Income Tax Appellate Tribunal - Mumbai
Intergreon Managed Soluitons (India) ... vs Asst Cit 12(2)(2), Mumbai on 14 December, 2018
आयकर अपीऱीय अधिकरण "K" न्यायपीठ मुंबई में ।
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI
BEFORE SHRI C.N PRASAD, JUDICIAL MEMBER
AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER
आयकर अपीऱ सं./I.T.A. No.6927/Mum/2016
(नििाारण वर्ा / Assessment Year : 2012 -13)
Integreon Managed बिाम/ ACIT 12(2)(2)
Solutions (India) Pvt. Ltd., R.No. 145, 1 s t floor,
602, 6 t h floor, v. Aayakar Bhavan,
IT Building-3,
M.K Road,
Nesco IT Park,
Nesco Complex, Mumbai-400020
Western Express Highway,
Goregaon (East),
Mumbai-400063
स्थायी ऱेखा सं./ PAN: AAACI7431A
आयकर अपीऱ सं./S.A No.429/Mum/2018
Arising out of ITA No. I.T.A. No.6927/Mum/2016
(नििाारण वर्ा / Assessment Year : 2012 -13)
Integreon Managed बिाम/ ACIT 12(2)(2)
Solutions (India) Pvt. Ltd., R.No. 145, 1 s t floor,
602, 6 t h floor, v. Aayakar Bhavan,
IT Building-3,
M.K Road,
Nesco IT Park,
Nesco Complex, Mumbai-400020
Western Express Highway,
Goregaon (East),
Mumbai-400063
स्थायी ऱेखा सं./ PAN: AAACI7431A
(अपीऱाथी /Appellant) .. (प्रत्यथी / Respondent)
Assessee by: Shri. Percy J. Pardiwala,
Shri. Niraj Sheth & Shri Ketan
Ved
Revenue by : Shri. Jayant Kumar (CIT-DR)
I.T.A. No.6927/Mum/2016
S.A No.429/Mum/2018
सुनवाई की तारीख /Date of Hearing : 24.09.2018
घोषणा की तारीख /Date of Pronouncement : 14.12.2018
आदे श / O R D E R
PER RAMIT KOCHAR, Accountant Member:
This appeal, filed by assessee, being I.T.A. No.6927/Mum/2016, is directed against the final assessment order dated 23rd September 2016 passed by the Assessing Officer (hereinafter called " the AO") dated 23rd September 2016 u/s 143(3) read with Section 144C(13) of the Income-tax Act,1961 (hereinafter called " the Act") , which was passed by the AO in pursuance to the directions dated 19.07.2016 issued by learned Dispute Resolution Panel-I, Mumbai (hereinafter called "the DRP") u/s 144C(5) of the 1961 Act , for assessment year 2012-13. The learned Transfer Pricing Officer(he reinafter called "the TPO") had earlier issued an order dated 25.01.2016 u/s 92CA(3) of the 1961 Act which led to passing of an draft assessment order dated 07 t h March 2016 by the AO u/s 143(3) read with Section 144C(1) of the 1961 Act , which was then challenged by the assessee before learned DRP wherein objections were f iled by the assessee against draft assessment order passed by the AO leading to issuance of aforesaid directions by learned DRP dated 19.07.2016 u/s 144C(5) of the 1961 Act , for AY 2012-13.
2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") read as under:-
"1.0 Adjustment/addition of Rs. 66,066,596/- on account of provision of back office support services to Associated Enterprises ("AEs"):
1.1 The Hon'ble Dispute Resolution Panel ('DRP')/ Ld. Assessing Officer ('AO')/ Ld. Transfer Pricing Officer („TPO') have erred on the facts of the case and in law in making 2 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 an upward adjustment of Rs. 66,066,596/- to the total income of the Appellant by holding that the international transaction relating to back office support services provided by the Appellant to its AEs is not at arm's length.
1.2 The Hon'ble DRP/ Ld. AO/ Ld. TPO erred in facts of the case and in law in characterizing the Appellant's low end back-office services which are in the nature of 'business process outsourcing' as high-end 'knowledge process outsourcing' services by relying on the Orders/ Directions for earlier years.
1.3 The Hon'ble DRP/ Ld. AO/ Ld. TPO erred in facts of the case and in law in disregarding the benchmarking analysis and comparable companies selected by the Appellant based on the contemporaneous data in the transfer pricing study report maintained as per section 92D of the Income Tax Act, 1961 ('the Act') read with Rule 10D of the Income-tax Rules, 1962 ('the Rules') and thereby rejecting the transfer pricing documentation maintained by the Appellant.
1.4 The Hon'ble DRP/ Ld. AO/ Ld. TPO erred in facts of the case in cherry picking companies having high operating margins without appreciating that such companies are functionally dissimilar to the Appellant.
