Income Tax Appellate Tribunal - Delhi
M/S. Ncs Pearson India Private Limited, ... vs Dcit, New Delhi on 3 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-2', NEW DELHI
BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER
AND
SH. O.P. KANT, ACCOUNTANT MEMBER
ITA No.5577/Del/2014
Assessment Year: 2008-09
M/s. NCS Pearson India Private Vs. DCIT (OSD), CCIT-V, New
Ltd., Pearson India Education Delhi
Service Private Ltd., 1A/1, Upper
Ground Floor, Sector 16A, Noida
PAN : AABCE4944M
(Appellant) (Respondent)
And
ITA No.5561/Del/2014
Assessment Year: 2008-09
DCIT, Circle -13(1), New Delhi Vs. M/s. NCS Pearson India Private
Ltd., 4th Floor - 18th Floor,
Ramnath House, Yusuf Sarai
Community Centre, New Delhi
PAN : AABCE4944M
(Appellant) (Respondent)
Assessee by Sh. Nageshwar Rao, Adv.
Department by Sh. Sanjay Kumar Yadav, Sr.DR
Date of hearing 15.11.2017
Date of pronouncement 03.01.2018
ORDER
PER O.P. KANT, A.M.:
These cross appeals by the assessee and the Revenue respectively are directed against order dated 31/07/2014 passed by the Ld. Commissioner of Income-tax (Appeals)-XX, New Delhi, [in short 'the Ld. CIT-A'] for assessment year 2008-09.
2 ITA Nos.5577/Del/2014 & 5561/Del/20142. The grounds of appeal raised by the assessee in ITA No. 5577/Del/2014 are reproduced as under:
"On the facts and circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the assessment order passed under section 143(3) r.w.s. 144C of the Income-tax Act, 1961 ("the Act") by Deputy Commissioner of Income- tax - (OSD), CCIT -V, New Delhi ("Ld AO"), after considering the adjustment proposed by the Additional Director of Income Tax, Transfer Pricing Officer 11(1) ("Ld. TPO") for the international transaction pertaining to provision of IT enabled services (hereafter referred to as "impugned transaction")in his order passed under section 92CA(3) of the Act on the following grounds:
Each of the ground is referred to separately, which may kindly be considered independent of each other.
1 That on facts and in law, the Ld. AO/TPO/CIT(A) have erred on facts and in law, by alleging that the Appellant is engaged in non-
routine, "high-end" services while failing to appreciate the risk-free and routine nature of the activities performed by the Appellant. In doing so, they have grossly erred in:
1.1 incorrectly characterizing the Appellant as a high-end service provider without conducting a proper Functional, Asset and Risk ("FAR") analysis of the international transactions; and 1.2 not considering that the Appellant in engaged rendering in routine coordination, administrative and Information Technology ("IT") enabled services to its AEs.
2. That on facts and in law, the Ld. AO/TPO/CIT(A) have erred in making an addition of INR13,318,981 to the returned income of the Appellant on account of alleged difference between the Arm's Length Price ("ALP") determined by the Ld. TPO and the value of international transactions of the Appellant pertaining to provision of support services to the Associated Enterprises ("AEs"), and thereby have grossly erred:
2. in not appreciating that the Appellant had prepared the detailed contemporaneous Transfer Pricing ("TP") documentation in compliance with the Act and Income-Tax Rules, 1962 ("the 3 ITA Nos.5577/Del/2014 & 5561/Del/2014 Rules") and selected uncontrolled comparable companies based on a detailed FAR analysis following a methodical benchmarking process 2.1 in not discharging his statutory onus to establish that the any of the conditions specified in clause (a) to (d) of Section 92C (3) of the Act have been satisfied before disregarding the ALP determined by the Appellant and proceeding to determine the arm's length price himself 2.3 by determining ALP of the international transactions entered into by the Appellant with its AEs using single year data of Financial Year ("FY") 2007-08 for the purpose of comparability analysis without considering the fact that the same was not available to the Appellant at the time of complying with the TP documentation requirement. The Ld AO/TPO/CIT(A) ought to have used multiple year data which would have captured normal market cycles and reduced the variability/distortions in the financial results arising out of single year data.
2.4 by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and making modifications to this analysis in a subjective, arbitrary and inconsistent manner. The Ld. AO/TPO did not provide the detailed accept / reject analysis undertaken by him to arrive at a comparable set of companies to benchmark the impugned transaction.
2.5 in rejecting certain comparable companies identified by the Appellant using turnover of less than INR 1 Crore as a comparability criterion while still comparing the Appellant with companies having significantly high turnover.
2.6 in rejecting certain comparable companies identified by the Appellant as affected by peculiar economic circumstances (e.g. mergers and acquisitions, companies which showed a diminishing revenue trend) and yet selecting/ upholding companies affected by similar peculiar economic circumstances as comparables in the TP Order.
