Income Tax Appellate Tribunal - Delhi
Actis Global Services Pvt. Ltd., New ... vs Assessee on 10 December, 2015
1
ITA 30/Del/2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-2" NEW DELHI
BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER
AND
SHRI C.M. GARG : JUDICIAL MEMBER
ITA No. 30/Del/2015
Asstt. Yr: 2010-11
Actis Global Services Pvt. Ltd., Vs. Income-tax Officer,
MIRA, The Corporate Suites, Coy. Ward 1(3), New Delhi.
Block D, Ground Floor, 1 & 2
Ishwar Nagar, New Delhi.
PAN: AAMFA 2371 E
( Applicant ) ( Respondent )
Applicant by : Shri Ajit Tolani CA &
Shri Atul Jain CA
Respondent by : Shri Peeyush Jain CIT(DR) &
Smt. Parvinder Kaur Sr. DR
Date of hearing: 15-10-2015
Date of order: 10-12-2015.
OR D E R
PER S.V. MEHROTRA, A.M.:
This appeal, preferred by the assessee, is directed against the assessment order dated 26.11.2014 passed by the Assessing Officer u/s 143(3)/r.w.s. 144C of the Income-tax Act, 1961, pertaining to AY 2010-11.
2. Brief facts of the case are that the assessee had filed return of income declaring total income of Rs. 20,29,360/-. The AO noticed that assessee had undertaken international transactions with its AEs to the tune of more than Rs. 15 crores. Therefore, in accordance with the provisions of section 92CA of the 2 ITA 30/Del/2015 Income-tax Act, the international transactions, entered into by the assessee with the AEs were referred to the TPO for determination of ALP of the said transactions.
3. Ld. TPO, after considering the TP report and taking into consideration the functional profile of the assessee, determined the ALP of services rendered at Rs. 22,24,02,990/- and since the price received was Rs. 18,03,75,500/-, directed for adjustment of Rs. 4,20,27,490/-. The other adjustment directed by ld. TPO was on account of accrual of interest on receivables, aggregating to Rs. 79,98,190/-. The assessee filed objections before ld. DRP. Ld. DRP issued directions on the basis of which the AO passed the final assessment order and made total TP adjustment of Rs. 2,67,22,563/-. Being aggrieved with the assessment order, the assessee is in appeal before us and has taken following grounds of appeal:
"1. The assessment order passed by the Income Tax Officer, Coy. Ward 1(3), New Delhi [Learned Assessing Officer (Ld. AO')] pursuant to directions of the Hon'ble Dispute Resolution Panel (Hon'ble DRP') is bad in law.
2. The Hon'ble DRP erred both on the facts and in law, in cnfirming the addition to the extent of Rs. 26,722,563 to the income of the Appellant by holding that its international transaction pertaining to provision of information technology enabled services do not satisfy the arm's length principle prescribed under the Income Tax Act, 1961 ('the Act').
3 On facts and in law, the Hon'ble DRP, Ld. AO and the Learned Transfer Pricing Officer-l (5) (hereinafter referred to as 'Ld. TPO') erred in disregarding the Assessee's use of multiple year! prior years' data in contravention of the provision of section 92C of the Act read with Rule 10B and Rule 10D(4) of the Income Tax Rules, 1962 ('Rules').3
ITA 30/Del/2015 4 On facts and in law, the Hon'ble DRP, Ld. AO and Ld. TPO erred in disregarding the doctrine of impossibility of performance in contravening Section 92D of the Act read with Rule 10D(4) of the Rules, which mandate the use of contemporaneous data for the determination of ALP of international transactions.
5. On facts and in law, the Hon'ble DRP erred in confirming the action of the Ld. TPO of modifying/ adding the selection filters, consequently rejecting the comparable companies identified in the TP documentation and ignoring the provisions of Rule 10B(2). In doing so, the Hon'ble DRP erred in :-
5.1 rejecting AOK In-House BPO Services Limited; 5.2 rejecting Aditya Birla Minacs Worldwide Ltd; 5.3 rejecting Cameo Corporate Services Ltd; 5.4 rejecting Delta Services (I) Pvt Ltd;
5.5 rejecting KNM Services Pvt Ltd;
5.6 rej~ng Sparsh BPO Services Ltd; and 5.7 rejecting Timex Group India Ltd.
6 On facts and in law, the Hon'ble DRP, Ld. AO and Ld. AO erred in selection of Infosys BPO Limited, which is not comparable to the Assessee in terms of functions performed, assets employed and risk assumed.
7 On facts and in law, the Hon'ble DRP, Ld. AO and Ld. TPO erred in selection of Eclerx Services Private Limited which is not comparable to the Assessee in terms of functions performed, assets employed and risk assumed.
8 On facts and ,in law, the Hon'ble DRP, Ld. AO and Ld. TPO erred in not allowing a risk adjustment under Rule 10B(1)(e) for determination of the ALP to account for the difference in the risk profile of the Appellant, a low-risk service provider, and of the comparable companies, that are full-fledged risk bearing entrepreneurs.4
ITA 30/Del/2015
9. On facts and in law, the Hon'ble DRP, Ld. AO and Ld. TPO erred in treating the outstanding receivables from AE as "unsecured loans" and imputing interest at the rate equal to prime lending rate of SBI plus 150 basis points i.e 13.25%.