1.5 The Hon'ble DRP / Ld. AO/ Ld. TPO erred in facts of the case and in law in adopting an inconsistent approach in selection of comparable companies vis-a-vis their own Orders/ Directions issued in earlier years to reach an erroneous conclusion regarding the arm's length nature of international transactions entered into by the Appellant.
1.6 The Hon'ble DRP/ Ld. AO/ Ld. TPO erred in facts of the case and in law by not allowing the use of multiple year data as prescribed under Rule 10B(4) of the Rules read with the OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administrations, for determining the arm's length price of international transaction of the Appellant.
2.0 General 2.1. The Ld. AO erred in levying interest under section 234B and 234C of the Act.
2.2. On the facts and circumstances of the case, and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act.3
I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 2.3. The Appellant craves leave to add, alter, amend, substitute and/or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal."
3. The brief facts of the case are that the assessee is wholly owned subsidiary of Integreon Managed Solutions Inc. , USA . The assessee is providing Information Technology enabled services to its associated enterprises based at USA and UK. The assessee had claimed that it is providing low end BPO services while Revenue is of the view that the assessee is providing high end Information Technology enabled KPO services. The assessee had entered into following international transaction with its associated enterprises as reported in form no. 3CEB and in its Transfer Pricing study report, which are listed below as under:-
The assessee has earned Profit Level Indicator(PLI) being Net Cost Margin of OP/TC of 24.46% from Information Technology enabled services. The assessee submitted its TP study report and audit report in form no. 3CEB during assessment proceedings. Reference was made by AO to learned Transfer Pricing Officer(TPO) by the AO u/s 92CA(1) of the 1961 Act referring aforesaid international transactions entered into by the assessee with its AE for computation of Arms Length Price. The assessee has contended that it is an low end BPO 4 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 engaged in the providing low end IT enabled services but TPO was of the view that assessee is providing high end IT based services to its associated enterprises and the assessee is an KPO. The assessee was also treated as KPO in preceding years by the TPO.
The TPO after detailed analysis and study of all the agreements entered into by the assessee with its AE and other material on record rejected TP study report prepared by the assessee wherein the assessee had selected six comparables which were all rejected by the TPO in its order dated 25-01-2016 passed u/s. 92CA(3) of the 1961 Act , for the reasons cited in the said order. The TPO applied its own filters and used TNMM method to compute ALP while treating assessee as KPO providing high end IT enabled services based upon functional analysis , assets deployed and risks assumed by the assessee. After rejecting all the comparables as were submitted by the assessee in its TP study report to compute Arms Length Price(ALP), the TPO shortlisted three comparables which were used for computing ALP of the international transactions by treating assessee as tested party, as under:
" Eclerx Services Ltd.
The Company though appearing in the Taxpayer's accept reject matrix at S. No. 25 of his search in Prowess database, had been rejected on account of an exceptional year of operation and on the basis of being functionally non comparable. It is pertinent to note that the taxpayer while rejecting this company has categorized it as an ITES (on the basis of industry) but itself has confirmed that:
"this company is engaged in data analytics services and process solutions and that the company operates as a KPO."
• This clarifies the taxpayer's approach of deliberate cherry-picking without giving any regard to functional similarity.
The Company provides an expert consulting and outsourcing option for managers of financial institutions 5 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 that demand reliability, accuracy, control, and cost efficiency. We provide consulting and outsourcing services to support financial transactions from trade closing through settlement, clearing, asset servicing and exposure management. It also provides reference data and risk management services, as well as financial control, accounting and reporting services to help our clients manage their increasingly complex businesses. The Company's solutions for discrete and complex financial processes support the largest players in the global financial services industry and our expertise spans equities, bonds, derivatives, loans, commodities, foreign exchange and structured products. The Company provides following services:
• Financial Transaction Operations • Reference Data Management • Finance Control, Accounting and Reporting • Technology Prototyping and Migrations • Metrics and Control Reporting
The financial of the said comparable company for last 3 years clearly established the fact that company is regularly in the profitability range of 40% plus. The operating margin of the said comparable for the year is being adopted for comparability analysis. This Company has arrived at an operating margin of 61.21% during the financial year 2011-12.
Acropetal Technologies (EDS):
In the financial year i.e. for A.Y.2010-11, in the assessee's own case, the said company was considered as an appropriate comparable by the TPO. The TPO had considered the net cost margins of the comparable at entity level. The H'ble Dispute Resolution Panel (DRP) has confirmed the company as an appropriate comparable but has directed to adopt the margins of the Engg Design segment of the said comparable.7he H'ble DRP has specifically commented that the services of the EDS, akin to that of the KPO and hence the margins of this segment should be compared with the assessee. Accordingly this company with the margins of EDS segment is being considered for the final benchmarking. This Company has arrived at an operating margin of 18.92% during the financial year 2011-12.
TCS E-serve:6
I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 The Company is engaged in the business of providing high-end KPO services for its customers in banking, financial services and insurance domain. Its operations include delivering core business processing services, analytics/insights and support services for both data and voice processes. This Company has arrived at an operating margin of 65.95% during the financial year 2011-12.
