Income Tax Appellate Tribunal - Delhi
M/S. American Express (India) Private ... vs Acit, New Delhi on 3 August, 2018
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "1-2": NEW DELHI
BEFORE SHRI R.K. PANDA ACCOUNTANT MEMBER
AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
ITA No.: - 1973/Del/2014
Assessment Year: 2007-08
American Express (India) Private ACIT
Limited, Circle-1(1)
Metropolitan Saket, 7th Floor, Vs. New Delhi.
Office Block District Centre, Saket
New Delhi 110017
PAN AAACA8163F
(Appellant) (Respondent)
ITA No. 2577/DEL/2014
Asstt. Year 2009-10
Deputy Commissioner M/s. American Express India
of Income Tax, Circle Vs. Pvt. Ltd.,
1(1), New Delhi Metropolitan Saket, 7th Floor,
Office Block, District Centre,
Saket, New Delhi - 17
Assessee by: Shri Nageshwar Rao & Shri
Sandeep Karhail, Advocates
Department by : Shri H.K. Choudhary, CIT -DR
Date of Hearing 08/05/2018
Date of 03/08/2018
pronouncement
ORDER
PER AMIT SHUKLA, J.M.
The aforesaid cross appeals have been filed by the assessee as well as by the revenue against final assessment order u/s 143(3) r.w.s. 144C, dated 28.2.2014, passed by the AO in pursuance of directions given by the Dispute Resolution Panel, New Delhi, vide order dated 24.12.2013 for the assessment year 2009-10.
2. In various grounds of appeal the assessee has challenged transfer pricing adjustment of Rs. 67,05,58,495/- made on account of provision for export of data processing and back office support services (ITES) and purchase of fixed assets. Before us the assessee on the transfer pricing issue has mainly challenged the inclusion and exclusion of various comparable companies. Besides this assessee has also raised, corporate tax issue on denial of deduction u/s 10A of Rs. 58,93,05,999/- in respect of AEGSC (STP Unit). Besides this assessee has also filed additional ground raising that AO has erred in not granting full credit of tax deducted at source to the assessee as claimed in the return of income.
3. We will first take up the transfer pricing adjustment made in the ITES service segment by the TPO. The brief facts are that the assessee i.e., American Express India Pvt. Ltd. (AEIPL) is 100% subsidiary of American Express International Inc. USA. It undertakes data management, information analysis and control activities for export to various American Express affiliates worldwide. The services are exported to the AEIPL customers mainly through telecom link whereby it receives input in the form of data in electronic form which is subsequently processed. It is compensated for services rendered with a cost-plus mark basis, that is, equal to operating expenses incurred plus an amount equal to 20% of operating expenses. The 2 assessee in transfer pricing study report has reported that it is a captive contract IT enabled services provider catering to the needs of the American Express Group. The functions performed by the assessee in the following manner: -
"AEIPL is a captive contract IT enabled service provider catering to the needs of the Group.
As per the contractual arrangement that AEIPL has with its associated enterprises for the provision of such support, the resultant output is the property of American Express Group and at no point in time shall such ownership vest with AEIPL either wholly or partly. AEIPL does not obtain any copyrights, patents rights, trade secrets or trademarks on such output.
AEIPL is remunerated on a cost-plus basis without regard to the success or failure of its activities. For this purpose, costs comprise all of the direct and indirect costs, including salaries, travel expenses, professional fees, rent, depreciation, financial charges, etc. Therefore, AEIPL is insulated from all key business risks.
The functions performed by AEIPL were as under: -
a) Input AEIPL receives raw data/raw information ("raw data") in electronic form or in the form of paper-based inputs (documents, vouchers, reports etc.). The raw data is received through mail/courier, fax and electronic transmission from clients' respective locations to AEIPL servers via data links. The raw data comprises unprocessed or semi-
processed accounting, financial and commercial information relating to the business of American Express locations worldwide.
The various kinds of raw data received by AEIPL are as follows:
3 Card member Data: Data pertaining to transactions executed by American Express card members.
American Express Company Data: Data pertaining to day-to-day transactions undertaken within American Express companies which need to be recorded and reported to the respective American Express Companies ('customer country') in different reports and accounting formats. Various types of inputs received for processing and recording in electronic or physical form are as follows:
- Invoices:
- Vouchers:
- Vendor Purchase Orders; and
- Employees Travel Expense Vouchers.
