processing activity, keeps a record of the data received and follows up with distributors. The cleansed data is then loaded to the customers' data warehouse by the end of the week. This process is repeated on a weekly basis.
4. In spite of the parent company having incurred operating losses, the assessee has consistently declared income on the basis of cost plus margin. During the year under consideration, a return of income was filed by the assessee on 30.11.2011 declaring loss of Rs. 32,36,750/- under normal computation and Rs. 1.05.60.849/- as book-profits u/s 11 5J of the Act. The IT(TP)A No.85/B/16 7 assessee, under the normal computation claimed deduction of Rs. 1,52,31,416/- under section 10A of the Act. Tax under MAT provisions being higher was paid.
5. The return was processed under section 143(1) of the Act. The return of income was selected for scrutiny by issue of notice under section 143(2) of the Act. Various details called for were filed by the assessee.
6. The assessee filed an audit report under Section 92E in Form No.3CEB5 certifying the prices charged in the international transaction with the associated enterprise on 29thi November 2011. During the year under consideration, the assessee entered into the following international transactions :-
Description Amount
Data Processing services 24,71,42,655
7. The assessee adopted Transactional Net Margin Method
(hereinafter referred as "TNMM" for short) as the most appropriate method IT(TP)A No.85/B/16 8 to justify the price charged for data processing services.
8. After carrying out a methodical search process on Prowess database, the assessee selected 4 companies as comparables. The assessee computed the arm's length price using data relating to FY 2010-11. Adopting operating profit to cost as the Profit Level Indicator (PL), the arithmetic mean margin of the comparables was computed at 9.06%. The PLI of the assessee was at 7.50%. Since the price received by the assessee was within 5% range of the arm's length price, the transactions in respect of data processing services provided to the AE were considered to be at arm's length.
9. The assessee has selected the following comparable in its TP study:
1. Acropetal Technologies Ltd.,
2. Cosmic Global Ltd.
3. Infosys BPO Ltd.,
4. Ultramarine & Pigments Ltd., IT(TP)A No.85/B/16 9
10. A reference was made u/s 92CA of the Act to the TPO and the TPO vide notice dated 19/2/2014 asked the assessee to submit the financial statements, tax audit report, TP documents mentioned in sec. 92D of the Act. Thereafter the TPO had given show cause notice on 24/11/2014 and vide this notice, the TPO asked the assessee to furnish his reply in respect of the comparable selected by the TPO. The TPO had also proposed three different TP analyses as BPO, KPO software services. The assessee filed the detailed reply on 5/12/2014 and has submitted various objections. The TPO finally passed the order rejecting one of the comparable selected by the assessee and thereafter selected total 10 companies including three companies selected by the assessee and thereafter has concluded the average net profit margin to the margin cost of 10 comparable at 24.77% and after giving the working capital adjustment, calculated the net margin on cost of 23.14%. It may be relevant to mention here that the assessee has not objected the inclusion of Acropetal Technologies Ltd., Cosmic Global Ltd, and Infosys BPO Ltd. In fact in the TP study submitted by the assessee, the assessee has given a profile of these companies as under:-
IT(TP)A No.85/B/16 10
1. Acropetal Technologies Ltd.
Acropetal Technologies Ltd is recognized in Information Technology (IT) outsourcing services. The company offers comprehensive enterprise solutions in Engineering Design Services, Healthcare, and Energy and Environment sectors. The company provides complete solutions in the form of consulting services, outsourcing, professional services, maintenance, and sustenance of all IT needs. They offer a broad spectrum of Engineering Design Services to reduce product design cycle time and costs. The portfolio of services includes concept design, product design & development advanced analysis, reliability engineering and value engineering. Engineering Design Service & Health care segments are considered for the purpose of arriving at margins for comparison.
2. Cosmic Global Ltd.
Cosmic Global Limited (CCI ) is a Business Service Provider with its Operations Center based in Chennai, India and front offices in the United Kingdom and Canada. Part of a 100 million USI) business organization CCL is ISO certified and is characterized by world class quality IT(TP)A No.85/B/16 11 and professionalism. The main services and solutions provided by Cosmic Global Limited are: translation, Localization, voiceovers, Multi lingual Desktop publishing, Accounts Processing and Transcription.
Standalone financials are considered for the purpose of arriving at margins for comparison.
3. Infosys BPO Infosys BPO, the business process outsourcing subsidiary of Infosys (NYSE: INFY), is an end-to-end outsourcing services provider. Infosys BPO addresses the business challenges and unlocks business value by applying proven process methodologies with integrated II and business process outsourcing solutions. The company focuses on integrated end-to-end outsourcing and delivery of result-oriented benefits to our clients through reduced costs, ongoing productivity improvements, and process reengineering.
Standalone financials are considered for the purpose of arriving at margins for comparison IT(TP)A No.85/B/16 12
11. Based on the net margin, the TPO has determined ITES services rendered at 283,099,037/- and accordingly determined TP adjustment for data processing services at Rs.35,956,382/-.