10. On the facts and in the circumstances of the case, the Ld. AO erred In initiating penalty proceedings under section 271 (1)( c) of the Act.
11. On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 234B and 234D of the Act.
12 On facts and in law the Ld. AO made computational errors in calculating the tax payable and interest under section 234B and 234D of the Act.
4. Brief facts of the case are that the assessee is an Indian company and subsidiary of Actis LLP.UK. The group was established as a Private Equity Investment Fund. 99.99% shares of company were held by Actis International Ltd. and the balance one share was held by Actis Assets Ltd. The function of the assessee in the TP document had been summarized as a back office service provider to the AE Actis Capital LLP. Services provided were stated to be financial accounting function, fund accounting function, HR support function, IT support function etc. Thus, the functions of the assessee primarily were of providing IT enabled services such as back office operations/ processing centres, bill paying centres, web enabled services, email support, IT help desk etc. to the group entity.
5. The international transactions, entered during the year, were as under:
i. Provision of back office support service Rs. 16,38,25,500/- ii. Reimbursement of expenses paid Rs. 3,06,755/-5
ITA 30/Del/2015 iii. Reimbursement of expenses received Rs. 3,20,944/-
6. Assessee had adopted TNMM method to be the most appropriate method for bench marking the international transaction. The PLI was OP/OC. In the present appeal there is no dispute on these two aspects and further there is no dispute as regards the ALP of reimbursement of expenses paid and reimbursement of expenses received. The adjustment had primarily been made on account of price received for services provided by assessee.
7. In order to justify ALP, the assessee had adopted a set of 14 comparables with an average of 12.55% as against assessee's own margin of 10%. The assessee had used multiple year data in its TP documents. The AO, after considering the assessee's TP report, issued show cause notice, which is reproduced at pages 3 to 11 of ld. TPO's order.
8. While issuing show cause notice, ld. TPO accepted the filter as applied by the assessee, but further proposed to apply following filters:
- Companies whose data is not available for the FY 2009-10 are excluded.
- Companies whose ITES income is less than RS.5 cr. are excluded.
- Companies whose revenue from ITES is less than 75% of the total operating revenues are excluded.
- Companies having more than 25% related party transactions (sales as well as expenditure combined) of the sales are excluded.
- Companies who have export sales less than 25% of the sales from ITES are excluded.
- Companies who have diminishing revenues/persistent losses for the last three years up to and including FY 2009-10 are excluded.6
ITA 30/Del/2015
- Companies having different financial year ending (Le. not March 31,2010) or data of the company does not fall within 12 month period i.e. 01.04.2009 to 31.03.2010, are rejected.
- Companies that are functionally different from the taxpayer are excluded.
- Companies that are having peculiar economic circumstances are excluded.
9. On the basis of these filters, applied by ld. TPO, ld. TPO rejected 10 comparables selected by assessee. This rejection was mainly on account of excluding those companies which had export sales less than 25% of the sales. The comparables selected by assessee in the TP study and the remarks of the ld. TPO on various comparables, were as under:
S. Name of the Company Average Remarks
No. (%)
1 AOK Inhouse BPO Services Ltd. 12.58% Rejected, as not fulfilling the filters
2 Aditya Birla Minacs Worldwide Ltd. 8.06% Rejected, as not fulfilling the filters
3 Cameo Corporate services Ltd. 9.77% Rejected, as not fulfilling the filters
4 Cosmic Global Ltd. 34.14% Accepted as it qualifies all the filters proposed
by TPO
5 Delta Services (I) Pvt. Ltd. 6.67% Rejected, as not fulfilling the filters
6 Informed Technologies Ltd. 12.01% The company ahs ITES income less than 75%.
Hence rejected
7 Infosys BPO Ltd. 24.29%
8. KNM Services Pvt. Ltd. . 13.69% Rejected, as not fulfilling the filters
9 Optimus Global Services Ltd. -1.85% Rejected, as not fulfilling the filters
10 Sparsh BPO Services Ltd. 5.97% Rejected, as not fulfilling the filters
11 Crosdomain Solutions Pvt. Ltd. 28.32% Modified by the latest data as per available
with TPO
12 Omega Healthcare Management 9.34%
Services Pvt. Ltd.
13 Inhouse Productions Ltd. 4.32% Modified by the latest data as per available
with TPO
14 Times Group India Ltd. 12.55% Rejected, as not fulfilling the filters
10. Before ld. TPO the assessee had requested for exclusion of Infosys BPO Ltd., which was not accepted by ld. TPO observing that mere large transactions cannot be aground for rejection, when the comparable had passed all the filters.
7ITA 30/Del/2015
11. As regards assessee's plea of rejecting Crossdomain Pvt. Ltd., ld. TPO pointed out that since the data for financial year 2009-10 was available, therefore, the plea of assessee could not be accepted.
12. The final set of comparables, selected by ld. TPO was as under:
Sl. Company PBIT/Cost (%)
No.
