Income Tax Appellate Tribunal - Hyderabad
Adp Private Limited, Hyderabad vs Dy.Cit., Circle-1(1),, Hyderabad on 18 January, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 191/Hyd/2014
Assessment Year: 2009-10
ADP Pvt. Ltd., Hyderabad. vs. Dy. Commissioner of Income-
tax, Circle - 1(1),
PAN - AAACW2655C Hyderabad.
(Appellant) (Respondent)
ITA No. 134/Hyd/2014
Assessment Year: 2009-10
Dy. Commissioner of Income- vs. ADP Pvt. Ltd., Hyderabad.
tax, Circle - 1(1),
Hyderabad. PAN - AAACW2655C
(Appellant) (Respondent)
Assessee by : Shri Ravi Bharadwaj
Revenue by : Smt. G. Aparna Rao &
Smt. U. Mini Chandran
Date of hearing 28-12-2016
Date of pronouncement 18-01-2017
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
These appeals are preferred by the assessee as well as the revenue against the orders passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'Act') dated 03/12/2013 relating to AY 2009-10.
2. Brief facts of the case are, the assessee, a wholly owned subsidiary of ADP group, is engaged in the business of computer software development services. The company had set up a 100% EoU under the STPI scheme at Hyderabad in June 1999. For this AY 2009- 10, the assessee filed its return of income on 29/09/2009 disclosing 2 ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
an income of Rs. 6,87,22,369/- after claim of deduction u/s 10A of the Act in respect of profit from STPI unit. The AO vide his draft order enhanced the total income of the assessee to Rs. 16,47,75,806/-, transfer pricing adjustment being Rs. 7,74,11,952/- in accordance with the TPO's order passed u/s 92CA(3) and in computing deduction u/s 10A of the Act, the AO made the following adjustments in applying the prescribed formula.
Export Turnover: Reduced communication charges of Rs. 8,73,53,250/- from export turnover considering the same as attributable to the delivery of software outside India. The above adjustment resulted in reduction on amount of profits eligible for deduction u/s 10A by Rs. 1,86,41,485/-.
2.1 The Assessee entered into the following international transactions for Software Development services and ITES as per Form 3CEB:
Associate Enterprise Amount (Rs.)
ADP Inc., USA 172,76,74,579
ADP Cobra Services Inc. 8,58,45,694
Automatic Data Processing Ltd., 15,19,11,112
Australia
ADP Tax Services Inc 34,26,09,948
ADP Benefit Services Inc 14,45,84,606
ADP Nederlands, BV 2,53,48,070
ADP Screening and Selection 4,67,82,601
Services Inc
ADP Insurance Agency Inc 3,03,93,335
Business Management Software 31,40,0186
Ltd.
ADP Global View BV 5,56,25,346
ADP Canada Co 5,14,90,335
Automatic Data Processing Ltd., 8,50,59,541
UK
ADP Employer Services GmbH 38,09,628
ADP GSI France 1,04,01,322
2.2 The assessee also reimbursed (paid) to AEs, an amount of Rs,4,10,04,154/-. In addition, to the above transactions, the assessee also made payments of Rs. 95,89,335/- towards management fee 3 ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
allocation, and Rs.56,43,087/- towards payroll services to one of the AEs. The transactions pertaining to payment of management allocation fees and payroll services were aggregated with the main transactions therefore, no separate analysis was done.
2.3 The TPO, of all the transactions, determined arm's length price with respect to the international transactions in providing software services. The assessee provided software development services to its AEs as well as ITES and the billing to the AE was on operating cost plus mark-up basis, as per the TP report. Considering that, the TPO conducted search for comparables of the taxpayer with regard to comparables engaged in ITES, and analyzed the transactions pertaining to the ITES.
2.4 As per the Annual report, the financials of the assessee for this FY, 2008-09, were as under:
Description Amount (Rs.)
