Income Tax Appellate Tribunal - Bangalore
Ariba Technologies India Private ... vs Deputy Commissioner Of Income Tax, ... on 15 June, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH : BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A No. 987/Bang/2022
Assessment Year : 2018-19
M/s. Ariba Technologies
India Pvt. Ltd.,
The Deputy
Plot C1, 8A Campus RMZ
Commissioner of
Ecoworld, Sarjapur,
Income Tax,
Marathahalli Outer Ring
Circle - 1(1)(1),
Road,
Vs. Bangalore.
Bangalore - 560 103.
PAN: AADCA0918P
APPELLANT RESPONDENT
Shri Aliasgar Rampurawala,
CA &
Assessee by :
Shri Manju L Prasad,
Advocate
Shri Sankar Ganesh K, Addl.
Revenue by :
CIT(DR)
Date of Hearing : 18-05-2023
Date of Pronouncement : 15-06-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal is filed by assessee against the final assessment order dated 16.08.2022 passed by assessment unit on following grounds of appeal:
"The grounds mentioned herein by the Appellant are without prejudice to one another.
1. On the facts and in the circumstances of the case and in law, the assessment order passed by the Assessment Unit Page 2 IT(TP)A No. 987/Bang/2022 under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income-tax Act, 1961 (`the Act') dated August 16, 2022, pursuant to the directions of the learned Dispute Resolution Panel-1, Bangalore (the 'learned Panel') dated June 23,2022 to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.
Transfer Pricing Grounds
2. On the facts and in the circumstances of the case and in law, the Assessment Unit erred in partly confirming the action of the NaFAC in making an adjustment of INR 12,73,38,540/- to the value of international transactions w.r.t Information Technology enabled Services ('ITeS') provided by the Appellant to Associated Enterprises.
3. On the facts and in the circumstances of the case and in law, the Assessment Unit/ learned TPO/NaFAC erred in not conforming with the directions of the learned Panel in entirety and making an adjustment dehors the direction, to the transfer price of the Appellant.
4. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the TPO/NaFAC of rejecting the Transfer Pricing (`TP') documentation maintained by the Appellant, in good faith, as required under section 92D of the Income-tax Act, 1961 ('the Act') read with rule 10D of the Income-tax Rules, 1962 ('the Rules').
5. On the facts and in the circumstances of the case and in law, and for the purpose of determining the arm's length price for the international transactions of the Appellant, TPO erred in conducting a fresh comparability analysis for the Appellant after arbitrarily applying certain additional filters and rejecting certain other filters applied by the Appellant in the TP Study and consequently holding that the Appellant's international transactions are not at arm's length.
6. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment Unit/ TPO/NaFAC of ignoring the limited risk nature of the functions of the Appellant and thereafter selecting high profit-making entrepreneurial companies as comparables. In doing so, the learned AO/ TPO has erred in not providing an appropriate adjustment towards the risk differential, even when the full-fledged entrepreneurial companies have been selected by the learned TPO as comparables.
7. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment Unit/TPO/NaFAC in proceeding to exclude companies which are functionally comparable to the Page 3 IT(TP)A No. 987/Bang/2022 business of the Appellant and formed part of the TP documentation maintained by the Appellant.
8. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment Unit/TPO/NaFAC in including companies as comparable, that are functionally different to the business of the Appellant and otherwise fails the test of comparability.
9. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment Unit/TPO/NaFAC in rejecting the additional companies proposed by the Appellant which are functionally comparable to the business of the Appellant.
10. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment Unit /TPO/NaFAC in including Fuzen Software Private Limited in the final list of comparables, which ought to be excluded.
11. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment Unit /TPO/NaFAC in including Infosys B P M Services Pvt Ltd in the final list of comparables, which ought to be excluded.
12. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment Unit /TPO/NaFAC in including Manipal Digital Systems Pvt Ltd in the final list of comparables which ought to be excluded.
13. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment Unit /TPO/NaFAC in including Domex E Data Pvt Ltd in the final list of comparables which ought to be excluded.
14. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment unit /TPO/NaFAC in including Vitae International Accounting Services Pvt Ltd in the final list of comparables which ought to be excluded.
15. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment unit/TPO/NaFAC in including Inteq B P 0 Services Pvt Ltd in the final list of comparables which ought to be excluded.
16. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment unit /TPO/NaFAC in including Motif India Infotech Pvt Ltd in the final list of comparables which ought to be excluded.
Page 4 IT(TP)A No. 987/Bang/2022
17. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment unit /TPO/NaFAC in including Eclerx Services Ltd in the final list of comparables which ought to be excluded.
18. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment unit /TPO/NaFAC in including MPS Ltd in the final list of comparables which ought to be excluded.
19. On the facts and circumstances of the case and in law, the Assessment unit /TPO/NaFAC erred in not taking cognizance and giving effect to the learned Panel's direction of excluding Ultramarine & Pigment Ltd. (Seg.) from the final list of comparables.
20. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment unit /TPO/NaFAC in excluding Sundaram Business Services Ltd. in the final list of comparables which ought to be included.
21. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment unit /TPO/NaFAC in excluding R Systems International Ltd- Business process outsourcing service segment in the final list of comparables which ought to be included.
22. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment unit /TPO/NaFAC in excluding DKM Online PVt Ltd in the final list of comparables which ought to be included.
23. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment unit /TPO/NaFAC in excluding Genius Consultants Ltd in the final list of comparables which ought to be included.
24. On the facts and circumstances of the case and in law, the learned Panel erred in upholding the action of the Assessment unit /TPO/NaFAC in excluding I Services India Pvt. Ltd. in the final list of comparables which ought to be included.
25. On the facts and in the circumstances of the case and in law, the Assessment unit TPO/NaFAC erred in not conforming with the directions of the Learned Panel while computation of operating mark-up on certain comparable companies:
Jindal Intellicom Ltd.
I S N Global Solutions Pvt. Ltd.
Fuzen Software Pvt. Ltd.
Motif India Infotech Pvt. Ltd.
Page 5 IT(TP)A No. 987/Bang/2022
26. On the facts and in the circumstances of the case and in law, the Assessment unit /TPO/NaFAC has erred in not conforming with the directions of the Learned Panel and has continued to consider domestic cost of INR 29,051,050 (corresponding to domestic revenue which the learned TPO has himself taken to be non-operating) as operating in nature while calculating the margin of the Appellant w.r.t.
ITeS segment resulting into erroneous mark up of 4.81% instead of 9.02%.
27. On the facts and in the circumstances of the case and in law, the Assessment unit erred in directing levy of interest under section 234B & 234C of the Act.
28. On the facts and in the circumstances of the case and in law, the Assessment unit /NaFAC has erred in initiating penalty proceedings under section 271(1)(c) of the Act for concealment of income and for furnishing inaccurate particulars of such income.
That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal."
2. Brief facts of the case are as under:
The Company is engaged in the business of providing software development and Information Technology ('IT') enabled services to its ultimate holding company SAP SE, intermediate holding company Ariba Inc and its group entities. It e-filed its return of income pertaining to A.Y.2018-19 on 29/11/2018 declaring total income at Rs.71.64.65.210/-. Subsequently. the case was selected for complete scrutiny through CASS. 2.1 Accordingly, necessary notice u/s 143(2) was issued and duly served upon the assessee. Notice u/s 142(1) dated 15/12/2020 along with questionnaire was issued and duly served upon the assessee online for making compliance on or before 30/12/2020. 2.2 In response to such notice u/s 142(1), the assessee filed the written submissions on 30.12.2020 & 14.01.2021 along with relevant details/documents called for.
Page 6 IT(TP)A No. 987/Bang/2022 2.3 The Ld.AO noted that during the previous year relevant to assessment year under consideration, the assessee had international transactions of Rs. 462,44,79,783/-with its Associated Enterprises. Hence, reference was made u/s 92CA(1) of the I. T. Act. 1961 to the Ld.TPO. On receipt of the reference, the Ld.TPO called for economic details of the international transaction between the assessee and its AE in Form 3CEB. 2.3.1 It was noted that following were the international transactions entered into by the assessee.
Description of the international
Sl.No. Amount (INR)
transactions
1 Payment of travelling expenses 2,636,756
2 Payment of training and seminar expenses 2,104,789
3 Payment of support charges 304,384,723
4 Payment of repair and maintenance 16,100,631
5 Payment of legal and professional charges 3,002,606
6 Payment of general admin charges 72,403,141
7 Payment of communication expenses 43,189,171
8 Payment of office maintenance and utilities 160,726
9 Provision of software development services 3,521,518,166
10 Provision of IT enabled services 481,345,077
11 Recovery of employee incentive expense 1,464,054
12 Employee Compensation Cost 12,105
2.3.2 The Ld.TPO observed that the assessee had earned a margin of 15.31% under SWD segment and 10.29% under ITeS segment. The Ld.TPO further noted that, the assessee had used TNMM as the most appropriate method and OP/OC as the PLI for bench marking the transactions. The Ld.TPO noted that, the assessee had chosen following 13 comparables with a median of Page 7 IT(TP)A No. 987/Bang/2022 8.19% under SWD segment and thus held the transaction under SWD segment to be at arms length.
Weighted
Sl.No. Name of the Company Average
PLI
1 Rheal Software Ltd. -4.26%
2 Maveric Systems Ltd. 0.19%
Isummation
3 3.44%
Technologies Pvt. Ltd.
4 Yudiz Solutions Pvt. Ltd. 4.18%
5 Sagarsoft (India) Ltd. 5.89%
Sasken Technologies
6 6.52%
Ltd.