- Airlines/SES/Hotels Data: These pertain to transactions undertaken for American Express travel business and include data on:
- Sale of air tickets to customers and payments to airlines:
- Payment to service establishments for purchases made through American Express Cards; and
- Booking of hotels for customers and payments to hotels.
- Customers Bank Data: These include data on treasury and other transactions done by American Express card members.
b) Processing of inputs (Data management, Information Analysis and Control):
The company uses the raw data as input and carries out a series of processes (i.e. reorganization, analysis and transformation and conversion of raw data) as per requirements of its customers to generate customized output.
c) Output 4 The Company's output includes the following items processed and prepared as per the customers' specifications:
Ready to use business reports and computations: Financial statements such as balance sheets, profit and loss accounts, ledgers, trial balances, accounts payable analysis, accounts receivable analysis, and fixed assets registers; Bank account control reports and bank transaction processing; Payroll processing and reports;
Account reconciliation reports;
Payment instructions for payment to vendors; Card transaction process outputs;
Travel MIS reports per customers' specific requirements.
Further, AEIPL also provides fall centre services to Group Companies, which involves answering incoming American Express card member calls for queries related to card member transactions. These queries include, inter alia, balance enquiry, product feature queries, change in personal information, etc."
4. So far as risk assumed by the assessee is concerned as compared to the AE, it was stated that all the major risk like, market risk, credit risk, price risk, etc., all were borne by AEs and the assessee does not have any such exposure of these risks being a captive service provider. Even the foreign currency risk is not borne by the assessee. The assets employed have been stated to be routine tangible assets such as technology infrastructure, office equipment, communication facilities, etc. It does not own any significant intangibles but uses the trademark process, knowhow, technical data software, operating/ quality standards etc. developed and owned by the group companies. Thus, assessee is captive service provider, with no significant intangible assets and is a risk mitigated entity. However, 5 its functions ranges from low end services like call centres and BPO services to preparation of ready to use business reports; financial reports like balance sheets, profit & loss accounts, trial balances, etc.; bank account control reports and host of other reports from raw data. If entity like assessee is carrying myriad of such services, then it is very difficult to classify it as a simply low-end service provider company or pure high-end service provider or KPO. The distinction of low-end service and high-end service becomes very thin in such cases. Hence the comparability with the uncontrolled transactions has to be on deeper FAR analysis.
5. Though assessee had entered as many as 26 transactions with its AEs, however the main dispute in this appeal relates to 'export of data processing and office support services' for the value of Rs. 782,63,63,57,677/-; and for purchase of fixed assets Rs. 41,67,500/-. For benchmarking the margin of ITES segment, the assessee has adopted TNMM as the most appropriate method with PLI as operating profit / operating cost. The assessee's PLI was arrived at 19.06%. After carrying out detailed search process and analysis, the assessee shortlisted nine comparable companies as noted by the TPO in his order, namely: -
S.No. Name of the Company Remarks of the TPO
1 Aditya Birla Minacs Worldwide This is a suitable comparable
Limited
2. Allsec Technologies Limited Diminishing sales for the last three
years. The export revenues are less
than 75% of total turnover, hence
not a suitable comparable
3. C G-VAK Software & Exports Significant income of the company Ltd. is from software development. The income from BPO operations is only Rs. 86 lakhs. This will not be 6 a good comparable.
4. Cepha Imaging Private Ltd. The annual report of the company has been perused. The Company is in the business of E-Publishing Services. E-publishing services include Typesetting, Composition, Art work, Proof reading, project management, XML conversions and multimedia services provided to publishers of books and journals. This is quite different form your functional profile that has been described earlier. That apart, this company cannot be classified as an ITES entity simply because it is using computer-
based technology for its publishing activities. This is not a suitable comparable.
5. Cosmic Global Limited This is a suitable comparable
6. Informed Technologies Limited This is a suitable comparable
7. R Systems International Limited This company has year ending other than March, Reliable financial data will not be available for a 12-month period. This cannot be used as a comparable
8. ICRA Online Ltd. This is a suitable comparable
9. Vishal Information Technologies This is a suitable comparable Limited (Now known as Coral Hub Ltd.)
6. Thus, the TPO rejected four comparables, namely, i) Allsec Technologies Limited; ii) CG VAK Software & Exports Limited; iii) R system International Ltd. (Segmental); and iv) Cepha Imaging Private Limited. In final five comparables from the assessee's search process was accepted by the TPO, that is,: -
7 S. No. Name of the Company
1. Aditya Birla Minacs Worldwide Limited
2. Cosmic Global Limited
3. Informed Technologies Limited
4. ICRA Online Ltd.
5. Vishal Information Technologies
Limited (Not known as Coral Hub Ltd.)
