Income Tax Appellate Tribunal - Mumbai
Apax Partners India Advisers P.Ltd, ... vs Dcit Cir 6(1), Mumbai on 8 June, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"K" Bench, Mumbai
Before S/Shri B.R. Baskaran (AM) & Sandeep Gosain (JM)
I.T.A. No. 1682/Mum/2014 (Assessment Year 2009-10)
M/s. Apax Partners India DCIT Circle 6(1)
Advisers Pvt. Ltd. Vs. Room No. 506
2 n d Floor, Devchand House 5 t h Floor
Shivsagar Estate Aayakar Bhavan
Dr. Annie Besant Road M.K. Road
Worli, Mumbai-400 018. Mumbai-400 020.
(Appellant) (Respondent)
I.T.A. No. 1738/Mum/2014 (Assessment Year 2009-10)
DCIT Circle 6(1) M/s. Apax Partners India
Room No. 506 Vs. Advisers Pvt. Ltd.
5 t h Floor 2 n d Floor, Devchand House
Aayakar Bhavan Shivsagar Estate
M.K. Road Dr. Annie Besant Road
Mumbai-400 020. Worli, Mumbai-400 018.
(Appellant) (Respondent)
PAN : AAFCA9595A
Assessee by Shri Porus Kaka &
Shri Manish Kanth
Department by Shri V. Jenardhanan
Date of Hearing 13.3.2018
Date of Pronouncement 08.6.2018
ORDER
Per B.R. Baskaran (AM) :-
These cross appeals are directed against the order passed by the Assessing Officer u/s. 143(3) read with section 144C(13) of the I.T. Act in pursuance of directions issued by learned Dispute Resolution Panel (DRP). The issue contested in both the appeals relates to transfer pricing adjustment made in the assessment, which was partially confirmed by learned DRP.
2. The facts relating to the case are stated in brief. The assessee is engaged in the business of providing non-binding investment advisory services 2 M /s . A p a x P a r tn e r s In d i a A d v i s e r s P v t. L t d.
pertaining to investment opportunity available in India to its Associated Enterprises (AE) named Apax Partners UK Ltd., located in UK. It does not have any authority to make investment decisions on behalf of its AE. The assessee was compensated at cost plus 15% mark up basis by its AE. The assessee adopted Transactional Net Margin Method (TNMM) to benchmark its transactions with AE by adopting PLI as "operating profit to operating cost, i.e., OP/OC". The PLI of the assessee worked out to 15.15% for the year under consideration. The assessee selected following comparables and arithmetic mean of PLI of these comparables worked out to 9.48%.
Sr.No. Name of the company Weighted average
1 Future Capital Holdings Limited (2.23)
2 ICRA Management Consulting Services Ltd. 5.02
3 ICRA Techno Analystics Ltd. 8.56
4 IDC (India) Ltd. 15.66
5 Informed Technologies India Ltd. 20.39
Arithmetic mean 9.48
Accordingly the assessee submitted that its transaction of receipt of fees from AE was at arm's length.
3. The AO referred the matter of determination of Arms Length Price (ALP) of the transactions entered with AE to the Transfer Pricing Officer (TPO). The Learned TPO noticed that he had classified the assessee as Knowledge Process Outsourcing (KPO) company in AY 2008-09, i.e., in the immediately preceding year and the same has also been confirmed substantially by learned DRP. The TPO noticed that, during the year under consideration also, the assessee was rendering vital and knowledge intensive services in the form of identifying and evaluating potential investments, providing advice regarding the same, giving recommendations with respect to such investments, conducting continual analysis in respect of these investments, providing support service for secondment of directors to assist the management of companies in which strategic investment has been made. Accordingly, the learned TPO held that 3 M /s . A p a x P a r tn e r s In d i a A d v i s e r s P v t. L t d.
the nature of services provided by the assessee should be taken as Knowledge incentive in nature and hence in the nature of KPO.
4. The TPO noticed from the T.P study conducted by the assessee, more particularly from "Accept and Reject matrix" that the following comparables have been omitted by the assessee for the reasons stated against each of them:-
(a) Vishal Information Technology Ltd (Now known as Coral Hubs Ltd) -
the average inventory to total assets ratio is greater than 5% ( i.e.,14.78%).
(b) Cosmic Global Ltd - It provides BOP and ITES services. Hence it operates in different industry and has difference in functional profiles.
(c) E Clerx Services Ltd - This company is a KPO provider in data analytics and operates in a different functional profile.
Since the immediately preceding year, the assessee was treated as a KPO, the Transfer pricing officer asked the assessee to furnish fresh set of comparables, vide order sheet entry dated 18-01-2012. Subsequently, vide order sheet entry dated 07-11-2012, the assessee was given following set of comparables and was asked to show cause as to why the margins should not be recomputed by using those comparables:-
Sr.No. Name of the comparable NCP
1 Coral Hubs Ltd. (Formerly Vishal Information 38.61
Technologies Ltd.)