CG-VAK Software & Exports
7 8.19%
Ltd.
8 E-Zest Solutions Ltd.
9.29%
9 Mukand Engineers Ltd. 21.18%
R Systems International
10 24.17%
Ltd.
11 InfoBeans Technologies Ltd. 25.85%
Bhilwara Infotechnology
12 26.45%
Ltd.
13 Tata Elxsi Ltd. 27.19%
35th Percentile 5.89%
Median 8.19%
65th Percentile 21.18%
2.3.3 In respect of ITeS segment, the Ld.TPO noted that the assessee used 20 comparables with a median of 10.31% and thus held the transaction to be at arms length.
Page 8 IT(TP)A No. 987/Bang/2022 Weighted Sl.
Name of the Company Average
No.
PLI
Osource India Private
1 0.11%
Limited
2 Athena BPO Pvt. Ltd. 1.17%
HDB Financial Services
3 1.54%
Ltd.
4 Genius Consultants Ltd. 2.83%
Cameo Corporate
5 3.00%
Services Ltd.
Digicall Teleservices
6 3.57%
Pvt. Ltd.
Sundaram Business
7 4.84%
Services Ltd.
8 DKM Online Pvt. Ltd. 9.22%
One Point One
9 9.69%
Solutions Ltd.
R Systems
10 10.13%
International Ltd.
Bhilwara
11 10.48%
Infotechnology Ltd.
Allsec Technologies
12 11.96%
Ltd.
CRP Risk Management
13 12.57%
Ltd.
14 Jindal Intellicom Ltd. 14.16%
Tech Mahindra
15 18.52%
Business Services Ltd.
Surevin BPO Services
16 21.53%
Ltd.
17 E Care India Pvt. Ltd. 27.30%
18 CES Ltd. 31.12%
Ultramarine &
19 39.36%
Pigments Ltd.
Access Healthcare
20 41.01%
Services Pvt. Ltd.
35 th Percentile 7.03%
Median 10.31%
65 th Percentile 13.37%
Page 9
IT(TP)A No. 987/Bang/2022
2.3.4 The Ld.TPO thereafter carried out its own search process and selected a set of 20 comparables with a median of 23.60% for SWD segment, the details of which are as under:
F.Year wise OP/OC (%) Wt.
Sl. No. Company Name
Average
2015-16 2016-17 2017-18
Infomile Technologies
1 9.86 11.06 8.64 9.69
Ltd.
Harbinger Systems
2 12.69 12.80 9.46 11.65
Pvt. Ltd.
Exilant Technologies
3 25.82 17.27 8.50 17.17
Pvt. Ltd.
4 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57
Larsen & Toubro
5 20.78 19.21 17.14 18.94
Infotech Ltd.
Great Software
6 17.88 23.87 17.31 19.73
Laboratory Pvt. Ltd.
Elveego Circuits Pvt.
7 8.3 40.17 6.75 20.19
Ltd.
Black Pepper
8 9.63 13.84 24.83 20.62
Technologies Pvt. Ltd.
9 Mindtree Ltd. 26.11 20.12 18.41 21.21
Aptus Software Labs
10 27.67 24.83 15.16 22.70
Pvt. Ltd.
11 AcewinAgriteck Ltd. 26.54 23.23 22.73 24.51
Persistent Systems
12 23.9 24.44 26.94 24.98
Ltd.
13 Wipro Ltd. 27.27 26.38 27.03 26.83
14 Tata Elxsi Ltd. 24.9 29.13 30.56 28.24
Infobeans
15 34.98 23.89 27.82 28.52
Technologies Ltd.
16 Nihilent Ltd. 24.46 30.8 35.11 30.17
Thirdware Solution
17 30.18 33.36 29.27 30.94
Ltd.
Threesixty Logica
18 Testing Services Pvt. 48.46 36.63 26.2 36.58
Ltd.
19 Infosys Ltd. 38.29 38.79 35.27 37.38
Cybage Software Pvt.
20 62.04 61.40 47.78 56.81
Ltd.
Page 10
IT(TP)A No. 987/Bang/2022
35th Percentile 20.19
Median 23.60
65th percentile 26.83
2.3.5 For ITeS segment, the Ld.TPO selected a set of 17 comparables with a median of 26.34%, the details of which are as under:
F.Year wise OP/OC (%) Sl.No. Name of the Comparable 2017- 2016- 2015- Wt. Avg 18 17 16 1 Jindal Intellicom Ltd. -5.35 8.66 2.78 7.41 2 Microland Ltd. 9.83 5.85 10.17 8.58 Datamatics Business 3 3.19 8.88 34.85 13.41 Solutions Ltd.
4 Fuzen Software Pvt. Ltd 16.1 15.07 16.06 15.75 Tech Mahindra Business 5 18.95 18.51 19.09 18.85 Services Ltd.
Infosys B P M Services Pvt.