1 Caliber Point Business Solutions Ltd. 11.4
2 Cosmic Global Ltd. 16.59
3 Inhouse Productions Ltd. 17.3
4 Crossdomain Solutions Pvt. Ltd. 19.66
5. Infosys BPO Ltd. 31.61
6. Acropetal Technology Ltd. (segment) 33.92
7 Eclerx Services Pvt. Ltd. 42.14
8 Genesys International 112.4
Avg 35.63
13. Ld. TPO had, accordingly, determined the ALP of provision of back office support service as under:
Operating cost 16,39,77,726 Arms Length Margin 35.53% of the OC Arms Length Price (ALP) 22,19,11,057 Price received 18,03,75,500 Shortfall being adjustment u/s 92CA 4,15,35,557
14. As regards the consequent adjustment on account of non-receipt of interest on amount receivable from AE, ld. TPO observed that an amount of Rs. 5,90,80,860/- was due from AE at the end of the financial year. Ld. TPO, after considering the assessee's submissions, observed that the argument that none of the invoices outstanding more than six months, was found contrary to the facts. He observed that from books of account it is evident that every single day of the year there has been some outstanding towards AE. He bench marked the transactions by applying prime lending rate of SBI plus 500 bps and, accordingly, 8 ITA 30/Del/2015 calculated the interest outstanding balance @ 16.75% which amounted to Rs. 98,96,044/- and made the addition of Rs. 79,98,190/-.
15. Before ld. DRP the assessee had filed its objections which have been considered from pages 24 to 25 of ld. DRP's order in which ld. DRP primarily accepted the ld. TPO's comparables on the ground that most of the comparables failed the export sales filter. As regards the adjustment on account of non-receipt of interest is concerned, ld. DRP gave the following directions:
"The TPO/AO is accordingly directed to verify the amount of receivables: i) In case the aggregate amount of receivables from the AEs does not exceed Rs. 50 crores, apply Prime Lending Rate of SBI as on 30th June of relevant previous year plus 150 basis points (ii) In case the aggregate amount of receivables from the AEs excess Rs. 50 crores, apply Prime Lending Rate of SBI as on 30th June of relevant previous year plus 500 basis points."
16. Ground nos. 1 & 2 are general. Ld. counsel did not press ground nos. 3 & 4 and, accordingly, these grounds are dismissed as not pressed.
17. Apropos ground no. 5, ld. counsel for the assessee referred to page 14 of DRP's order wherein the findings as regards exclusion of companies with export sales less than 25% of the sales is contained.
18. Ld. counsel submitted that when the comparables selected by assessee were functionally similar to that of the tested party (assessee), then there was no relevance of export filter and the same should not have been applied.
19. Ld. counsel referred to Rule 10A(a), which has now been renumbered as clause (ab), wherein the definition of uncontrolled transaction is given, which means a transaction between enterprises other than associated enterprises, whether resident or non-resident. With reference to this definition, ld. counsel pointed out 9 ITA 30/Del/2015 that filter is not prescribed in law. He pointed out that law itself says that comparison can be with resident or non-resident and, therefore, export filter should not have been applied. He submitted that the filter is required to bring whether bigger sub set to smaller sub set and only those filters are relevant which target in identifying functionally dissimilar companies because law prescribe specific criteria. He submitted that there is no logic of assigning a cut of such as 25% or 50% or 75%.
20. Ld. counsel pointed out that the activities/ functions performed rather than the geographical location allocation is of primary importance and TNMM method is less affected by transactional difference at net level. In TNMM method broad comparability of functional profile is to be taken into consideration. He submitted that Rule 10B(2)(d) dealing with the conditions prevailing in the market in which the respective parties to the transaction operate being a relevant condition for deciding the comparability is relevant only in CUP method and not in TNMM method, where margins are considered and not price. He submitted that rejecting companies on the ground that they do not have adequate foreign exchange revenues is not a comparability factor prescribed under the Indian Transfer pricing law and, has thus, no legal basis for removing otherwise good comparables.
21. Ld. DR has filed written submissions, which are placed on record.
22. Ld. DR submitted that as per Rule 10B(2), geographical location ha specifically been included in the Rules and is, thus, of specific consideration. She submitted that if exactly same transaction is not available, then TPO has to adopt some reasonable basis. He submitted that comparables may be functionally same but the same takes into consideration only cost part and selling part cannot be 10 ITA 30/Del/2015 ignored. She submitted that market does influence the price and, therefore, complete transaction has to be considered otherwise we will get distorted picture.
23. Ld. DR has filed detailed submissions in this regard, which are reproduced hereunder:
(1) Provisions of Rule 10B(2)( d)- "conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail"
(2) Export filter ensures that comparable entities are operating in the same geographical location.
Those geographical markets, in which parties entering into transactions operate is an important factor which influences the price of the transactions. With the geographical market, in which the other party is located, all those factors which influence the transaction price also come into play. If we do not factor in this into our identification of uncontrolled com parables, we would be making an incorrect identification. The main reason for applying export earnings filter is that the assessee is providing its services from India to U.K. the comparable companies could also, as far as possible, should be providing services from India to such countries or similarly developed countries like UK, Europe etc, so that the prevailing market conditions in the countries in which the buyer and seller are located are same similar. Otherwise, adjustments need to be made for the differences in geographical markets.
