Income Tax Appellate Tribunal - Hyderabad
Avineon India Pvt.Ltd., Hyd, Hyderabad vs Dcit, Circle-1(1), Hyd, Hyderabad on 7 July, 2017
ITA Nos 238 and 257 of 2016.
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' B ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri S.Rifaur Rahman, Accountant Member
ITA No.238/Hyd/2016
(Assessment Year: 2011-12)
M/s. Avineon India P Ltd Vs Dy. Commissioner of Income Tax
Hyderabad Circle 1(1)
PAN: AADCA 7416 Q Hyderabad
(Appellant) (Respondent)
ITA No.257/Hyd/2016
(Assessment Year: 2011-12)
Dy. Commissioner of Vs M/s. Avineon India P Ltd
Income Tax Hyderabad
Circle 1(1), Hyderabad PAN: AADCA 7416 Q
(Appellant) (Respondent)
For Assessee : Shri Pradeep Kasthala
For Revenue : Smt. U. Mini Chandran, DR
Date of Hearing: 11.04.2017
Date of Pronouncement: 07.07.2017
ORDER
Per Smt. P. Madhavi Devi, J.M.
Both are cross appeals for the A.Y for the A.Y 2011-12 filed by the assessee as well as the Revenue against the assessment order passed u/s 143(3) r.w.s. 144C(5) of the Act. Let us deal with assessee's appeal first.
ITA No.238/Hyd/2016The assessee has raised the following grounds of appeal:
Page 1 of 13ITA Nos 238 and 257 of 2016.
"1. The final assessment order passed by the assessing officer is erroneous both in law and on the facts of the case.
2. The ld. A.O/TPO/Dispute Resolution Panel ("DRP") has erred by including Accentia Technologies Limited as comparable company.
3. The ld. A.O/TPO/DRP has erred by considering MIs ICRA Online Limited at segment level as against entity level as comparable to that of the appellant company. In doing so, the ld.DRP failed to substantiate the basis of considering only the segment level results as against the entity level results of the comparable.
4. The ld. A.O/TPO/DRP has erred by not including Microland Limited as comparable to that of the appellant company.
5. The ld. DRP has erred in law and on facts by rejecting:
a. Cosmic Global Limited, b. Informed Technologies Limited and c. Microgenetics Systems Limited as comparable to that of the appellant company while the same have been considered as comparable by the ld. TPO earlier.
6. The ld DRP has erred by considering a mark- up of 5% on reimbursement of expenses.
7. For these and such other grounds that may be advanced at the time of hearing, the appellant prays that:
a. Accentia Technologies Limited be rejected as a comparable;
b. Consider the following as comparable:
i. ICRA Online Limited at entity level; ii. Microland Ltd iii.Cosmic Global Ltd Page 2 of 13 ITA Nos 238 and 257 of 2016.
iv. Informed Technologies Ltd & v. Microgenetics Systems Ltd c. Relief to be granted in respect of mark-up on reimbursement of expenses".
2. At the time of hearing, the learned Counsel for the assessee submitted that the assessee is not interested in pursuing grounds of appeal No.3 & 4. They are accordingly rejected as not pressed.
3. As regards the other grounds of appeal, brief facts are that the assessee company, engaged in the business of providing Information Technology Enabled Services and Software Development services to its AE's, filed its return of income for the A.Y 2011-12 on 29.11.2011 declaring total income at Rs.1,80,34,352 under the regular provisions of the I.T. Act and book profit u/s 115JB of the Act at Rs.2,42,15,058. During the assessment proceedings u/s 143(3) of the Act, the AO observed that there are international transactions with AEs which exceeded the limits fixed by the CBDT and therefore, the determination of the ALP was referred to the TPO u/s 92CA of the Act. The TPO passed an order u/s 92CA(3) of the Act on 13.09.2014 suggesting an adjustment of Rs.5,74,92,775. In accordance with the same, the draft assessment order was passed against which the assessee preferred its objections before the DRP. The DRP granted partial relief to the assessee. Against the relief granted by the DRP, the Revenue is in appeal before us, while against the adjustment confirmed by the DRP, the assessee is in appeal before us.
Page 3 of 13ITA Nos 238 and 257 of 2016.