6 16.65 22.35 24.41 20.95 Ltd.
7 CES Ltd. (seg) 12.50 26.48 31.90 21.77 Manipal Digital Systems 8 20.93 28.91 21.04 23.54 Pvt. Ltd.
9 Domex E Data Pvt Ltd. 35.61 35.97 13.77 26.34 Vitae International 10 26.35 26.63 28.75 27.35 Accounting Services Pvt Ltd 11 A G S Health Pvt. Ltd. 30.19 36.06 14.7 27.64 Ultramarine & Pigment Ltd.
12 24.61 46.63 30.27 33.28 (Seg.) Fails Access Healthcare Services 13 37.37 41.27 RPT 39.03 Pvt. Ltd filter Inteq B P O Services Pvt.
14 31.68 36 64 48.47 39.15 Ltd.
Motif India Infotech Pvt.
15 47.89 48.99 38.8 45.72 Ltd.
Page 11 IT(TP)A No. 987/Bang/2022 16 Eclerx Services Limited 39.94 49.55 55.38 46.85 17 MPS Ltd 56.89 62.2 66.53 61.83 35th Percentile 20.95 Median 26.34 65th Percentile 33.28 2.3.6 The Ld.TPO thus computed the shortfall under both the segments as the proposed adjustment as under:
Adjustment u/s Sl.No. Description 92CA (in Rs.) 1 SWD Segment 289,520,610 2 ITeS segment 161,641,459 Total adjustment u/s 92CA 45,11,62,068
3. On receipt of the transfer pricing order u/s. 92CA, the Ld.AO passed the draft assessment order u/s. 144C by proposing an addition in the hands of the assessee incorporating the transfer pricing adjustment at Rs.45,11,62,068/-.
Against the draft assessment order, the assessee filed objections before the DRP.
4. The DRP excluded certain comparables sought by assessee under SWD and ITeS segment and also included certain comparables thereby the proposed adjustment in respect of SWD segment became Nil and under ITeS segment, the adjustment was restricted to Rs.12,73,38,540/-. 4.1 The Ld.AO passed the impugned order by making addition in the hands of the assessee amounting to Rs.12,73,38,540/-. Aggrieved by the order of the Ld.AO, the assessee is in appeal before this Tribunal.
5. At the outset, the Ld.AR submitted that assessee has raised an application seeking admission of additional grounds on 28.02.2023. The details are as under:
Page 12 IT(TP)A No. 987/Bang/2022
"29. On the facts and in the circumstances of the case and in law, the final assessment order dated 16 August 2022 passed by the Ld. Assessing Officer/Assessment Unit under section 143(3) r.w.s. 144C (13) r.w.s. 144B of the Act, is barred by limitation since it is passed beyond the maximum time prescribed u/s 144C (13) of the Act and is thus liable to be quashed as time barred.
30. On the facts and in the circumstances of the case and in law, the ACIT TP 'W(1), Bangalore CLd. TPO') erred in not adopting the upper turnover filter of Rs. 200 crores while doing the comparability analysis for the Appellant's international transaction pertaining to provision of IT enables services.
It is prayed that upper turnover filter of Rs. 200 crores be applied while selecting the comparable companies.
Further, the Assessee craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. Further, this ground of appeal is independent of the grounds of appeal already filed by the Appellant.
Submitted with utmost reverence"
5.1 It has been submitted that no new facts needs to be considered in order to dispose of the additional grounds raised by the assessee. It is submitted that, the additional grounds raised do not require verification of any new facts. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee.
5.2 On the contrary, the Ld.CIT.DR though opposed admission of the additional ground, could not bring anything on record which would challenge such a right available to assessee under the Act. We have perused the submissions advanced by both sides in light of records placed before us.
5.3 We note that the additional grounds are directly connected with the main issue of disallowance and no new facts needs to be Page 13 IT(TP)A No. 987/Bang/2022 investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts.
5.4 Considering the submissions and respectfully following the decisions of Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional grounds raised by the assessee. Accordingly, we admit the additional grounds raised by the assessee.
Accordingly, the additional grounds filed by assessee stands admitted.
6. The Ld.AR submitted that Additional Ground no. 29 raised by assessee goes to the root cause of the case and therefore needs to be adjudicated first.
6.1 In this ground the Ld.AR submitted that the final assessment order dated 16.08.2022 passed by the Ld.AO is barred by limitation as it is passed beyond the maximum time prescribed u/s. 144C(13) of the act. He submitted that the DRP order is dated 23.06.2022 and the impugned order is passed on 16.08.2022 and therefore there is a delay. 6.2 On the contrary, the Ld.DR has filed report dated 24.03.2023 at the time of hearing stating as under:
Page 14 IT(TP)A No. 987/Bang/2022 Page 15 IT(TP)A No. 987/Bang/2022 6.2.1 The Ld.DR thus submitted that the DRP directions were received by the revenue on 04.07.2022 and therefore the impugned order dated 16.08.2022 is passed within the period of limitation.