As mentioned above, the taxpayer's services rendered to the AE are in the nature of high end data analysis services, which are in the nature of KPO services. Thus the TPO considered only those comparable companies, which are engaged in KPO services from the spectrum as given above. Thus from the above short listed companies, the TPO considered only those companies which are engaged in KPO services.
These three comparables had an PLI being OP/TC as under:-
The assessee had declared PLI being OP/TC of 24.46% while arithmetic means of PLI being OP/TC of above three comparables shortlisted by TPO was 48.69% . The assessee was show caused by TPO to which the assessee raised its objections both on legal grounds as well on merits before the TPO , inter-alia challenging inclusion of Eclerx Services Limited and TCS e-Serve Limited as comparables by the TPO , while the assessee accepted Acropatel Technologies (EDS) as comparable as was selected by TPO , which were accepted by the assessee without prejudice to its other rights to challenge on other grounds. The contentions of the assessee were rejected by TPO including challenge to comparable Eclerx Services Limited and TCS e-7
I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 Serve Limited. The assessee had also , inter-alia , contended without prejudice to its rights that Accentia Technologies Ltd. be included as comparable as in view of the assessee , it is an appropriate comparable which submission of the assessee was accepted by TPO, which led to the final selection of following four comparables by the TPO having an arithmetic mean of PLI being OP/OC of 35.76% as against PLI of 24.46% declared by the assessee, as tabulated hereunder:-
The assessee had on other hand declared PLI of 24.46% which finally led to the additions to the income of the assessee of Rs. 6,60,66,596/- by TPO vide its orders dated 25.01.2016 passed u/s 92CA(3) of the 1961 Act . This order passed by TPO culminated into an draft assessment order dated 07th March 2016 passed by the AO u/s 143(3) read with Section 144C(1) of the 1961 Act , which was challenged by the assessee before learned DRP-1 Mumbai, who were pleased to passed an orders dated 19.07.2016 wherein Eclerx Services Ltd. as well TCS e-Serve Ltd., were accepted by learned DRP as comparable despite objections raised by the assessee which objections stood rejected by learned DRP, vide directions dated 19.07.2016 passed u/s 144C(5) of the 1961 Act. The aforesaid directions issued by learned DRP culminated into an assessment order dated 23rd September 2016 passed u/s 143(3) read with Section 144C(13) of the 1961 Act.
4. Now, the assessee is before the tribunal challenging the additions made to the income of the assessee by computing ALP to its 8 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 international transactions with its AE to the tune of Rs.6,60,66,596/-. The learned Senior Counsel for the assessee at the outset submitted that the assessee is not raising any challenge to the rejection of assessee's TP study as well rejection of the assessee's comparable by TPO and as confirmed by learned DRP. The learned counsel for the assessee also submitted that it has no objection to the selection of assessee as tested party and selection of TNMM method as was adopted by TPO for computing ALP of its international transactions. The learned counsel for the assessee submitted that challenge is now being restricted only to inclusion of TCS e-Serve Limited by the TPO as comparable for computing ALP. It is submitted that the assessee is not raising any challenge to inclusion of rest of the three comparables as were short listed by the TPO for computing ALP which were all upheld to be valid comparables upto the stage of passing of the final assessment order by the AO i.e. both TPO as well learned DRP had accepted them as comparables for the purposes of computing ALP of its international transactions with its AE. Thus, in nut-shell learned Senior Counsel for the assessee has raised objection as to inclusion of TCS e-Serve Ltd. as comparable by learned DRP for computing ALP. Our attention was drawn to the order of the learned DRP wherein the learned DRP has , inter-alia, commented that the TCS e-Serve Limited is included as comparable because its annual report is not submitted by the assessee and hence learned DRP is not able to validate argument of the assessee that the same cannot be included as it has an high turnover of Rs. 1578 crores while assessee turnover is Rs. 68 crores, which is 23 times the turnover of the assessee. It was submitted by learned Senior Counsel for the assessee that this finding of learned DRP is perverse as the annual reports of TCS E- serve Limited was submitted before learned DRP in CD in electronic format. it was submitted the TCS e-Serve Ltd., has PLI being OP/OC of 63.73% while assessee had PLI of 24.46% . The copy of the relevant extract of financial statements of TCS e-Service Limited for impugned assessment year is now placed before the Bench both by learned 9 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 Senior Counsel for the assessee as well by learned CIT-DR, which is placed in file. It was submitted that TPO has computed arithmetic means of PLI of comparables being 35.76% . It was submitted that TCS e-Serve Ltd. was not included by TPO in preceding year as comparable , while for the succeeding year i.e. AY 2013-14 , the TPO has excluded TCS e-Serve Limited as comparable for computing ALP after detailed deliberations and discussions by TPO while passing order dated 31.10.2016 for AY 2013-14 u/s 92CA(3) of the 1961 Act. The said order dated 31.10.2016 passed by TPO for AY 2013-14 in assessee's own case is placed in file. It was submitted that only for this year i.e. AY 2012-13 , the TCS e-Serve Ltd. was included as comparable for computing ALP. It was submitted that TCS e-Serve Ltd., belongs to a very large and reputed industrial house namely Tata Group and is a large company having standalone turnover of Rs. 1578.44 crores as against assessee's turnover of