2.7 by wrongly rejecting certain companies and adding certain companies to the final set of comparables for the impugned transaction on an ad-hoc basis. The TPO has resorted to 4 ITA Nos.5577/Del/2014 & 5561/Del/2014 cherry picking of comparables to determine ALP for the impugned transaction without due cognizance to the FAR profile of the Appellant vis-a-vis the companies selected as comparable.
2.8 by selecting certain companies which are themselves controlled, having significantly high related parties transactions in excess of 25% of the sales.
2.9 by selecting certain companies which are earning super normal profits as comparable to the Appellant.
3. That on facts and in law, the Ld. AO/TPO/CIT(A)have failed to make appropriate adjustments to account for varying risk profile of the Appellant, which is a captive contract service provider, vis-a- vis the comparables. In the process, they have also neglected the Indian TP regulations, OECD guidelines on TP and judicial precedence.
4. That on facts and in law, the Ld. AO/TPO/CIT(A)have erred in incorrectly computing the operating margins of the companies selected as comparables by considering provisions for doubtful debts, miscellaneous expenses, bank charges, provision for foreign exchange derivative loss written back as non-operating in nature. This is in contradiction to the Ld. TPO's own stated approach and also that the said items are accepted as operating expenses in normal business parlance being incurred in normal course of business.
5. That on facts and in law, Ld. AO/TPO/CIT(A) have failed to make appropriate /adjustments to account for differences in working capital employed by the Appellant vis-a-vis the companies selected as comparable and in the process ignored Indian TP regulations and judicial pronouncements.
6. That on facts and in law, the Ld. AO has erred in levying interest under Section 234B of the Act.
7. That on facts and in law, the Ld. AO has erred by initiating penalty proceedings under section 271 (t )(c) of Act in relation to TP adjustment and without recording any adequate reasons for such initiation.
5 ITA Nos.5577/Del/2014 & 5561/Del/2014The above grounds and sub grounds of appeal are mutually exclusive and without prejudice to each other.
The Appellant craves for leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal(s) at any time before or at the time of hearing of this appeal
2. The grounds of appeal raised by the Revenue in ITA No. 5561/Del/2014 are reproduced as under:
1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in directing the exclusion of companies i.e. M/s. Aceentia Technologies Limited, M/s. Coral Hubs Limited and M/s. Mold Tek Technologies Ltd. as comparables in the final set of comparables for working of ALP.
2. On the facts and circumstances of the case, the appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal.
3. The briefly stated facts are that the assessee company is a subsidiary of "NCS Pearson Ins. USA". NCS, USA is engaged in the business of providing electronic test delivery services to various international entities. For enabling the international entities to effectively carry out online test in India, the NCS, US contracted with various third-
parties in India to act as testing centre(s). The assessee provides administrative assistance and other services to the parent company in carrying out their contractual obligations.
3.1 The Assessee company filed return of income for the year under consideration on 31/08/2008 declaring income of Rs.1,42,46,880/-. The case was selected for scrutiny and notice under section 143(2) of the Act was issued and complied with. The Assessing Officer noticed international transactions carried out by the assessee with its associated enterprises (AEs) and referred determination of arm's length price of 6 ITA Nos.5577/Del/2014 & 5561/Del/2014 those international transactions to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO proposed adjustment of Rs.1,33,18,981/- to the income vide his order dated 31/10/2011. The Assessing Officer passed a draft assessment order on 08/12/2011. Since the assessee did not prefer to file objections before the Ld. Dispute Resolution Panel (DRP) against the draft assessment order within the stipulated period, the Ld. Assessing Officer passed the final assessment order under section 143(3) r.w.s. 144C of the Act assessing the total income at Rs.2,75,65,860/-. Aggrieved with the transfer pricing adjustment, the assessee preferred appeal before the Ld. CIT-(A), who partly allowed the appeal of the assessee. Aggrieved with the finding of the Ld. CIT-(A), the assessee and the Revenue, both are in appeal before the Tribunal raising the respective grounds as reproduced above.
4. At the outset, the Ld. counsel of the assessee referred to the application filed for condonation of the delay of one-day in filing the appeal and requested that said delay in filing appeal was due to error in calculation of limitation period by the Authorized Representative of the assessee and thus according to him there has been a bonafide reason for delay. An affidavit in support of the application for condonation of the delay was also filed. He, accordingly, requested condoning the delay in filing the appeal.
4.1 The Ld. Senior Departmental Representative (Sr. DR) did not seriously objected for condoning the delay.
4.2 We have heard the rival submission on the issue of condonation of the delay in filing the appeal. In view of the bonafide reason and delay of only one day, we condoned the delay in filing the appeal and the parties were directed to advance their arguments on the grounds raised in the appeal.
7 ITA Nos.5577/Del/2014 & 5561/Del/20145. Before us, the learned counsel of the assessee pressed only ground Nos. 2.7 and 5 of the appeal and, therefore, remaining grounds are dismissed as rendered infructuous.