11ITA 30/Del/2015 (3) The geographical location costs saving benefits are available to exports of services. The same are not available to domestic players:-
It is common business sense that every entrepreneur tries to source its goods or services from the cheapest possible market and sell the same to the markets where the goods or the services can be sold at the highest price. A businessman who can source his goods or services from the low cost countries but cannot sell the same in the fully developed and expensive markets obviously loses out to the businessman who has access to the both-sourcing of services from low cost countries and selling them at higher rates in the developed countries. The companies in the developed countries are outsourcing work to India for this reason only. The location costs saving benefits are available to exports of services. The same are not available to the domestic players. In case the filter adopted by the TPO is not taken into account, it will lead to comparison of revenue and corresponding margins earned by entities rendering services within India with the entities rendering services outside India. Since the margins earned by exporting services outside India is bound to be more than the margins earned by rendering services within India, due to the higher price of service in the export sector by using the same low costs, it is clear that non application of this filter will lead not only to inadequate comparison but also an inaccurate.
(4) While examining the operational comparability, the operating market i.e. wherein the services are being sold is also important:-
While arguing for operational comparability, Ld. Counsel emphasized on the nature of operational! service only and ignored the market in which services are sold. The operating markets should be same or similar in the case of taxpayer and the comparable. In the case of tax payer, the operating market is 12 ITA 30/Del/2015 abroad, whereas, in the case of a predominantly domestic company, the operating market is India, where here are differences in overall economic development, purchase power parity, business model, cost arbitrage and also level of competition (as India's share in global software services market is still low). Hence, it is felt that companies with at least 25% of its revenue from export sector will have similar economic circumstances as that of the tax payer. Therefore the companies that are predominantly into the domestic market cannot be compared with the assessee who is a predominantly export oriented service provider.
(5) Following cases are relied in this regard. (i) Chiron Behring vaccines Pvt. Ltd. 2011-TII-30-ITAT Mumbai-TP. (ii) Deloitte consulting India Pvt. Ltd. ITA No. 1082IHYD/2010 Hyderabad-ITAT. (iii) ITO vs CRM Services India Pvt. Ltd. 14 Taxman 96.
(a) Further there should be no comparability of transactions in the domestic and export segment, a proposition held by Hon. ITA T in the case of Chiron Behring Vaccines Pvt. Ltd. 2011-TII-30-ITAT-MUM-TP.
(b) This issue was also involved the recent judgment delivered by Hyderabad tribunal in the case of Deloitte consulting India Pvt. Ltd. ITA No. l082IHYD12010 Hyderabad-ITAT .. Wherein the use of this filter was approved by the Hon. Tribunal in para 39 of the judgment reproduced below: .
"39. The next ground is with regard to rejection of independent comparable companies by TPO/CTT(A) on the basis that they do not have any foreign exchange revenue. We find that the TPO, in the case of back office services segment, has rejected the following five companies on account of the fact that these companies do not generate foreign exchange revenue.
13
ITA 30/Del/2015
i) C.S. Software Enterprise Ltd.
ii) Ideaspace Solutions Ltd.
iii) MCS Ltd.
iv) Tata Share Registry Ltd.
v) Vakrangee Software's Ltd.
We find that the domestic BPO is much smaller business segment than the export BPO. The productivity and return in domestic segment is also much less than the export segment. The TPO clearly demonstrated in his order at page-9 that the earnings per seat in domestic segment is 0.45 lakhs as against 2.37 lakhs in the export segment which works out to 5.27 times more than the domestic segment. In the export segment, the earnings will be more due to the fact that they have advantage of time zone and higher productivity etc. It appears that the assessee company agreed that one criterion for selection/rejection of the comparables is FAR analysis. The aforesaid companies do not have any export business for the year under consideration whereas the assessee company has full fledged export business. The functions, risks and assets are entirely different. Hence, the aforesaid company cannot be considered as a comparable company for determining the ALP. It is the contention of the learned counsel for the assessee that there is nothing mentioned in the India TPR that comparables may be rejected merely on the ground that it has no foreign exchange revenue. He referred to the meaning of the "uncontrolled transaction" as given in Rule 10A of the Income- tax Rules wherein it states that the transaction between enterprise other than the associate enterprise whether resident or non-resident. In our considered view, the reference to resident and non-resident in Rule 10A of IT Rules, is related to the residential status and not related to the domestic or export. Moreover, the Delhi Bench of the Tribunal in the case of 14 ITA 30/Del/2015 Mentor graphics (supra) held that the ALP should be determined by taking results of a comparable transaction in comparable circumstances. Rule 10B(2)(d) also emphasizes that the comparability of the transaction should be international transaction. We do not find any merit in the argument of the learned counsel for the assessee that the companies rejected by the TPO operate in similar market condition do not have any international transaction. In view of the above, the reasoning given by the CIT(A) in confirming the action of the TPO in rejecting the aforesaid company as not comparable is justified. In view of the above, five companies listed above shall not be included in the final list of comparable companies.
(c) Another judgment where this issue is discussed is ITO vs CRM Services India (P) Ltd. 14 Taxmann 96 as below:
" 15. Ground no. 4.5 is against rejection of Shreejal info Hubs Ltd. As a comparable case. In this connection, it has been mentioned in the TPO's order that the assessee raised objection and it was submitted that this company is carrying out business of vending information, i.e. customer support or a contract centre. This business is similar to the BPO business. The TPO rejected the submission by mentioning that vending of information and rendering services to call centre are activities different from running a call centre. Therefore, the functional profile of the two companies were different.
