Income Tax Appellate Tribunal - Hyderabad
Monter.Com (India) (P) Ltd.,, ... vs Acit, Circle-1(2), Hyderabad on 31 March, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
S.No. ITA No. AY Appellant Respondent
1 1762/H/11 2007-08 Dy. M/s Monster.com
Commissioner of India Pvt. Ltd.,
Income-tax, Hyd.
Circle - 16(2),
Hyd. PAN -
AACCM3695G
2 1697/H/11 2007-08 M/s Monster.com Commissioner of
India Pvt. Ltd., Income-tax (A),
Hyd. Hyderabad.
PAN -
AACCM3695G
3 49/H/13 2008-09 Dy. M/s Monster.com
Commissioner of India Pvt. Ltd.,
Income-tax, Hyd.
Circle - 16(2),
Hyd. PAN -
AACCM3695G
4 69/H/13 2008-09 M/s Monster.com The Income Tax
India Pvt. Ltd., Officer, Ward -
Hyd. 16(2), Hyd.
PAN -
AACCM3695G
5 1333/H/14 2009-10 Dy. M/s Monster.com
Commissioner of India Pvt. Ltd.,
Income-tax, Hyd.
Circle - 16(2),
Hyd. PAN -
AACCM3695G
6 872/H/14 2009-10 M/s Monster.com Dy. Commissioner
India Pvt. Ltd., of Income-tax,
Hyd. Circle - 16(2),
Hyd.
PAN -
AACCM3695G
Revenue by : Shri P. Chandra Sekhar
Assessee by : Shri B. Satyanarayana Murthy
2
ITA No. 1762/H/11 and others
Monster.Com (India) Pvt. Ltd.
Date of hearing 28-02-2017
Date of pronouncement 31-03-2017
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
These appeals are preferred by the Assessee as well as Revenue against the orders of Commissioner of Income-tax (Appeals) (in short CIT(A)) for assessment years 2007-08 to 2009-10. As identical issues are involved in these appeals, they were clubbed and heard together and, therefore, a common order is passed for the sake of convenience.
ITA No. 1697/H/11 for AY 2007-08 by assessee and ITA No.1762/H/11 by the revenue.
2. Briefly the facts of the case are that the assessee company is engaged in the business of providing online recruitment services. It filed its return of income for AY 2007-08 on 30/10/2007 admitting loss of Rs. 3,68,28,299/-. The return of income was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued, against which, the AR of the assessee furnished information/details called for. Thereafter, the AO completed the assessment u/s 143(3) r.w.s. 92CA r.w.s. 144C of the Act and determined the total income of the assessee at Rs. 22,31,19,883/- by making the following additions.:
1. Delayed payment of employees contribution to PF
2. Taxing of accrued income shown as unmatured advances in the balance sheet.
3. Arm's length Price determined by TPO u/s 92CA of the Act.
3. Aggrieved with the above order, the assessee preferred an appeal before the CIT(A) against the additions in respect of accrued 3 ITA No. 1762/H/11 and others Monster.Com (India) Pvt. Ltd.
income shown as unmatured advances and Arm's length price adjustment u/s 92CA of the Act.
4. As regards the issue of taxing of accrued income shown as unmatured advances in the balance sheet, the CIT(A) after considering the submissions of the assessee and relying on the decision of the coordinate bench of this Tribunal in assessee's own case for the Previous Year, deleted the addition made by the AO.
5. As regards the addition in respect of international transactions, the CIT(A) gave partial relief to the assessee.
6. Aggrieved by the order of the CIT(A), the revenue is in appeal before us against the deletion of addition on account of unmatured advances and the assessee is in appeal before us against partial relief on account of international transactions.
7. As regards the issue of taxing of accrued income shown as unmatured advances in the balance sheet, raised by the revenue in its appeal (Ground Nos. 1 & 2), the AO observed as under:
" 1. The advances shown by the assessee are already accrued to the assessee. These are not refundable receipts. As per notes to Accounts at Point No.2, it was mentioned that 'Unmatured income includes the amount whereof has not been linked and identified with the individual customers - contracts in view of volumes and heterogeneous nature of contracts. Besides, there are no uniform payment terms in the variety of contracts entered into during the year. This, however, does not impact income accrual and disclosure in the balance sheet except in case of debtors to the extent of amount not so determined.' This note to the accounts clearly indicates that the income is already accrued in respect of these advances.
2. The assessee-company was requested to submit confirmations from the companies from whom these advances are received to show that these amounts are appearing as liabilities in their balance sheet to prove the point that this income is not accrued to the assessee. If the paying company debits the full expenditure on these payments, the receiving company cannot show part of the amount as receipt and part of the amount as advance. The examination of agreement copies entered by assessee with others for providing on-line services, clearly 4 ITA No. 1762/H/11 and others Monster.Com (India) Pvt. Ltd.
indicate that the income is already accrued to the assessee. There is no clause for refund of these advances in the agreements entered by the assessee with others.