6.3 We have perused the submissions advanced by both sides in the light of records placed before us.
The Ld.DR before us has filed a chart extracted from ITBA wherein the various stages at which the assessment of the present assessee was pending has been tabulated. Page 16 IT(TP)A No. 987/Bang/2022 Page 17 IT(TP)A No. 987/Bang/2022 Page 18 IT(TP)A No. 987/Bang/2022 6.4 From the above dates, it is very clear that the DRP directions were received by the faceless assessment unit that had the jurisdiction to pass the assessment order on 04.07.2022. Further, we also note that an email was sent from the office of the DRP-1, Bengaluru to the DCIT, Transfer Pricing (1)(1)(1), Bangalore on 01.07.2022. Thus in our view, the Ld.AO has passed the impugned assessment order as contained in section 153 i.e., within one month from the end of the month in which such direction is received.
We therefore do not find any merit in Additional Ground no. 29 raised by the assessee.
Accordingly legal issue raised in Additional Ground no. 29 stands dismissed.
Page 19 IT(TP)A No. 987/Bang/2022
7. Coming to the merits of the case, the Ld.AR submitted that Ground nos. 1-2 are general in nature and therefore do not require any adjudication.
7.1 He submitted that in Ground no. 3, assessee is seeking a relief to the extent that the DRP directions were not followed. The Ld.AR at the time of argument has not highlighted the issues in respect of which the DRP directions were not followed by the Ld.AO. Under such circumstances, we are unable to record a categorical observation and a direction to the Ld.AO. However, we mention that the Ld.AO shall once again consider and pass an order in conformity with the DRP directions as the case may be in respect of the issues that were raised and considered by the DRP. Accordingly, ground no. 3 raised by assessee stands allowed for statistical purposes.
7.2 Ground nos. 4-10 raised by assessee is submitted to be not pressed.
Accordingly, these grounds are dismissed as not pressed. 7.3 The Ld.AR submitted that Additional Ground no. 30, Ground no. 11, Ground nos. 16-18 & Ground nos. 12-14 are alleged by the assessee seeking inclusion / exclusion of comparables.
8. Before we undertake the comparability analysis, it is sinequa non to understand the functions performed, assets owned and risks assumed by assessee.
Page 20 IT(TP)A No. 987/Bang/2022 Functions Page 21 IT(TP)A No. 987/Bang/2022 Page 22 IT(TP)A No. 987/Bang/2022 Page 23 IT(TP)A No. 987/Bang/2022 Page 24 IT(TP)A No. 987/Bang/2022
9. The Ld.AR submitted that Ground no. 11 and Additional Ground no. 30 are in respect of application of turnover filter by adopting the upper turnover filter of Rs. 200 crores. He submitted that the comparables alleged in ground no. 16-18 also needs to be considered by applying the turnover filter of 1 to 200 crores. The Ld.AR thus submitted that the assessee seeks exclusion of following comparables in the above grounds on failure of turnover filter:
Name of the Turnover
S.No.
comparable (in crores)
Infosys BPM
1. 3,071
Services Pvt. Ltd.
Motif India Infotech
2. 207.08
Pvt. Ltd.
3. Eclerx Services Ltd. 1150.69
4. MPS Ltd. 220.90
Page 25
IT(TP)A No. 987/Bang/2022
9.1 He placed reliance on following decisions in support of his submissions.
a) Decision of Coordinate Bench of this Tribunal in case of Altair Engineering India Pvt. Ltd. vs. ACIT in IT(TP)A No. 1025/Bang/2022 for A.Y. 2018-19 by order dated 09.01.2023.
b) Decision of Coordinate Bench of this Tribunal in case of Cenduit (India) Services Pvt. Ltd. vs. DCIT in IT(TP)A No. 227/Bang/2021
c) Decision of Coordinate Bench of this Tribunal in case of Autodesk India (P) Ltd. vs. DCIT in IT(TP)A Nos. 540 & 541, 616 & 617/Bang/2013 9.2 On the contrary, the Ld.DR relied on the orders passed by authorities below.
9.3 We have perused the submissions advanced by both sides in the light of records placed before us.
The Ld.AR submitted that Coordinate Bench of this Tribunal in case of Altair Engineering India Pvt. Ltd. vs. ACIT in IT(TP)A No. 1025/Bang/2022 for A.Y. 2018-19 by order dated 09.01.2023 considered the above four comparables by applying the turnover filter and held as under:
"30. The learned counsel for the Assessee prayed for exclusion of the following 7 companies out of the final list of 11 comparable companies that remain after DRP directions and in this regard raised ground No.11.5.2 of the original grounds of appeal, which reads as follows:
"11.5.2. The Lower Authorities are not justified in failing to adopt the upper turnover filter of Rs. 200 crores that resulted in wrongful selection of following 7 companies selected by the TPO:
1) Microland Ltd.;
2) Tech Mahindra Business Services Ltd;
3) Infosys B P M Services Pvt. Ltd;
4) Access Healthcare Services Pvt. Ltd
5) Motif India Infotech Pvt. Ltd;
6) Eclerx Services Limited;
7) MPS Ltd."