2 Cosmic Global Ltd. 48.20
3 Eclerx Services Ltd. 49.73
4 Informed Technologies India Ltd. 22.95
Arithmetic mean 39.87
5. The assessee objected to the comparables selected by the TPO and the same has been summarized as under by the TPO :-
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7.1 The assessee made its submissions vide letter dated 13.2.2012, 27.8.2012 and finally 16.11.2012. The same are summarized as under :
(i) The assessee has maintained detailed record of the methodological search process and it was done as per procedures outlined in the Transfer Pricing regulations and in good faith to comply with all the provisions of law and to provide a true and fair analysis that was undertaken with fair and prudent business intent.
(ii) During the course of the hearing your good-self never pointed out any deficiency in the methodical search adopted by the company nor any deficiencies/anomalies in respect of the comparables arrived at by the Company.
(iii) The assessee has neither been provided the search process followed to identify the companies provided above, nor provided it with the margin computation of any of these purported comparable companies.
(iv) Out of the four above mentioned companies proposed to be used as comparables, the assessee is of the view that Cosmic Global Ltd., Eclerx Service Ltd. and Coral Hub Ltd. (formerly Vishal Information Technologies Ltd.) are not comparable to the assessee.
6. The TPO was not convinced with the contention of the assessee and accordingly rejected TP study done by the assessee with following observations:-
7.4.2 The following pertinent defects have been found in the TP analysis carried on by the taxpayer.
a) As per Rule 10B(4), it is mandatory to use the current financial year i.e. the financial year in which the international transactions took place (FY 2008-09). But the taxpayer did not consider current year data exclusively in all of the comparable companies.
b) The taxpayer used earlier two years data without justifying how such earlier year data had an influence on pricing for the taxpayer or the comparable companies.
c) The taxpayer has selected companies which are functionally not comparable, comparables which are consistently loss making companies, etc. 5 M /s . A p a x P a r tn e r s In d i a A d v i s e r s P v t. L t d.
d) As discussed above, some of the taxpayer's comparables do not stand scrutiny of FAR analysis,
e) The taxpayer selected companies with predominant domestic operations though the taxpayer is mainly an export oriented IT enabled service provider.
f) The taxpayer selected companies with declining revenues though no reasonable adjustments can be made to account for under utilization of assets/human resources that may arise in such conditions.
g) Some companies like Eclerx Services Ltd., Cosmic Global Ltd., and Coral Hubs Ltd, though qualify all the fitters applied by the tax payer based on IBS data pertaining to the F.Y. 2008-09, have hot been selected.
7. Accordingly, TPO prepared final list of the comparables as initially proposed by him in the show cause notice, which gave arithmetic mean PLI 39.87%. Accordingly, he proposed adjustment of ` 614.55 lakhs. The same was added by the Assessing Officer.
8. Before Ld DRP, the assessee objected to classification of the assessee as KPO. It also objected to the comparables identified by the TPO, viz., Eclerx Services Ltd, Coral Hubs ltd and Cosmic Global Limited. The assessee also objected to the rejection of certain comparables viz., M/s Future Capital Holding Ltd and ICRA Management Consulting Services Ltd.
9. The Learned DRP upheld the view taken by the TPO that the services provided by the assessee are in the nature of KPO. The Learned DRP upheld the following comparables selected by the TPO :
i) Coral Hubs Ltd. (Formerly Vishal Information Technologies Ltd.)
ii) Cosmic Global Ltd.
iii) Eclerx Services Ltd.
In addition to the above, learned DRP also directed the Assessing Officer to include IDC (India) Ltd. as comparable. Further the Learned DRP upheld the rejection of following comparable selected by the assessee.
i) Future Capital Holdings Ltd.
6
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ii) ICRA management Consulting Services Ltd.
The Learned DRP also upheld the view taken by TPO that current year data must be used for TP analysis and accordingly rejected multiple years data adopted by the assessee.
10. The revenue is aggrieved by the decision of Ld DRP in directing the AO to include IDC (India) Ltd as a comparable. The assessee is aggrieved by the decision of Ld DRP in not accepting its contentions.
11. We shall first deal with certain common contentions. The TPO has considered the assessee as a KPO company. We notice that the TPO has mainly followed the decision taken by him in the immediately preceding year, i.e., in AY 2008-09 for treating the assessee company as KPO company. The assessment order passed for AY 2008-09 has been challenged before the Tribunal and the ITAT has already passed its order on 12-09-2017 and the same is reported in (2017)(86 taxmann.com 169). Before the Tribunal, the assessee has challenged the decision of the tax authorities to treat the assessee as KPO company and the same appears to have been accepted by the Tribunal, though it has not been spelt directly. Accordingly we set aside the order passed by the AO on this issue and hold that the assessee, being an investment advisory company, cannot be taken as a KPO company.