3. The assessee-company is following mercantile system of accounting and therefore, the company has to offer the entire amount as receipts and provide for provision for expenses to be incurred, if any, in respect of these amounts based on some scientific method or past experience and it cannot postpone the entire amounts to the subsequent period on the ground that the period of service is not yet completed. The assessee-company already debited huge direct or indirect expenses on these receipts and postponement of all these receipts results in distortion of true profits.
4. Whatever be the method followed, recognition of revenue has to be in consonance with the method of accounting so followed vis-à-vis the nature and character of the amount accrued or received and the year of such accrual or receipt [State Bank of Travancore 158 ITR 102 (SC)]. The Assessing Officer has the power to adopt the correct method of valuation of closing stock instead of wrong method adopted by the assessee for a long period. Method of stock valuation followed should not only be consistent but should also be correct. British Paints India Limited 188 ITR 44 (SC).
Similar issue is involved in the assessee's own case and additions were made on this issue for the assessment years 2004-05 to 2006-07. Accordingly, the unmatured income of Rs.51,02,38,034/- is treated as assessee's income. In this case, while completing the scrutiny assessment for the assessment year 2006-07, the unmatured income/advance shown of Rs.30,11,23,732/- was taxed as income. In the assessment year 2007-08, the assessee offered these advances as receipts and therefore, these amounts are excluded from the receipts. The addition on this count comes to Rs.20,91,14,302/- (i.e., Rs.51,02,38,034 - Rs.30,11,23,732)."
8. The CIT(A) following the decision of the ITAT in assessee's own case, deleted the addition made by the AO.
9. Aggrieved, the revenue is in appeal before us.
10. Before us, the ld. DR has conceded that the issue in dispute is squarely covered by the decision of ITAT in assessee's own case, while, the ld. AR has relied on the order of the CIT(A).
5 ITA No. 1762/H/11 and othersMonster.Com (India) Pvt. Ltd.
11. Considered the rival submissions and perused the material facts on record. The issue is covered in favour of the assessee by the decision of the ITAT, Hyderabad in assessee's own case in ITA No. 1081/Hyd/04, for AY 2001-02, order dated 10/08/2007 wherein the coordinate bench observed as under:
" In the second ground, the revenue is aggrieved against the deletion of the addition made on account of difference in professional receipts. It was noted by the AO that as per two TDS certificates, the assessee had received professional fees aggregating to Rs. 1,39,125 (Rs. 1,18,125 + 21,000). However, the assessee had shown total receipts of Rs. 60,558/- only. The explanation of the assessee was that it follows mercantile system of accounting and under the said system, it recognizes the revenue on the basis of proportionate completion method which is recognized by the Institute of Chartered Accountants of India (ICAI) in its Accounting Standard of Revenue Recognition. Under this method, revenue is recognized proportionately by reference to the performance of each act. The revenue recognized under this method would be determined on the basis of contract value, associate cost, number of acts or other suitable basis. When services are provided by an indeterminate number of acts over a period of time, revenue is recognized on a straight line basis over the specific period. However, the assessing officer was of the view that since the said Accounting Standard has not been notified recognized by the CBDT under s.145(2) of the IT Act 1961 (the Act), the receipts have to be accounted for on the basis of TDS certificates. Accordingly, the amount of Rs.78,567 was added as difference in professional receipts. The CIT(A) considered the explanation of the assessee and following the order of the Hyderabad Bench of the Tribunal in the case of Bharat Television Ltd. In ITA No.1797/Hyd/89 and of the Madras Bench in the case of Sakura Electronics (P) Ltd. allowed the claim of the assessee.
The contention of the learned Departmental Representative was that since the assessee has accounted for only proportional receipt, credit for the entire TDS cannot be allowed. On the other hand, the learned counsel supported the order of the CIT(A).
On due consideration of the matter, we uphold the order of the CIT(A). Whether a particular Accounting Standard has been notified or not is not material. What is to be seen is whether the assessee has followed a recognized method of accounting or not. If method followed by the assessee is such whereby correct income cannot be deduced, then only the assessing officer has 6 ITA No. 1762/H/11 and others Monster.Com (India) Pvt. Ltd.
the authority to adopt a reasonable basis to determine the total income. In the instant case,. It cannot be disputed that the assessee has followed a recognized method of accounting and hence, there is no question of adding any further amount to the total income. There being no infirmity in the order of the CIT(A), we uphold the same."
Therefore, we do not find any infirmity in the order of the CIT(A) in deleting the addition made by the AO following the decision of the ITAT and, accordingly, we uphold the order of the CIT(A) and dismiss the ground raised by the revenue in its appeal.
12. As regards the issue regarding ALP adjustment by TPO, raised by the assessee in its appeal (3-10 grounds of appeal), it is observed that the assessee made certain international transactions pertaining to BPO services to its AEs Viz., Monster Worldwise Inc., USA, Monster Worldwide Ltd., UK and Monster SG Pte Ltd., Singapore. The AO referred the matter to TPO vide letter dated 23/11/2009 to determine Arm's Length Price (ALP). TPO vide his order u/s 92CA(3) of the Act dated 29/10/2010 determined the ALP of the international transactions at Rs. 14,45,74,324/- as against Rs. 9,86,40,527/- adopted by the assessee. Thus, the difference of Rs. 4,59,33,797/- is the adjustment made u/s 92CA of the Act.