4. In the assessee's appeal, Ground No.2 is against including Accentia Technologies Ltd as a comparable company. In its TP study, the assessee had reported provision of ITES and recovery of expenses as international transactions and determined the ALP under TNMM and CUP methods respectively. The TPO however, rejected the TP study of the assessee holding that its search process suffered from defects. He undertook an independent analysis by aggregating both the transactions under TNMM. The TPO selected 13 companies as comparable to the assessee and arrived at the arithmetic mean margin of 26.51%. On issuance of a show-cause notice, the assessee objected to the comparables selected by the TPO. As far as Accentia Technologies Ltd is concerned, the assessee's objection was that it was providing high end I.T services and therefore, was not comparable to the assessee. However, the TPO observed that the assessee has not considered the verticals and horizontals of ITES as well as the high end and low end distinction while selecting the comparables and therefore, the TPO also has not gone into the same distinctions. Further, he observed that the functions undertaken by the assessee are also similar to the Accentia Technologies Ltd. He observed that Accentia Technologies Ltd is earning income from medical transcription, billing & collection and coding, all of which activities also fall under the category of ITES. He observed that the assessee is in the business of providing ITES in the areas of technical data management, storage and retrieval primarily to its AEs and that this includes software services in CAD/GIS applications, drawing, MAP conversion and digitalization services, enterprise software services, engineering consultancy & services in the areas of project designing. Therefore, according to the TPO, Page 4 of 13 ITA Nos 238 and 257 of 2016.
both the assessee as well as the comparables are into similar type of services and hence the assessee's objection was rejected.
5. Before the DRP also, the assessee had objected to Accentia Technologies Ltd, being considered as a comparable. It was also submitted that Accentia Technologies Ltd was having a different model of execution of project along with high end software delivery and that from the fixed asset schedule it is seen that it has intangible brands/IPRs. It was also submitted that the Company's value of brand and IPR for the year ended as on 31.03.2011 is 36% of the total value of the assets and 47% of the total net block of assets, whereas the assessee does not own any brands and I.P. rights and delivers the customer's job on work order basis. The DRP however, held that the engineering functions and GIS functions performed by the assessee are also high end ITES services similar to KPO. Therefore, the assessee's objections were rejected and the assessee is in appeal before us.
6. The learned Counsel for the assessee, while reiterating the submissions made before the authorities below, has drawn our specific attention to the page Nos. 192 & 193 of the paper book which contains the assessee's objections on Accentia Technologies Ltd before the DRP. In support of his contention that the said company, Accentia Technologies Ltd, should be excluded as it is a KPO service provider, the learned Counsel for the assessee placed reliance upon the decision of the ITAT Bangalore Bench in the case of Swiss Re Shared Services (India) (P.) Ltd.v.
Page 5 of 13ITA Nos 238 and 257 of 2016.
Assistant Commissioner of Income-tax, Circle-6 (1) (2), Bangalore reported in (2016) 76 Taxmann.com 22.
7. The learned DR, on the other hand, supported the orders of the authorities below and submitted that the assessee is also into high end KPO services and therefore, the TPO has rightly taken Accentia Technologies Ltd as a comparable to the assessee.
8. Having regard to the rival contentions and the material on record, we find that both the TPO as well as the DRP have held the assessee also to be a KPO and have not disputed that the Accentia Technologies Ltd is a KPO. However, as regards the intangible assets such as brands/IPRs owned by Accentia Technologies as against the assessee, which does not own any brands/IPRs, both the TPO as well as DRP have been silent. As regards the assessee's argument of not owning any intangible assets is concerned, we find that the assessee (in its Annual Report) has reported that its AEs owns complete intellectual property rights relating to computer software including the copyright, patent etc., and the mark-up associated with the software and that the assessee does not own any significant non routine intellectual property thereto. Both the TPO & DRP are silent on this contention of the assessee. In our opinion, this fact would influence/have impact on the FAR analysis and consequently the margin of the respective companies and therefore, is an important factor to be considered while selecting comparables. In view of the same, we deem it fit and proper to remit the issue of the ownership of Brands/IPRs by Accentia Page 6 of 13 ITA Nos 238 and 257 of 2016.
Technologies Ltd as compared to none owned by the assessee and if it is found that the Accentia Technologies owns the intangibles as stated by the assessee and if the assessee does not own any intangible asset at all, then clearly the company cannot be taken as a comparable to the assessee. With this limited direction, we remit the issue to the file of the TPO.