Rs. 68 crores which is almost 23 times turnover of the assessee company. It was submitted by learned Senior counsel for the assessee that TCS e-Serve Limited is providing high end services including knowledge services. The learned CIT-DR drew our attention to the copy of Annual Report for the financial year 2011-12 filed by the assessee wherein it is stated that the said company is providing Business Process Services(BPO) for its customers in Banking, Financial Services and Insurance domain. It was submitted that TCS e-Serve Limited operations included delivering core business processing services, analytics/insight and support services for both data and voice processes. However, by learned counsel for the assessee submitted that there being huge differential in turnover, TCS e-Serve Limited cannot be taken into consideration as comparable for computing ALP of the international transactions entered into by the assessee with its AE. It was submitted that the TPO erred in not applying turnover filter while computing ALP of its international transactions. The Ld Senior Counsel for the assessee relied upon the decision of Hon'ble Bombay High Court in the case of CIT v. Pentair Water India P. Ltd,.(2016) 381 10 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 ITR 216 (Bom) and Hon'ble Delhi High Court in the case of CIT v. New River Software Services P Ltd.,(2017) 85 Taxman.com 302(Delhi) to content that turnover, size and scale of operations are relevant criteria to compute ALP of international transactions of the tax-payers with its AE. The assessee also relied upon decision of Hon'ble Delhi High Court in the case of Pr. CIT v. Toluna India Private Limited in ITA no. 393 & 394 /2016 , orders dated 29.07.2016. It was submitted that revenue itself has not included TCS e-Serve Ltd. as comparable in assessment year 2013-14, wherein the TPO has deleted the same by following the aforesaid decision of Hon'ble Bombay High Court in the case of Pentair Water India Private Limited(supra), vide orders dated 31.10.2016 passed u/s 92CA(3) of the 1961 Act, as under:
"TCS e-Serve Limited: • Assessee's Contention The assessee has contended that this Company is engaged in the business of providing services for its customers in banking, financial services and insurance domain. Its operations include delivering core business processing services, analytics/insights and support services for both data and voice processes and hence, is functionally dissimilar and not comparable to the activities undertaken by the assessee.
The assessee also stated that TCS E-serve Ltd. has super normal profits during the year and cannot be compared to the assessee. In this regard, the Assessee places reliance on the Jurisdictional Tribunals decision in case of M/s Capital IQ information System (India) Private Limited, Hyderabad (ITA No. 1961/Hyd/2011) wherein it has held that the companies having supper normal profits during the year cannot be accepted as the comparable company.
The assessee contends that while considering TCS as a comparable company, due consideration should be given to the fact that TCS possesses brand value being a subsidiary of TATA group which will tend to influence the pricing policy and thereby directly impacting the margins earned by TCS.
Further, the assessee stated TCS e-serve has a turnover INR 17,916.4 million, which is more than 25 times the turnover .of the Assessee which is INR 714.93 million. In 11 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 this regard, the assessee places reliance on the following High Court judgements:
In the case of Pentair Water India Pvt, Ltd., the High Court of Bombay at Goa [(2016) 381 ITR 0216 (Bombay)] held the following:
''While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of Rs. 11 crores cannot be compared with a company which is having turnover of Rs.260 crores which is more than 23 times the turnover of the .Assessee. This company cannot be regarded, to be in equal size to the Assessee. We, accordingly, direct the AO to exclude this company out of the comparables."
In the case of Toluna India Pvt. Ltd. [ITA 393/2016 & 394/2016], the Delhi High Court held the following:
"On the question, of exclusion of the above comparables, the Court finds that given the scale of operations of the above entities, their exclusion from the list of comparables for the purposes of determination of ALP appears justified."
Hence, this comparable should be rejected.
TPO‟s Comments:
The contentions of the assessee regarding the comparable TCS E-serve are considered.
It is engaged in transaction processing (financial information processing), analytics, software testing, software validation and data-centre management activities. From the director's report following paras are reproduced showing functionality:
Your Company is one of the pioneers in the ITES-BPO industry in India. It is in the business of providing business process management services in the banking and financial services (BFSI) vertical (ie industry' vertical) to help its customers achieve their business objectives by providing innovative, best-in-class services. Your Company is an integral part of the Tata Consultancy Services' (TCS) strategy to build on its 'Full Services Offering' that offer global customers an integrated portfolio of services ranging from IT services lo BPO services. Company provides a broad range of 12 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 services that cater to the process management requirements for delivery of wide range of financial products and enterprise support functions, which include -
• Financial Information Processing (data processing) • Customer Contact (voice based) • Business Process Management • Analytics As seen from the above, it can be inferred that. TCS Eserve is a KPO. The assessee itself is a high-end KPO service provider as discussed in elaborate in para 7 above. The assessee is engaged in knowledge services and business research. These are akin to a KPO and therefore should be benchmarked using a KPO comparable like TCS E-serve.