13. Aggrieved with the above order, the assessee preferred an appeal before the CIT(A) and submitted before the CIT(A) that assessee has entered into BPO services with its AEs for the first time during this year and one time data cleaning services as detailed below:
Telecalling Monster Worldwide, USA 7,21,39,173 Monster Worldwide, U.K. 50,77,468 Monster Worldwide, Singapore 79,59,335 8,51,75,976 Data Cleaning Monster Worldwide, U.K. 1,34,64,550 9,86,40,526 7 ITA No. 1762/H/11 and others Monster.Com (India) Pvt. Ltd.
In the above transactions, assessee has adopted 15% mark up on the cost relating to BPO services and for data cleaning charges. It has charged fee of Rs. 18,000/- per month + $ 2 dollars each for records processed. It has earned huge margin of 63.8% on such data cleaning services. The abstract of the revenue is given below:
US UK Singapore Total Tele-calling activity Turnover 72,139,173 5,077,468 7,959,335 85,175,976 (A) Total cost 62,729,716 4,415,190 6,921,161 74,066,067 15% mark 9,409,457 662,278 1,038,174 11,109,910 up Data Cleaning Activity Turnover - 13,464,550 - 13,464,550 (B) Total Cost - 4,868,943 - 4,868,943 Margin - 8,595,607 - 8,595,607 Total (A+B) 98,640,526
13.1 For the purpose of TP regulations, the assessee adopted the cost + 15% mark up as ALP in respect of BPO services. In respect of data cleaning services, as the transactions were one time and the margin worked out at 63.8% on the turnover and at Rs. 176.5% on cost, the assessee did not work out any comparables.
13.2 The assessee submitted that TPO has adopted mark up of 36.41% and subsequently, after considering the objections of assessee, TPO has reduced the mark up to 30.21%. Assessee further submitted that TPO has increased the operating cost of international transactions to Rs. 11,10,31,660/- as against the cost of Rs.
7,89,354,010/- as declared by the assessee . On the operating cost of Rs. 11,10,31,660/-, the TPO has adopted the ALP margin of 30.21% and determined the ALP at Rs. 14,45,74,324/-. Accordingly, determined the ALP adjustment of Rs. 4,59,33,797/-.
8 ITA No. 1762/H/11 and othersMonster.Com (India) Pvt. Ltd.
13.3 Assessee submitted that TPO has committed a mistake by increasing the cost incurred by the assessee in international transactions, TPO treated the entire cost of business of the assessee as one involved in international transactions, computed percentage of loss on overall basis and computed the cost by applying that percentage to the international turnover shown.
13.4 As regards the other issue relates to the percentage of mark up recommended by the TPO, the assessee submitted that the activity carried out in BPO is a non-technical activities carried out by under- graduates and graduates. The assessee in its TP analysis has relied on the comparative cases. The assessee had a margin of 15% and it was substantiated by comparative cases referred to in TP documentation. Whereas the TPO recommended a mark up of 30.21% as against 15% adopted by the assessee. The TPO treated the assessee as a company carrying on the business of software development and basically an export oriented unit. Assessee submitted that the TPO failed to appreciate that the assessee is mainly a domestic company which carried on the international transactions in a very minor scale. The figures given below will substantiate its position:
a) Domestic turnover from the main activity of data bank maintenance Rs. 77,47,93,696
b) interest income Rs. 17,92,175
c) Other income Rs. 7,83,431 Rs. 77,73,69,302 Income from BPO operations Rs. 9,86,40,526 Total Rs. 87,60,09,828 ============ 13.5 Assessee further submitted that some of the facts and observations of the TPO are mostly related to some other company and, therefore, the finding reached by the TPO do not apply to the case of the assessee.9 ITA No. 1762/H/11 and others
Monster.Com (India) Pvt. Ltd.
14. After considering the submissions of the assessee, the CIT(A) observed as under:
1. The turnover of tele calling activities is Rs. 8,51,75,976/-. The turnover of data cleaning activity is Rs. 1,34,64,550/- bringing the total turnover form international transactions to Rs.
9,86,40,526/-. With respect to the former, the appellant stated that the only cost incurred were employee costs and depreciation on computers and head phones provided to the employees. On these costs, a 15% mark up was made. On the other hand, with respect to data cleaning activities, the amount charged by the appellant was Rs. 18,000I- per month per person plus $2 for records processed. Therefore, the billing amount worked out to Rs. 1,34,64,550/-.
2. It is important to note that the appellant has not provided any details of the amount billed with respect to the BPO tele calling services. Significantly, it is to be noted that the appellant has not added all the costs. There are costs involved in maintaining office, electricity and host of other things connected to a particular activity. Each of these costs relating to international transaction has to be apportioned to that activity. It is incorrect to say that only employee salaries and deprecation on computers and head phones would be enough to account for all the costs relating to BPO services. The operating costs have not been determined correctly by the appellant.
