Income Tax Appellate Tribunal - Pune
Brintons Carpets Asia Pvt. Ltd.,, Pune vs Deputy Commissioner Of Income-Tax,, ... on 24 February, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "C", PUNE
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER
ITA No.547/PUN/2016
िनधा रण वष / Assessment Year : 2011-12
Brintons Carpets Asia Pvt. Ltd., Vs. DCIT,
Plot No.414/415/416, Circle-1(1), Pune
Village Urawade,
Tal. Mulshi, Pune
PAN : AAACB7059H
Appellant Respondent
Assessee by Shri Nikhil Pathak
Revenue by Shri T. Vijaya Bhaskar Reddy
Date of hearing 21-02-2020
Date of pronouncement 24-02-2020
आदेश / ORDER
PER R.S.SYAL, VP :
This appeal by the assessee is directed against the final assessment order dated 27-01-2016 passed by the Assessing Officer (AO) u/s.143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter called 'the Act') in relation to the assessment year 2011-12.
2. The only issue raised in this appeal is against the transfer pricing addition of Rs.56,09,376/- made in the international 2 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., transaction of `Provision of Carpet designing, planning and estimation services'.
3. Briefly stated, the facts of the case are that the assessee is a domestic company engaged in the business of manufacturing and sale of machine made Axminster Woven carpets and spun yarn. A return of income was filed declaring total income of Rs.7,46,72,803/-. Certain international transactions were reported in Form no. 3CEB. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The only international transaction in dispute before the Tribunal through this appeal is 'Provision of Carpeting, designing, planning and estimation services' with transacted value of Rs.5,53,40,229/-. The factual panorama qua this transaction is that the assessee rendered carpet designing services to its Associated Enterprises (AEs). The assessee computed its own Profit Level Indicator (PLI) of Operating profit to Total Cost (OP/TC) at 8.97% under this segment. Ten companies were chosen as comparables with their mean PLI of OP/OC at 7.93%. That is how, the assessee claimed this international transaction to be at ALP. The TPO made certain 3 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., alterations to the list of comparables. He shortlisted eight companies as comparable with certain inclusions/exclusions, in/from the assessee's list of comparables. On this basis, the TPO proposed certain transfer pricing adjustment which was recommended by the AO in the draft order. The assessee assailed the selection of comparables before the Dispute Resolution Panel (DRP), which excluded one company thereby restricting the list of comparables to seven with mean margin at 18.71%. It is on the basis of this final list of comparables that the AO made transfer pricing addition of Rs.56.09 lakh. Aggrieved thereby, the assessee is in appeal before the Tribunal.
4. We have heard both the sides and gone through the relevant material on record. It is noticed that the assessee entered into several international transactions including the manufacturing of carpets and rendering of design services. In the instant appeal, we are concerned only with the transfer pricing addition in respect of carpet design services. The TPO did not disturb the application of the Transactional Net Margin Method (TNMM) as the most appropriate method and the PLI of OP/OC as selected by the assessee. The entire controversy rotates around the selection of 4 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., comparables only. The assessee is aggrieved by the inclusion of three companies in the final set of comparables, which we will espouse shortly for consideration and decision in seriatim.