Operating Revenue 284,26,98,860
Operating Cost 243,13,68,874
Operating Profit (PBIT) 41,13,29,986
OP to Cost Ratio 16.92%
2.5 For determination of the arm's length price of the above
transactions with its associated enterprises, the assessee adopted Transactions Net Margin method (TNMM). TPO did not dispute the method and considered it to be the Most Appropriate Method. The profit level indicator, operating profit to cost ratio, for the assessee was 17.53%. Its TP study based on 8 comparables yielded PLI of 17.53%. Hence the margin earned was considered at arm's length by the assessee. But, the TPO carried out a fresh search, rejected 4 comparables of the assessee, and added another 8 on the basis of information called for u/s 133(6) of the Act. This led to an average (arithmetic mean) PLI of the comparables at 27.42%.The final comparables selected by the TPO are as under:
4ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
Sl.No. Name of the company OP to
Total cost
1. Accentia Tech. 49.40
2. Acropetal Technologies Ltd. (Seg.) 25.01
3. Aditya Birla Minacs Worldwide Ltd. 0.53
4. Cosmic Global ltd. 48.20
5. Crossdomain 29.38
6. Eclerx Services Ltd. 53.34
7. Infosys BPO Ltd. 16.90
8. Jeevan Scientific/Softech 16.56
Technology Ltd.
9. Microland ltd. 2.35
10. Microgenetic Systems Ltd. 10.11
11. R Systems International ltd. 5.77
12. Genesys International ltd. 71.50
Arithmetic Mean 27.42
2.6 Working capital adjustment was allowed by the TPO which reduced the PLI to 23.55%. All these actions led to an adjustment of Rs. 7,74,11,952/-. Calculation for the Arm's Length Price is as below:
Description Amount
Arithmetic mean of PLI as 27.42%
arrived at by the TPO
Less: WCA 3.87%
Arm's length margin as 23.55%
arrived at by the TPO
Operation Cost (OC) 116,70,57,059
Adjusted Arm's Length 23.55% of the
Margin (%) (AALM) operating cost
Arms length price (ALP) @ 144,18,98,996
123.55% of operating cost
Price received by the 136,44,87,044
assessee
Shortfall being adjustment 7,74,11,952
u/s 92CA
The above shortfall of Rs. 7,74,11,952/- was treated as transfer pricing adjustment u/s 92CA of the IT Act by TPO.5
ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
2.7. Accordingly, the TPO passed an order u/s 92CA(3) of the Act on 28/01/2013, recommended adjustment of Rs. 7,74,11,952/-. The same was incorporated by the AO in the draft assessment order.
3. Aggrieved the assessee preferred appeal before the DRP.
4. DRP rejected the objections of the assessee and confirmed the action of the TPO with regard to the adjustment of Rs. 7,74,11,952/-. However, as regards the objection of the assessee regarding computation of deduction u/s 10A of the Act by reducing the data link charges from the export turnover and further not reducing the same from the total turnover, the DRP directed the AO to reduce data link charges from the export turnover as well as from total turnover while computing deduction u/s 10A.
5. Aggrieved with the above order, assessee is in appeal before us and has raised 14 grounds of appeal, out of which the assessee has pressed only ground No. 8 pertaining selection of comparables and ground No. 13 pertaining to short credit for tax deducted at source, which is corporate tax matter. Therefore, the other grounds are treated as not pressed.
6. The Revenue also came in appeal against the action of the DRP in directing the AO to exclude the data link charges and freight charges both from export turnover as well as total turnover while computing deduction u/s 10A of the Act.
First we will take up the grounds of assessee:
7. The ld. AR objected to the selection of following comparables by the TPO, which is raised in ground No. 8.
Name of the company
1. Accential Technologies Ltd.
2. Acropetal Technologies ltd. (Seg.)
3. Cosmic Global Ltd.
4. Eclerx Services ltd.
5. Genesys International Corporation ltd.
6ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
Therefore, we will deal with each of the company that was objected by the assessee.