3. The Transfer Pricing Officer pointed out that the appellant has wrongly picked 20 suitable companies only to justify its markup. The Transfer Pricing Officer has rightly pointed out that no filters have been applied by the appellant and that the results of companies so chosen are not really incredible.
4. The Transfer Pricing Officer has rightly stated that the appellant is mainly in IT enabled services. However, he has compared the results of the International Transactions of the appellant in part with some software developing companies. The appellant has not developed any software.
5. The appellant has pointed out that some of the facts mentioned by the Transfer Pricing Officer actually relate to some other companies and are not really relevant. This observation is partly correct. However, I find that the filters applied by the Transfer Pricing Officer are as follows:
• Companies whose data is not available for the FY 2006-07 were excluded.
• Companies whose IT enabled service revenue <Rs 1 cr. Were excluded.10 ITA No. 1762/H/11 and others
Monster.Com (India) Pvt. Ltd.
• Companies whose IT enabled service revenue is less than 75% of the total operating revenues were excluded • Companies who have more than 25% related party transactions(income as well as expenditure combined) of the operating revenues were excluded • Companies who have less than 25% of the operating revenues as export sales were excluded • Companies who have diminishing revenues/persistent losses for the period under consideration were excluded • Companies having different financial year ending (i.e. not March 31, 2006) or data of the company does not fall within 12 month period Le. 01-04-2005 to 31-03-2006, were rejected • Companies that are functionally different from that of taxpayer, after giving valid reasons, were excluded.
6. Para 16 of the order of the TPO is reproduced below:
"16. The comparables considered during the last assessment year (AY 2006-07) It can be seen from the order passed u/s 92CA in the case of taxpayer for the AY 2006-07 that the following 13 comparables are considered by the TPO. The selection / rejection of these companies for the current assessment year (AY 2007-08) are discussed as below.
16.1 Maple eSolutions Ltd This company is considered as a comparable by the TPO even for the current AY 2007-08.
16.2 Allsec Technologies Ltd This company is considered as a comparable by the TPO even for the current AY 2007-08.
16.3 Datamatics Financial Services Ltd (Seg.) This company is considered as a comparable by the TPO even for the current AY 2007-08. « 16.4 Transworks Information Services Ltd This company is considered as a comparable by the TPO even for the current AY 2007-08.
16.5 Cosmic Global Ltd This company is considered as a comparable by the TPO even for the current AY 2007-08.11 ITA No. 1762/H/11 and others
Monster.Com (India) Pvt. Ltd.
16.6 Vishal Information Technologies Ltd This company is considered as a comparable by the TPO even for the current AY 2007-08.
16.7 Asit C Mehta Financial Services Ltd (Earlier known as Nucleus Netsoft & GIS (India) Ltd) This company is considered as a comparable by the TPO even for the current AY 2007-08.
16.8 Goldstone Infratech Ltd (Seg.) (Earlier known as Goldstone Teleservices Ltd) This company is not considered as a comparable by the TPO for the current AY 2007-08 as the turnover of the ITES segment is below Rs. 1 crore for the FY 2006-07.
16.9 Spanco Ltd (Seg.) (Earlier known as Spanco Telesystems & Solutions Ltd.) This company is considered as a comparable by the TPO even for the current AY 2007-08.
16.10 Ace Software Exports Ltd This company is not considered as a comparable by the TPO for the current AY 2007-08 as the company has declining revenues for the last three year upto and including the FY 2006-07.
16.11 Apex Knowledge Solutions Pvt Ltd This company is considered as a comparable by the TPO even for the current AY 2007-08.
16.12 R Systems International Ltd (Seg.) This company is considered as a comparable by the TPO even for the current AY 2007-08.
16.13 Flextronics Software Systems Ltd (Seg.) This company is considered as a comparable by the TPO even for the current AY 2007-08.
A plain reading of the above in this case reveals that the Transfer Pricing Officer has written certain things which are factually incorrect. There is no order in the case of the appellant under section 92CA for Asst. Year 2006-07. Obviously, the Transfer Pricing Officer has quoted this with reference to some other tax payer and not the appellant. The appellant has also categorically stated that there was no such order for the earlier year.
7. From the filters given above, I see that the Transfer Pricing Officer has excluded companies whose IT enabled service revenue is less than 25% of the total operative revenue as export 12 ITA No. 1762/H/11 and others Monster.Com (India) Pvt. Ltd.
sales. From the data given on page 3 of the TPO order, I find the following information:
"2.3 Financial Results of taxpayer for the F Y 2006-07:
Description Amount
Operating Revenue Rs.87,34,34,222
Operating Cost* Rs.98,31.74,171
Operating Profit (PBIT) (-)Rs. 10,97,39,949
Operating Profit to Cost (-) 11.16%
Ratio
2.4 International Transactions (as mentioned in the 3CES report):
> Provision of BPO Services Rs. 9,86,40,527/-
From the above data, I find that the international transactions compared to the operating revenue are 11.29%. Therefore, the filter with regard to 25% operating revenue is incorrect because, this filter excluded comparable companies. Therefore, the TPO should have excluded those companies who had more than 25% of the operating revenue as export sales and not vice versa.