5. Before analyzing the comparability or otherwise of three companies under consideration, it would be essential to consider the functional profile of the assessee under this transaction. The TPO has briefly referred to the international transaction as that of design services without making any discussion on the precise nature of activity. The DRP has also simply mentioned at page 3 of its order that the assessee provided 'IT enabled support services pertaining to planning and estimation activities, design development activities and customer support activities' to its AE, namely, Brintons Ltd., UK (BLK). We have gone through the Transfer Pricing Study report of the assessee, which throws some light on the nature of activity carried out by the assessee under this transaction. Relevant discussion has been made at page 70 of the TP study report. Under the main head, 'Service Centre Division', the assessee has reported that its Service Centre Division provides planning and estimation services (during pre-production stage), designing services (during pre as well as post production stage), 5 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., project management and customer support services to BLK. It has been provided that BLK maintains Client Relationship Management (CRM) database wherein all the requisitions for any planning and estimation work, designing work, request for Project Management and Customer Support are logged on by various Brinton group entities. The CRM Manager forwards the above requisitions to the assessee for feasibility analysis. Under the head "Functions performed" by assessee, it has been mentioned that on receipt of instructions from BLK via CRM database as regards the projects to be executed, the team at the assessee's office commences work on the project which involves Planning, Estimation and Designing services. Planning and Estimation services are carried out by Interior Designers, Architects and Civil Engineers of the assessee who download the request for services made by various Brinton group companies. After that, it proceeds with the execution of the task which comprises of 'quick take off' involving giving client a brief idea as to the quantity and cost estimations, technical inputs involving giving technical inputs pertaining to the layout and other specific issues raised by the customer on their orders; recommending layout, namely, 6 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., recommendations about the nature of quantity to be manufactured, changes in the colour scheme etc.; definitive plans for approval, namely, converting the layout into 3D image using CAD/CAM software; and sending the finalized layout to production design team and fitting plans. The second major activity done by the assessee is of design services under which the design for the carpets are worked out according to the area/interior concept with support from BLK, UK and then sent to the customer for approval. Thereafter, design development is carried out by the assessee on the basis of the inputs given by the customers and BLK. We have also gone through the Agreement entered into between the assessee and BLK, effective from 1.4.2010, whose copy has been placed on record. Under this Agreement, the assessee is supposed to render services relating to planning and designing carpets. Nature of services has been set out at Schedule-1 to the Agreement. The Schedule provides that the assessee shall implement pre- production planning, project management and design its services on behalf of BLK in accordance with the standards agreed in writing from time to time. Design development encompasses designing of carpets originating from the field designers providing 7 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., initial customer concepts to the assessee via CRM system. Thereafter, the assessee carries out planning and estimation by providing the customers with the technical advice and recommendations relating to the proposed layouts together with estimated quantities and cost estimations. The assessee takes the completed design and develops detail floor fitting plans for the relevant project manager. The production designer of the assessee transforms the completed customer design and specifications into a format suitable for manufacturing. In a nutshell, the entire activity of the assessee under this international transaction starts with receipt of input from its UK based AE about the requirements of its customers who intend to purchase carpets from it; making preliminary designs as per requirements of the customers to its UK based AE; finalizing the design after discussions with the customer and/or its AE; and handing it over to the Manufacturing segment for the purposes of carrying out the manufacturing activity in accordance with the design finalized under this segment. With the above understanding of the functional profile of the assessee, now we proceed to examine the comparability or otherwise of the three companies under consideration.
8ITA No.547/PUN/2016
Brintons Carpets Asia Pvt. Ltd., i. Infosys BPO Ltd. :
6. The TPO selected this company as comparable. The assessee objected to the same by submitting that it was functionally different and also a big brand. The TPO rejected the assessee's contentions and included the same in the final list of comparables. The assessee remained unsuccessful before the DRP as well.
7. Having head both the sides and gone through the relevant material on record, we find from the Annual report of Infosys BPO Ltd., a copy of which has been placed on record, that its total revenue stands at whopping Rs.1129.11 crore as against the assessee's revenue under this segment at a mere Rs.5.53 crore. Segmental information of this company is available at page 403 of the paper book, which divulges that this company has segments of rendering services in the Financial sector, Manufacturing sector, Telecom sector, Retail sector and Others. Total revenue of Rs.1129 crore and odd has been earned from the above five major sectors. The assessee's design services are meant only for the Manufacturing of carpets as against the Infosys BPO Ltd. engaged in rendering ITeS services not only for Manufacturing but also for Financial, Telecom, Retail and Other sectors. Operating profit 9 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., rates of such segments, as per segmental information, varies from approximately 16% to approximately 35% of the sectors in which Infosys BPO Ltd. rendered ITeS services. The TPO has selected Infosys BPO Ltd. on entity level as comparable, which is obviously not correct. Not only this, the quantum of transactions carried out by this company is streets ahead of the assessee. Whereas the assessee earned total revenue of Rs.5.54 crore from this segment, this company earned revenue of Rs.1129.11 crore. Services rendered by this company in the manufacturing sector alone stands at Rs.261.45 crore. This shows that the turnover of the assessee in this segment is no match to the turnover of Infosys BPO Ltd. The Hon'ble jurisdictional Bombay High Court in CIT Vs. Pentair Water India Pvt. Ltd. (2016) 381 ITR 216 (Bom), upheld the view of the tribunal in excluding certain companies on the basis of higher turnover. In view of the foregoing discussion, we are satisfied that this company ought not to have been included in the final set of comparables. We, therefore, order to exclude the same.