1. Accentia Technologies ltd.:
1.1 The ld. AR objecting to the aforesaid company being treated as comparable, submitted that the said company has extraordinary events and acquisitions. He submitted that in the following rulings ITAT rejected the said company as comparable:
1. HSBC Electronic Data Processing India Pvt. Ltd., ITA No. 247&295/Hyd/14.
2. M/s Capital IQ Information Systems (India) Pvt. Ltd., ITA No. 124/Hyd/14.
3. TNS India Pvt. Ltd., ITA No. 604 & 419/Hyd/14.
4. Excellence Data Research , ITA No. 159/hyd/14
5. Hyundia Motor Engg. P. Ltd., ITA No. 255/H/14
6. OSI Systems Pvt. Ltd., ITA No. 683&542/H/14 1.2 In the case of Capital IQ Information Systems India Pvt. Ltd., (supra), the coordinate bench has held as under:
21.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the ld. Counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as comparable.
Moreover, this is also not a comparable in the case of M/s Mercer Consulting (India) P. ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the AO/TPO to exclude this comparable, from the list of comparables selected."
1.3 The ld. DR, on the other hand, relied on the orders of revenue authorities and submitted that the acquisition was completed during the year but it may not have any financial impact. (refer page 221 of paper book).
7ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
1.4. After considering the submissions of both the parties and keeping in tune with the consistent view of different benches of the Tribunal in respect of history of this company in acquiring new business. It might have some impact on the financials and inadequate segmental data, this company was not considered as comparable. The ld. DR submitted that there may not be any financial impact due to acquisition. We are not in a position to appreciate as the data submitted before us is insufficient. Considering the consistent view of other coordinate benches, we are inclined to reject this company as comparable. Therefore, we direct the AO/TPO to exclude the aforesaid company from the list of comparables.
2. Acropetal Technologies Ltd.
2.1 The ld. AR objecting to the aforesaid company being treated as comparable, submitted that the said company provides engg design services and a product company. He submitted that in the following rulings of ITAT, which rejected the said company as comparable:
1. HSBC Electronic Data Processing India Pvt. Ltd., ITA No. 247&295/Hyd/14.
2. M/s Capital IQ Information Systems (India) Pvt. Ltd., ITA No. 124/Hyd/14.
3. TNS India Pvt. Ltd., ITA No. 604 & 419/Hyd/14.
4. Excellence Data Research , ITA No. 159/hyd/14
5. OSI Systems Pvt. Ltd., ITA No. 683&542/H/14 2.2 In the case of Capital IQ Information Systems India Pvt. Ltd., (supra), the coordinate bench has held as under:
20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which 8 ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper."
2.3 The ld. DR, on the other hand, relied on the orders of revenue authorities.
2.4. After considering the submissions of both the parties and keeping in tune with the consistent view of different benches of the Tribunal in respect of rejecting this company as comparable due to functionally different and improper segmental data (refer page 235 of paper book). We, therefore, direct the AO/TPO to exclude the aforesaid company from the list of comparables.
3. Cosmic Global Ltd.:
3.1 The ld. AR objecting to the aforesaid company being treated as comparable, submitted that the segmental revenue of BPO segment of this company is only Rs. 27.76 lakhs and also brought to our notic the company has engaged in sub-contracting the business by incurring huge translation charges (Refer page 241 of paper book).
He submitted that in the following rulings ITAT rejected the said company as comparable:
1. HSBC Electronic Data Processing India Pvt. Ltd., ITA No. 247&295/Hyd/14.
2. M/s Capital IQ Information Systems (India) Pvt. Ltd., ITA No. 124/Hyd/14.
3. TNS India Pvt. Ltd., ITA No. 604 & 419/Hyd/14.
4. Excellence Data Research , ITA No. 159/hyd/14
5. Hyundia Motor Engg. P. Ltd., ITA No. 255/H/14
6. OSI Systems Pvt. Ltd., ITA No. 683&542/H/14 3.2 In the case of Capital IQ Information Systems India Pvt. Ltd., (supra), the coordinate bench has held as under:
19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP 9 ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3, which read as under-
"13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this Case constitute 57.31% the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, find that its total revenue from operations are at 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at Rs. 9.90 lacs, translation charges at Rs. 6.99 crore and accounts BPO at Rs. 27.76 lakhs. The Id. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the Id. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs.3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of Rs. 6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment.