7. The TPO then after detailed discussion, further added two more comparables from the reject matrix of the assessee; i.e., E Clerx Services Ltd.; and Microgenetics Systems Ltd. The average margin of the seven comparables chosen by the TPO was arrived at 29.91 which were as under: -
S. No. Name OP/OC (%)
1. Aditya Birla Minaacs Worldwide Ltd. 0.50
2. Vishal Information Technology Limited 36.93
3. Cosmic Global Ltd. 48.2
4. Informed Technologies India Ltd. 23.16
5. Eclerx Ltd. 47
6. ICRA Online Ltd. 43.6
7. Microgenetics Systems Limited 9.98
AVG. 29.91
8
8. The TPO not only denied the working capital adjustment and risk adjustment, etc., but further tinkered with the calculation of operating margin of the assessee holding that, sum of Rs. 1,53,40,901/- which has been termed as reimbursement of expenditure is required to be considered for applying mark up and consequently for the purpose of computing the arm's length price. Finally, the adjustment made by the TPO under ITES was as under: -
Computation of margin of the tested party: (Rs.) Operating income (excluding reimbursement) 7855449647 Operating Expenditure (excluding reimbursement) 6566523449 Reimbursement received 15340901 Operating income (including reimbursement) 7870790548 Operating income (including reimbursement) 6581864350 Operating Profit 1288926198 OP /OC 19.58% Computation of arm's length price Operating Cost 65428557 Arm's Length Margin (%) 29.91% Arm's Length Price (ALP) 84998238 Price received 70437323 Shortfall being adjustment u/s 92CA 14,560,915
9. Now before us Ld. Counsel for the assessee had challenged inclusion of three comparable companies and exclusion of six comparables companies by the TPO. These comparables are discussed in brief herein below:
9i) E-Clerx Services Ltd. (OP/OC before working capital adjustment 53.23%) (included by the TPO):
10. Before us the Ld. Counsel, submitted that this company cannot be held to be comparable, because this company was into high end KPO services which provides data analytics, operation and management and audit reconciliation services. It is engaged in end to end support through the trade lifecycle, including trade confirmation, settlement, transaction maintenance, risk analytics and reporting. It has different skills of employees and has very high significant intangibles. He pointed out that the Tribunal in assessee's own case for the assessment year 2007-08 (order dated 7.6.2017) has held that assessee is not into a high-end service provider in view of our specific attention to para 27 to 29 of the order. He further submitted that Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs CIT In ITA No. 102/Del/2015 has held that KPO service provider company cannot be taken as comparable for a company which providing simple low-end ITES services i.e. BPO services. He also strongly relied upon the decision of the coordinate bench in the case of Cadence Design system India Ltd. In ITA No. 2071/Del/2014 order dated 4.9.2017, wherein the company has been held to be non-comparable with the company providing company of his support services. Thus, this comparable should be excluded.
11. On the other hand, Ld. DR pointed out to the agreement of the assessee with its AE, dated 1.9.2008 and pointed out that it has been stated that assessee will undertake development and export of computer software information technology enabled services including Global Business Processing and support of services. These kinds of services cannot be held to be low end services. Assessee cannot be said to be performing routine ITES services which is evident from the 10 various kind of functions carried out by it. In the profile of the assessee company, it has been stated that it also includes software development; hence it is much more than KPO. American Express Group is into finance business, the data processed by the assessee is far more complex, hence it has rightly been included by the TPO and upheld by the DRP.
12. By way of rejoinder, Ld. Counsel submitted that, there is no software development for export by the assessee at all and there are no highly qualified manpower which is evident not only from the TP study report, but it has been also accepted by the Tribunal in assessee's own case for the assessment year 2007-08. That it is low- end service provider. The earlier agreement also contained similar scope of work and there is no change except for the mark up.