However, as seen from the annual report, of TCS e-Serve and as the assessee stated TCS e-serve has a turnover INR 17.916.4 million, which is more than 25 times the turnover of the assessee which is INR 714.93 million. Thus, relying on the case of Pentair Water India Pvt. Ltd., the High Court of Bombay at Goa [(2016) 381 1TR 0216 (Bombay)] it is considered that TCS e-Serve has a turnover multiple times that of the assessee For reasons discussed above, TCS E-Serve is rejected as a comparable."
The learned Senior Counsel for the assessee fairly submitted that Hon'ble Delhi High Court in Chryscapital Investment Advisors India P. Ltd., (2015) 376 ITR 183 (Delhi) vide orders dated 27.04.2015 had held that high turnover is not a good criteria to reject comparable .The Ld. CIT-DR submitted that Pentair Water India P. Ltd.(supra) did not lay down proposition of law that high turnover companies are to be excluded while the said proposition of law was laid down in the case of Chryscapital Investment Advisors India Private Limited(supra) and just because turnover is high the same cannot be criteria to exclude comprable. The Ld. CIT-DR submitted that assessee did not filed annual report of TCS e-Serve Limited for the impugned assessment year before learned DRP and hence the revenue could not make proper FAR analysis. The Ld. Senior Counsel reiterated and stated 13 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 before the Bench that CD was filed which contained audited financial statements of all comparable companies in electronic form for the relevant period which included audited financial statements of TCS e- Serve Limited for financial year 2011-123 . It was submitted that decision of Hon'ble Bombay High Court in the case of Pentair Water India P. Ltd. (supra) has clearly held that turnover is a relevant factor.
5. We have considered rival contentions and perused the material on record including cited case laws. we have observed the assessee is wholly owned subsidiary of Integreon Managed Solutions Inc. , USA .
The assessee is providing IT enabled services to its associated enterprises based at USA and UK. The assessee had claimed that it is providing low end BPO services while Revenue is of the view that the assessee is providing high end IT enabled KPO services. The assessee had entered into following international transaction with its associated enterprises reported in form no. 3CEB and in its transfer pricing study report which are listed below as under:-
The assessee has earned Profit Level Indicator(PLI) being net cost margin of OP/TC of 24.46% from Information Technology enabled services. The assessee submitted its TP study report and audit report in form no. 3CEB was also submitted before the authorities below. The total turnover of the assessee during the year under consideration was Rs. 68 crores. The assessee has contended that it is an low end 14 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 BPO engaged in the providing low end Information Technology enabled services but TPO was of the view that assessee is providing high end IT based services to its associated enterprises and the assessee is an KPO. The assessee was also treated as KPO in preceding years by the TPO. The TPO after detailed analysis and study of all the agreements entered into by the assessee with its AE and other material on record rejected TP study report prepared by the assessee wherein the assessee had selected six comparables which were all rejected by the TPO for detailed reasons cited in the said order of the TPO. The TPO applied its own filters and used TNMM method to compute ALP while treating assessee as KPO providing high end IT enabled services based upon functional analysis , assets deployed and risks assumed by the assessee. After rejecting all the comparables as were submitted by the assessee in its TP study report to compute Arms Length Price(ALP) and considering the submissions of the assessee which were without prejudice , the TPO shortlisted four comparables which were used for computing ALP of the international transactions by treating assessee as tested party , which had an arithmetic mean of PLI i.e. OP/OC of 35.76%, as under:
The challenge of the assessee to TPO selection of comparables and other legal contentions raised with the learned DRP met with an unfavourable fate which led assessee to file appeal with the tribunal. The assessee has restricted its challenge only to inclusion of TCS e- Serve Limited as comparable by the authorities below for computing ALP and at the same time accepting the entire process of computation 15 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 of ALP by the TPO. The assessee is now contemplating exclusion of TCS e-Serve Limited as a chosen comparable by TPO which was upheld by learned DRP , on the grounds that turnover criteria was not adopted by the AO which is an error committed by authorities below. The standalone turnover of TCS e-Serve Limited was Rs. 1578.44 crores while the assessee company who has only turnover of Rs. 68 crores, which is 23 times multiple. We have observed that Hon'ble jurisdictional High Court in the case of Pentair Water India Private Limited(supra) has held that turnover is a relevant criteria for selection of comparables for computing ALP of an international transactions in any uncontrolled transactions between independent enterprises. The decision of Hon'ble Bombay High Court in the case of Pentair Water India Private Limited(supra) is reproduced hereunder:
"2. Briefly, it is the contention of the Appellant that the Assessee-Respondent is engaged in the business of manufacture of fibre glass pressure vessel used for water treatment, swimming pool equipments and that the Respondent-
Company is making three kinds of vessels namely (I) Code Line, (ii) Composite pressure vessels and (iii) FRP pressure vessels and set up an in- house facility for catering to its needs on the area of engineering, designing & product development. It is further their case that the Company has rendered such services in the relevant assessment year 2007-2008 to some of its group companies abroad and that the Respondent is the subsidiary to Pentair INC, USA and is involved in the same business. The said Respondent-Company has a unit at Verna Industrial Estate where the said manufacturing activity is taking place. It is further their case that the Respondent-Assess has filed returns of Income on 30.10.2007 disclosing total income of Rs. 5,28,09,795/- on which total tax was Rs. 1,81,13,280/-. An Order under Section 92CA was passed on 27.10.2010 by the TPO and the AO on 21.12.2010 added an amount of Rs. 1,68,60,877/- in the Order passed under Section 143 (3) of the said Act. It is further the contention of the Appellant that being aggrieved by the said Order, the Respondent-Assessee preferred an Appeal before the Commissioner Income Tax Appeal and by its Order dated 16.11.2012, directed the AO to compute the TP adjustment by taking the operating margin at the comparable rate of 22.92%. Being aggrieved by the said Order, both the Respondent as well as the Appellant filed Appeals before the Income Tax Appellate Tribunal which came to be disposed of by Order dated 23.05.2014. Being aggrieved by the said Order, the Appellant has preferred the present Appeal.