13.3. However, we find this case to incomparable on the alternative argument advanced by the Id. AR to the effect that total revenue of the accounts BPO segment of Cosmic Global ltd. is very low at Rs. 27.76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs.86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Ltd. at Rs. 27.76 lacs is still on much lower side, the 10 ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
reasons give above would fully apply to hold Cosmic Global ltd. as incomparable. This case is, therefore, directed to be excluded from the list of comparables.
In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons."
3.3 The ld. DR, on the other hand, relied on the orders of revenue authorities.
3.4. After considering the submissions of both the parties, it is observed that this company has earned in BPO segment only Rs. 27.76 lakhs and also incurred huge cost by way of translation charges. We are aware that the translation charges have an inbuilt margin included in the cost, which cannot compared with the cost structure of the assessee. Hence, this company cannot be considered as comparable. Accordingly, we direct the AO/TPO to exclude the aforesaid company from the list of comparables.
4. Eclerx Services Ltd.:
4.1 The ld. AR objecting to the aforesaid company being treated as comparable, submitted that the said company has diversified services and KPO Services. He submitted that in the following rulings ITAT rejected the said company as comparable:
1. HSBC Electronic Data Processing India Pvt. Ltd., ITA No. 247&295/Hyd/14.
2. M/s Capital IQ Information Systems (India) Pvt. Ltd., ITA No. 124/Hyd/14.
3. TNS India Pvt. Ltd., ITA No. 604 & 419/Hyd/14.
4. Excellence Data Research , ITA No. 159/Hyd/14
5. Hyundia Motor Engg. P. Ltd., ITA No. 255/H/14
6. OSI Systems Pvt. Ltd., ITA No. 683&542/H/14 4.2 In the case of Capital IQ Information Systems India Pvt. Ltd., (supra), the coordinate bench has held as under:
"18.2 We have considered the issue and examined the Annual report and the objections of the assessee. As seen from the 11 ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
annual report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover, this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee's services. We, therefore, direct the AO/TPO to exclude this company."
4.3 The ld. DR, on the other hand, relied on the orders of revenue authorities.
4.4. After considering the submissions of both the parties and keeping in tune with the consistent view of different benches of the Tribunal in respect of the aforesaid company, we direct the AO/TPO to exclude the aforesaid company from the list of comparables.
5. Genesys International Corporation Ltd.:
5.1 The ld. AR objecting to the aforesaid company being treated as comparable, submitted that the said company is functionally different and has provision for geographical information system services. He submitted that the in the following rulings ITAT rejected the said company as comparable:
1. HSBC Electronic Data Processing India Pvt. Ltd., ITA No. 247&295/Hyd/14.
2. M/s Capital IQ Information Systems (India) Pvt. Ltd., ITA No. 124/Hyd/14.
3. TNS India Pvt. Ltd., ITA No. 604 & 419/Hyd/14.
4. Excellence Data Research , ITA No. 159/hyd/14
5. Hyundia Motor Engg. P. Ltd., ITA No. 255/H/14
6. OSI Systems Pvt. Ltd., ITA No. 683&542/H/14 5.2 In the case of Capital IQ Information Systems India Pvt. Ltd., (supra), the coordinate bench following the decision of the Delhi Bench in the case of M/s Mercer Consulting (India) Ltd. Vs. DCIT in ITA No. 966/Del/2014, dated 6 th June, 2014, held that there is a vast difference between the functions of the above company and that of the assessee. This company as such, cannot be treated as comparable on FAR Analysis. We, therefore, direct the AO/TPO to 12 ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
exclude this company. The findings of the bench in the case of M/s Mercer Consulting (India) Ltd. (supra) are as under:
"14.2. We have heard the rival submissions and perused the rival materials on record. It has been noticed supra that assessee is basically providing various services to the customers of its AEs in relation to human resources which are more or less centered around the employees of the prospective clients. When we consider the nature of services provided by Genesys International Corporation Ltd., it comes to the forefront that they are providing full range of geospatial services to its customers. In simple terms, geospatial services means the services relating to the relative position of things on the earth's surface. These basically include 3D mapping, Navigation maps, Image processing, Cadastral mapping, etc. If we take into account the nature of services provided by the assessee, being financial and retirement security, health, productivity of employees and employment relationships and then try to compare them with those rendered by Genesys, it is manifested that both are totally incomparable.
