Income Tax Appellate Tribunal - Hyderabad
S & P Capital Iq (India) Private Limited, ... vs Deputy Commissioner Of Income Tax, ... on 24 April, 2019
ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' B ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri S.Rifaur Rahman, Accountant Member
ITA No.1878/Hyd/2017
(Assessment Year: 2013-14)
M/s. S&P Capital IQ (India) Vs Dy. Commissioner of Income
Private Limited, Hyderabad Tax, Circle 3(1)
PAN: AACCS8657G Hyderabad
(Appellant) (Respondent)
For Assessee : Shri K.C. Devdas
For Revenue : Shri Y.V.S.T. Sai, DR
Date of Hearing: 12.02.2019
Date of Pronouncement: 24.04.2019
ORDER
Per Smt. P. Madhavi Devi, J.M.
This is assessee's appeal for the A.Y 2013-14 against the final assessment order dated 16.10.2017 passed u/s 143(3) r.w.s. 144C(1) of the I.T. Act.
2. Brief facts of the case are that the assessee company, engaged in the business of providing I.T. enabled services to it's A.E, filed its return of income for the A.Y 2013-14 on 30.11.2012 admitting an income of Rs.54,88,99,410/-. During the scrutiny proceedings u/s 143(3) of the Act, the AO observed that the assessee has entered into international transactions with its AE and therefore, the determination of the ALP of international transaction was referred to the TPO u/s 92CA of the Act. The TPO Page 1 of 11 ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
observed that the assessee provides I.T. enabled back office services to its AEs and in this process it extracts the required data from the financial statements, notes to financial statements, audit report etc., and collating in the form of ratios, standardized graphs etc., and also prepares business descriptions, biographies of key executives and tracks key developments in the companies on a regular basis. Therefore, he treated the assessee as a Contract I.T. Enabled Service Provider, operating in a low risk or almost risk mitigated environment.
3. From the 3CEB report/T.P. document, the AO observed that the international transaction was for a sum of Rs.372,38,88,703 and that the assessee's margin was 15.38% and that the reimbursement of expenses to the AE was to the tune of Rs.31,64,046. After going through the TP document, the TPO was of the opinion that the method of search adopted by the assessee suffers from defects which resulted in selection of inappropriate comparables and rejection of comparable companies. Therefore, he rejected the TP document of the assessee and conducted an independent analysis by aggregating both the transactions under the TNMM. He observed that the assessee has selected 10 companies as comparables. The TPO accepted only 3 companies i.e.e4e Healthcare Business Services Private Ltd, Infosys BPO Ltd and Microgenetics Systems Ltd as comparable to the assessee. Thereafter, the TPO adopted 7 companies as comparable to the assessee including the 3 companies taken by the assessee and accepted by the TPO. Thereafter, he arrived at the average margin of the comparable companies at 22.30% and after giving the negative working capital Page 2 of 11 ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
adjustment of (-)1.10%, he arrived at the TP adjustment u/s 92CA of the Act at Rs.25,98,03,681/- towards ITES services rendered by the assessee. In accordance with the TP order, a draft assessment order was proposed against which the assessee preferred its objections before the DRP and the DRP granted partial relief by directing the exclusion of two companies i.e. Acropetal Technologies Ltd and Infosys BPO Ltd from the final list of comparables. In consonance with the DRP order, the final assessment order was passed resulting in the adjustment of Rs.25,10,61,407/- against which the assessee is in appeal before us by raising the following revised grounds of appeal:
"On the facts and circumstances of the case and in law, the Learned Assessing Officer ('Learned AO') has erred in passing the assessment order under section 143(3) read with section 144C of the Income Tax Act, 1961 ('the Act') after considering the adjustments proposed by the Learned Transfer Pricing Officer ('learned TPO') in his order passed under section 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ('Hon'ble DRP').
Each of the ground is referred to separately, which may kindly be considered independent of each other.
That on the facts and circumstances of the case and in law:
1. The learned AO/TPO/DRP have erred in making an addition of INR 251,061,407 to the total income of the appellant in respect of international transaction pertaining to provision of IT-enabled services by the appellant to its associated enterprise ('AE') (hereinafter referred to as 'impugned transaction').
2. The learned AO/TPO/DRP have erred in not accepting the economic analysis undertaken by the appellant in accordance with provisions of the Act and modifying the economic analysis for determination of arm's length price ('ALP') of the impugned transaction to hold that the same is not at arm's length.Page 3 of 11
ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
3. The learned AO/TPO/DRP have erred in:
a. Not accepting the use of multiple year data, as adopted by the appellant in transfer pricing (TP') documentation; and b. Determining the arm's length margins I prices using data pertaining only to Financial Year ('FY') 2012-13 which was not available to the appellant at the time of complying with the Indian TP documentation requirements.
4. The learned AO/TPO/DRP have erred, in rejecting certain comparable companies selected by the appellant by applying inappropriate comparability criteria such as :
a. Different accounting year; and b. Employee cost less than 25 percent of total cost
5. The learned AO/TPO/DRP have erred in passing an order which has computational errors in the margin of the comparable companies used in determination of arm's length margin for the impugned transaction.