8. With regard to the 13 comparable companies, I find that a number of them are not comparable to the appellant. For example, Accentia Technologies Ltd (Seg) is 100% export oriented as are Apex Knowledge Solutions Limited, Bodhtree Consulting Ltd (Seg), Datamatics financial Services Limited, etc. A look at the chart on page 56 of the order of the TPO shows that all the companies are not comparable in respect to export earnings over sales ratio with the appellant because the appellant's ratio is only 11.29%. Moreover, a number of these companies are into software development. Services include engineering services, plant design, civil and industrial electronics and process, etc. These services have nothing to do with tele marking and data cleaning services which were provided by the appellant.
9. The most important filter which the TPO did not apply pertained to the specific services undertaken by the appellant i.e., tele marketing, tele BPO services.
10. As another example, Bodhtree Consulting Limited, one of the comparable companies, selected does business relating to epaper processing, offshore projects, epaper solutions. Only one portion of its activities relate to data cleansing services for which anyway the appellant has shown much higher margins.
13 ITA No. 1762/H/11 and othersMonster.Com (India) Pvt. Ltd.
Otherwise, its services do not relate to the services of the appellant.
11. As yet another example, Apex Knowledge Solutions Pvt. Ltd. is into GIS and engineering services and not into services offered by the appellant 5.3 From the above discussions, I find that whereas it is correct to say that the appellant has not taken all expenses Into account and has artificially shown 15% markup on selected cost. On the other hand, the Transfer Pricing Officer has applied incorrect filters and has compared the appellant's results with those of primarily incomparable companies. Therefore, I find that the calculation with respect to actual operating costs calculated by the TPO at Rs. 11,10,31,660/- are correctly calculated because such costs with respect to IT enabled services for exports are not very different from those of the appellant. These costs have also not taken into account any working capital adjustments as the appellant has stated that such an adjustment is not required. On the other hand, the margin of 30.21% is not correct. I hold that the margin of 15% of costs as taken by the appellant would be the correct margin. The cost would be Rs. 11,10,31,660/- as already stated and the arm's length price would work out to Rs. 12,76,86,409/-. The appellant gets relief accordingly."
15. Before us, the ld. AR submitted that assessee is following cost plus method of ALP i.e. cost + 15% mark up in respect of tele calling services (BPO). He submitted that the TPO has disturbed the cost structure relating to ALP adjustment by treating the cost of whole business overlooking the cost involved in international transactions. To support his view, he submitted details of outsourcing billing raised by the assessee to its AEs, which is part of the paper book at pages 7 to 141 and 159 of the paper book. To support his claim, the assessee filed additional evidence in relation to details of cost before us, which is part of the paper book. He submitted that the same information is submitted before us, what was submitted before the CIT(A), which is part of paper book.
16. Ld. DR submitted that TPO has adopted TNMM method rejecting the cost plus method adopted by the assessee. However, he agreed with the observation of CIT(A) that some of the filters adopted by the TPO are incorrect and some of the datas relating to some other 14 ITA No. 1762/H/11 and others Monster.Com (India) Pvt. Ltd.
assessee are adopted by the TPO. He also submitted that the matter can be remitted back to the file of the TPO for fresh consideration.
17. Considered the rival submissions and perused the material facts on record. As noted from the order of TPO, the total cost of the assessee adopted by the TPO is not correct as he should have adopted the cost what is relevant for the international transactions. As observed by the CIT(A), the cost adopted by the assessee are only relating to man power and depreciation relating to computer, may not be sufficient, there may be other cost associated to the international transactions like administration, management resources etc. To substantiate the cost allocation method adopted by the assessee, Assessee has filed additional evidence before us, which requires verification. At the same time, some of the filters adopted by the TPO, as highlighted by CIT(A), are not proper and some of the comparables considered by the TPO are not relevant to the assessee. Considering the above factual errors, we remit the issue back to the file of the TPO for de-novo consideration. We direct the TPO to re-do the assessment after giving proper opportunity to the assessee in this regard. Accordingly, the grounds raised by the assessee are allowed for statistical purposes.
18. In the result, appeal of the revenue is dismissed and appeal of the assessee is allowed for statistical purposes as far as AY 2007-08 is concerned.
ITA No. 49/H/13 for AY 2008-09 by the revenue and ITA No. 69/H/13for AY 2008-09 by the assessee.
19. As regards ground Nos. 2&3 raised by the revenue regarding accrued income shown as unmatured advances amounting to Rs. 16,96,48,620/-, similar issue has been decided by us in AY 2007-08 in revenue's appeal. As the issue is materially identical to that of AY 2007-08, we uphold the order of the CIT(A) in deleting the said addition and accordingly, dismiss the grounds raised by the revenue.