14.3. The TPO on page 48 of his order has examined CBDT Circular SO 890 (E) dated 26.9.2000 which provides a detailed list of products or services that can be covered under the ITES for the purposes of Section 10A and 10B of the Act. In this Circular, Information Technology Enabled Products/Services have been divided into fifteen categories, starting with Bank Office operations, Call centres etc. and ending with Website services. From the very description of such services, it is palpable that even though these fall under the overall ITES category, but some of them are quite different from each other. To cite, service at Sl.No. (vi) of this Circular is 'Geographic Information System services and at Sl. No. (vii) is 'Human Resources Services.' No doubt, all these fifteen categories of products/services have been included under the major head of 'Information Technology Enabled Services' (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading 'Geographical Information Systems Services', whereas those rendered by the assessee fall partly under clause (vii) with the heading 'Human Resources Services' and partly under clause (xi) with the heading 'Payroll'. On juxtaposition examination of these two sets of services, we find that there is a vast difference which make one quite distinct from the other. In view of such functional incomparability between assessee and Genesys, we hold that this company cannot be treated as comparable. We, therefore, direct to exclude this case from the list of comparables."
5.3 The ld. DR, on the other hand, relied on the orders of revenue authorities.
13ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
5.4. After considering the submissions of both the parties and keeping in tune with the decision of the ITAT, Delhi Bench in respect of the aforesaid company, we direct the AO/TPO to exclude the aforesaid company from the list of comparables.
8. We therefore direct the Assessing Officer /TPO to determine the ALP keeping in view our directions given hereinabove and if on such determination the price charged by the assessee for its international transaction is found to be within the arms length then no adjustment is required to be made.
9. As regards ground No. 13 regarding short credit for tax deducted at source, we remand the issue to the file of the AO with a direction to allow the TDS credit in accordance with law.
10. In the result, the appeal of the assessee is allowed.
11. As regards the ground raised by the revenue in its appeal regarding the action of the DRP in directing the AO to exclude data link charges and freight charges both from turnover as well as total turnover while computing deduction u/s 10A, we do not find any infirmity in the order of the DRP as it is in conformity with the ratio laid down by the Hon'ble Bombay High Court in case of CIT vs. Gem Plus Jewellery (330 ITR 175) as well as different Benches of Tribunal including ITAT, Chennai Bench (SB) in the case of ITO vs. Sak Soft (313 ITR (AT) 853) wherein it is held that communication charges attributable directly to the export of article or thing outside India has to be excluded both from export turnover as well as total turnover while computing exemption u/s 10A of the Act. In view of the ratio laid down as above, the finding of the DRP on this issue is upheld and ground raised by the Revenue is dismissed.
12. In the result, appeal of the revenue is dismissed.
14ITA No. 191 & 134/H/14 M/s ADP Pvt. Ltd.
13. To sum up, assessee's appeal is partly allowed for statistical purposes and the appeal of the revenue is dismissed.
Pronounced in the open court on 18 th January, 2017.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 18 th January, 2017
kv
Copy to:-
1) M/s ADP (P) Ltd., 6-3-1091/C/1, Fortune - 9, Rajbhavan Road, Somajiguda, Hyderabad.
2) DCIT, Circle - 1(1), 4 th Floor, Aayakar Bhavan, Hyderabad.
3) DRP, Hyderabad
4. DIT, International Taxation, Income Tax Towers, 10-2-3, AC Guards, Hyderabad - 500 004.
5) The Departmental Representative, I.T.A.T., Hyderabad.
6) Guard File