6. The learned AO/TPO/DRP has erred, in law and on facts and circumstances of the case, by wrongly rejecting certain companies from and adding certain companies to the final set of comparables for the impugned transactions on an adhoc basis, thereby resorting to cherry-picking of comparable for benchmarking the impugned transactions.
6.1 The learned AO/TPO/DRP has erred, in law and on facts and circumstances of the case, in excluding certain companies listed below from the final set of comparables even though these companies are comparable to the assessee • Informed Technologies Limited • Jindal Intellicom Private Limited ACE BPa Services Limited R Systems Intenational Limited (Seg.) Allsec Technologies Limited Datamatics Financial Services Limited Caliber Point Business Solutions Limited 6.2 The learned AO/TPO/DRP has erred, in law and on facts and circumstances of the case, in including certain Page 4 of 11 ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
companies listed below to the final set of comparables even though these companies are non-comparable to the assessee.
• Hartron Communications Limited (Seg.) (33.43 percent) • Capgemini Business Services (India) Limited (26.78 percent)
7. The learned AO/TPO/DRP have erred in not making suitable adjustments to account for differences in the risk profile of the appellant vis-a-vis the comparable companies.
8. The learned Aa has erred in initiating penalty proceedings under section 271 (1) (c) of the Act.
9. The learned AO has erred in levying consequential interest under section 234B and 234C of the Act.
The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.
The appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case".
4. At the time of hearing, the learned Counsel for the assessee submitted that the assessee is challenging the exclusion of only two companies i.e. Capgemeni Business Services (India) Ltd and Hartron Communications Ltd. The assessee is also seeking inclusion of two companies i.e. Jindal Intellicom Ltd ("Jindal") and Informed Technologies Ltd ("Informed"). Though the assessee has raised as many as nine grounds of appeals, at the time of hearing, the learned Counsel for the assessee submitted that the assessee is limiting its arguments on the exclusion and inclusion of the above companies only and further submitted that if the above two companies are excluded, the assessee's margin would be within the +_3% of the assessee's margin. All other grounds are therefore, treated as not pressed.
Page 5 of 11ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
5. As regards the comparability of Capgemeni Business Services (India) Ltd to the assessee, the learned Counsel for the assessee submitted that the said company was functionally different from the assessee. He submitted that as per the Annual Report of the company, it is engaged in providing diversified high end services in the nature of engineering services, IT Enabled share services, supply chain, procurement, technical publication, operational control assessments for compliance with SOX Act, IT Risk assessment, assurance and risk management. Therefore, according to the assessee, it is a company which is providing KPO services and therefore, cannot be treated as comparable to the assessee. Further, it is submitted that Capgemeni Business Services (India) Ltd is a well known brand, which is used by the said company without any payment of royalty and therefore, the presence of intangible is a factor which has to be considered for excluding this company from the final list of comparables. He referred to the relevant observations of TPO and DRP wherein the relevant objections were raised by the assessee, but were not dealt with by the TPO and by the DRP in detail but were summarily rejected. He has also led us to the relevant papers in the relevant annual reports of the company to buttress his argument that this company is engaged in providing high end KPO services. According to him, Capgemenini is also providing Engineering and Design Services, which are KPO services even as per Rule IOTA.
6. The learned DR, on the other hand, submitted that the assessee is relying upon the recitals in the Website of the Page 6 of 11 ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
company wherein in order to advertise, lot of technical terminologies were used but the fact is that Capgemeni Business Services (India) Ltd is an I.T. enabled service provider and has been treated as such by the Department. He submitted that even the assessee has got a brand value and therefore, the assessee and Capgemeni Business Services (India) Ltd were on par with each other and no adjustment is required to be made.
7. Having regard to the rival contentions and the material on record, we find that Capgemeni Business Services (India) Ltd during the year, provided I.T. enabled assured services in finance and accounting to many Indian and Global clients and has widened the scope of services in supply chain, programme, technology and engineering services etc.,whereas the assessee is providing services in financial processes, annual and quarterly financial reports. Therefore, we are satisfied that both the companies are not into similar type of activities as Capgemeni Business Services (India) Ltd is also into more diversified activities such as Technology & Engineering services and therefore, the activities rendered by it are functionally different. For the sake of clarity and ready reference, the relevant details from the annual report of Capgemeni at Page 1035 of the Paper Book are reproduced hereunder:
"Company Profile & Key Figures:
With more than 180,000 people in over 40 countries, Capgemini is a global leader in consulting, technology and outsourcing services. Together with its clients, Capgemini creates and delivers business, technology and digital solutions that fit their needs, enabling them to achieve innovation and competitiveness. A deeply multicultural organization, Capgemini has developed its own way of working, the Page 7 of 11 ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
Collaborative Business Experience, and draws on Hightshore, its worldwide delivery model.
We offer an array of integrated services that combine top-of- the-range technology with deep sector expertise and a strong command of our four key businesses.