13. We have heard the rival submissions and also perused the relevant finding given in the impugned orders as well as material referred to before us. The functions carried out by the assessee for the export of data process and back of its support services has already been highlighted above, which is, the raw data comprised of unprocessed or semi-processed data relating to accounting, financial and commercial information pertaining to the business of American Express locations worldwide is received from various electronics means; and after receiving of such data the assessee carries out various kind of processing of output services as enlisted in the earlier part of the order, like preparation of various kinds of business, accounting and financial reports. On perusal of such functions, it is seen that some of the processing like ready to use business reports and computation; financial statement such as balance sheet, profit and loss accounts, ledger, trial balances, accounts payable analysis, accounts receivable analysis, bank account control reports etc. cannot 11 said to be a simple lower ITES services provider. Though, other different services may be reckoned to be a routine ITES services, but not the entire functions. Before us, Ld. Counsel has strongly relied upon the decision of the Tribunal for A.Y. 2007-08, wherein the Tribunal had observed as under: -
"28. On analysis of the functions of the assessee it is noted that it provides back office operations, revenue accounting, call centre services, support centre is naturally and ITES services and is definitely different from the Knowledge process outsourcing services. Further merely for the reason that AEGSEC services at Gurgaon unit provides certain data risk analysis services to detect high risk account activity does not make the services provided as high end services Provider."
Tribunal noted that the services provided are different from KPO services provider and it was only in respect of AEGSCI services at Gurgaon Unit where certain data services were taken, it was held that it does not make high end service provider. Though the cumulative services as provided by the assessee may not be classically put into bracket of high-end KPO service provider, but at the same time it cannot be said that that it is purely low-end ITES service provider in line of BPO services. KPO services normally carry out high end data analysis and data processing solutions which requires highly qualified and technical human resource and skilled persons to carry out such kind of activities. As compared to the BPO where focus is on processing and call service, the KPO requires specialize knowledge and ability to handle more complex activities. Now if we compare E Clerx Services with the assessee, we find that first of all, it is a high end KPO Company which provides data analytics, business knowledge process outsourcing company, re-engineering and automation services. E Clerx Services Ltd. is providing end to end support in trade 12 lifecycle including trade confirmation, settlement, transaction maintenance, risk analysis and reporting and most of its activities relates to settlement etc. Though some of the assessee's activities could be reckoned as slightly more than lower end services provider, but if we compare with E Clerx Service, then functionally it cannot be said to be comparable. On asset side, it is seen that, it has significant intangibles which 7.24% of the total assets, whereas in case of assessee there is none. E Clerx has also outsourced its substantial work to the third parties during the year which in the case of the assessee is only from its own human resources. This is evident from the fact that sum of Rs. 266.56 million has been spent on 'contract services' apart from own employee cost of Rs. 577.31 million. This signifies that substantial part of its services is being outsourced. Such an outsourcing of services is definitely distinguishable from assessee. Moreover, we find that in A.Y. 2007-08, E Clerx has been held to be non-comparable with the assessee following the judgment of Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (377 ITR 533). The High Court held that, it is high-end KPO and most of its work was outsourced to other service providers which affect the profitability. Thus, following the Jurisdictional High Court judgment, we hold that E Clerx Services Ltd. cannot be held as comparable to assessee.
ii) Vishal Information Technologies Ltd.: -
14. This company too has been held to be non-comparable with the assessee by the Tribunal in A.Y. 2007-08. Moreover, it is an undisputed fact that this company operates on outsourcing model as more than 90% of employees have been outsourced. Before us, Ld. Counsel submitted not only it has a different business model of outsourcing activities, but it also functionally different; and in 13 assessee's own case, right from the assessment year 2005-06 to 2007- 08 this company has been held to be non-comparable with the assessee company. On the other hand, Ld. DR submitted that its main work continues to be the IT segment only and functionally it is comparable and whether it is outsourcing the employees, it will not make much difference in the functionality.