12. Feeling aggrieved by the order passed by the TPO, the assessee filed the proceeding before the DRP. However, before the DRP, the assessee was not successful and the DRP has upheld the finding of the TPO.
13. Though various ground were raised before us, but during the course of argument, but the assessee has only restricted its prayer for the adjudication of the ground with respect to transfer pricing only.
14. Before us, no specific ground with respect to exclusion of any of the comparable has been placed. However, the ld AR has submitted that the assessee has no objection for retention / inclusion of Cosmic Global Ltd., e4e Healthcare Business Services Pvt. Ltd. and Jindal Intellicom Ltd..Further for the remaining seven comparables, the assessee has raised the objections and submitted arguments for exclusion of the said seven comparables.
IT(TP)A No.85/B/16 13 15 Now we deal with the submissions of the assessee with respect to remaining seven companies:-
1) Accentia Technologies Ltd.
In respect of Accentia, the ld AR has submitted that the company is functionally different, as it has significant intangibles. Further this company adopts different business model of inorganic growth via acquiring various companies and, therefore, it was submitted that this company is required to be excluded. For buttress, the ld AR relied upon the following 4 comparables, they are :
1. Swiss Re Shared Services India Pvt. Ltd, in IT(TP)A No.598/Bang/2016
2. S&P Capital IQ India Pvt. Ltd., in IT(TP)A No.564/HYd/2016
3. Exevo India Pvt. Ltd. in ITA No.588/Del/2016
4. Orange Business Services India Solutions Pvt. Ltd. in IT(TP)A No.355/Del/2016 IT(TP)A No.85/B/16 14
16. We wish to take only Swizz Re Shared Services India Ltd. (Supra), wherein at paragraph 15 it is mentioned as under:
"15. As against the above, Assessee was providing back office support to its group companies and affiliates, in the field of reinsurance, which its affiliates were engaged in. Work done by the assessee has been captured by us at para three above. This in our opinion was entirely different from the type of activities that Accentia Technologies Ltd, was into. Type of services rendered by the assessee is also clear from the service agreement entered with its AE called Swiss Re, Zurich, dt. 1.2.2009. Annexture-1 to this agreement, is reproduced hereunder:
IT(TP)A No.85/B/16 15
17. The coordinate bench while excluding the Accentia Technologies Ltd., as comparable has relied upon the decision of Hon'ble Delhi High Court in the case of Ramp green Solution Pvt. Ltd., and other judgment and ultimately in paragraph 20 it has held that the Accentia Technologies Ltd., was not a good comparable for the purpose of ALP study of the assessee.
IT(TP)A No.85/B/16 16
18. The ld AR before us has filed the profile of the assessee company in the paper book and the same is reproduced in the TP order to the following effect:-
"Zyme Solution Pvt Ltd is a wholly owned subsidiary of Zyme Solution Inc., USA. Zyme India is engaged in providing support to data management services to Zyme USA's customers. The Taxpayer is a captive service provider rendering services. On Total cost reimbursement plus. a mark up to its parent company. The services provided are in the field of support functions. pertaining to support to data management services (support to data analysis services) (with minimal application of knowledge and limited to nil analytical and technical skills) to its parent company (associated enterprises) in USA. In spite of the parent company having incurred operating losses, the assessee company has consistently declared income on cost plus margin."
19. As noted by us herein above, the coordinate bench in paragraph 15 has reproduced work profile of the company from the service agreement entered by the assessee with its AE. We noticed that in the IT(TP)A No.85/B/16 17 entire paper book , functions performed by the assessee while discharging contractual obligation with assessee are not available and, therefore, in the absence of any document showing the kind of service being rendered by the assessee to its AE, it is difficult to compare the functions/profile of the assessee company with that of the profile of the M/s Swizz Re Shared Services India Pvt. Ltd., (Supra). In view thereof, we deem it appropriate to remand the matter with respect of Accentia Technologies Ltd. to the file of TPO/DRP for the purpose of comparing the profile of the assessee with that of the Accentia Technologies Ltd./ M/s Swizz Re Shared Services India Pvt. Ltd., (Supra). We may also point out that Delhi High Court in the case of Ramgreen Solutions Pvt. Ltd., Vs. CIT in ITA No.102/2015 dt. 10-8-2015, wherein at paragraph 33 to 35 Hon'ble High court held as under:-
"33. The Special Bench of the Tribunal in Maersk Global Centers (India) Put. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could IT(TP)A No.85/B/16 18 be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability.
34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does IT(TP)A No.85/B/16 19 not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression `KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/ product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing IT(TP)A No.85/B/16 20 analysis. The perception that a BP0 service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BP0 service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently.
35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities.
However, where the controlled transactions are clearly IT(TP)A No.85/B/16 21 in the nature of lower-end ITeS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold".