6. The ground No. 2.7 relates to selection of comparables by the Ld. TPO in final set of comparables. Before us, the ld. counsel of assessee challenged exclusion of only one comparable "eClarx Services Ltd". The ground No. 1 of the appeal of the Revenue is also related to the selection of comparables wherein the Revenue has challenged exclusion of the comparables, namely, M/s Acentia Technologies Ltd., M/s Coral Hubs Ltd. and M/s Mould Tek Technologies Ltd. Before taking the above grounds for adjudication, we feel it appropriate to reproduce the relevant facts in brief qua the transfer pricing adjustment. 6.1 The assessee claimed that it was engaged in providing services such as collection and remittance of dues, coordination between all the interested entities to ensure that tests are delivered smoothly and other necessary support services are provided. The assessee summarized the activities as provision of coordination, liasioning, administrative support and other Information Technology (IT) enabled support services for smooth functioning of the test in India. According to the assessee, the services fall under the ambit of IT enabled services (ITes), which are rendered to its AE as an independent contractor and for which it is compensated on the cost plus markup basis of 15%. 6.2 The international transactions undertaken by the assessee with its associated enterprises as summarized by the Ld. TPO in his order are reproduced as under:
No. Nature of transaction Method Value of
transaction
1. Provision of collection co-ordination TNMM 82,304,290/-
and technical support services
2. Collection on the behalf of AE CUP 104,175,401
8
ITA Nos.5577/Del/2014 & 5561/Del/2014
3. Reimb. Of cost by AE TNMM 178,836
4. Reimb. Of cost to AE CUP 902,357
6.3 The Ld. TPO accepted the arm's length price of the international transaction except the transaction of support services. 6.4 The assessee for computation of arm's length price of the transaction of support services applied Transactional Net Margin Method (TNMM) taking Operating Profit to Total Cost (OP/TC) as Profit Level Indicator (PLI). The PLI of the company is arrived at 15% on cost whereas the average PLI of the comparables is arrived at 15.38%. The PLI of the comparables has been arrived at by considering the data for financial year 2005-06, 2006-07 and 2007-08.
6.5 The assessee selected following comparables in its transfer pricing study without making adjustment for working capital or risk:
Sl. No Name of comparable Weighted
Average
OP/ TC
(%)
1. Ace Software Exports Ltd. 20.59
2. Aftech Ltd. (Aftek Infosys Ltd.) 37.13
3. CSS Technergy Ltd. -20.15
4. Datamatics Technologies Ltd. 9.36
5. Eclerx Services Ltd. 54.23
6. MCS Ltd. -10.98
7. Prometric India Pvt. Ltd. 8.05
8. Saraswat Infotech Ltd. 31.85
9. Aditya Birla Minacs Worldwide Ltd. (Transwork 8.33
Information Services Ltd.)
Average 15.38%
6.6 The Ld. TPO rejected few comparables selected by the assessee
and also added few comparables selected by him to the final set of comparables. The Ld. TPO used current year data for computation of PLI. The final set of comparables selected by the learned TPO is reproduced as under:
9 ITA Nos.5577/Del/2014 & 5561/Del/2014 Sl. No. Name of comparable OP/TC
1 Accentia Technologies Ltd 40.94
2 Aditya Birla Minacs Worldwide Ltd. -3.99
3 Caliber Point Business Solutions 10.97
Ltd.
4 Cosmic Global Ltd. 23.3
5 CSS Technergy Ltd. 26.28
6 Eclerx Services Ltd 65.88
7 HCL Comnet Systems & Services 37.99
Ltd.
8 Maple Esolutions Ltd 20.73
9 Mold-Tek Technologies Ltd 96.66
10 R Systems International Ltd. (Seg.) 10.34
11 Triton Corp Ltd 23.5
Vishal Information Technologies 50.68
12 Ltd
Average 33.61
6.7 The Ld. TPO also rejected the contention of the assessee for
providing working capital adjustment to the margin of comparable on the ground that it was not relevant to the service industry. The Ld. TPO also noted that the assessee failed to demonstrate that the difference in working capital deployed was making difference in the margin earned by the assessee and the comparables.
6.8 The Ld. TPO took arithmetic mean of the PLI of the comparables at 33.61% and computed the arm's length price of the international transaction of support services as under:
Operating Cost (a) Rs.7,15,68,948
Arm's Length Margin (b) 33.61% of the Operating Cost
=2,40,54,323
Arm's Length Price (ALP)(a+b) = 9,56,23,271
6.9 After reducing the price of the transaction shown of
Rs.8,23,04,290/- by the assessee, the Ld. TPO proposed adjustment of Rs.1,33,18,981 (Rs.9,56,23,271 - 8,23,04,290).
10 ITA Nos.5577/Del/2014 & 5561/Del/20146.10 In the assessment order passed on 08/12/2011, the Ld. Assessing Officer, accordingly made adjustment of Rs.1,33,18,981/- and assessed total income at Rs.2,75,65,860/-.