3. Ms. Asha Desai, learned Counsel appearing for the Appellant, has pressed for only two substantial questions of law framed at para 5A and 5B of the Appeal Memo. Learned Counsel has further pointed out that the Income Tax Appellate Tribunal has erred in holding that the profits on costs of five comparable companies as abnormal without giving reasons how the functions 16 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 discharged, assets deployed and risks assumed of such companies were different from the Respondent-Company. Learned Counsel further pointed out that the Tribunal has also erred in holding that the size and turnover of the company are deciding factors for treating a company as comparable and accordingly erred in excluding M/s. HCL Comnet Systems & Services Ltd., M/s Infosys BPO Limited and M/s. Wipro Ltd., as comparables.
4. On the other hand, Shri Jain, learned Counsel appearing for the Respondent, has pointed out that both the Authorities have concurrently come to the conclusion that the said Companies are not comparable to the Respondent- Assessee Company and, as such, this Court cannot re-appreciate the evidence on record to come to any concurrent finding. Learned Counsel further submits that these concurrent findings of facts based on the material on record cannot be re- appreciated by this Court in the present Appeal as there is no substantial question of law which arise therein. Learned Counsel further pointed out that to answer the said two substantial questions of law, this Court would have to re-appreciate the material on record which is not at all permissible. Learned Counsel further submits that the bifurcation intended to be affected by the learned Counsel appearing for the Appellant was not even raised before the Tribunal and, consequently, the above Appeal deserves to be rejected.
5. On perusal of the impugned Order passed by the Tribunal dated 23.05.2014, we find that the Tribunal has recorded the reasons for not accepting the said three companies are comparable by stating as follows :
(i) HCL Comnet Systems & Services Ltd :- We find force in the submission of the ld. AR that this company cannot be a comparable as the turnover of this company is 260.18 crores while in the case of the Assessee, the turnover is around Rs. 11 crores only.
While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of Rs. 11 crores cannot be compared with a company which is having turnover of Rs. 260 crores which is more than 23 times the turnover of the Assessee. This company cannot be regarded to be in equal size to the Assessee. We, accordingly, direct the AO to exclude this company out of the comparables.
(ii) Infosys BPO Ltd. :- In this case also we noted the turnover in respect of this Company is Rs. 649.56 crores while the turnover of the Assessee company is around Rs. 11 crores which is much more than 65 times of the Assessee's turnover. We, therefore, do not find any illegality or infirmity in the order of CIT (A) in excluding this Company out of the comparables. Accordingly, we confirm the order of the CIT (A).
(iii) Wipro Ltd. :- After hearing the rival submissions, we noted that the CIT (A) applying the turnover filter has excluded this company out of the comparables. The turnover reported in the case of Wipro Ltd. Is Rs. 939.78 crores while in the case of the Assessee the turnover is around Rs. 11 crores. Therefore, on the basis of the turnover filter itself this company cannot be regarded to be comparable to the Assessee company and accordingly, we do not find any infirmity in the finding of CIT (A) while he excluded this company on the turnover criteria following the decision of this tribunal in :
17I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) E-Gain Communication (P.) Ltd. v. ITO [2008] 23 SOT 385 (Pune) Deloittee Consulting India (P.) Ltd. v. Dy. CIT [2013] 144 ITD 451/36 taxmann.com 68 (Hyd.) Genisys Integrating System (India) (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 (Bang.)