15. After considering the aforesaid submissions and considering material placed on record, we find that it has a different business model in as much as its outsourcing charges is 90.57%, which reflects that it has a different business model all together and outsourcing model is different from a company which carries out its work through its own resources as it reflects huge difference in employee cost ratio to turnover. The assets in the form of human resources and other intangible are completely different in such kind of companies. Further this company has been held to be non-comparable by the Hon'ble Delhi High Court in the case of Rampgreen Solutions Private Ltd. (supra) on this ground; and also by the judgment of Hon'ble P & H High Court in the case of M/s. M/s. Mercer Consulting (India) Pvt. Ltd. vs DCIT in ITA 101 of 2015, on the same ground. Moreover, as pointed out by Ld. Counsel, in assessee's own case it has been rejected as comparable. Thus, following the same precedence and as made above we hold that this company should be excluded from the comparability list.
iii) ICRA Online Limited (segment):
16. This company has been included by the TPO as it was engaged in rendering market research and data analysis and services which falls under the category of ITES. Its KPO division provides financial and analytical services and support to the clients in the area of data 14 extraction, aggregation, electronic conversion of financial statements, validation and analysis, accounting and finance research and analytics. The assessee's contention has been that this company is rendering KPO services, therefore, functionally it is not comparable with the assessee. Before us, the Ld. Counsel from the annual report pointed out that this company is rendering KPO services which is different from the activities carried out by the assessee, which is purely low-end service provider.
17. On the other hand Ld. DR, strongly relying upon the order of the authorities below submitted that in so far as functional profile is concerned, ICRA Online carries out almost similar functioning as that of the assessee, because this is also into financial and analytical services accounting and finance etc., and the assessee company is also into the preparation of business reports, computation, preparation of financial statements like balance sheet, profit and loss account, bank account control reports, account reconciliation and similar kind of services. These services cannot be said to be simple low end ITES services. The TPO has held that the ICRA Online provides financial and analytical services and support to the clients in the areas of data extraction, aggregation, electronic conversion of financial statement, validation and analysis accounting and finance, search and analytic services. He submitted that, though these services have been classified as KPO services, but in the case of the assessee also, from the functions performed it can be seen that it receives raw data / raw information in the electronic form for which assessee carries out detailed process and preparation ready to use business reports and computation, financial statements such as balance sheet profit and loss account, ledgers, trial balances and account payable and receivable analysis fixed assets register, bank account control reports 15 and preparation of various other accounts of reports based on the inputs. Preparation of such reports and financial statements from a raw data cannot be held to be simple low end ITES services.
18. We have already discussed in the earlier part that the Tribunal in A.Y. 2007-08 has noted that back office operations, call centre services, revenue accounting is different from KPO. To that extent there could not be any quarrel that such services are simple ITES services. However, preparing of financial reports from a raw data and preparation of balance sheet and profit and loss account and data analytics cannot be held purely as low end ITES service. If the assessee is carrying out various kinds of functions which involve both high-end and low end ITES services, then it is very difficult to categorise it as a simple low end ITES service provider. At times when such varied functions are carried out, then there is very thin line of demarcation between KPO and BPO. The functions carried out by ICRA Online which is again in the field of financial and economic analysis, it cannot be held that functionally this company is different and cannot be compared with the assessee. Even though ICRA Online has classified itself a pure KPO, but on a deeper analysis of the functional profile of the assessee as well as ICRA Online, we find that there is not much of functional differences. On deployment of assets and risks assumed again no distinguishing features has been brought on record. Moreover, this company has been selected by the assessee in its T.P study analysis and was not challenged before AO, which goes to prove that on FAR analysis this company is comparable to the assessee. Therefore, this company has rightly been included by the TPO from assessee's list. Accordingly, we hold that the ICRA Online is good comparable company for benchmarking the assessee's margin.
1619. The assessee has challenged the following companies for inclusion which has been rejected by the TPO: -
iv) Allsec Technologies Limited
20. TPO has rejected this comparable on the ground that it has a diminishing sale for the last three years and it fails filter of 75% of export turn over. Before us, the Ld. Counsel submitted that Allsec Technologies' operating revenue has increased in financial year 2008- 09 from the previous year, hence it cannot be held that it has diminishing revenue trend. Moreover, the export income to service income ratio is 74.45% in the financial year 2008-09, which goes to show that this company was primarily engaged in export activity. He further pointed out that this comparable has been included by the TPO in assessee's own case in the A.Y.s 2005-06 and 2006-07. Ld. DR on the other hand submitted that there has been loss for two years in the case of Allsec Technologies Ltd. therefore it is a persistent loss making company which needs to be excluded.