12. The Ld A.R argued that the TPO did not find defects in the TP study documents and hence rejection of the same should not be sustained. As noticed earlier, the TPO has proceeded to determine the ALP of the transactions with AE by treating the assessee as KPO and further he has also pointed out the defects in the T.P documentation of the assessee. Hence, it cannot be said that the rejection of the TP study of the assessee is without any basis. Further we notice that the TPO has selected the comparables from the TP study of the assessee only. In any case, we have held that the assessee cannot be treated as KPO company and hence this contention of the assessee would lose its significance.
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13. The Ld DRP and TPO has observed that the assessee has taken multiple year data, while the provisions of Rule 10B(4) mandates uses of Current year data. We agree with the above said observations of the tax authorities. Accordingly we direct the assessee as well as the AO to adopt current year data for determining the ALP of the transactions.
14. Now we shall take up the appeal filed by the revenue. The decision of Ld DRP to include IDC (India) Ltd as a comparable is being questioned by the revenue. We notice that the Ld DRP has considered the above said company as a comparable in AY 2008-09 also and the same has been accepted by the revenue. The following observations made by the Ld DRP in AY 2008-09 has been extracted by the Tribunal in its order:-
"6.8 We have also examined the assessee's submissions regarding the companies selected by it as comparables. Although the TPO has given valid reasons for rejecting the same as comparables, we find that the TPO has not completely disagreed with the functional comparability in the case of IDC (India) Ltd. In fact, the TPO has observed that the company is a global provider of market intelligence agency services for the IT, Telecom and Consumer Technology Markets. It appears from the Annual Report that the company is a market research company primarily dealing in research services and products. Considering this profile, we are of the view that IDC (India) Ltd should be included as a comparable."
Before us, the revenue could not furnish any material to contradict the findings so given by Ld DRP. Accordingly we are of the view that the Ld DRP was justified in including IDC (India) Ltd as a comparable. Accordingly we reject the ground urged by the revenue.
15. The Ld A.R submitted that the profit of M/s IDC (India) Ltd has been adopted incorrectly at 15.66% and the same needs to be rectified. In the earlier paragraphs, we have observed that the Current year data should be adopted for determining the ALP and hence the matter of determination of ALP of comparables needs to be set aside to the AO. At that stage, this matter may be taken up by the assessee before the AO/TPO.
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16. We shall now take up the appeal filed by the assessee, wherein the assessee is contesting inclusion of certain comparable and also exclusion of certain comparables. The assessee is objecting inclusion of Coral Hubs Ltd as a comparable by Ld DRP/TPO. The ld A.R submitted that the Ld DRP has excluded this comparable in the preceding assessment year. He submitted that the functional profile of this company is different and further its activities are carried out mostly through outsourcing.
17. We heard Ld DR on this issue and perused the record. We notice that the Tribunal has extracted following observations made by Ld DRP in AY 2008-09:-
"6.3 In respect of Vishal Information Technologies Ltd., now known as Coral Hubs Ltd, we find that a major part of the business of the company comprises outsourcing of services. We are therefore, in agreement with the assessee that this company is functionally different and should be deleted from the list of comparables."
However, during the year under consideration, the Ld DRP has included this company as comparable, mainly on the ground that the activity of outsourcing cannot be a ground for rejection of the same. In this regard, the Ld DRP has placed reliance on the decision rendered by Delhi bench of ITAT in the case of Agilent Technologies.
18. We notice that the TPO has included Coral Hubs Ltd on the ground that it is a KPO company, since he has considered the assessee company as KPO company. The contention of the assessee is that there is no functional similarity between the assessee-company and Coral Hubs Ltd. Other reasons have also been cited by the assessee in its reply filed before TPO. We notice that the co-ordinate bench has upheld the exclusion of Coral Hubs Ltd in AY 2008-09. Consistent with the view taken by the Tribunal in AY 2008-09, we direct the AO/TPO to exclude Coral Hubs Ltd as comparable.
19. The next comparable objected by the assessee is Eclerx Services Ltd. This company was taken as a comparable in AY 2008-09 also and the Tribunal 9 M /s . A p a x P a r tn e r s In d i a A d v i s e r s P v t. L t d.
has rejected the same. Following the same, we direct the AO/TPO to exclude Eclerx Services Ltd as comparable.