15 ITA No. 1762/H/11 and othersMonster.Com (India) Pvt. Ltd.
20. As regards the ground Nos. 1 to 3( a to j) raised by the assessee regarding the addition of Rs. 7,25,22,986/- in respect of international transactions, in the previous year relevant to the assessment year, the assessee-company made certain international transactions pertaining to BPO services to associated enterprises viz. Monster Worldwide Inc., USA Monster Worldwide Ltd., UK and Monster SG Pte Ltd., Singapore. Hence, AO through letter dt.30.7.2010, a reference has been made to the Transfer Pricing Officer for determination of Arm's Length Price. The Transfer Pricing Officer vide his order u/s.92CA(3) of the Income Tax Act dt 28.10.2011, determined the short fall of Arms Length price (ALP) of the International transactions pertaining to the above transactions at Rs.7,25,22,986/- which is adjusted u/s. 92CA of the Act and the same is added to the total income of the assessee. The order of Transfer Pricing Officer dt.28.10.2011 is treated as part of this order.
21. When the assessee preferred an appeal before the CIT(A), the CIT(A) after analyzing the issue elaborately, confirmed the addition made by the AO.
22. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
23. The ld. AR submitted that the TPO while adopting the operating cost for ALP adopted Rs. 154,90,03,563/- and excluded the sales with unrelated parties of Rs. 14,29,09,863/- and determined the sales with related parties, which is factually incorrect. The actual sales with related parties i.e. BPO services are Rs. 14.29 crores and arrived at the ALP adjustment of Rs. 7,25,22,986/-, which is 50% of actual international transactions. Further the ld. AR submitted that the method adopted by the TPO to arrive at the ALP in relation to operating cost is incorrect.
16 ITA No. 1762/H/11 and othersMonster.Com (India) Pvt. Ltd.
24. Ld. DR accepted the mistakes in the TPO order in relation to arriving of ALP adjustments.
25. Considered the rival submission and perused the material facts on record. The method adopted by the TPO to arrive at the operating cost to determine the ALP is factually incorrect. He has treated the related party transaction as unrelated party transaction and treated total operating cost of the business as international transactions, which is factually incorrect. We are in agreement with the submissions of the ld. AR. Accordingly, we remit the issue back to the file of the TPO to determine ALP de-novo after providing opportunity of being heard to the assessee. Accordingly, grounds raised by the assessee in this regard are treated as allowed for statistically purposes.
26. As regard the ground No. 4 raised by the assessee regarding the addition of Rs. 2,51,21,597/- as interest u/s 234B, it is observed that charging interest u/s 234B is consequential in nature, therefore, interest u/s 234B may be computed on the final taxable income arrived at by the AO.
27. In the result, appeal of the revenue is dismissed and appeal of the assessee is allowed for statistical purposes in AY 2008-09 is concerned.
ITA No. 1333/H/14 for AY 2009-10 by the revenue and ITA No.872/H/14 for AY 2009-10 by the assessee.
28. As regards ground Nos. 1&2 raised by the revenue regarding accrued income shown as unmatured advances amounting to Rs. 60,26,51,868/-, similar issue has been decided by us in AY 2007-08 in revenue's appeal. As the issue is materially identical to that of AY 2007-08, we uphold the order of the CIT(A) in deleting the said addition and dismiss the grounds raised by the revenue.
17 ITA No. 1762/H/11 and othersMonster.Com (India) Pvt. Ltd.
29. As regards the ground Nos. 1 to 3 ( a to g) pertaining to transfer pricing adjustment of Rs. 85,79,248/- u/s 92CA of the Act, by the assessee, it is observed that as per 3CEB report, the international transactions reflected are as under:
AE Nature of Amount
transaction (Rs.)
Monster Worldwide Inc., Provisions of 8,67,01,622
BPO services
Monster SG Pte Ltd., -do- 1,36,76,045
Singapore
Monster Technologies -do- 42,71,726
Malaysia Sds Bhd.
Monster Worldwide Canada Commission 89,374
received
Monster SG Pte Ltd., -do- 9,28,485
Singapore
Monster Worldwide Ltd., UK -do- 29,84,778
Monster.com HK Ltd. -do- 3,63,603
E-career Z(Beijing) Ltd. -do- 33,052
Job Korea Co. Ltd. -do- 3,416
Monster Jobs Mexico S.De -do- 28,523
R.L.de.CV
Monster Technologies -do- 70,015
Malaysia Sdn Bhd
Monster Worldwide C.Z.s.r.o. -do- 46,464
Monster.com Worldwide Inc. -do- 23,863
Monster Worldwide Ltd., UK Commission 16,51,310
paid
Monster Worldwide Inc., USA -do- 1,11,61,814
Monster Worldwide Canada -do- 63,830
Monster SG Pte Ltd., -do- 2,23,188
Singapore
Monster Belgium NV -do- 3,420
Monster Malaysia Sdn Bhd -do- 14,188
Monster.com HK Ltd. -do- 69,049
Monster Technologies Reimbursement 21,72,329
Malaysia Sdn Bhd by AE
Monster SG Pte Ltd., -do- 44,08,797
Singapore
Monster.com HK Ltd. -do- 7,73,605
Monster Worldwide Inc., Reimbursement 5,49,23,576
to AE
18,46,86,072
18
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Monster.Com (India) Pvt. Ltd.