31. We have already seen that the Assessee's turnover in the ITeS was only Rs. 12,88,48,604 after Page 26 IT(TP)A No. 987/Bang/2022 adjustment of revenue by the TPO. We have also seen while deciding the application of turnover filter in SWD services Segment that companies with turnover of Rs.200 crores or more cannot be compared with companies having turnover of less than Rs.200 crores. For the reasons stated therein, we direct exclusion of the companies listed in ground No.11.5.2 whose turnover is admitted above Rs.200 crores from the list of comparable companies."
9.4 In the above decision, we note that for the same assessment year under consideration, this Coordinate Bench in case of Altair Engineering India Pvt. Ltd. vs. ACIT (supra) has noted that the turnover of the four comparables sought for exclusion by assessee in the present case exceeds Rs. 200 crores whereas the assessee's turnover under ITeS segment is only Rs.78.66 crores. Respectfully following the above, Infosys BPM Services Pvt. Ltd., Motif India Infotech Pvt. Ltd., Eclerx Services Ltd. and MPS Ltd. stands excluded.
10. Ground nos. 12-14 raised by assessee is against inclusion of following comparables.
a) Manipal Digital Systems (P.) Ltd.
b) Domex E Data (P.) Ltd.
c) Vitae International Accounting Services (P.) Ltd. 10.1 It is the submission of the Ld.AR that these comparables are to be excluded as they are functionally not similar with that of assessee. He has placed reliance on the following decisions where these comparables have been excluded on functional dissimilarities.
a) Decision of Hon'ble Pune Tribunal in case of Rage Frameworks India (P.) Ltd. vs. ACIT in ITA No. 674/Pun/2022 for A.Y. 2018-19
b) Decision of Hon'ble Pune Tribunal in case of Credence Resource Management (P.) Ltd. vs. ACIT in ITA No. 133/Pun/2021 for A.Y. 2016-17 Page 27 IT(TP)A No. 987/Bang/2022
c) Decision of Coordinate Bench of this Tribunal in case of Altair Engineering India Pvt. Ltd. vs. ACIT in IT(TP)A No. 1025/Bang/2022 for A.Y. 2018-19 by order dated 09.01.2023.
d) Decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. vs. CIT reported in (2015) 60 taxmann.com 355 (Delhi) 10.2 On the contrary, the Ld.DR relied on the orders passed by authorities below.
10.3 We have perused the submissions advanced by both sides in the light of records placed before us.
We note that Coordinate Bench of this Tribunal in case of Altair Engineering India Pvt. Ltd. vs. ACIT (supra) has considered Manipal Digital Systems (P.) Ltd. and Domex E Data (P.) Ltd. by observing as under:
"32. Learned Counsel for the assessee submitted that out of the remaining 4 comparable companies Manipal Digital Systems Pvt. Ltd., and Domex E Data Pvt. Ltd., should be excluded for the reason that these 2 companies are functionally different and cannot be compared to an ITeS company such as the assessee. In so far as Domex E Data Pvt. Ltd., is concerned, it is the stand of the assessee that this company performs diversified functions like ITeS premedia work and e-book/other boom distribution. It was submitted that no segmental information of the various segments or atleast ITeS segment is available. Reliance was placed on the following decisions of the ITAT whereby Tribunal has held that this company cannot be compared with ITeS company.
Global E-business Operations Pvt Ltd vs DCIT [TS-796- ITAT-2022(Bang)-TP] AY 2016-17 M/s. Schlumberger India Technology Centre Private Ltd vs DCIT [TS-473-ITAT-2022(PUN)-TP] AY 2016-17 Credence Resource Management (P.) Ltd vs ACIT [2022] 138 taxmann.com 543 (Pune - Trib.), for AY 2016-17
33. The plea of the assessee was however rejected by the DRP on the ground that ITeS includes BPO and KPO services and that the contentions of the assessee were Page 28 IT(TP)A No. 987/Bang/2022 based on website information which cannot be regarded as correct. Learned DR relied on the order of the DRP. We have carefully considered the rival submissions. We find that in the decision cited by the learned DR, Tribunal has held that this company is not comparable with an ITeS company owing to those companies being in the field of KPO which cannot be equated or compared with a company rendering ITeS.
34. In so far as comparability of Domex E Data Pvt. Ltd., is concerned, the argument was that this company is engaged in providing KPO and therefore cannot be compared with an ITeS such as the assessee. On this objection, the DRP again held that ITeS and KPO have to be regarded as one and the same. Learned Counsel has pointed out that in the following decisions, Tribunal has taken the view that companies rendering KPO services cannot be regarded as a comparable company with an ITeS company.