21. After considering the rival submissions and on perusal of the relevant record as referred to at the time of hearing, we find that the main reason for exclusion by the TPO was that, this company has diminishing revenue for the last three years and export revenue is less than 75% of the total turnover. However, on perusal of the annual report, we find that operating revenue has increased in the financial year 2008-09 from the previous year and hence such a contention of the TPO is contrary to the facts and records. In so far as the export filter of 75% applied by the TPO, we find that the export turn over to the total turnover was at 74.45% and since it was assessee's comparable and the assessee at the time of search process has applied the filter of excluding the cases where export revenue is less than 25% 17 of the total revenue, therefore this company was thrown in the search analysis. There is no rule or mechanism for putting specific ceiling of limit in a particular filter. These are only used for quantitative analysis while the selecting comparables by applying filter. The TPO cannot suo moto apply the filter later on for selecting or rejecting the comparable of the assessee, because that amounts to cherry picking. There is no dispute with regard to otherwise functional or FAR comparability with that of the assessee. Therefore, the reasons assigned by TPO of putting such a ceiling for exclusion of this company cannot be upheld looking to the fact that the difference of the ceiling put by the TPO is only 0.5%. We find that in the case of Mercer Consulting (India) Pvt. Ltd. Vs. CIT in ITA No. 966 Del 2014 on similar ground this Tribunal has rejected the TOP's contention on the same very grounds. Thus, we hold that Allsec Technologies Limited should be included in the comparable list.
v) R Systems International Limited: -
22. This company has been rejected on the ground that it has a different financial year ending, i.e., 31st December and not 31st March. Before us, Ld. Counsel submitted that the quarterly audited results are available in the public domain and hence proportionate profit margin can be worked out. He further submitted that in A.Y. 2007-08 this company was held to be comparable by the TPO; and moreover this issue now stands covered by the decision of ITAT Delhi Bench in the case of Mercer Consulting (India) vs. CIT (supra) and Cadence Design Systems (India) Pvt. Ltd. ITA No. 2074/Del/2014, wherein they have followed the judgment of Hon'ble Delhi High Court in the case of McKinsey Knowledge Centre India Pvt. Ltd. On the other hand Ld. DR strongly relied upon the order of the authorities below.
1823. After considering the aforesaid submissions, we find that this comparable has not been rejected not on the ground of functionality, albeit on the ground that it is following different accounting period. If the quarterly results are available in the public domain wherein the figures between, 1st January, 2009 to 31st March, 2009 are available, then there cannot be any difficulty to work out the proportionate profit margin. This issue has been discussed in detail by this Tribunal in the case of Cadence Design Systems (India) Ltd. (supra) wherein it has been observed as under :-
"19.2 We have heard rival submissions and also perused the relevant finding given in the impugned order. This comparable company has been rejected not on the ground of functionality albeit on the ground that it is following the financial year accounting from January to December (i.e., calendar year). Though a comparable company following a different financial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period is available then it cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Ld. Counsel before us submitted that the audited accounts of R-Systems for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.3.2009 can easily be deduced. If 19 there are no major incident of factors disturbing the profit margin in that quarter, whose results are being worked out and the transactions of the Company are carried out in the normal course of business, then we do not find any reason to reject the comparable out rightly on the aforesaid ground. The working of PLI based on audited accounts as incorporated above clearly clinches the point. The Hon'ble P&H High Court in CIT Vs. M/s. Mercer Consulting India Pvt. Ltd., in the context of R-Systems only had made a very important observation which reads as under :-
""27. The TPO excluded the case of R-Systems International Limited for the list of comparables. The ITAT included the same. The Transfer Pricing Officer excluded the case of R- Systems International Limited on the ground that it follows the calendar year i.e. 1st January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The Transfer Pricing Officer followed an order passed by the Mumbai Bench of the Tribunal in ACIT vs. Hapag Lloyd Global Services Ltd. 2013-TH-68-ITATMUM-TP in which it had been held that a company with a different financial year ending cannot be compared.
28. We are unable to agree with the decision of the Transfer Pricing Officer and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different it would make no difference. If it is possible to determine the value of the transactions during the corresponding period, the purpose of comparables would be 20 served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the Transfer Pricing Officer must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP.
29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.3.2009 and 31.3.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.3.2008 are excluded and if the results for the quarter ending 31.3.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.3.2009.
30. This view is not contrary to Rule 10(B)(4) which reads as under:-
"10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transaction has been entered into.
31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analysing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the 21 financial year in which the international transaction has been entered into. Thus, so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R-System International Limited is available.
32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, the same cannot be held as not passing the test of sub-rule (4) of Rule 10B."
Thus, following the same ratio we direct the TPO to consider the quarterly results and work out the proportionate profit margin.
vi) CG-VAK Software & Exports Ltd.
24. Ld. TPO has rejected the inclusion of this company on the ground that it fails the turn over filter of Rs. 5 crores; and further this company is engaged in providing software development services. Before us, the Ld. Counsel submitted that at the entity level it has a huge turnover of more than Rs. 72 crores and such a turn over filter applied by the TPO for rejecting a comparable is not correct. The assessee has taken segmental detail of the BPO services for the purpose of benchmarking the international transaction and moreover in assessee's own case it has been held to be a good comparable in A.Y.s 2004-05, 2005-06 and 2006-07.
25. After considering the rival submissions and on perusal of the relevant records, we find that this company has been rejected for inclusion on the ground it has low turnover, which is less than Rs. 1 22 crore. So far as exclusion of this comparable on basis of turnover filter criteria of less than Rs. 1 crore, we find that, first of all, it was a comparable chosen by the assessee and at the time of selection process the assessee as stated that it had not applied any turnover filter for accepting or rejecting the comparables. Once the turnover filter has not been applied at the quantitative level then comparability has to be done on qualitative level based on FAR analysis. If on FAR analysis it is found that there are differences on account of either assets deployed, risk assumed materially affecting the cost or margin then only comparability analysis fails in such cases. Further, under the TNMM, the comparability of an international transaction with an uncontrolled transaction is to be seen with reference to functions performed after taking into assets employed and the risk assumed. While reckoning the comparability analysis under TNMM, the main emphasis is into net margin realized on the transactions undertaken and not the price of the product or services. The transfer pricing rules under Rule 10B and 10C also contemplate for eliminating the material effects and to make reasonably accurate adjustment for eliminating the differences on account of such material effects. Mere circumstance of a company which otherwise confirm to the comparability analysis in terms of Rule 10B(2) and (3), huge profit or huge turnover ipso facto does not lead to its exclusion unless and of course it is shown that turnover or huge profit is on account of factor leading to a different results in FAR analysis. We find that the Hon'ble Delhi High Court in the case of Chrys Capital Investment Advisors India Pvt. Ltd. Vs. DCIT (supra) after detailed analysis of rule 10B(3), has been reiterated the same principle that if the company is functionally comparable then same cannot be rejected on the basis of turnover. The Hon'ble High Court in its very detailed judgment, wherein it was required to answer, whether the comparable can be rejected on the ground that 23 they have high profit margin as compared to the assessee in TP analysis, has also dealt upon the turnover factor in detail and held that if the company is functionally comparable then same cannot be rejected on the basis of turnover. Thus, following the ratio laid down by the Hon'ble Delhi High Court, we hold that the company cannot be held to be incomparable simply on the ground of low turnover, unless it is demonstrated that the assets and risk are completely different and are incomparable. Thus, we direct the TPO to include CG Vak Software and Export Ltd. as a comparable company.
vii) Cepha Imaging Limited;
26. This comparable have been rejected by the TPO on the ground that it fails the export turn over. Further there is no discussion by the DRP in the impugned order. Before us the Ld. Counsel pointed out that this company qualifies the export turnover, because during the year under consideration the export turnover of this company was 100% which is evident from the annual report of this company.
27. After considering the relevant finding and submissions made by the Ld. Counsel, we find that the only dispute is with regard to export filter. Once the export of the said company is stated to be 100%, then how the TPO has held that it fails export turn over and what is the source of information is not borne from the records. Ld. Counsel has drawn our attention to the annual report and pointed out that during the year all its revenues are from export only. Thus, the reason given by the TPO to reject this comparable is contrary to the facts and records; and accordingly, we deem it proper to direct the TPO to examine this aspect of export turnover and if the contention of the assessee is found to be correct then he must include this company as comparable.
24viii) Fortune Infotech Limited; and ix) Microland Limited:-
28. These comparables were taken up by the assessee for inclusion before the DRP for the first time. However, there is no discussion in the said DRP order. Therefore, we remit these comparables to the file of the TPO to examine the functionality and other parameters for inclusion or exclusion of this comparable.
29. In view of the aforesaid finding with regard to the comparables disputed before us, we direct the TPO to compute the margin and benchmark the same to the assessee's PLI. Accordingly, the issue relating to transfer pricing adjustment on provision for back office services is treated as partly allowed for statistical purposes.
30. The next ground raised by the assessee is regarding the ALP on purchase of fixed assets. Before us the Ld. Counsel for the assessee submitted that, first of all, no such adjustment was made by the TPO in his original draft order or in the final assessment order. Even the DRP has not given any direction to the AAO in this regard. The TPO has made these adjustments post DRP direction in the order passed u/s 154 on 24.7.2014, which is even after passing of the final assessment order. Thus, such an adjustment without any DRP's direction could not have been made. On the other hand Ld. DR submitted that though this issue was referred by the TPO in his order but no adjustment was made and that is why the TPO has passed order u/s 154, whereby he made the adjustment on purchase of fixed assets.
31. From the perusal of the impugned TPO order, we find that though there is a reference on account of purchase of fixed assets from the AE, but no adjustment was made by the TPO on this score.
25The TPO in the original order has stated that the assessee purchased assets amounting to Rs. 44,34,339/- from AE for which TPO asked the assessee to furnish the WDV of the aforesaid assets in the books of the AE. The WDV of the assets books was Rs. 25,28,872/- whereas assessee has purchased at a higher price. The assessee's contention has been that it has purchased the fixed assets on a fair market value determined by the valuer and WDV of assets cannot be the same as fair market value which may be lower and higher. The TPO made the observation that in arm's length scenario WDV of assets should be taken at arm's length price. Though he has made the discussion but has not made any adjustment. It is for this reason assessee did not file any objection before the DRP. Even in the final assessment order, no such adjustment has been made. Now TPO much after the completion of final assessment order has made this adjustment without any discussion and has made the adjustment of Rs. 19,06,467/- without any discussion.
32. Since the present appeal has been filed by the assessee against the final assessment order where there is no such discussion and if assessee is aggrieved by such a rectification order passed after the passing of final assessment order, then assessee can go for other remedies and cannot challenge the issue which is not borne out from the impugned order, because it neither can be entertained by way of additional ground or additional plea under the rules. This issue is thus treated as infructuous.
33. The next issue raised by the assessee relates to claim of deduction u/s 10A amounting to Rs. 58,93,05,999/- in respect of AEGSC (STP Unit). Before us Ld. Counsel submitted that this issue has been decided in favour of the assessee in assessee's own case by 26 the Tribunal in the earlier years. On the other hand Ld. DR strongly relied upon the order of the AO.
34. From the perusal of the impugned order as well as the earlier order of the Tribunal, we find that in A.Y. 2003-04, the Tribunal has upheld the order of Ld. CIT(A) allowing the deduction u/s 10A . In A.Y. 2008-09, again in revenue's appeal this Tribunal following the earlier decision of the Tribunal held that assessee was entitled for deduction u/s 10A on the ground that it has established a new unit. Once already deduction u/s 10A on the same unit has been allowed in the earlier years by the Tribunal, therefore, no different view can be taken for the same unit on similar set of facts for denying the deduction in A.Y. 2009-10. Accordingly, we direct the AO to allow deduction u/s 10A in respect to the said unit.
35. In the additional ground assessee has challenged that AO has failed to given credit of the TDS claimed in the return of income. Accordingly, we direct the AO to verify the claim of the assessee and give credit of the TPS after verifying and in accordance with law.
36. Now we come to the revenue's appeal whereby the revenue has challenged that the DRP is not justified in directing that no separate adjustment was called for under the head 'interest' as interest on receivables was subsumed in the working capital adjustment allowed. From the perusal of the impugned order, it is seen that DRP has observed that TPO has treated interest @ 15.77% per annum and accordingly computing the adjustment of Rs. 53,53,573/-. The DRP held that while issuing direction for allowing capital adjustment the issue of any interest element pertaining to the receivable will get subsumed and therefore, no separate adjustment is called for.
2737. We find that, since the tax effect on the disputed amount in the revenue's appeal is much less than Rs. 20 lacs, therefore, in view the circular No. 3/2018 dated 10.7.2018 which is applicable on the pending appeals also, we hold that ground of appeal is not maintainable and the same is dismissed.
Order pronounced in the Open Court on 3rd August, 2018.
sd/- sd/-
(R.K. PANDA) (AMIT SHUKLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 3.8.2018
Veena
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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