20. In view thereof TPO is directed to ascertain the profile of the assessee by examining the service agreements which the assessee is having with its AE and to come out whether the service rendered by the assessee to its AE were in the nature of BPO, KPO or Software Services.
21. With respect to Acropetal Technologies and Infosys BPO, the assesse has submitted that these companies are functionally different and is engaged in rendering engineering design services etc. It was further submitted that these companies fails in turnover filter as well as employee cost filter.
Acropetal Technologies Ltd. and Infosys BPO IT(TP)A No.85/B/16 22
22. As stated herein above, the assessee itself has selected the comparables viz., Acropetal Technologies and Infosys BPO and even in response to show cause notice, the assessee has accepted the said comparables. In our view, once the assessee has accepted the comparables before the TPO and has not challenged the said comparables before the DRP and has also not challenged the said comparables before this Tribunal, in our view the exclusion of these 2 comparables on the basis of the chart, is not possible/proper. These 2 comparables cannot be subject matter of appeal before the Tribunal as inclusion of these 2 comparables was never challenged by the assesse before the DRP/TPO as well as before the Tribunal. The grounds raised by the assessee before us are not providing any objection for these 2 comparables. Therefore, the objection of the assessee in respect of exclusion of these 2 comparables is devoid of merit and is, therefore, rejected.
ICRA Online Ltd. (seg) IT(TP)A No.85/B/16 23
23. The assessee has submitted that this company is functionally different since it is engaged in providing information services, software services and KPO services and the company has substantial RPT at 24.77%. The assessee has also drawn our attention to the orders passed by the coordinate bench in the case of 24/7 Customer.com Pvt. Ltd., in ITA No.227/Bang/2010 and Logica Pvt. Ltd., in IT(TP)A No.1129/Bang/2011. The assessee has also submitted that this company fails on export turnover filter of 75%.
24. On the other hand, if we look into the reply given by assessee in response to show cause notice, we notice that the basic objection of the assessee was ICRA Online Ltd. is providing information services and Technology Solution and caters to the financial service sector. It was also mentioned that outsourcing service segment is mainly engaged in providing KPO services and hence rejected in functional analysis. The outsourcing service segment was KPO activity in nature and it is not what the assessee is into.
IT(TP)A No.85/B/16 24
25. On the other hand, the TPO controverted the said study and information at 24/7 Cutomer.com Pvt. Ltd. and has mentioned that ICRA Online Ltd., company has reported 3 segments i.e information services and outsourcing services and software services and only outsourcing was taking into consideration.
26. While dealing with Accentia Technologies Ltd., the Bench has observed the work agreement that the assessee is having its AE is not readily available by way of contract and, therefore, the TPO has only relied upon the submission made by the assessee during the course of proceedings. In our view, it is necessary for the TPO to look into the scope of work which the assessee is rendering to its AE and the TPO should be in a position to categorically comment whether services rendered by the assessee are comparable with that of the ICRA Online Ltd. In view thereof, we deem it appropriate to remand the matter to the file of the TPO to examine this aspect. It may be relevant to point out that though the assessee has raised objection on failure of the comparable of Acropetal Technologies on RPT filter and on export turnover filter.
IT(TP)A No.85/B/16 25 We are not dealing with this issue as the said issue has not been raised and challenged before the TPO. We may note that the assessee has submitted that the company is required to be rejected as it fails on RPT filter being 22.77%. We direct the TPO to verify the RPT of ICRA Online Ltd. (seg) and if the RPT was found to be 22.77% or more than 15% than TPO is directed to excluded it .
Jeevan Scientific Technology Ltd., Mindtree Ltd., iGate Solutions Ltd.
27. The total operating revenue of the assessee was 2,47,142,655/- and the total operating revenue of Jeevan Scientific Technology Ltd., as per page 32 was 172,14,00,000/-, Mindtree Ltd. was 5,653,000,000/- and iGate Global Solutions Ltd was 118,45,540,000/-.
29. The ld AR relied upon the decision of the Tribunal in the case of Macfee Software India Pvt. Ltd., 136/2016 to say that if the turnover of the comparable is below 1/10th of the turnover sales of the assessee or more than 10 times sales of the assessee then said comparables are required to be excluded.
IT(TP)A No.85/B/16 26
30. Respectfully following the judgment of the Macfee Software India Pvt. Ltd., we direct the exclusion of other 3 comparable companies from the list of comparables and accordingly the appeal is allowed for statistical purposes.
31. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 28th April, 2017.
Sd/- Sd/-
(A.K GARODIA) (LALIET KUMAR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Bangalore
Dated : 28/4/2017
Vms
Copy to :1. The Assessee
2. The Revenue
3.The CIT concerned.
4.The CIT(A) concerned.
5.DR
6.GF By order
Asst. Registrar, ITAT, Bangalore.