Transperfect Solutions India Pvt. Ltd vs ACIT [[TS-497- ITAT-2022(PUN)-TP]] AY 2016-17 Schlumberger India Technology Centre (P.) Ltd. Vs DCIT [TS-473-ITAT- 2022(PUN)-TP] AY 2016-17 Credence Resource Management (P.) Ltd vs ACIT [2022] 138 taxmann.com 543 (Pune - Trib.), for AY 2016-17
35. In the light of the aforesaid decisions, we are of the view that Domex E Data Pvt. Ltd., should be excluded from the list of comparable companies."
10.4 From the above observation, we note that Domex E Data (P.) Ltd. has been treated to be a KPO whereas the assessee before us is a contract service provider with limited risks. 10.5 In respect of Manipal Digital Systems (P.) Ltd., we note that Hon'ble Pune Tribunal in case of Rage Frameworks India (P.) Ltd. vs. ACIT (supra) has observed that there is no segmental specification available in the accounts of the annual report. We note that in the annual report of this comparable placed at page 1505, this comparable is providing multiple other services such as premedia services, web development services, ebook Page 29 IT(TP)A No. 987/Bang/2022 distribution and various publishing services. It is noted that it is engaged in high end services including conceptualisation, designing and analytics that cannot be compared to a low end ITeS services segment. Merely because this company is reported to be rendering 100% ITeS services, it cannot be compared to a low end ITeS service provider like that of assessee. 10.6 We note that Coordinate Bench of this Tribunal in case of M/s. Global E-Business Operations Pvt. Ltd. vs. DCIT in IT(TP)A No. 174/Bang/2022 by order dated 16.11.2022 has considered this comparable for A.Y. 2017-18 by observing as under:
"12.1.8 We have heard the rival submissions and perused the materials available on record. As per the annual report of the company, it is also in end-to-end content services across the value chain. From the website and annual report, it is clearly evident that the company is also engaged in web development, mobile application development. The company also provides publishing editorial & composition services, which includes creating layout & artwork for advertisements and brochures, typesetting services and proof reading. As per revenue from operations, it includes "Revenue from web development and other services" (INR 2.18 Cr) and "income from e-book Distribution" (INR 69 lakhs), without providing the segmental revenue and profitability with respect to ITES segment. Advertising and sales promotion expenses at 6.50%, 7.19% & 8.78% of total expenditure in FY 2016- 17, FY 2015-16 & FY 2014-15 respectively. 12.1.9 Further, the Tribunal in the case of Iron Mountain Services Ltd. in IT(TP)A No. 307/Bang/2022 dated 20-9- 2022 has held as under:-
16. "The next company the assessee seeks to exclude is ManipalDigitalSystems Pvt. Ltd. In this regard, it was submitted that this company is engaged in provision of multiple high-end services including KPO activity like Design Services, Animation. It was submitted that no segmental details were available in the financial statements on the variety of services provided by this company like Design Services, Animation. Reliance was placed on the decision of the ITAT, Pune Bench in the Page 30 IT(TP)A No. 987/Bang/2022 case of Credence Resource Management Pvt. Ltd., (supra) wherein this company was excluded by the Pune Bench with the following observations:
"8. The assessee submits that the ManipalDigitalSystems Private Limited is functionally different from the assessee which is involved in provision of ITes services. As per the annual report of the company, the activity undertaken by the company is in the nature of pre-press activities which is not comparable to the assessee. That further in the website of the company, it is engaged in the diversified set of activities which involves graphic solutions, packaging brand management, digital publishing and digital content solutions. Therefore, the assessee submits that this company should be rejected from the final set of comparables companies."
10.7 Hon'ble Pune Tribunal has also referred to the decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. vs. CIT in ITA No. 102/2015 by order dated 10.08.2015, a copy of which has been placed in the paper book case law compilation at page 1-22. We note that Hon'ble Delhi High Court in para 31 has observed that the Tribunal had held that once a service falls under the category of ITes then there is no sub classification of segment. Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITes. 10.8 Hon'ble Delhi High Court rejecting such view of the Tribunal had held that such a view, if upheld, would be contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. Hon'ble High Court also observed that ITes encompasses a wide spectrum of services that use Information Technology based delivery. Hon'ble Court further observed that such service could include rendering highly technical services by qualified technical personnel involving advanced skills and Page 31 IT(TP)A No. 987/Bang/2022 knowledge, such as engineering, design and support and that, on the other end of the spectrum ITes would also include voice based call centers that render routine customer support for their clients.
10.9 The relevant portion of the judgment is extracted as follows for the sake of completeness:
" . . . . . . . . . Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous.
32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider.
33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid Page 32 IT(TP)A No. 987/Bang/2022 reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability.