6.11 Aggrieved, the assessee challenged that adjustment made before the Ld. CIT-(A) on various grounds. The Ld. CIT-(A) upheld the rejection of multiple year data for computing PLI. The Ld. CIT-(A) upheld exclusion of comparables, namely, Allsec Technologies Ltd, Ace Software Ltd. and MCS Ltd. The Ld. CIT-(A) accepted objection of the assessee for inclusion of the Acentia technologies Ltd, Coral hubs Ltd, Mold-Tek technologies Ltd and HCL Comnet Systems and Services Ltd. and directed the Ld. AO/TPO to exclude these from the list of final comparables.
6.12 The assessee also requested for exclusion of e-Clarx Services Ltd. from the list of final comparables, but in view of the fact that it was considered by the assessee itself as comparable, the Ld. CIT-(A) directed to retain the company as comparable in the final set of comparables.
6.13 The finding of the learned CIT-(A) on the issue of comparables is reproduced as under:
"6.5 As discussed above, the AO/TPO is directed to exclude HCL Comnet Systems & Services Limited, Mold-Tek Technologies Limited, Coral Hubs Limited and Accentia Technologies Limited from the final set of the comparables. The rest of the comparables as used by the TPO should be retained. The TPO/ AO is directed to treat the loss on sale of fixed assets as non-operating in nature for the comparables as well as for the appellant. The TPO/ AO is directed to re-workout the mean OP/TC of the comparables by making the above changes. The difference of arm's length should be calculated accordingly. The adjustment to the international transaction is subject to the discussion in the subsequent paragraph of this order on the applicability of + /-5% as per proviso to section 92C(2) of the IT Act."11 ITA Nos.5577/Del/2014 & 5561/Del/2014
6.14 Further, the Ld. CIT-(A) rejected the contention of the assessee for allowing benefit of +/- 5% adjustment. The learned CIT-(A) also rejected claim for risk adjustment and working capital adjustment. 6.15 The exclusion/inclusion challenged by the assessee and Revenue respectively of comparables is adjudicated as under:
e-Clerks Services Ltd. (ESL):
7. This company was selected by the assessee itself as comparable, however, before the Ld. CIT-(A) the assessee requested for its exclusion, which was rejected by the Ld. CIT-(A).
7.1 Before us, the learned counsel of the assessee filed a paper book containing pages 1 to 1070 and requested for exclusion of the above company from the final set of comparables. He referred to page 455 of the paper book and submitted that the company was engaged in providing data analytics process solution to global enterprise clients, which is a kind of knowledge process outsourcing (KPO) service and, thus functionally dissimilar to the assessee. He submitted that company has been categorized as 'KPO' in the case of Rampgreen Solutions Private Limited Vs. CIT (ITA No. 102/2015) for assessment year 2008- 09 and thus, cannot be compared with the assessee, which is akin to a Business Procees Outsourcing (BPO). According to the Ld. Counsel, during the year the company acquired 'Ignentica Travel Solutions Ltd.', which being the extraordinary event during the year, has impacted the PLI of the company. He further submitted that the company owns significant intangibles. The learned counsel further submitted that the company has been rejected as comparable in the assessee's own case for assessment year 2009-10.
12 ITA Nos.5577/Del/2014 & 5561/Del/20147.3 Ld. CIT(DR), on the other hand, referred to page 504 to 506 of the assessee's paper book and submitted that assessee has not furnished its FAR analysis and no detail as to the exact function of the assessee are furnished before the Ld. TPO. He referred to page 32-37 of the paper book, which is a copy of agreement between the assessee and the AE and submitted that trademark/intellectual property generated in the process was to be transferred to the AE without any remuneration. He submitted that normal BPO cannot generate intellectual property and therefore, the assessee cannot be categorized as BPO. The Ld. CIT(DR) further submitted that the acquisition process has not affected the PLI of the company and therefore, there is no impact of extraordinary event during the year under consideration. In view of the arguments, the learned CIT(DR) requested for retaining the company in the final set of comparables.
7.4 The Ld. counsel in the rejoinder submitted that all information in respect of the FAR analysis of the assessee was already submitted before the learned TPO and a copy of which was also available in the pages 420 to 422 of the paper book .
7.5 We have heard the rival submission and perused the relevant material on record. The assessee submitted details of services rendered to its AE as under:
· Coordination and liaisoning between test centres and NCS US. · Provide IT enabled support services on phone and on ground, to test centres to ensure smooth functioning of the tests. · Resolve technical problems at the test centres as per the test centres guides provided by the AEs.
· Collect information on the vendors interested in operating as test centres and · Collection and remittance of fees collected on behalf of NCS US.13 ITA Nos.5577/Del/2014 & 5561/Del/2014
7.6 Further, during the year no R&D expenses have been incurred leading to creation of any intellectual property. Before the Ld. TPO, the assessee submitted that majority of the operational personnel employed were either graduates or postgraduate with limited number of Engineering Graduate.