9. As regards Ground No.5, though the assessee has sought inclusion of 3 companies as comparable, the learned Counsel for the assessee submitted that the assessee is now seeking inclusion of only 'Microgenetics Systems Ltd' as comparable to the assessee. According to the learned Counsel for the assessee, the TPO, himself has taken this company as a comparable in his TP study but the DRP has directed its exclusion on the ground that in the case of Microgenetics Systems Ltd which is engaged in the activity of Medical Transcription, the expenses to the extent of 23% have been incurred on outsourcing of medical transcription activity. Therefore, according to him, when the TPO himself has accepted the said company as a comparable and the assessee has not challenged its inclusion, the DRP ought not to have directed its exclusion.
10. The learned DR, however, relied on the order of the DRP and submitted that the P&L a/c of the Microgenetics Systems Ltd and Schedule-F thereof shows the expenditure incurred towards medical transcription activity which is nothing but for outsourcing of medical transcription activity and though it Page 7 of 13 ITA Nos 238 and 257 of 2016.
may not be exactly 23% of the expenses, it is evidently incurred on outsourcing of the medical transcription activity.
11. Having regard to the rival contentions and the material on record, and after going through the P&L A/c of the comparable Microgenetics Systems Ltd and particularly Schedule-F thereof placed in Paper Book filed by the assessee relating to production expenses, we find that during the relevant previous year the assessee has incurred Rs.22,03,823 towards medical transcription charges. Though, it is not 23% of the expenses incurred by the assessee as observed by the DRP, the payments were for outsourcing of the activity and hence is involved in a different functional model as compared to the assessee. In view of the same, we do not find any reason to interfere with the direction of the DRP. Thus, assessee's ground of appeal No.5 is rejected.
12. As regards Ground No.6, this issue relates to the international transaction of recovery of expenses to the tune of Rs.15,76,541. The assessee submitted that the recoveries are at cost on the basis of actual payment to 3rd party service providers, such as hotel and travel agencies and that the third party service provider invoices can be a CUP and hence the book values of the said transactions have been taken as representation of the ALP. The TPO however, held that the receipt of reimbursement has not been routed through books of account and since no independent party would render such services without any markup, and since recovery of expenses always forms part of operating cost in the case of independent comparable companies, these expenses incurred by the assessee and subsequently reimbursed by the Page 8 of 13 ITA Nos 238 and 257 of 2016.
AEs were added by the TPO to the operating revenues as well as operating costs for the purpose of aggregation of transactions and determining ALP under TNMM. He accordingly computed the Arms' Length Price @ 25.73% and arrived at the figure of Rs.19,82,175 and suggested the adjustment of Rs.4,05,644. When the objection was raised before the DRP, the DRP reduced the mark-up of 25% to 5%. Against the relief given by the DRP, the Revenue is in appeal before us, while the assessee is in appeal against the 5% mark-up. The DRP relied upon the decision of the ITAT in the case of Kirby Building Systems India Ltd in ITA No.1759/Hyd/2012 and ITA No.262/Hyd/2014 for the A.Ys 2008- 09 and 2009-10 for upholding the mark-up of 5%.
13. The learned Counsel for the assessee submitted that the facts in the case of Kirby Building Systems India Ltd are distinguishable and that no profit making is involved in the case of the assessee. The learned DR supported the orders of the AO.
14. Having regard to the rival contentions and the material on record, we find that the assessee's case is that the costs are reimbursed without any mark-up as the expenses are towards travel and visa processing and translation. It was submitted that there is no unreasonable credit facility extended to the AEs in incurring the expenses of travel and visa processing and therefore, it cannot be said to be unreasonable in nature. The assessee therefore, prayed for deletion of 5% mark-up while the Revenue wants it to be recomputed at 25.73% as done by the TPO. We find that the expenses reimbursed are travel and visa Page 9 of 13 ITA Nos 238 and 257 of 2016.
processing charges. In our opinion, there could not be any mark- up on such expenses and particularly in the absence of any material on record that unreasonable credit facility has been extended to the AEs of the assessee for such reimbursement of costs. Further, the assessee has also adopted the CUP method to hold the transactions to be at ALP. Except for aggregating both the transactions at TNMM, the TPO has not been able to bring out any material on record to show that the reimbursement of expenses are excessive and therefore, at a markup. Further, in the case of Kirby Building Systems India Ltd, the issue was of cost sharing exercise in implementing ERP systems in the group and ITAT held that it involves services by the said company, but in the case of the assessee, it is pure reimbursement of expenses incurred by the assessee and no service element is involved. Thus, DRP's reliance on the said decision is clearly misplaced. In view of the same, the assessee's ground of appeal No.6 is allowed and the AO/TPO is directed to treat the transaction to be at ALP and adjustment to be made at Rs. Nil.