Q. Find Services:
Application Services - Infrastructure Services Services
Business Services - Insights & Data _
Cloud Choice - Technology and Engg. Services
Consulting Services - Mobile Solutions
Cybersecurity - Ready2Series
Digital Services - Secure Your Assets
The aforesaid activities cannot be considered comparable to the assessee which is engaged in providing low end IT enabled services and is a risk mitigated entity.
Further, a news article in Business Wire India, dated 25 October 2012, categorically mentions that Capgemini provides a wide variety of services such as Finance & Accounting, Management Assurance, Engineering Services, Content Management, Research & Advisory, Supply Chain Management, Procurement Services and Human Resources outsourcing etc. However quite many of these services such as engineering services, research and advisory are high-end KPO services which cannot be compared with the routine IT enabled services".
As regards exploitation of brand value, we are in agreement with the contentions of the learned DR that both the companies used brands of their holding companies and therefore, are on par with each other. However, due to functional dissimilarity, we direct the AO to exclude this company from the final list of comparables.
8. As regards, Hartron Communications Ltd is concerned, the argument of the assessee is that it is functionally different because it includes both ITES as well as other services like software services and the segmental results/information is Page 8 of 11 ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
not available. He also submitted that it is an exceptional year of operation with an increase in revenue from BPO business to the tune of 483.72% over the last year and there is a huge fluctuation in the financial results of the company in the earlier and subsequent A.Ys. He also submitted that the fluctuation is on account of difference in treatment of income and expenditure. He submitted that the said company, on one hand, recognizes exceptional revenue on cash basis and the expenditure on accrual basis and thus it violates the concept of mercantile system of accounting. Therefore, it cannot be held as a comparable. The assessee also referred to the decisions of the Tribunal at Delhi in the case of Ciena India in ITA No.1453/Del/2014 wherein it was held that companies whose financial results are not based on mercantile system of accounting, should not be taken as a comparable. In support of this contention, the learned AR referred to the Annual Report of the said company.
9. On the other hand, the learned DR relied upon the orders of the authorities below and submitted that sufficient information with regard to the revenue from ITES is available and has been taken by the TPO in his order. He submitted that the said company is also following mercantile system of accounting except for a few items and therefore, it is not correct to say that the said company is following cash system of accounting which is not allowed to be followed after it was made mandatory to maintain books of account on mercantile system of accounting. Therefore, according to him, Hartron Communications Ltd is also a comparable company.
Page 9 of 11ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
10. Having regard to the rival contentions and the material on record, we find that Hartron Communications Ltd has reported income from both the export and domestic sales. As seen from the auditor's report, the assessee has maintained proper books of account as required by law and there is no qualification by the auditors. At para 1.6 of the notes forming part of the accounts for the year ending 31.03.2013, it is mentioned that all the revenues are accounted from accrual basis, except for processing charges (export income), interest on calls arrears, listing fee and leave encashment which are accounted for on cash basis. At Para 12 of the said report, it is stated that the income from BPO services is Rs.17,99,52,212 which has been booked on the basis of Indian currency realized. At note 17, the revenue from operations is reported, we find that the export income has been reported at Rs.17,99,52,211/-. Further, from the data published by the assessee, this year is an exceptional year of operation. The financial results of Hartron Communications Ltd cannot be considered for the preceding and succeeding financial years is as under:
F.Y 2009-10 (-) 22.07% F.Y 2010-11 (-) 97.56% F.Y 2011-12 (-) 37.15% F.Y 2012-13 25.05% F.Y 2013-14 (-) 2.52% F.Y 2014-15 (-) 26.02% Therefore, it can be seen that this year has been an exceptional year for the said company. Therefore, we are of the opinion that Hartron Communication Ltd cannot be considered as a comparable company to the assessee. In this view of the matter, without commenting on the other objections of the assessee, Page 10 of 11 ITA No 1878 of 2017 S&P Capital IQ India P Ltd Hyderabad.
against this company, we direct the AO/TPO to exclude this company from the final list of comparables only for the ground of exceptional performance during the relevant year.
11. Though the assessee has sought inclusion of Informed Technologies India Ltd, Jindal Intelicom Ltd, we find that by exclusion of the two companies in the above paragraphs, the assessee's margin falls within + or -3% of the average margin of the comparables. Therefore, we do not venture to adjudicate on the inclusion of these two companies at this stage, as it would only result in an academic exercise.
12. In the result, assessee's appeal is partly allowed. Order pronounced in the Open Court on 24th April, 2019.
Sd/- Sd/-
(S.Rifaur Rahman) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 24th April, 2019.
Vinodan/sps
Copy to:
1 M/s.S&P Capital IQ India Pvt. Ltd., Survey No.12P, Kondapur
Village, Serilingampally Mandal, R.R. Distt. Hyderabad 500081 2 Dy.CIT, Circle 3(1) Hyderabad 3 Pr.CIT 3 Hyderabad 4 Chief CIT - (Intl.Taxn) Bengaluru 5 The DR, ITAT Hyderabad 6 Guard File By Order Page 11 of 11