7.7 Thus, though the agreement contained a clause according to which any intellectual property created by either party or both parties pursuant to the agreement would be the property of AE, but during the year no intellectual property has been created. The services rendered by the assessee are of routine nature low-end ITes services. 7.8 On perusal of the page 2 to 4 of the annual report for financial year 2007-08 of e-Clerks Services Ltd., we find that company has categorized itself as a KPO. The relevant part of annual report is reproduced as under:
"We are a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to some of the largest brands in the world. We are recognized experts in our chosen markets - Financial Services and Retail and Manufacturing - and you'll see that reflected in our client list and the accolades we regularly receive from industry forums.
We add value to our clients' businesses by providing a unique blend of consulting services and process outsourcing."
(Page 3 of Annual Report FY 2007-08) "Our services demonstrate our expertise. Pricing analytics, bundling optimization, content operations, sales and marketing support, product data management, revenue management and data analytics are some of our offerings to Retail and Manufacturing clients. To our Financial Services clients, we offer real-time capital markets, middle and back office support, portfolio risk management services and various critical data management services."
14 ITA Nos.5577/Del/2014 & 5561/Del/2014(Page 4 of Annual Report FY 2007-08) "Today, we employ over 1500 domain specialists working for our clients, working as them."
Chairman's Message (Page 6 of Annual Report FY 2007-08) "We are a leading, third party data analytics KPO company.
eClerx is a very different company, with industry specialized services for meeting complex client needs. We are sometimes compared to a BPO or an IT off shoring company, which we are not.
We are a data analytics KPO service provider specializing in two business verticals - Financial Services and Retail and Manufacturing. We provide solutions that do not just reduce cost, but help our clients increase sales and reduce risk, by enhancing efficiencies and by providing valuable insights that empower better decisions."
7.9 It is evident from above that the company is engaged in high-end KPO activities and functionally dissimilar to the assessee. 7.10 Further, according to the page 14 of the annual report for financial year 2007-08, which is reproduced as under, the company has acquired a UK-based company:
"Acquisitions made during the year eClerx has acquired UK-based Igentica Travel Solutions Limited ("ITS") on July 27, 2007. This acquisition is consistent with the Company's strategy of looking for inorganic growth via "bolt on"
acquisitions which fit well with the existing strengths of the Company. ITS has provided the Company with a set of 28 large customers, primarily in Europe, thus strengthening the Company's presence in that geography. It has also given the Company an entry platform into a new vertical - travel and hospitality, besides consolidating the Company's position in the retail and manufacturing space."
15 ITA Nos.5577/Del/2014 & 5561/Del/20147.11 In view of this extraordinary event happened during the year the company cannot be used as comparable to the assessee. 7.12 Further, as per the page 40 of the annual report, which is fixed assets Schedule, the company owns significant intangible assets i.e. computer software, which is approximately 11% of the total assets of the company. Whereas, the assessee does not own any intangibles and merely operates as a contract service provider. Thus, it cannot be compared with the company who owns significant intangible property. 7.13 We further note that the Tribunal in ITA No. 2556/Del/2014 for assessment year 2009-10 in assessee's own case has excluded the company with following findings:
"30. Undisputedly, the taxpayer is a low end BPO rendering services as a captive service provider. Comparability of Eclerx has been examined by the coordinate Bench of the Tribunal in Macquarie Global Services (P.) Ltd. vs. DCIT (supra) for AY 2009-10- wherein it was ordered to be excluded as a comparable to the companies providing BPO / low end services / ITES having supernormal profit. Coordinate Bench of the Tribunal in Macquarie Global Services (P.) Ltd. vs. DCIT (supra) ordered to exclude Eclerx by returning following findings "24. We have perused the Annual report of this company, a copy of which s available on pages 494 onward of the paper book, It can be seen that it is a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to global clients. This company provides end to end support through trade lifecycle including trade confirmation, settlements, etc. It also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability services. From the above narration of the nature of business done by Eclerx Services Pvt. Ltd., it is overt that it, being a KPO company, is providing data process solutions to its clients, which activity is way different from that of the asses see company, which is basically of providing accounts payable services and general accounting services to its AEs alone. Not only that, this company has significant intangibles which its uses for the purposes of rendering KPO services. As the assessee is a captive unit rendering services to its AEs without any intangibles, there can be no comparison between the 16 ITA Nos.5577/Del/2014 & 5561/Del/2014 assessee and Eclerx Services Pvt. Ltd. We, therefore, order for the exclusion of this company from the final set of comparables. "
31. So, when the taxpayer is a routine ITES i.e. low end service provider, it cannot be a suitable comparable with Eclerx which is a KPO providing data analytics and data process solutions to global enterprise clients and it is having significant intangibles to the tune of 7.24%. So, high end KPO cannot be compared with low end routine ITES service provider. Eclerx also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability service which makes it functionally dissimilar with the taxpayer. So, in view of the matter, we order to exclude Eclerx from the final set of comparables.