6. The said findings of the Tribunal in respect of the said three Companies are on the basis of appreciation of evidence on record. We find no infirmity in the said findings of the Tribunal on that count. In fact, the Tribunal has endorsed the views of the CIT Appeals whilst coming to such conclusions. The concurrent findings of facts arrived at by the Authorities below, cannot be re- appreciated by this Court in the present Appeal.
7. In this connection, the Apex Court in the Judgment reported in the case of Vijay Kumar Talwar v. CIT [2011] 1 SCC 673 has observed at Para 23 thus :
"23. A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and/or while arriving at the said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration or legal principles have not been applied in appreciating the evidence, or when the evidence has been misread. (See Madan Lal v. Gopi, Narendra Gopal Vidyarthi v. Rajat Vidyarthi, Commr. of Customs v. Vijay Dasharath Patel, Metroark Ltd. v. CCE and W.B. Electricity Regulatory Commission v. CESC Ltd)"
8. In the present Appeal, the Appellant-Revenue has not been able to controvert or deny the data relied upon by the Authorities below to come to such conclusion. The said Companies are no doubt large and distinct companies where the area of development of subject services are different and as such the profit earned therefrom cannot be a bench-marked or equated with the Respondent- Company.
9. Shri Jain, learned Counsel has rightly relied upon the Judgment of the Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd. [2013] 219 Taxman 26/36 taxmann.com 289. Learned Counsel has also brought to our notice the Order of the Income Tax Appellate Tribunal whilst examining similar circumstances for the assessment year 2005-06. He has taken us through the findings therein to point out that the conclusions arrived at are based on a comparison that the condition in any uncontrolled transaction between an independent enterprises for the purpose of such comparison, economically relevant characteristics must be sufficiently comparable if two parties are to be placed in a similar situation. Learned Counsel as such submitted that it is not open for the appellant to now contend a different criteria to ascertain the comparability. In fact the Tribunal whilst passing the impugned Order has considered the said principles whilst coming to the conclusion that the said three Companies cannot be treated to be comparable to the Respondent-Assessee Company. The turn over is obviously a relevant factor to consider the comparability.
10. In view of the above, we find that the said two substantial questions of law proposed by the learned Counsel appearing for the Appellant do not arise in the present Appeal taking note of the concurrent findings of fact arrived at by the Authorities below. The Appeal stands accordingly rejected."
18I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 The Hon'ble Delhi High Court in the case of PCIT v. New River Software Services Private Limited(supra) has also taken a similar view, held after considering the decision of Hon'ble Bombay High Court in the case of Pentair Water India Private Limited(supra) that size and scale are relevant criteria for exclusion of comparables, by holding as under:
"11. As regards the exclusion of M/s. Infosys BPO, the same is covered in favour of the Assessee and against the Revenue by the decision in CIT v. Pentair Water India (P.) Ltd. [2016] 69 taxmann.com 180/381 ITR 216 (Bom.) and the decision dated 10th July, 2013 of this Court in CIT v. Agnity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26.
12. Wipro BPO is more or less on the same footing as Infosys BPO as far as the size and scale are concerned. Consequently the Court finds no legal infirmity in the impugned order of the ITAT, which has, apart from excluding the above comparables, remanded the matter to the TPO on the question of working capital adjustment.
13. The appeal is dismissed therefore on account of both delay as well as merits."
Similar view has been taken by Hon'ble Delhi High Court in the case of Pr. CIT v. Toluna India Private Limited (supra) vide its orders dated 29.07.2016 wherein the Hon'ble Court has taken a view that scales of operation of the entities have bearing on their selection as comparable for determination of ALP of the international transactions entered into by the tax-payer with its AE. The Revenue has relied upon decision of Hon'ble Delhi High Court in the case of Chrsycapital Investment Advisors (India) Limited (supra) which has albeit taken a different view by holding as under :
"33. Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile - in respect of the activity in question can be viewed independently from other activities-cannot be subject to a per se standard of loss making company or an "abnormal" profit making concern or huge or "mega" turnover company. As explained earlier, Rule 10B (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B(1), while judging comparability. Rule 10B (3) on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company -19
I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature - such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made."
Learned CIT-DR could not produce any contrary decision of Hon'ble jurisdictional High Court nor any decision of Hon'ble Apex Court was cited which has taken a view in favour of Revenue. We have also observed that TPO itself has not included TCS e-Serve Limited as comparable in assessee's own case for preceding year i.e. AY 2011-12 while computing ALP of its international transactions with its AE vide orders dated . We also note that in immediately succeeding year i.e. AY 2013-14 , the TPO has in assessee's own case deleted TCS e-Serve Limited while computing ALP of its international transactions vide orders dated 31.10.2016, by holding as under:
"TCS e-Serve Limited: • Assessee's Contention The assessee has contended that this Company is engaged in the business of providing services for its customers in banking, financial services and insurance domain. Its operations include delivering core business processing services, analytics/insights and support services for both data and voice processes and hence, is functionally dissimilar and not comparable to the activities undertaken by the assessee.