15.1 Before us, the Id. Counsel mentioned that the information vending is nothing but customer support or contract centre. Thus, Shreejal info Hubs Ltd. Is importing information of supplier of goods and services to prospective customers. As per director's report, it is carrying out the business of information vending by employing calling agents under the brand name "Ask Me", which is essentially a call centre/contract service centre. Therefore, functional profile is same i.e., to furnish information about the client- company. On the other hand, the 15 ITA 30/Del/2015 case of the Id. DR is that Shreejal Info Hubs Ltd. is working for the clients in India while the assessee is providing services in USA, thus, business territories are totally different.
15.2 We have considered the facts and the submissions made in this behalf. We are of the view that territory of the business is a material factor in deciding comparability of the cases. The assessee renders services in USA while Shreejal Info Hubs Ltd. enders services in India. This fact alone is sufficient to exclude this comparable. Thus, it is held that the AO/TPO rightly rejected this case as a comparable case."
(d) In the case of Mis Indo American Jewellery Ltd.
(2010-TII-24-ITAT- Mum- TP) ITA T held that Domestic Company cannot be compared with the taxpayer who is mainly an exporter.
(e) In the case of Mis Ranbxy India 299 ITR (AT) 175 (Del) the ITA T held that economic conditions prevailing in the market including geographical locations, size of market, government order in force, etc are required to be considered.
(f) In the case of Mis Vedaris Technology, ITA T, Delhi held that domestic company cannot be taken as a comparable when the taxpayer is mainly an exporter.
(6) By considering the export earnings criterion, an attempt has been made by TPO to taken into account the factors which are similar to the factors in which the assessee operates. The reliance is again placed on the judgment in the case of Mentor Graphics (Noida) (P) Ltd. vs. Deputy Commissioner of Income Tax, Circle -6(1), New Delhi [2007] 109 ITD 101 (DELHI). Further it was also observed by the Hon'ble Tribunal in the ~case of Skoda Auto India Pvt. Ltd. 2009- TIOL-214-ITAT- Pune that when information available in public domain is not sufficient to make the comparison possible some approximation and reasonable assumptions are inevitable.
16ITA 30/Del/2015
24. We have considered the submissions of both the parties and have perused the record of the case. The main dispute is whether the filter of export sales to total sales of 25% applied by ld. TPO and accepted by ld. DRP is justified or not. This has resulted in exclusion of those comparables selected by assessee where export to total sales is less than 25%. Admittedly, the assessee is mainly an export oriented IT enabled service provider, deriving 100% of its revenues from exports in this segment. The contention of ld. counsel is that since it is not disputed that the comparables selected by assessee were functionally similar to that of assessee, therefore, by applying this filter of export sales of less than 25% for excluding the comparables is not justified because there is nothing in law to adopt this filter. On the contrary, he submitted, that law prescribes that the comparables can be residents or the non-residents. In our opinion, the submission advanced by ld. counsel cannot be accepted, particularly in view of Rule 10B which prescribes the mode of determination of ALP u/s 92C. Rule 10B(1) prescribes various methods which can be adopted by the tested party to determine the ALP. One of the methods prescribed is transactional net margin method, which is reproduced hereunder:
Determination of arm's length price under section 92C.
10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:-
(a) comparable uncontrolled price method, by which,-
(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;17
ITA 30/Del/2015
(ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the price in the open market;
(iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction;
(b) resale price method, by which,-
(i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified;
(ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions;
(iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services;
(iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market;
(v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the 18 ITA 30/Del/2015 property or obtaining of the services by the enterprise from the associated enterprise;
(c) cost plus method, by which,-
(i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined;
(ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;
(iii) the normal gross profit mark-up referred to in sub-clause
(ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark- up in the open market;
(iv) the costs referred to in sub-clause (l) are increased by the adjusted profit mark-up arrived at under sub-clause (iii);
(v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise;
(d) profit split method, which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of anyone transaction, by which-
19ITA 30/Del/2015
(i) the combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined;
(ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; .
(iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii);
(iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction:
Provided that the combined net profit referred to in sub-clause
(i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (il) and
(iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction;
(e) transactional net margin method, by which,-20
ITA 30/Del/2015 (1) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (I) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.
25. Rule 10B(2) prescribes various factors which have to be taken into consideration for the comparability of an international transaction, which are as under:
"10B(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-
(a) the specific characteristics of the property transferred or services provided in either transaction;21
ITA 30/Del/2015
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail."
(3) An uncontrolled transaction shall be comparable to an international transaction if-
(i) None of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from such transactions in the open market; or
(ii) Reasonably accruing adjustments can be made to eliminate the material effects of such differences."
26. All these factors are relevant for all the methods, which have been spelt out in Rule 10B(1). Therefore, the submission of ld. counsel that Rule 10B(2)(d) is relevant only for CUP method cannot be accepted. All these factors have bearing on the net margin to be determined in all methods including TNM method. We are in agreement with the submission of ld. Sr. DR, reproduced earlier, that those geographical markets in which parties entering into transactions operate is an important factor which influence the price of the transaction and that has to be factored into for identification of uncontrolled transactions. Various case laws 22 ITA 30/Del/2015 relied upon by ld. DR also fortify the view taken by us. For the sake of brevity, we are not referring to those decisions which have been elaborately considered in the submi1ssions of ld. DR, reproduced earlier. We, accordingly, reject this contention of ld. counsel for the assessee.