7.14 In view of above discussion, we direct the Ld. AO/TPO to exclude above company from the final set of comparables. 7.15 Thus, ground No. 2.7 of the appeal of the assessee is allowed.
Acentia Technology Ltd.
8. Inclusion of this company was objected by the assessee on the ground that it was engaged in providing software development services as well as IT enabled services. The Ld. CIT-(A) directed to exclude this company from the final set of comparables observing as under:
"6.4.1 As regards Accentia Technologies Limited ("Accentia"), the appellant has stated that Accentia is engaged in providing software development services as well as IT enabled services to its customers. It is engaged in the business of medical transcription and software development service for the FY 2007-08.The TPO has observed that this company should be considered as a comparable because its revenue from ITES is more than 75% of total revenue. The appellant has submitted that the TPO has considered 'Billing and Coding' as part of the ITES revenue and the revenue from ITES is only 63.80 percent and it does not pass the 75% revenue filter applied by the TPO. The appellant has stated that on perusal of the Annual Report of the company for the FY 2007-08 it is observed that Accentia earns software revenues from its offshore development centre. The appellant has argued that Accentia earns income from both ITES and software development through its offshore development centres and there is no segmental information. The appellant has further informed that during the year, Geofsoft Technologies (Trivandrum) Limited and Iridium 17 ITA Nos.5577/Del/2014 & 5561/Del/2014 Technologies India Pvt. Ltd were merged with ACCENTIA and ACCENTIA purchased business of Thunga Software Private Limited, GSR systems Inc, GSR Physician billing services Inc, Denmed Transcription Services Inc. and Accentia FZE. The restructuring undertaken by the Accentia is an exceptional circumstance and should accordingly be rejected. The Appellant relied on the decision of the Hon'ble Hyderabad ITAT in case of Capital IQ Information systems (India ) Pvt. Ltd.(ITA No. 1961/Hyd/2011)wherein it has been held "Accentia Technologies Ltd............ It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's oum. case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner......11. On care careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de- merger will have an effect the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded." The appellant has submitted that Accentia should be rejected as a comparable. I have carefully considered the submission of the appellant and also gone through the order of the TPO. Considering the facts of the case, I hold that Accentia Technologies Limited is not a proper comparable as no segmental information is available and extra- ordinary events like merger and de-merger has taken place in this case. Accordingly, the AO/TPO is directed to exclude this company from the final set of comparables."
8.1 The Ld. CIT(DR) referred to page 53 of the Ld. TPO and submitted that the Revenue of the company from ITes was 80.87% of the total revenue and thus it passed the 75% revenue filter and accordingly, the Ld. TPO was justified in including the said company as one of the comparable. He referred to page 909 of the assessee's paper book, which is part of annual report of the company, according to which the company acquired 'Thunga Software Private Limited', and eight-year-old medical transcription encoding company. He further submitted that Assessee did not adduce any evidence from the annual report that the merger and amalgamation has impacted the PLI of the company.
18 ITA Nos.5577/Del/2014 & 5561/Del/2014According to him, the merger has not adversely impacted the company's financials.
8.2 On the contrary, learned counsel of the assessee supported the finding of the learned CIT-(A) on the issue in dispute. 8.3 We have heard the rival submission and perused the relevant material on record. The learned CIT-(A) has held that revenue from ITes was only 63.80% and, therefore, the company fails 75% revenue filter applied by the TPO. The Ld. CIT(DR) has not controverted this fact. In view of the substantial activity of software development and in absence of segmental data, the company cannot be compared with the assessee which is providing low-end ITes services. Further, learned CIT-(A) has brought on record list of the companies merged/amalgamated with the company. It is settled law that in view of extraordinary event of merger/demerger during relevant year, the company cannot be chosen as comparable. In view of the above, we are of the opinion that finding of the Ld. CIT-(A) on the issue of exclusion of the company from set of comparables is well reasoned and no interference on our part is required. Accordingly, we direct the Ld. AO/TPO to exclude the said company from the final set of comparables.
Coral Hub Limited.
9. Inclusion of this comparable was challenged by the assessee on the ground that working model of the company is outsourcing based and therefore it cannot be compared with the assessee. The Ld. CIT-(A) directed the AO/TPO to exclude the company with observation as under:
"6.4.2 As regards Coral Hubs Limited ("CORAL"), the appellant has stated that le employee cost of CORAL is only 4.39 percent of its operating cost and it has substantial vendor payments, hire charges etc. for Rs. 21.82 crores (i.e. 87 percent of its total expenditure) 19 ITA Nos.5577/Del/2014 & 5561/Del/2014 evidencing that the company has outsourced most part of its work and has not provided the services itself. The appellant has stated that the business model of CORAL is different from that of the appellant since the company outsources its work and therefore, is functionally dissimilar to the business undertaken by the appellant. The appellant has relied on the decision of the Hon hie ITAT in the case of Maersk Global Service Center India Private Limited (ITA No. 3774/MUM/2011) wherein it has been held that "48. Insofar as the cases of Tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded " The appellant has also relied on the decision of the Hyderabad bench of Hon'ble ITAT in case of M/s Capital IQ Information Systems (India) Pvt. Ltd Vs DCIT (ITA No. 1961/Hyd/2011 and other case laws. Considering the facts of the case, I hold that Coral Hubs Limited is not a proper comparable as the business model of CORAL is different from that of the appellant. Accordingly, the AO/TPO is directed to exclude this company from the final set of comparables."