The assessee also stated that TCS E-serve Ltd. has super normal profits during the year and cannot be compared to the assessee. In this regard, the Assessee places reliance on the Jurisdictional Tribunals decision in case of M/s Capital IQ information System (India) Private Limited, Hyderabad (ITA No. 1961/Hyd/2011) wherein it has held that the companies having supper normal profits during the year cannot be accepted as the comparable company.
The assessee contends that while considering TCS as a comparable company, due consideration should be given to the fact that TCS possesses brand value being a subsidiary of TATA group which will tend to influence the pricing policy and thereby directly impacting the margins earned by TCS.
Further, the assessee stated TCS e-serve has a turnover INR 17,916.4 million, which is more than 25 times the 20 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 turnover .of the Assessee which is INR 714.93 million. In this regard, the assessee places reliance on the following High Court judgements:
In the case of Pentair Water India Pvt, Ltd., the High Court of Bombay at Goa [(2016) 381 ITR 0216 (Bombay)] held the following:
''While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of Rs. 11 crores cannot be compared with a company which is having turnover of Rs.260 crores which is more than 23 times the turnover of the .Assessee. This company cannot be regarded, to be in equal size to the Assessee. We, accordingly, direct the AO to exclude this company out of the comparables."
In the case of Toluna India Pvt. Ltd. [ITA 393/2016 & 394/2016], the Delhi High Court held the following:
"On the question, of exclusion of the above comparables, the Court finds that given the scale of operations of the above entities, their exclusion from the list of comparables for the purposes of determination of ALP appears justified."
Hence, this comparable should be rejected.
TPO‟s Comments:
The contentions of the assessee regarding the comparable TCS E-serve are considered.
It is engaged in transaction processing (financial information processing), analytics, software testing, software validation and data-centre management activities. From the director's report following paras are reproduced showing functionality:
Your Company is one of the pioneers in the ITES-BPO industry in India. It is in the business of providing business process management services in the banking and financial services (BFSI) vertical (ie industry' vertical) to help its customers achieve their business objectives by providing innovative, best-in-class services. Your Company is an integral part of the Tata Consultancy Services' (TCS) strategy to build on its 'Full Services Offering' that offer global customers an integrated portfolio of services ranging from IT services 21 I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018 lo BPO services. Company provides a broad range of services that cater to the process management requirements for delivery of wide range of financial products and enterprise support functions, which include -
• Financial Information Processing (data processing) • Customer Contact (voice based) • Business Process Management • Analytics As seen from the above, it can be inferred that. TCS Eserve is a KPO. The assessee itself is a high-end KPO service provider as discussed in elaborate in para 7 above. The assessee is engaged in knowledge services and business research. These are akin to a KPO and therefore should be benchmarked using a KPO comparable like TCS E-serve.
However, as seen from the annual report, of TCS e-Serve and as the assessee stated TCS e-serve has a turnover INR 17.916.4 million, which is more than 25 times the turnover of the assessee which is INR 714.93 million. Thus, relying on the case of Pentair Water India Pvt. Ltd., the High Court of Bombay at Goa [(2016) 381 1TR 0216 (Bombay)] it is considered that TCS e-Serve has a turnover multiple times that of the assessee For reasons discussed above, TCS E-Serve is rejected as a comparable."
Respectfully following jurisdictional High Court decision in the case of Cit v. Pentair Water India Private Limited(supra), we order exclusion of TCS e-Serve Limited as comparable while computing ALP of the assessee's international transactions with its AE, while rest of the comparables as were adopted by the TPO and confirmed by learned DRP shall be taken into consideration for computing ALP of international transactions of the assessee with its AE. This disposes of all the grounds raised by the assessee as the assessee has narrowed its challenge during the course of hearing before the Bench only to the inclusion of TCS e-Serve Limited as comparable for computing ALP for its international transactions with its AE. The appeal of the assessee is partly allowed as indicated above. We order accordingly.22
I.T.A. No.6927/Mum/2016 S.A No.429/Mum/2018
6. Since we have decided the issues arising in ITA no.
6927/Mum/2016 for AY 2012-13 on merits as detailed above by ordering exclusion of TCS e-Serve Limited as comparable, the Stay Application in SA no. 429/Mum/2018 arising out of ITA no. 6927/Mum/2016 for AY 2012-13 has become infructuous and is dismissed. We order accordingly.
Order pronounced in the open court on 14.12.2018.
आदे श की घोषणा खऱ
ु े न्यायाऱय में ददनांकः 14.12.2018 को की गई
Sd/- Sd/-
(C.N.PRASAD) (RAMIT KOCHAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, dated: 14.12.2018
Nishant Verma
Sr. Private Secretary
copy to...
1. The appellant
2. The Respondent
3. The CIT(A) - Concerned, Mumbai
4. The CIT- Concerned, Mumbai
5. The DR Bench,
6. Master File
// Tue copy//
BY ORDER
DY/ASSTT. REGISTRAR
ITAT, MUMBAI
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