10ITA No.547/PUN/2016
Brintons Carpets Asia Pvt. Ltd., ii. Eclerx Services Ltd. :
8. The TPO proposed to include this company in the list of comparables, which was objected to by the assessee on the ground that this company was functionally different rendering KPO services. The TPO did not accept the assessee's contention of treating this company as not comparable on the issue of it rendering KPO services as against the assessee providing BPO services on the ground that there was no difference in the functionality of BPO and KPO services. He referred to the CBDT Notification No.890(E) dated 26-09-2000 and held that the differentiation between two companies on the basis of BPO and KPO was not fully correct in as much as KPO could not be said to be different from BPO. No relief was allowed by the DRP.
9. Having head both the sides and gone through the relevant material on record, it is seen that the TPO included Eclerx Services Ltd. in the list of comparables by noticing it to be engaged in rendering KPO services but observing that there was not much difference between a company providing KPO and another providing BPO services in as much as the BPO services are part of KPO services. In our humble opinion, simply because BPO is 11 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., included in the list of KPO services in the said Notification does not per se make every BPO company comparable to a KPO company. What is relevant to note for examining the comparability is the nature of services provided. Even under the KPO services, as per the CBDT Notification No.890 (E), as taken note of by the TPO, call centre, data processing, engineering and design, geographic information system services, human resource services, medical transcription, support centres etc. have also been classified under one category of KPO. It does not mean that a company rendering call centre or back office operations becomes comparables to a company rendering geographic information system services or engineering and design or medical transcription services etc. Further comparability within the overall category of KPO service is also required to be separately established for treating a particular company as comparable.
10. Adverting to the facts of the instant case, we find that the assessee's functional profile under this segment is that of design services. On the other hand, the annual report of Eclerx services, whose copy has been placed at page 258 onwards of the paper book, shows that this company has rendered services to the 12 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., financial institutions for planning their priorities by partnering with them to increase control, execute ongoing functions with the significant reduction in costs and accelerate change initiatives by providing domain specific re-engineering expertise. This company is also providing services to its clients for operating on day-to-day basis which include trade processing, reference data, accounting and finance and expense management activities. It has been reported in the Director's report that 'our professional services practice includes consulting, business analysis and solution testing'. In addition, this company rendered services comprising of trade processing support, reference data maintenance; contract risk review; reconciliation and controls; margin and exposure management, accounting and finance and consulting services. Page 323 of the paper book is a copy of Schedule to financial statements, which contains segmental reporting with the remark:
'the company operates under a single primary segment, i.e. data analytics and process outsourcing services'. Thus, it is seen that this company has only one consolidated segment comprising of all the services as discussed hereinabove. In view of the fact that the nature of services rendered by Eclerx Services Ltd. is at much 13 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., variance with that of the assessee, apart from the level of business operations, we hold that this company cannot be considered as comparable to the assessee company. We, therefore, order to exclude it from the list of comparables.
iii. Accentia Technologies Ltd. :
11. The TPO included this company in the list of comparables despite the assessee's objections of functional incomparability, diversification of business, product development, high end services
-KPO acquisition during the year and intellectual property rights. For holding that there was no distinction between KPO and BPO services, the TPO reiterated his reasoning as given for including Eclerx services Ltd. in the list of comparables.