15. In the result, assessee's appeal is partly allowed.
ITA No.257/Hyd/2016-Revenue's Appeal16. As regards Revenue's appeal, we find that the Revenue has raised the following grounds of appeal:
"1. That the Ld. DRP erred in directing to exclude Infosys BPO Ltd from the list of comparables selected by the TPO without appreciating that Rule 10B(2) does not permit such exclusion.Page 10 of 13
ITA Nos 238 and 257 of 2016.
2. That the Ld.DRP erred in directing to include ICRA online ltd in the list of comparables selected by the TPO on the ground that the TPO of Bangaluru has selected this company in his list of com parables.
3. That the Ld. DRP erred in directing to exclude Eclerx Services Ltd, TCS eservices Ltd, Infosys BPO Ltd and Cosmic Global Ltd from the list of com parables selected by the TPO.
4. That the Ld. DRP erred in directing to exclude provision for doubtful debts from the operating cost of assessee as well as the comparable companies.
5. That the Ld. DRP erred in directing to charge mark of 5% on reimbursement as compared to 25.73% applied by the TPO.
6. Any other ground that may be urged at the time of hearing".
17. From the above grounds, it is seen that the Revenue is aggrieved by the direction of the DRP to exclude Infosys BPO Ltd, Eclerx Services Ltd, TCS Eserve Ltd and Cosmic Global Ltd from the final list of comparables selected by the TPO. We find that the DRP has directed exclusion of these companies on the following grounds:
i) Infosys BPO Ltd: This company is not comparable to the assessee not only because its size but also because of its brand value, diversified activity and other functional dissimilarities;
ii) Eclerx Services Ltd: This Company has extreme margin during the relevant A.Y. Further, the DRP also observed that in the assessee's own case for the earlier A.Y, the Income Tax Appellate Tribunal has Page 11 of 13 ITA Nos 238 and 257 of 2016.
directed to exclude the said company from
comparables.
iii) TCS E-serve Ltd: This Company provides technology
services involving software testing, verification and validation of software at the time of implementation and data centre management which makes the company functionally not comparable.
iv) Cosmic Global: This Company has a different working model as the expenses to the extent of 41% are on sub-contracting and has a significant effect on the margin. Further, the Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt Ltd has taken note of the above activity for its exclusion from comparables.
18. Though the learned DR supported the order of the TPO for inclusion of above companies as comparables, he has not been able to place any material on record to rebut the findings of the DRP. In view of the same, we see no reason to interfere with the order of the DRP on a direction to exclude these companies. Thus, grounds of appeal Nos. 1 & 3 are rejected.
19. As regards Ground No.2, the Revenue is seeking inclusion of ICRA Online Ltd in the list of comparables and the learned Counsel for the assessee submitted that the assessee has no objection to this company being considered as a comparable. Therefore, this ground is treated as allowed.
20. As regards Ground No.4 against the direction of the DRP to exclude provision for bad and doubtful debts from the operating cost of the assessee as well as comparable companies, Page 12 of 13 ITA Nos 238 and 257 of 2016.
we do not see any reason to interfere with the order of the DRP as no prejudice is caused to the Revenue by such a direction. Therefore, the ground of appeal No.4 is rejected.
21. Ground of appeal No.5 is also rejected in view of our findings on mark-up of the reimbursement of the expenses in the assessee's appeal.
22. In the result, the appeals of both the assessee as well as the Revenue are treated as partly allowed.
Order pronounced in the Open Court on 7th July, 2017.
Sd/- Sd/-
(S.Rifaur Rahman) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 7th July, 2017.
Vinodan/sps
Copy to:
1 M/s. Avineon India P Ltd, 'Cyber Gateway' Block 1A, 1st Floor, Hitech City, Madhapur, Hyderabad 500081 2 Dy. Commissioner of Income Tax, Circle 1(1) Hyderabad 3 DRP-1 G-16 Ground Floor, Central Revenue Buildings, Queens Road, Bangalore 560001 4 Pr. CIT - 1 Hyderabad 5 The DR, ITAT Hyderabad 6 Guard File By Order Page 13 of 13