29.1 After examining the TP study submitted by the assessee, the TPO observed that the assessee has not carried out the economic analysis, however, he summarized it as under:
Nature of transaction Amount (Rs.)
Provision of BPO 10,46,49,393
Services
Commission received 45,71,573
Commission paid 1,31,86,799
Reimbursement by 73,54,731
AE
Reimbursement to 5,49,23,576
AE
Sr. Nature of MAM PLI Margin Margin of
No. international of comparables
transaction taxpayer
1 Provision of BPO CPM NA 15% NA
services
2 Commission received RPC NA 10% NA
3 Commission paid RPM NA 10% NA
4 Reimbursement by NA NA NA NA
AE
5 Reimbursement to NA NA NA NA
AE
29.2 The TPO has observed that the assessee has not furnished TP document nor any other document to substantiate its claim of MAM. It has thus not substantiated the transactions by bench marking them. It is further stated in the Annexure D of Form 3CEB that it has secured loan from its AE with an arrangement of interest rate of 200 basis points over the quarterly LIBOR rate. However, during the year no interest has been paid/payable by the assessee.
29.3 As per the audited statement of accounts, the financials of the assessee are as under:
Description Amount (Rs.)
Operating revenue 1,40,63,73,614
Operating Cost 1,19,67,96,659
Operating Profit 20,95,76,955
OP/OR (%) 14.90
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Monster.Com (India) Pvt. Ltd.
OP/OC (%) 17.51
29.4 On going through the TP document, the TP observed that the method of the search process suffers from defects which resulted in selection of inappropriate comparables and rejection of companies that are appropriate comparables. A detailed show cause notice was issued to the assessee and its response was solicited. The assessee has filed its reply on 01/11/2012 and 05/12/2012.
29.5 After considering the submissions of the assessee, the TPO has arrived the arm's length margin at 24.67% and the arm's length price on provisions of ITES was determined at Rs. 11,34,49,059/- and a sum of Rs. 85,79,248/- was treated as adjustment u/s 92C(3) of the Act, by which the income was enhanced.
30. When the assessee preferred an appeal before the CIT(A), the CIT(A) following his decision in AY 2008-09, confirmed the TP adjustment made by the AO/TPO.
31. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
32. In addition to the regular grounds of appeal, the assessee has raised additional grounds, which are as under:
"1. The lower authorities are not justified in adopting, as comparables, the following companies - 1) Accentia Technologies Ltd., 2) Acro Petal Technologies Ltd., 3) Cosmic Global Ltd., 4) eClerx Services Ltd., 5) Genesis International Ltd., and 6) Infosyms BPO Ltd.,
2. The lower authorities should have seen that these companies were held by the ITAT to be as not comparables in their order, in cases similar to or superior to the assessee company."
33. For determination of arm's length price, the TPO has selected the following companies as comparables:
S.No. Company name PBIT/Cost (%)
1. Accentia Tech 49.40
20
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Monster.Com (India) Pvt. Ltd.
2. Acropetal Technologies Ltd. 25.01
(seg.)
3. Aditya BirlaMinacs Worldwide 0.53
Ltd.,
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
(Seg.)
12. Genesys International Ltd. 71.50
Arithmetic Mean 27.42
34. The ld. AR of the Assessee has objected to 6 companies as comparables out of the said companies selected by the TPO, which were rejected by the coordinate bench of this Tribunal in the following cases:
1. HSBC Electronic Data Processing India Pvt. Ltd., in ITA No. 247/Hyd/14, order dated 18/02/2015 for AY 2009-10.
2. M/s Capital IQ Information Systems (India) Pvt. Ltd., Hyd. In ITA No. 124/Hyd/2014 for AY 2009-10, order dated 31/07/2014.
3. M/s Berkadia Services India Pvt. Ltd., Hyderabad in ITA No. 1802/Hyd/13, order dated 19/09/2014 for AY 2009-10.
35. The ld. DR relied on the orders of revenue authorities.
36. Considered the rival submissions and perused the material facts on record. As submitted by the ld. AR of the assessee, the six comparables objected by the assessee, have been excluded by the coordinate benches of this Tribunal in the aforesaid cases. For the sake of clarity, we extract the findings of the coordinate bench in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd., (supra) as under:
"15. We have considered the contentions of the parties and examined the documents and paper-books placed on record. Correctness of inclusion/exclusion of the above companies is decided hereunder case by case.21 ITA No. 1762/H/11 and others
Monster.Com (India) Pvt. Ltd.
(1) Infosys B P O Ltd. :
16. It was the contention of assessee that this BPO is a giant in its area and has brand value of Infosys Technologies limited. Assessee's main contention was that it is not functionally similar and its turnover is much more when compared to that of assessee.