12. Having heard both the sides and gone through the relevant material on record, we find from the Annual report of this company, whose copy is available at page 169 onwards of the paper book, that it is engaged in rendering KPO services. The Managing Director of this company has said in his message to the shareholders on page 6 of the Annual report that the company decided to develop its own EMR (Electronic Medical Records) software rather than depending on third party offering and market 14 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., the same all over the US. It has further been mentioned that due to these developments, the company invested large amount of funds in the development of EMR software and SaaS model marketing of the same in the US. It has still further been mentioned that this company supported a Product Division under the name of Iridium and with a focused approach. The product team was able to come up with end-to-end global work flow automation system that help in the day-to-day work flow. The products like Iridium Medical Transcription Automation software, Iridium certified home based medical transcription, Iridium certified medical transcription, Falcon-2000, etc., are few of the products which have been accepted by customers. It has also been mentioned in the Annual report that: "since August, 2010 Accentia's products development team, along with their functional experts and development partners have been involved in the mission of designing and developing a world class fully integrated multi-disciplined cloud based host.......... Application which integrates all services from electronic medical record (EMR) Practices...... Management System (PMS) - Code Mapping/Scrubbing - Medical Billing and Receivables Management System (RCM......) - Electronic Data 15 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., Interchange with insurance companies. The above seamlessly integrated (SaaS) system functions as a one stop shop for a clinical provider that manages all their healthcare documentation needs, receivables managements needs..........". Profit & Loss Account of this company is available at page no. 211 of the Paper book, from which it can be seen that under the head 'Income', there is a first item of 'Sales and services.' Under the head 'Segment information' in 'Notes to Accounts', it has been mentioned that:
'Company has only one segment of activity, namely, 'healthcare receivable management', therefore, segment reporting as defined in AS-17 does not apply.' From the above discussion, it transpires that this company is not only earning income from sale of software Products as well, but is also having a common pool of income both from products and services and there is no bifurcation of income available from rendering of services. In this view of the matter, it becomes clear that this company is nowhere close to the exclusive ITES segment of the assessee company. The Hon'ble Delhi High Court in Principal CIT vs. B.C. Management Services Pvt. Ltd. (2018) 403 ITR 45 (Del), has held that Accentia Technologies Pvt.
Ltd. is engaged in KPO services and is, hence, not comparable 16 ITA No.547/PUN/2016 Brintons Carpets Asia Pvt. Ltd., with a company providing ITES. This decision has also been rendered for the assessment year 2011-12, which is under consideration in this appeal. We, therefore, order to exclude this company from the list of comparables.
13. Under the given circumstances, we set-aside the impugned order on this issue and send the matter back to the AO/TPO for fresh determination of ALP of the international transaction in dispute in accordance with the directions given supra. Needless to say, the assessee will be allowed a reasonable opportunity of hearing.
14. In the result, the appeal is allowed for statistical purposes.
Order pronounced in the Open Court on 24th February, 2020.
Sd/- Sd/-
(S.S. VISWANETHRA RAVI) (R.S.SYAL)
JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; दनांक Dated : 24th February, 2020
सतीश
17
ITA No.547/PUN/2016
Brintons Carpets Asia Pvt. Ltd.,
आदेश क ितिलिप अ िे षत/Copy
षत of the Order is forwarded to:
1. अपीलाथ / The Appellant;
2. यथ / The Respondent;
3. The CIT(A)-13, Pune
4. The Pr. CIT -5, Pune
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे
"सी" / DR 'C', ITAT, Pune
6. गाड फाईल / Guard file
आदेशानुसार/
ार BY ORDER,
// True Copy //
Senior Private Secretary
आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
Date
1. Draft dictated on 21-02-2020 Sr.PS
2. Draft placed before author 24-02-2020 Sr.PS
3. Draft proposed & placed JM
before the second member
4. Draft discussed/approved JM
by Second Member.
5. Approved Draft comes to Sr.PS
the Sr.PS/PS
6. Kept for pronouncement on Sr.PS
7. Date of uploading order Sr.PS
8. File sent to the Bench Clerk Sr.PS
9. Date on which file goes to
the Head Clerk
10. Date on which file goes to
the A.R.
11. Date of dispatch of Order.
*