27. In the ground, the assessee has assailed exclusion of various comparables, which are as under:-
- AOK In-House BPO Services Limited;
- Aditya Birla Minacs Worldwide Ltd;
- Cameo Corporate Services Ltd;
- Delta Services (I) Pvt Ltd;
- KNM Services Pvt Ltd;
- Sparsh BPO Services Ltd; and
- Timex Group India Ltd.
28. All these comparables had been excluded as they did not pass through export filter applied by ld. TPO. As we have already upheld the export filter applied by ld.
TPO in earlier part of our order, we reject the assessee's contention.
29. However, as regards Aditya Birla Minacs Worldwide Ltd, ld. counsel referred to the annual report contained at page 364 of the paper book, wherein it is mentioned in schedule 17 Notes to Accounts" that earning in foreign currency (accrual basis) for IT enabled services was Rs. 15825.42 lacs. He submitted that it is 71.57% of the total sales and, therefore, could not be rejected by applying the filter of export sales of being less than 25% of total sales. He submitted that computation has not correctly been done by ld. TPO.
30. Having heard both the parties, we restore this issue to the file of ld. TPO to examine the computation of export earnings to total sales as claimed by ld. counsel 23 ITA 30/Del/2015 for the assessee and, if, the same is found to be correct, then this comparable has to be included in the list of comparables.
31. In the result, ground no. 5 is partly allowed for statistical purposes.
32. The next ground no. 6, raised by ld. counsel for the assessee is regarding inclusion of Infosys BPO in the list of comparables. Ld. counsel submitted that the decision of Hon'ble Delhi High Court in the case of Chryscapital, lays down that super normal profit is only an indicator of further inquiry but does not lay down anything about functionality test. He submitted that Infosys has several intangibles which exist in private equity but not in BPO.
33. Ld. counsel referred to annual report of Infosys for FY 2009-10 and pointed out that in the performance over view it is clearly stated that assessee acquired McCamish, a premier business process solutions provider based in US, which enhanced its capability to deliver end to end business solution for its insurance and financial services clients with a compelling value proposition. Thus, ld. counsel submitted that during the year under consideration there was an extraordinary event of merger and, hence, this could not be taken as a comparable. Further, he referred to the significant Accounting Policies and Notes on Accounts, wherein in the company's over- view, it is stated as under:
"Infosys BPO Limited ("Infosys BPO" or "the company") was incorporated as Progeon Limited on April 3,2002 to provide business process management services to organizations that outsource their business processes. Infosys BPO is a majority owned and controlled subsidiary of Infosys technologies Limited ("Infosys", NASDNM: INFY). The Company helps clients improve their competitive positioning by managing their business processes in addition to providing increased value. The name of the Company was changed from Progeon Limited to Infosys BPO Limited with effect from August 29,2006."24
ITA 30/Del/2015
34. Ld. counsel submitted that this comparable has been excluded in plethora of decisions by the ITAT, particularly on the ground of economy of scale. In the synopsis filed by assessee, a list of all such cases has been annexed.
35. Ld. Sr. DR referred to the decision of the ITAT Delhi in the case of Agilent Technologies International Pvt. Ltd. Vs. ACIT (ITA no. 6047/Del/2012 dated 14- 6-2013), wherein it has been held that companies with extraordinary event such as merger or amalgamation should be rejected, if, because of merger/ demerger the company becomes functionally different. It was further held that if the merger of the two functionally similarly placed companies take place, the event of merger itself cannot be taken as a factor for exclusion of the said comparable.
36. Ld. Sr. DR submitted that para 33 of Chryscapital read with para 44 makes it clear that only adjustment is to be made but the comparable cannot be rejected. He pointed out that Actis is a brand and, therefore, assessee was also having intangibles, therefore, out right exclusion of this is not warranted. He, therefore, submitted that the matter should be restored to the AO/ TPO so that inquiry is made in the light of the decision in Agilent Technologies & Chryscapital.
37. Ld. Counsel for the assessee, in the rejoinder, submitted that adjustments can be made only when specific difference can be identified, which has not been done by Revenue. He submitted that considering the overall business profile of Infosys, the same is not at all comparable to assessee.
38. We have considered the submissions of both the parties and have perused the record of the case. There is no denying of the fact that Infosys BPO operates on a large scale and caters to wide variety of customers operating in different industries. Ld. counsel has filed before us extracts from the annual reports and 25 ITA 30/Del/2015 white paper issued by Infosys in regard to 'Process Progression Model ( "PPM"), a holistic model to transform business processes'.
39. A birds' eye view of the said model makes it clear that it involves various processes which are aimed at coping with various challenges which impede the business strategy. On the other hand, the assessee's business profile is quite limited and not at all comparable to the optimistic business model of Infosys. The turnover of Infosys was Rs. 1127 crores during the FY 2009-10 as compared to the assessee's turn over of Rs. 18.04 crores. This huge difference in the turnover itself makes it clear that the margins achieved by Infosys BPO being a service sector company, are much higher than that of assessee. In service sector higher turnover reflects higher margin because it is primarily the customer's satisfaction which is relevant in selecting the service provider even at the payment of higher margins.