20. The next comparable objected by the assessee is Cosmic Global Ltd. The Ld A.R submitted that the functions of the above said company is that of providing translation services. He invited our attention to page 289 of the Case law paper book, wherein the decision rendered by the Tribunal in the case of Cosmic Global Ltd (2014)(48 taxmann.com 365)(Chennai-Trib) is placed. In the said decision the business of the assessee is stated as that of providing translation services. In the annual report also, the functions of Cosmic Global Ltd is described as under in the notes of accounts (Page 482 of the paper book):-
"The company's activities being I T enable services like medical transcription, translation and software development, there are no pertinent information relating to Research and Development, conservation of energy and technology absorption and innovation that could be furnished."
Since the functions are different and the business model is also different, we are of the view that there is merit in the contentions of the assessee that the above said company cannot be considered to be a comparable. Accordingly we direct the AO/TPO to exclude Cosmic Global Ltd as comparable.
21. The Ld A.R submitted that ICRA Management consultancy P Ltd should be included as comparable. He submitted that the co-ordinate bench has included the same in AY 2008-09. We find merit in the said submissions. Accordingly we direct the AO/TPO to include ICRA Management consultancy P Ltd as comparable.
22. The Ld A.R submitted that the Ld DRP has accepted that the functions of M/s Future Capital Holdings Ltd is comparable with the assessee. However, the Ld DRP has rejected the same on the ground that the Related Party Transactions (RPT) was in excess of 25%. He submitted that the Ld DRP has computed the RPT by including the reimbursements. He submitted that the 10 M /s . A p a x P a r tn e r s In d i a A d v i s e r s P v t. L t d.
reimbursement of expenses should not be considered for working out RPT and in support of this proposition, he placed reliance on the decision rendered by the co-ordinate bench in the case of M/s Lehman Brothers Advisers P Ltd vs. DCIT (ITA No.595/Mum/2014 dated 25.10.2017) and also the decision rendered in the case of M/s Goldstar Jewellery Design P Ltd (ITA No.7317/Mum/2012 dated 23.04.2013).
23. We heard Ld DR on this issue and perused the record. The co-ordinate bench in the case of Goldstar Jewellery Design P Ltd (supra) has observed that "the term "related party transaction" cannot be considered in its generic sense. It will encompass only such transactions between the related parties which directly affect the overall profitability in one way or the other". The Ld A.R submitted that the reimbursements do not affect profitability and hence the same has to be excluded. We find merit in the said submissions. The reimbursement of expenses does not result in any profitability, i.e., it is mere compensation for the expenses incurred by one party on behalf of another party. Accordingly we direct the AO/TPO to exclude the reimbursements and accordingly compute RPT transactions. Accordingly we restore this comparable to the file of AO/TPO for considering it afresh.
24. The Ld D.R submitted that the assessee has opted for Advance Pricing Agreement (APA) for AY 2010-11, wherein the assessee has accepted determination of higher margins. Accordingly he submitted that the margin so determined in AY 2010-11 should be extended to this year also, i.e. to AY 2009-10 also. He submitted that the Pune bench of Tribunal has allowed adoption of terms of APA for the years not covered by the APA, in the case of M/s Abicor Binzel Production (India) Pvt Ltd vs. DCIT (ITA Nos.2253 to 2255/PUN/2014 dated 15.12.2017).
25. The Ld A.R submitted that there was specific request from the assessee before the Pune bench for adoption of terms of APA for other years, where as there is no such request from the assessee herein. He submitted that the 11 M /s . A p a x P a r tn e r s In d i a A d v i s e r s P v t. L t d.
revenue has not raised any ground relating to this issue and hence the Ld D.R should not have made this submission at all. He submitted that the assessee has opted for roll back of terms of APA and the roll back was upto AY 2010-11 only. Accordingly the Ld A.R strongly objected to the plea put forth by Ld D.R.
26. We heard the parties on this issue. We notice that Rule 10MA provides for the methodologies of Roll back of the APA and clause (iv) of sub rule (2) of Rule 10MA states that there should be a request from the assessee for roll back of APA. In the instant case, admittedly, there is no request from the assessee for roll back. Hence we do not agree with the submissions made by the Ld D.R.
27. Accordingly we restore the issue of determination of ALP to the file of AO/TPO by considering the comparables approved by us in the preceding paragraphs by adopting single year data in terms of Rule 10B(4) of IT Rules.
28. In the result, the appeal of the assessee is treated as allowed and the appeal of the revenue is dismissed.
Order has been pronounced in the Court on 8.6.2018.
Sd/- Sd/-
(SANDEEP GOSAIN) (B.R.BASKARAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 8/6/2018
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT
5. DR, ITAT, Mumbai
6. Guard File.
BY ORDER,
//True Copy//
(Senior Private Secretary)
PS ITAT, Mumbai