34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income-tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service Page 33 IT(TP)A No. 987/Bang/2022 rendered and not of a service (higher in value chain) that may possibly be rendered subsequently.
35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower- end ITeS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold.
36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP."
10.10 We are thus of the considered opinion that as there is no segmental details available in respect of this comparable, in order to understand the earnings of the company from ITeS segment, it cannot be considered to be a comparable with that of assessee. Respectfully following the view expressed by Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. vs. CIT (supra), we direct the Manipal Digital Systems (P.) Ltd. to be excluded from the final list.
Page 34 IT(TP)A No. 987/Bang/2022 Accordingly Ground nos. 12-13 raised by the assessee stands allowed.
10.11 Vitae International Accounting Services (P.) Ltd. The present comparable has been sought by assessee for exclusion by submitting that it is functionally not similar with that of assessee.
On the contrary, the Ld.DR relied on the orders passed by the authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
We note that the annual report of this comparable is placed at page 1816 of the paper book. The company overview in note 1 to the statement of account reveals that it is carrying on business of data processing, handling back office functions and rendering ITeS to their clients abroad using computer software. The present assessee before us is also the contract service provider with absolutely minimal risk. The only segment with which this company earns income is from sale of services being processing fees. In our view, this comparable carries out the basic ITeS services similar to that of assessee and therefore is held to be comparable.
Accordingly, we direct this comparable to be included in the final list.
Accordingly ground no. 14 raised by assessee stands dismissed.
11. Ground no. 15 - The Ld.AR submitted that assessee do not wish to press this ground and accordingly, this ground is dismissed as not pressed.
Page 35 IT(TP)A No. 987/Bang/2022
12. Ground no. 19 - Assessee is seeking exclusion of Ultramarine & Pigment Ltd. as the DRP had already excluded in para 2.51.1.1. The Ld.AR submitted that, the DRP directions has not been followed while passing the assessment order. We note that the DRP observed in respect of this comparable as under:
"2.51.1.1 Having considered the submissions, on perusal of the annual reports, it is seen that the company has spent an amount of Rs.3821.72 lakhs (page 61 of the AR) as against total revenue of Rs.28252.99 lakhs which comes to 13.52%. Thus, the company fails the employment cost filter adopted by the TPO. Therefore, TPO is directed to exclude the company from the list of comparables under ITES segment."
We direct the Ld.AO/TPO to exclude this comparable as per the directions of the DRP.
13. Ground nos. 20-23 - The Ld.AR submits that assessee do not wish to press these grounds.
Accordingly, these grounds are dismissed as not pressed.
14. Ground no. 24 - The assessee seeks inclusion of I Services India (P.) Ltd.
The Ld.AR submitted that this comparable was excluded by the Ld.TPO as it was not reflected in the search matrix of the TPO. The Ld.AR submitted that this comparable needs to be included. 14.1 On the contrary, the Ld.DR relied on the orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
14.2 We are of the opinion that merely because the comparable does not appear in the search process by the Ld.TPO, it cannot be excluded if assessee is able to file the annual reports which are verifiable.
Page 36 IT(TP)A No. 987/Bang/2022 14.3 We rely on the decision of Coordinate Bench of this Tribunal in case of Prism Networks vs. ACIT reported in (2022) 141 taxmann.com 163.
14.4 We rely on the following observation in case of Prism Networks vs. ACIT (supra) in support of this contention.
"18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to have adjudicated the question of inclusion of these companies as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground No. 7 is treated as allowed for statistical purposes."
Respectfully following the above, we accordingly, remand this comparable to the Ld.AO/TPO to reconsider it in the light of the annual reports that will be filed by assessee. In the event they are found to be functionally similar with that of assessee, the same may be included in the final list.
Accordingly, this ground raised by the assessee stands partly allowed for statistical purposes.
15. Ground no. 25 - The Ld.AR submits that assessee do not wish to press this ground.
Accordingly the same is dismissed as not pressed.
Page 37 IT(TP)A No. 987/Bang/2022
16. In Ground no. 26, the Ld.AR submits that assessee seeks to directions to rectify the computational errors in calculating the margins of the assessee with respect to ITeS segment. He submitted that the directions of the DRP has not been followed.
16.1 We accordingly, direct the Ld.AO/TPO to compute the correct margins of the remaining comparables on giving order effect to this order of the Tribunal in accordance with law. Accordingly, ground no. 26 raised by assessee stands allowed for statistical purposes.
17. Ground nos. 27-28 are consequential in nature and therefore do not require adjudication. In the result, the appeal filed by assessee stands partly allowed.
Order pronounced in the open court on 15th June, 2023.
Sd/- Sd/-
(CHANDRA POOJARI) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 15th June, 2023.
/MS /
Copy to:
1. Appellant 2. Respondent
3. CIT 4. DR, ITAT, Bangalore
5. Guard file
By order
Assistant Registrar,
ITAT, Bangalore