40. In Merker equitable service centre India Pvt. Ltd. 133 ITD 543, it was held that Infosys BPO cannot be considered as a comparable to a captive service provider, like assessee.
41. Ld. DR has submitted that Actis is also a brand and, therefore, adjustment should be made for the difference. We are unable to accept this contention particularly because the department has not brought on record any brand value of Actis on record. Moreover, the wide difference in turnover makes it clear that there is wide difference in the brand value of the two companies and, therefore, without quantification of the same, effect on turnover cannot be ascertained. We further find that the Infosys BPO has not been taken as comparable in detailed list annexed to synopsis filed by assessee including the following cases:
- Zavata India Pvt. Ltd. Vs. DCIT (ItA no. 1781/Hyd/2011)
- Capital IQW Information Systems (India) Pvt. Ltd. Vs. DCIT (Int. Taxation) (ITA no. 1961/Hyd/2011) 26 ITA 30/Del/2015
- Triniti Advanced Software Labs (P) Ltd. (2011-TII-92-ItAT-Hyd-TP). Agnity India Technologies Vs. ITO ITA 1204/2011 Delhi High Court - In this case it was emphasized that Infosys Technologies Ltd. could not be considered as a comparable being a giant company. The same principle is applicable to Infosys BPO also.
42. In view of above discussion, we direct ld. TPO to exclude Infosys BPO.
43. In the result, ground no. 6 is allowed.
44. The next ground no. 7, raised by ld. counsel for the assessee is regarding inclusion of eClerx Services Limited. Ld. counsel pointed out that this company is a data analytical knowledge process outsourcing service provider. It provides data analytics, data management and process improvement solutions to global enterprise clients, mainly in capital markets and financial services. Ld. counsel submitted that the company's engagements are concerned of the two specializations, namely, capital market and financial services, wherein it provides model office and back office support to the capital market business and sales and marketing support.
45. Ld. counsel referred to the annual report of this comparable company, wherein it is stated as under:
"eClerx Services Limited (eClerx) is a knowledge process Outsourcing (KPO) Company providing data analytics, data management and process improvement solutions to global enterprise clients, eClerx supports its clients through two business units - Financial Services and Sales and Marketing Support.
xxx xxx xxx
27
ITA 30/Del/2015
In the Capital Markets division, the Company today provides end-to-end financial transaction support services such as trade booking, trade confirmation, asset servicing, cash settlements, client servicing, risk management and reference data integrity across all asset classes, and its services span both "sell-side"
(the large banks) and "buy-side" (the funds and asset managers). Furthermore, the Company provides strategic and process consulting services, helping clients devise solutions to improve efficiency, reduce risk and meet regulatory and market demands.
Similarly in the Sales and Marketing Support division, the Company today supports clients in all elements of product and services marketing and sales-with a focus on online support to include content development and management, search engine management, web operations, pricing and customer analytics, product database management and catalog audits. The Company is also pursuing a strategy of creating a portfolio of platform attached services, by creating a suite of services that are complementary to industry standard IT platforms."
46. Ld. counsel further submitted that this comparable has to be excluded in view of the decision of Hon'ble Delhi High Court in the case of Rampgreen Solution (ITA no. 102/2015), wherein in para 31 it has been held as under:
31. In the present case, the Tribunal noted that Vishal and eClerx were both engaged in rendering ITeS. The Tribunal 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. We find it difficult to accept this view as it is contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITeS encompasses a wide spectrum of services that use Information Technology based 28 ITA 30/Del/2015 delivery. Such services could include rendering highly technical services by qualified technical personnel, involving advanced skills and knowledge, such as engineering, design and support.
While, on the other end of the spectrum ITeS would also include voice-based call centers that render routine customer support for their clients. 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."
47. After hearing both the parties, we direct the ld. TPO to exclude this comparable from the list of comparables in view of decision of Hon'ble Delhi High Court as this company is functionally different, which is evident from the business profile of eClerix, reproduced earlier from Annual Report.
48. In the result, ground no. 7 is allowed.
49. Apropos ground no. 8 ld. counsel for the assessee submitted that assessee being a captive or low risk service provider, operates in a virtually risk free environment , while entrepreneurial enterprises like comparable companies selected by ld.TPO undertake the full range of economic risks, such as, market risk, price risk, product risk, idle-time risk, credit risk, foreign exchange fluctuation risk, technology obsolescence risk etc. Hence, the return earned by the comparable companies selected by ld. TPO is not comparable to the rate of return earned by Actis Global. He pointed out that all significant business and 29 ITA 30/Del/2015 entrepreneurial risks are borne by the AEs of assessee who own all the valuable intellectual property rights and other commercial or marketing intangibles. Ld. counsel has furnished a table elaborating difference in the risk profile of assessee vis-a-vis comparable companies, which are reproduced hereunder:
Risks Actis Caliber Cosmic Inhouse Cross Infosys Eclerx Global Point Clobal Productions Domain BPO Services Services Business Ltd. Ltd. Solutions Ltd. Pvt. Ltd.
Private Solutions Ltd. Pvt. Ltd.