It was also contended that the Infosys BPO has done brand building exercise by incurring large amounts of brand building and advertisement expenditure and undertaking brand campaigning outside India. Further, it also has huge asset base and therefore, this company is not functionally comparable to assessee. Assessee relied on the decision of the Hon'ble Delhi High Court in the case of CIT V/s. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Del), wherein it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee.
16.1 Even though we are not in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs.129.8 crores, which as against turnover of Rs.1016 crores of the Infosys, ( which is only about 5 times) we are of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, just because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company.
(2) Genesys International Ltd.
17. It was the contention that this company functions in two horizontals, and is having super profits. It was further submitted that this company is not only in software development but also in Geospatial Services, which are highly technical. It also involves in consulting activity. It was the contention that this company was analysed by the coordinate Bench of the Tribunal at Delhi in the case of M/s. Mercer Consulting (India) Ltd. V/s DCIT (vide order dated 6th June, 2014 in ITA No.966/Del/2014), wherein this company was excluded in that case. Learned counsel for assessee relied upon the findings of the Tribunal vide paras 14.2 and 14.3, in that case, which read as follows-
"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.22 ITA No. 1762/H/11 and others
Monster.Com (India) Pvt. Ltd.
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 of 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."
17.1. On careful consideration of the matter, respectfully following the above decision of the coordinate Bench, we are also of the opinion that there is vast difference between the functions of the above company and that of assessee. This company as such, cannot be treated as comparable on FAR analysis. We therefore, direct the Assessing Officer/TPO to exclude this company.
(3) Eclerx Services Ltd.
18. The objection of assessee to this comparable is that this company is functionally dissimilar. It is in the business of consultancy and advisory service and provides only analytical data. It is also involved in quality monitoring. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. Therefore, the functions of the above company are dissimilar to assessee, which is a captive service provider. On the principles laid down by the Hon'ble Special Bench of the ITAT (Mumbai) in the case of Maersk Global Centres (India) Pvt. Ltd. V/s. ACIT (ITA No.7466/Mum/2012 for assessment year 2008-09 dated 7.3.2014) and the principles laid down by the coordinate bench of the Tribunal(Delhi) in the case of M/s. Mercer Consulting (India) Pvt. Ltd., (supra), assessee submits that this company cannot be selected as a comparable.
23 ITA No. 1762/H/11 and othersMonster.Com (India) Pvt. Ltd.
18.1 The Learned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded.
18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the 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 Assessing Officer/TPO to exclude this company.
(4) Cosmic Global Ltd.
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 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% of 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, we find that its total revenue from operations are at Rs.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 lac. The ld. 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 ld. 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 inthe 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 ld. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited 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 Limited at 24 ITA No. 1762/H/11 and others Monster.Com (India) Pvt. Ltd.
Rs.27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited 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.
5) Acropetal Technologies Ltd. (seg.)
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 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. 20.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company.
(6) Accentia Technologies Limited.
21. This company was objected to by assessee on the reason of super profits as well as extra-ordinary events. It was submitted that acquisition of Oak Technologies & Trans Services has impact on the profits of the company and has taken inorganic growth as strategy to increase the profits because of the peculiar economic circumstances and brand value. The same in these circumstances cannot be selected. It was submitted that assessee was in medical transcription services.
21.1. The Departmental Representative however, objected to the pleas of assessee stating that the extraordinary events occurred in earlier year and therefore, the same cannot be considered as having any impact in the year under consideration.
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 learned 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 a comparable. Moreover, this is also not a comparable in the case 25 ITA No. 1762/H/11 and others Monster.Com (India) Pvt. Ltd.
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 Assessing Officer/TPO to exclude this comparable, from the list of comparables selected."
36.1 Therefore, following the said decision of ITAT as well as rule of consistency, the companies objected by the assessee in the additional grounds have to be excluded from the list of comparables. In view of the above, we direct the AO/TPO to exclude the aforesaid companies from the list of comparables and recompute the ALP afresh. Accordingly, the grounds raised by the assessee are allowed.
37. As far as the ground No. 4 regarding charging of interest u/s 234B and 234D of the Act, since charging of interest under these sections is consequential in nature, and the same will ultimately depend upon the outcome of the adjustment to be made to the ALP, the AO/TPO is directed to recompute the interest under the said sections accordingly.
38. In the result, appeal of the revenue is dismissed and appeal of the assessee is allowed.
39. To sum up, revenue appeals in AY 2007-08, 2008-09 and 2009- 10 are dismissed and the appeals of assessee in AY 2007-08 and 2008-09 are allowed for statistical purposes and assessee's appeal in AY 2009-10 is allowed.
Pronounced in the open court on 31 st March, 20167 Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 31 st March, 2017.
kv
26
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Monster.Com (India) Pvt. Ltd.
Copy to:-
1. M/s Monster.Com (India) Pvt. Ltd., C/o Venugopal & Chenoy, CAs., 4-1-889/16/2, Tilak Road, Hyderabad - 500
001.
2. DCIT, Circle - 16(2), Aayakar Bhavan, Hyderabad.
3. CIT(A) - V, Hyderabad
4. CIT - IV, Hyd.
5. DR, ITAT, Hyderabad
6. Guard File