9.1 The Ld. CIT(DR) relying on the order of the learned TPO submitted that the company cannot be rejected merely on the model chosen for the its functions carried out.
9.2 The Ld. counsel, on the other hand, relied on the order of the Ld. CIT-(A).
9.3 We have heard the rival submission and perused the relevant material on record. In view of the employee cost as low as 4.39% of the operating cost, and 87% of the total expenditure for vendor payments, hire charges etc., it is evident that company has outsourced most part of its work and thus, the business model of the company is different from the assessee, which is carried out by recruiting employee. In such circumstances, it would not be appropriate to include the company in the final set of comparables. Thus, in our opinion, the finding of the Ld. CIT- (A) on the issue of exclusion of the company from set of comparables is 20 ITA Nos.5577/Del/2014 & 5561/Del/2014 well reasoned and we do not find any error in same. Accordingly, we direct the AO/TPO to exclude the company from the final set of the comparables.
Mod-Tek Technologies Ltd.
10. Inclusion of this company was challenged by the assessee on the ground that it was functionally different. The Ld. CIT-(A) also directed to exclude this company from the list of final comparable on the ground of functional dissimilarity. The finding of the Ld. CIT-(A) on the issue in dispute is reproduced as under:
"6.4.3 As regards Mold-Tek Technologies Ltd. ('Mold-Tek'), the appellant has explained that Mold-Tek provides high end structural engineering KPO services to various clients and also has an in- house software development team, quality control training and trouble-shooting facilities, whereas NCSIPL is engaged in provision of coordination, liaisoning, administrative support and other IT enabled support services to NCS US, wherein NCS US achieves its objective to ensure smooth functioning of the tests in India by taking the services of NCSIPL. The appellant has further submitted that the Structural Engineering services are not functionally comparable to the Appellant's coordination, liaisoning, administrative support and other ITES activities. In the case of Maersk Global Centres (India) (P.) Ltd Vs ACIT [2014] 43 taxmann.com 100 (Mumbai - Trib.) (SB) the Special Bench of the Hon'ble ITAT Mumbai has held that *In so far as the case of Mold-Tek Technologies Ltd. is concerned, it is observed from the annual report of the said company for the financial year 2007-08 placed at page 139 to 151 of the paper book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further information of Mold-Tek Technologies Ltd. available on their Website is furnished in the form of printout at page 158 to 165 of the paper book and a perusal of the same shows that it is a leading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down 21 ITA Nos.5577/Del/2014 & 5561/Del/2014 design and development costs of civil, structural, mechanical and plant design by 30-40% and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in- house software development team, quality control training and troubleshooting facilities. M/s Mold-Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services." I am of the view that Mold-Tek Technologies Limited is functionally different from the appellant. Accordingly, the AO/TPO is directed to exclude it from the list of final comparables."
10.1 Before us the Ld. CIT(DR) submitted that activity of the assessee was also more or less like KPO and, therefore, the company is comparable to the assessee and should not be excluded from the final set of comparables.
10.2 On the contrary, learned counsel relied on the finding of the Ld. CIT-(A) on the issue in dispute and submitted that the company was engaged in the Structure Engineering Consulting Services (KPO) , whereas assessee has rendered routine services of coordination, liaisoning, administrative support and other IT enabled support services etc. He further submitted that the company made acquisitions during the year and thus, the year under consideration is exceptional year of operation of the said company.
10.3 We have heard rival submission and perused the relevant material on record. On perusal of page 14 of the annual report of the company, which is available on page 999 of the paper book, we find that the company was engaged in providing structural engineering services. The annual report has also mentioned that acquisition of the U.S. based 22 ITA Nos.5577/Del/2014 & 5561/Del/2014 structural engineering KPO has created scope of growth for the company in the near future. In our considered opinion, the activity of consultancy in structural engineering cannot be compared with routine services of coordination, administrative support and other IT enabled support services rendered by the assessee to its AE. Further, page 9 of the annual report, which is available on page 994 of the assessee's paper book, we find that 'M/s. Tech-men Tools Private Limited' merged with assessee company and Mold-tek Plastic Limited demerged from the assessee company during the year under consideration. In view of this extraordinary event also, this company cannot be compared with assessee company. In view of the above facts, we do not find any infirmity in the finding of the Ld. CIT-(A) on the issue in dispute in directing the Ld. AO/TPO for excluding the above company from the final set of comparables.