Limited
Market Risk No Yes Yes Yes Yes Yes Yes
Service No Yes Yes Yes Yes Yes Yes
Liability Risk
Credit Risk No Yes Yes Yes Yes Yes Yes
Foreign No Yes Yes Yes Yes Yes Yes
Exchange
Risk
Manpower Limited Yes Yes Yes Yes Yes Yes
Risk
Legal and Limited Yes Yes Yes Yes Yes Yes
Statutory
Risk
Capacity No Yes Yes Yes Yes Yes Yes
Utilization
Risk
50. Ld. counsel submitted that following the decision of ITAT Delhi Bench in the case of Motorola Solutions India Pvt. Ltd. Vs. ACIT (ITA no. 5637/Del/2011), the matter may be restored back to the file of ld. TPO for necessary risk adjustment after availing the services of technical experts to be appointed by both the parties.
51. Ld. DR referred to para 7.8 of ld. DRP's order and pointed out that when called upon to quantify the risk adjustment, the assessee filed reply, which was very vague and without any basis being backed by factual input, correlating its functioning, the functioning of the service sector and the functioning of the comparable companies.30
ITA 30/Del/2015
52. We have considered the submissions of both the parties and have perused the record of the case. Ld. TPO had denied the risk adjustment claimed by assessee on the ground that assessee failed to show that the comparables had actually undertaken suck risk and failed to demonstrate how the same material affected from margins. He pointed out that unless it was shown that how the risk adjustment to fetch the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the tax payer. Before ld. DRP also the assessee failed to furnish any data for quantification of risk. Unless the difference can be ascertained accurately and their import on the margin can be assessed with reasonable accuracy, the adjustment cannot be allowed. Under such circumstances, the matter also cannot be restored back to the file of ld. TPO. In the result, ground no. 8 is dismissed.
53. Ground no. 9: Brief facts, apropos ground no. 9, are that AO noticed that the assessee had got outstanding receivables of Rs. 5,90,80,860/-. He further noticed that the opening balance of such receivables was Rs. 3,88,32,043/-. These receivables were from the AE of the assessee itself, for whom services were rendered by the assessee. Accordingly, AO issued show cause notice, inter alia, observing, as under:
"Accordingly, the above deferred payment/ receivable is proposed to be considered as an international transaction requiring determination of ALP. In absence of any suitable CUP data or credit rating of your AE, interest on the outstanding balance at the end of the year is proposed to be benchmarked at the prime lending rate of SBI plus 500 bps. The 500 of basic point is added to take into account various factors including opportunity cost. Accordingly, shortfall on account of non-charging of interest is proposed to be calculated @ 31 ITA 30/Del/2015 16.75% which comes to 98,96,044/- which is proposed to be adjusted."
54. The assessee's reply has been summarized as under, in which following points were raised:
(a) The working capital adjustment would contain the element of interest part of the receivables.
(b) Amount, which is more than six months old, should only be considered for accrual of interest.
55. The ld. TPO did not accept both these arguments for the reasons mentioned in his order, for which primarily be observed that the working capital adjustment could not be allowed to service industry and in regard to the details submitted by assessee regarding the period for which balances were outstanding, he observed that the said details contained various errors.
56. Ld. DRP partly allowed the assessee's appeal, the observations from which have been reproduced earlier in para 15 of this order.
57. Ld. counsel for the assessee submitted that all the outstandings are for less than six months and, therefore, no adjustment is called for. He relied on the decision of ITAT Bangalore in the case of M/s Logix Micro Systems Ltd. (ITA no. 423/Bang/2009). He submitted that only in some cases 90 days delay is there in realization of proceeds from AEs.
32ITA 30/Del/2015
58. Ld. counsel further submitted in AY 2009-10, ld. DRP has accepted the assessee's contention that the issue of interest element pertaining to the receivables will be substituted in the same.
59. We have considered the submissions of both the parties and have perused the record of the case. As far as ld. counsel's plea based on the directions of DRP for AY 2009-10 is concerned, we find that in the said assessment year the assessee had objected to the TPO not allowing working capital adjustment and since this adjustment was directed to be allowed by ld. DRP, therefore, a separate addition on this ground was not required. However, in the present assessment year, ld. TPO had denied the working capital adjustment and the same has not been assailed before us. Under such circumstances, the matter needs to be restored back to the ld. TPO to verify the assessee's contention regarding all the invoices outstanding being for less than six months and, if, the same is found to be correct, then no addition is called for in view of the ITAT decision in the case of M/s Logix Micro Systems Ltd. (supra). One of the plea of ld. counsel for the assessee was that the entire funds are received from parent company. However, this plea has been taken for the first time and was not taken before lower revenue authorities. Therefore, this aspect also needs to be considered by ld. TPO while deciding this issue de novo. In the result, ground no. 9 is allowed for statistical purposes.
60. Ground no. 10 relating to initiation of penalty u/s 271(1)(c) is premature.
33ITA 30/Del/2015
61. Ground nos. 11 & 12: The charging of interest u/s 234B & D, taken in ground no. 11, is consequential. The AO shall recalculate the charging of interest under the aforesaid sections, while giving effect to the appellate order.
62. In the result, assessee's appeal is partly allowed.
Order pronounced in open court on 10/12/2015..
Sd/- Sd/-
(C.M. GARG) (S.V. MEHROTRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated:10/12/2015.
*MP*
Copy of order to:
1. Assessee
2. AO
3. CIT
4. CIT(A)
5. DR, ITAT, New Delhi.