10.4 The ground of the Revenue in relation to the three companies is accordingly dismissed.
11. The ground No. 5 of the appeal of assessee relates to not allowing appropriate adjustment to account for differences in working capital employed by the assessee as well as companies selected as comparable.
11.1 The Ld. CIT-(A) rejected objection of the working capital adjustment with his observation as under:
6.7 The appellant has also objected to the rejection of its claim for the working capital adjustments. Working capital adjustments are difficult to apply due to the lack of accurate and reliable data. In absence of reliable financial data, it is difficult to apply working capital adjustments. Apart from the issue of unreliable data for the tested party, adequate financial data is not available for the comparable companies. Working capital adjustment needs to be given on the basis of daily or at least monthly average of payables, receivables and inventory and not 23 ITA Nos.5577/Del/2014 & 5561/Del/2014 on the basis of yearend figures. While these daily and monthly figures may be available in the taxpayer's case, the same are not available in the case of comparable companies. Further, in the case of taxpayer as well as comparable companies there are issues of segmental data. Segmental data may be available for P&L account but the same may not be available for Balance Sheet items. Hence, calculation of reasonably accurate adjustments is not possible.
Further, the issue of working capital would be relevant only when there is a situation of inventory remaining tied up or receivables being held up. These situations may not be so relevant to the service industry. A working capital adjustment would be required only when the varying levels of the working capital deployed make a difference to the margins earned by the taxpayer and the comparables. This is actually at the heart of every comparability adjustment. The taxpayer has not been able to demonstrate with evidence that the difference in the working capital deployed is making a difference in the margin earned by the taxpayer and the comparables. Accordingly, the objection in respect to working capital adjustment is dismissed.
11.2 Before us, the Ld. counsel of the assessee referred to page 470 of the paper book and submitted that lower authorities has not allowed the working capital adjustment despite specifically requested before them. He also referred to page 499 of the paper book, wherein effect of working capital adjustment was demonstrated on margin of the comparables.
11.3 The Ld. counsel submitted that the Tribunal in the case of Westfalia Separator India Private Limited Vs. ACIT in ITA No. 4447/Del/2007 for assessment year 2003-04 has allowed working capital adjustment for service industry also. The Ld. counsel also relied on the decision of Tribunal in the case of Mercer Consulting India Private Limited, (2014) 47 taxmann.com 84 (Delhi-Trib) to support his proposition that working capital adjustment can be allowed to service industry also.
24 ITA Nos.5577/Del/2014 & 5561/Del/201411.4 On the contrary, Ld. CIT(DR) relied on the finding of the lower authorities.
11.5 We have heard the rival submission and perused the relevant material on record. We find that the Tribunal in the case of Mercer Consulting (India) Private Limited (supra) on the issue of working capital adjustment has observed as under:
"16.2 Having heard the rival submissions and perused the relevant material on record, we find that the viewpoint canvassed by the authorities below is sans merit. Working capital adjustment is ordinarily confined to inventory, trade receivables and trade payables. If a company carries on high trade receivables, it would mean that it is allowing its customers a relatively longer period to pay their amount which will result into higher interest cost and the resultant less profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it to pay back its suppliers which lowers the interest cost and accelerates profits. To have a level playing field, it is sine qua non that the working capital adjustment should be carried out to bring two otherwise comparable cases at par with each other. We are unable to comprehend any reason or rhyme to restrict the grant of working capital adjustment only in the case of manufacturers or traders. What is true for these categories of businesses, is fully true for a service provider as well. It is a different matter that in the case of service provider, no working capital adjustment would be required towards higher or lower inventory, but the same may be warranted in respect of higher or lower trade receivables/payables. Since the authorities below have rejected the assessee's contention for grant of working capital adjustment at the threshold, which in our considered opinion is not correct, we set aside the impugned order and remit the matter to the file of the TPO/AO for examining the assessee's claim for grant of working capital adjustment on merits and thereafter, allow the same, if it is available. Needless to say, the assessee will be allowed an adequate opportunity of hearing.
11.6 Similarly, the Tribunal in the case of Westfalia Separator India Private Limited (supra), following the decision of the Tribunal in the case 25 ITA Nos.5577/Del/2014 & 5561/Del/2014 of Mercer consulting (India ) Private Limited sent back the matter on this issue to the AO/TPO for verifying the calculation so made by the assessee in support of its working capital adjustment. 11.7 Respectfully following the above decision of the Tribunal, we restore the matter back to Ld. AO/TPO for verifying the calculation of the working capital adjustment provided by the assessee and give effect in accordance with law. The ground of the appeal of the assessee is accordingly allowed for statistical purposes.
12. In the result, appeal of the assessee is partly allowed for statistical purposes whereas appeal of the Revenue is dismissed. The decision is pronounced in the open court on 3rd Jan., 2018.
Sd/- Sd/-
(AMIT SHUKLA) (O.P. KANT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 3rd January, 2018.
RK/-(D.T.D)
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi