Income Tax Appellate Tribunal - Mumbai
Maersk Global Service Centers (India) ... vs Assessee on 29 July, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
"K" BENCH, MUMBAI
BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND
SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER
ITA no.1082/Mum./2015
(Assessment Year : 2010-11)
Maersk Global Service Centers
(India) Private Limited
4th & 5th Floor, Prudential Building
Central Avenue Road ................ Appellant
Hiranandani Business Park
Powai, Mumbai 400 076
PAN - AADCM7786M
v/s
Income Tax Officer
Ward-7(2)(1), Aayakar Bhawan ................ Respondent
101, M.K. Road, Mumbai 400 020
Assessee by : Shri Porus Kaka, Sr. Counsel
Revenue by : Shri N.K. Chand
Date of Hearing - 11.07.2016 Date of Order - 29.07.2016
ORDER
PER SAKTIJIT DEY, J.M.
Aforesaid appeal at the instance of the assessee is directed against the assessment order dated 15th December 2014, passed under section 143(3) r/w 144C of the Income Tax Act, 1961 (for short "the Act") in pursuance of the direction of the Dispute Resolution Panel (DRP) for the assessment year 2010-11.
2
Maersk Global Service Centers (India) Private Limited
2. Brief facts are, the assessee an Indian company is a wholly owned subsidiary of Maersk GSC Holdings A/S, which in turn is a down-stream subsidiary of A.P. Moller Maersk (APMM). The assessee, as noted by the Transfer Pricing Officer, acts as a service provider carrying out limited functions based on instructions received from its Associate Enterprise (A.E). It does not undertake any marketing activity and does not bear entrepreneurial risk. Service provided by the assessee are in the nature of Information Technology Enabled Services (ITES) or commonly known as business process out sourcing (BPO) service relating to transaction processing, data entry, re- conciliation of statements and other similar support services. As per the terms of agreement, for the service provided by the assessee to its A.E., it is remunerated on a cost plus mark-up basis. For the assessment year under consideration, assessee filed its return of income on 12th October 2010, declaring total income of ` 2,20,660 under the normal provisions and book profit of ` 14,67,13,912 under section 115JB. During the assessment proceedings, the Assessing Officer noticed that the assessee has entered into international transactions with its A.E. and, therefore, made a reference to the Transfer Pricing Officer for determining the arm's length price. The Transfer Pricing Officer after verifying the audit report in form no.3CEB and other documents submitted before him found that during the 3 Maersk Global Service Centers (India) Private Limited relevant previous year assessee has provided ITES to its A.E. for ` 1,51,39,34,000. After perusing the transfer pricing analysis made by the assessee, he noted that the assessee has selected comparables on the basis of multiple year data instead of single year (current year's data). Therefore, pointing out various defects and deficiencies, the Transfer Pricing Officer rejected the transfer pricing study made by the assessee and proceeded to determine the arm's length price independently, though, he accepted TNMM as most appropriate method with Operating Profit / Operating Cost (OP/OC) as the Profit Level Indicator (PLI). However, by applying certain filters, he selected nine companies as comparable with arithmetic mean of 31.73%. By applying the aforesaid arithmetic mean to the operating cost, the arm's length price was determined at ` 180,28,54,145 as against price charged by assessee of ` 151,78,06,000. The resultant shortfall of ` 28,50,48,145 was treated as transfer pricing adjustment. On the basis of transfer pricing adjustment made by the Transfer Pricing Officer, the Assessing Officer framed the draft assessment order which the assessee objected before the DRP on various grounds.
3. The DRP after considering the objections of the assessee, accepted its claim in relation to selection / rejection of certain comparables as well as working capital adjustment. Whereas, other objections raised by the assessee were rejected. In pursuance to the 4 Maersk Global Service Centers (India) Private Limited order passed by the DRP, the Assessing Officer passed the impugned assessment order. Though, the assessee has raised multiple grounds in the appeal memo, however, at the outset learned Sr. Counsel, Shri Porus Kaka, appearing for the assessee wanted to confine his argument to grounds no.2, 3, 5 and 6. As far as grounds no.2 and 3, are concerned, they are as under:-
"2. On the facts and in the circumstances of the case and in law, order passed by the Assessing Officer under section 143(3) of the Act is bad in law as it is not passed in conformity with directions issued by Hon'ble DRP and thereby violating section 144C(10) and section 144C(13) of the Act.
3. On the facts and in the circumstances of the case and in law, the Assessing Officer grossly erred in disregarding the following directions of the DRP.
a) To reject certain companies alleged as comparable by the Transfer Pricing Officer (eClerx Services Limited, Coral Hubs Limited, ICRA Online Limited and BNR Udyog Limited;
b) To accept certain comparable companies incorrectly rejected by the Transfer Pricing Officer (spanco Limited and Caliber Point Business Solutions Limited).
c) To allow the working capital adjustment.
4. Learned Sr. Counsel submitted, the DRP after considering the objections of the assessee on the issue of comparability of certain companies had directed exclusion of some companies selected by the Transfer Pricing Officer and also directed him to include some companies proposed by the assessee. He further submitted, the DRP had also directed for allowance of working capital adjustment. However, the Assessing Officer in the final assessment order has 5 Maersk Global Service Centers (India) Private Limited completely ignored these directions of the DRP which is contrary to the statutory provisions. In this context, learned Authorised Representative drew our attention to the specific findings of the DRP.
5. Learned Departmental Representative on the other hand submitted, this is an inadvertent mistake committed by the Assessing Officer which could have been rectified if the assessee would have moved an application under section 154 of the Act.
6. We have considered the submissions of the parties and perused the material available on record. On a perusal of the order dated 27 th October 2014 of the DRP, we have noticed that upholding the objection of the assessee, the DRP had directed for exclusion of some of the companies selected by the Transfer Pricing Officer which are as under:-
i) E-clerx Services Ltd;
ii) Coral Hubs Ltd.
(earlier known as Vishal Information Technologies Ltd.)
iii) ICRA Online Ltd.
iv) BNR Udyog Ltd.
7. Further, the DRP has also directed the Transfer Pricing Officer to include two of the companies selected by the assessee viz. Spanco Ltd. and Caliber Point Business Solutions Ltd., which were earlier rejected by the Transfer Pricing Officer. Further in Para-37, the DRP had 6 Maersk Global Service Centers (India) Private Limited directed the Transfer Pricing Officer to allow working capital adjustment. As it appears, the Assessing Officer passed the impugned assessment order without implementing the aforesaid directions of the DRP. In this context, we may observe, sub-section (10) of section 144C mandates that every direction issued by the DRP shall be binding on the Assessing Officer. Further, sub-section (13) of section 144C provides that the Assessing Officer shall complete the assessment in conformity with the directions of the DRP. That being the clear statutory mandate, the Assessing Officer has failed to perform his statutory duty in not implementing the directions of the DRP. We, therefore, direct the Assessing Officer / Transfer Pricing Officer to compute the arm's length price after implementing the directions of the DRP as noted above. Grounds no.2 and 3 are allowed.
8. In ground no.5, the assessee has objected to the selection of the two companies as comparables, namely, Accentia Technologies Ltd. and Infosys BPO Ltd. Herein after we will deal with each of the companies objected by the assessee.
ACCENTIA TECHNOLOGIES LTD.
9. Objecting to the selection of this company, learned Sr. Counsel submitted, the assessee is a back office service provider to its A.E., whereas Accentia Technologies Ltd. is a parent company. It takes all 7 Maersk Global Service Centers (India) Private Limited the risks. He submitted, the company is providing high end service in the nature of KPO service which is not comparable to routine ITES service. Further, segmental information is also not available. He submitted, during the relevant previous year, there is also a merger of Asscent Infoserve which is in healthcare service. Learned Sr. Counsel submitted, the business of this company is highly diversified including software development and related service which require specialized skill. It has also goodwill, brand name and IPRs. He submitted, the margin of medical coding is on higher side when compared to medical transcription. Medical coding constitutes 15% of operating revenue. He submitted, the information contained in the website of the company reveals that most of the key persons are engineer and highly qualified people whereas assessee's work force consists of mostly graduates with no special skills / training. Learned Authorised Representative submitted, for the reason that this company has diversified activity and is into high end KPO services, it was rejected as a comparable in assessee's own case for assessment year 2009-10. He submitted, relying upon the aforesaid decision of the Tribunal, the DRP also rejected this company as a comparable to assessee in assessment year 2011-12 and the Transfer Pricing Officer himself relying upon the decision of the Tribunal and direction of DRP rejected Accentia Technologies Ltd. as comparable in assessment year 2012-13. He also 8 Maersk Global Service Centers (India) Private Limited submitted, in various Benches of the Tribunal also holding that Accentia Technologies Ltd., being a KPO service provider, has rejected it as comparable in case of routine BPO service provider.
10. Learned Departmental Representative justifying the selection of this company submitted, captive service provider filter has not been applied either by the assessee or Transfer Pricing Officer. Referring to the Full Bench decision of the Tribunal in Mearsk Global Service Centre India Pvt. Ltd., learned Departmental Representative submitted, the Tribunal itself has held that the BPO segment again cannot be further divided into high end and low end service. Learned Departmental Representative submitted, as all the functions of this company is similar to assessee, it is to be treated as comparable. Referring to the financials of the company, he submitted, all income has been reported under single segment and the software development, if any, is for own use of the company.
11. We have considered the submissions of the parties and perused the material available on record. Though, the Transfer Pricing Officer has categorized the assessee as a KPO service provider, however, as could be seen from the extracted portion from the order of the Tribunal, Special Bench decision in assessee's own case in Para-3.13 of the DRP's direction, the Special Bench has specifically observed that 9 Maersk Global Service Centers (India) Private Limited work force employed by the assessee comprised of 96% of graduates and post graduates and only 4% workforce was professional such as Chartered Accountant, B. Tech., etc., which goes to show that function performed by the assessee to its A.E. were mainly in the nature of providing back office support service of low end nature. Thus, the aforesaid observation by the Special Bench leaves no room for doubt that the nature of service provided by the assessee to its A.E. is low end BPO service and cannot be considered as KPO service. Whereas, on a perusal of the information contained in the annual report of Accentia Technologies Ltd., a copy of which has been placed in the paper book, we have noticed that the company is into diversified activities like development of software, legal process out sourcing, health care management, etc. A reference to the Profit & Loss account of the company for the relevant financial year indicates that there is no segment-wise data maintained by this company. Further, Schedule-I forming part of the Balance Sheet indicates that during the relevant previous year, there was amalgamation of Asscent Infoserve. with the company. The Tribunal, Mumbai Bench while considering the comparability of Accentia Technologies Ltd. to the assessee in assessment year 2009-10 in ITA no.2594/Mum./2014 and Anr., dated 16th January 2015, has held as under:-
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Maersk Global Service Centers (India) Private Limited
"12. Now coming to the Accentia Technologies Ltd., as pointed out by the Ld. Counsel, it is seen form the annual report of the said company, it is a parent company providing high end management solutions in health care. It is mainly medical transcription company doing medical coding, medical billing and receivables management services. The BPO services has not been started in this year that is in the F.Y. 2008-09. The TPO has included this company mainly on the ground that it is a KPO and is providing high end ITES related services in the field of health care. Once it is evident from the annual report for the A.Y. 2008-09 that it has not started its data processing outsourcing or KPO services, it cannot be held to be a good comparable for bench marking the assessee's margin for the F.Y. 2008-09, that is, for A.Y. 2009-10. Moreover this company has substantial goodwill being a parent company and therefore, cannot be held to be comparable with the company which is mainly a captive service provider. Therefore, we are of the opinion that this company cannot be considered to be comparable in the present year for bench marking the margin of the assessee's company. Accordingly, the same is rejected.
13. Now coming to the two comparables included by the assessee. So far as R. System International Ltd. (Segmental) is concerned, it has been pointed out by the learned senior counsel that this company was accepted as a comparable by the TPO in assessee's own case in the A.Y. 2007-08 and also by the DRP in A.Y. 2008-09. The TPO has rejected this comparable in this year, simply on the ground that it is not purely a KPO service provider and having calendar year ending. On the contrary the BPO segment of R. System is functionally comparable to the assessee and simply because it is following calendar year accounting it cannot be rejected. In A.Y. 2008-09, the DRP in the light of functions performed by the assessee as well as BPO segment of R. System International, has accepted the same to be comparable company. This fact has also been noted by the Special Bench in para 12 of the order."
12. We have also noted, considering the aforesaid order of the Tribunal, the DRP in assessee's own case in assessment year 2011-12 and the Transfer Pricing Officer himself in assessment year 2012-13 have rejected Accentia Technologies Ltd. as a comparable. The Tribunal, Delhi Bench in Equant Solutions India Pvt. Ltd. v/s DCIT, in 11 Maersk Global Service Centers (India) Private Limited ITA no.1202/Del./2015 dated 21st January 2016 for the very same assessment year 2010-11, while examining the functionality of this company found that it provides KPO service, LPO and DPO besides operating software service. The Tribunal also found that this company was having substantial amount of Brands, IPRs and goodwill, hence, it cannot be compared to a low end ITES service provider. The Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. v/s CIT, ITA no.102/2015 dated 10th August 2015, in fact, disagreed with the view expressed by the Tribunal, Mumbai Special Bench in Mearsk Global Centers India Pvt. Ltd., that ITES services cannot further be bifurcated to the BPO and KPO service for the purpose of comparative analysis. The Hon'ble High Court held that even though KPO may be coming under the broad category of ITES but the nature of service provided by KPO is completely different from the nature of service provided by a BPO service provider. The Hon'ble High Court held while the KPO is on the higher end of the spectrum involving employment of advanced skills and knowledge for providing service, BPO does not necessarily involve advanced skill and knowledge. Therefore, BPO service provider cannot be functionally comparable to a KPO. Reverting back to the facts of the present case, there is no discernible difference in the functional profile of the assessee and Accentia Technologies Ltd. in the impugned assessment year compared to the earlier assessment years. 12
Maersk Global Service Centers (India) Private Limited Therefore, applying the ratio laid down by the Hon'ble Delhi High Court in the above referred decision as well as different benches of the Tribunal including the Tribunal, Mumbai Bench, in assessee's own case for assessment year 2009-10 and also considering the fact that the DRP as well as Transfer Pricing Officer following the aforesaid decision of the Tribunal in assessee's own case have excluded Accentia Technologies Ltd. in assessment year 2011-12 and 2012-13, we hold that this company cannot be a comparable to the assessee. Accordingly, we direct the Assessing Officer / Transfer Pricing Officer to exclude it from the stage of comparables.
Infosys BPO Limited
13. Objecting to this company, the learned Authorised Representative submitted, this company provides business process management service to organizations that out source their business process unlike the assessee which broadly provides back office support service. He submitted, as per the information provided in the website of the company it applies business excellence frameworks to significantly reduce costs, enhance effectiveness and optimize business process of its clients. Learned Authorised Representative submitted, this company is a giant in the field owning significant goodwill and has substantial brand value of the Infosys Group. He submitted, the assets 13 Maersk Global Service Centers (India) Private Limited and risks of this company is totally different from the assessee. Specifically referring to the director's report forming part of the annual report of the company, a copy of which is submitted in the paper book, learned Authorised Representative submitted during the relevant previous year this company had made acquisition by acquiring membership interest of an overseas company viz. Mccamish Systems LLC which provides premier business process outsourcing service to the insurance, retirement and financial service industry and has a large client base. Therefore, this company having operated in different geographic and market conditions cannot be a comparable to the assessee. Further, referring to Schedule-12 to the Profit & Loss account of the company for the year ended 31st March 2010, learned Sr. Counsel submitted that the company has incurred selling and marketing expenses which signifies that it has taken marketing risk unlike the assessee. Further, referring to Schedule-13 of Profit & Loss account, learned Sr. Counsel submitted, the provisions made for bad and doubtful debt signifies the risk taken by the assessee. Learned Authorised Representative submitted, because of its high turnover, brand value, etc., the Hon'ble Jurisdictional High Court in Pentair Water India Pvt. Ltd., Tax Appeal no.18 of 2015 dated 16th September 2015, has held that it cannot be comparable with a low turnover company. The learned Sr. Counsel submitted, the Tribunal Delhi Bench 14 Maersk Global Service Centers (India) Private Limited in Equant Solutions India Pvt. Ltd. (supra) for the very same assessment year has excluded Infosys BPO Ltd. as a comparable. Finally, learned Sr. Counsel submitted, Infosys BPO Ltd. was never considered as a comparable in the earlier year nor in the subsequent assessment year. Therefore, applying the rule of consistency this company should be excluded from the list of comparables.
14. Learned Departmental Representative submitted, Transfer Pricing Officer while selecting comparables has not applied any high turnover filter. He submitted, if companies having turnover of more than ten times are to be excluded, as pleaded by the assessee, then applying the same logic companies having turnover ten times lesser than the assessee should also be excluded. Learned Departmental Representative submitted, high turnover has no impact on profitability. Therefore, only because a company has high turnover for that reason alone, it cannot be rejected if functions of the company are similar. As far as brand value is concerned, learned Departmental Representative submitted, there is no discussion on the issue by the DRP. Learned Departmental Representative submitted, the company being functionally similar to assessee should be treated as comparable.
15. We have considered the submissions of the parties and perused the material available on record in the light of relevant case laws cited 15 Maersk Global Service Centers (India) Private Limited by the assessee. Undisputedly, this company belongs to Infosys Group thereby carries the goodwill and brand value of the Group. Moreover, the turnover of Infosys BPO Ltd. is equally high. However, apart from the fact that the turnover of this company is high, it is even otherwise functionally different from the assessee because of advantage of goodwill and brand value it gained being part of Infosys Group. Further, incurring of marketing and selling expenses as well as provisions for bad and doubtful debt indicates that this company has taken marketing risk, therefore, functions performed assets employed and risk undertaken by this company being different from the assessee it cannot be treated as comparable. For the aforesaid reasons, the company has not been treated as comparable to a captive BPO service provider in the decisions referred to earlier. In view of the aforesaid, we exclude this company as a comparable.
16. In ground no.6, though the assessee has raised the issue of rejection of a number of comparables by the Transfer Pricing Officer but at the time of hearing learned Sr. Counsel confined his argument in respect of only one comparable viz. R. Systems International Ltd.
17. Challenging the decision of the Transfer Pricing Officer / DRP in rejecting this company and specifically referring to the observations of DRP, learned Authorised Representative submitted that the only 16 Maersk Global Service Centers (India) Private Limited reason for which the DRP excluded this company is on account of different accounting period. Learned Authorised Representative submitted, while assessee's accounting period is financial year, R. Systems International Ltd. follows calendar year, as its accounting period. However, data relating to 9 months is available which can be considered for comparability analysis. Learned Authorised Representative submitted, this company has been accepted as a comparable in assessee's own case in assessment year 2007-08 and 2008-09. In fact, the Tribunal while considering the issue of rejection of R. Systems International Ltd. as a comparable on identical reasoning took note of the fact that the company was not only accepted by the Transfer Pricing Officer / DRP in assessment year 2007-08 and 2008-09 but also referred to the observations of the Tribunal, Mumbai Special Bench in assessee's own case for assessment year 2008-09 wherein the Special Bench took note of the observations of the DRP regarding the nature of service provided by the assessee as low end BPO hence, accepted R. Systems International Ltd. as a comparable. Learned Authorised Representative submitted, the DRP again in assessment year 2011-12 has accepted R. Systems International Ltd. as comparable. In this context, he referred to the order of the DRP for assessment year 2011-12 a copy of which is placed at Page-143 of case law compilation. Learned Authorised 17 Maersk Global Service Centers (India) Private Limited Representative also relied upon the decision of the Hon'ble Delhi High Court in CIT v/s Mckinsey Knowledge Centre India Pvt. Ltd., ITA no. 217/2014 dated 24th March 2015.
18. Learned Departmental Representative on the other hand supporting the reasoning of the Transfer Pricing Officer / DRP justified rejection of this company as a comparable. Learned Departmental Representative relying upon a decision of the Tribunal, Pune Bench in Honeywell Automation India Pvt. Ltd. v/s DCIT, ITA no.4/Pn./2008 dated 10th February 2009, submitted that since the company and the assessee have different financial year / accounting period cannot be considered as comparable.
19. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. We find from the record that the Transfer Pricing Officer rejected this company as a comparable on the ground that the assessee is a KPO service provider whereas this company is into low end BPO service. However, the aforesaid objection of the Transfer Pricing Officer was not accepted by the DRP in assessee's own case for assessment year 2008-09 and, in fact, DRP held R. Systems International Ltd. as comparable to the assessee. Taking note of the aforesaid observations of the DRP, the Transfer Pricing Officer himself 18 Maersk Global Service Centers (India) Private Limited in assessment year 2007-08, accepted R. Systems International Ltd. as a comparable. It further appears from record that in assessment year 2009-10, the Assessing Officer again rejected R. Systems International Ltd. as comparable on the ground that it is not comparable to KPO service provider like assessee and secondly it has a different accounting period. However, the Tribunal while deciding assessee's appeal for assessment year 2009-10, ITA no.2594/Mum./ 2014 dated 16th January 2015, accepted R. Systems International Ltd. as comparable to the assessee observing as under:-
"13. Now coming to the two comparables included by the assessee. So far as R. System International Ltd. (Segmental) is concerned, it has been pointed out by the learned senior counsel that this company was accepted as a comparable by the TPO in assessee's own case in the A.Y. 2007-08 and also by the DRP in A.Y. 2008-09. The TPO has rejected this comparable in this year, simply on the ground that it is not purely a KPO service provider and having calendar year ending. On the contrary the BPO segment of R. System is functionally comparable to the assessee and simply because it is following calendar year accounting it cannot be rejected. In A.Y. 2008-09, the DRP in the light of functions performed by the assessee as well as BPO segment of R. System International, has accepted the same to be comparable company. This fact has also been noted by the Special Bench in para 12 of the order.
14. Thus, consistent with the fact that in A.Y. 2007-08, TPO himself has accepted R. System as a good comparable and DRP in A.Y. 2008-09 has also accepted the same to be comparable, which has been upheld by the Special Bench, therefore, we do not find any reasons to deviate from such a precedence of the earlier years, so as to come to a different conclusion without any material difference on record for this year. Thus, we direct the TPO/AO to include R. System International Ltd. in the list of final comparables for bench marking the assessee's margin."19
Maersk Global Service Centers (India) Private Limited
20. Following the aforesaid decision of the Tribunal, the DRP also in assessee's own case for assessment year 2011-12 has accepted R. Systems International Ltd. as a comparable. As could be seen from the impugned order of the DRP, the only reason on which the company was rejected is on account of different financial year. As already stated while assessee is following financial year as accounting period this company follows calendar year as it's accounting year. However, there is no dispute that contemporaneous data relating to nine months i.e., April to December is available in public domain. Therefore, the data available for nine months in public domain can be extrapolated to make a reasonable comparability analysis. This view was expressed by the Hon'ble Delhi High Court in Mckinscy Knowledge Centre India Pvt. Ltd. (supra) while approving the decision of the Tribunal. Therefore, this company having been found to be functionally similar to the assessee thereby accepted as a comparable by the Tribunal as well as the Departmental Authorities in assessee's own case in earlier and subsequently assessment years, we do not find any reason to exclude the same as a comparable. Accordingly, accepting assessee's plea, we direct the Assessing Officer / Transfer Pricing Officer to consider R. Systems International Ltd. as a comparable. Thus, ground no.6, is partly allowed.
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Maersk Global Service Centers (India) Private Limited
21. Insofar as the other grounds are concerned, the learned Authorised Representative did not wish to press them. Hence, these grounds are dismissed as "not pressed".
22. In the result, assessee's appeal is partly allowed.
Order pronounced in the open Court on 29.07.2016 Sd/- Sd/-
RAMIT KOCHAR SAKTIJIT DEY
ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 29.07.2016
Copy of the order forwarded to:
(1) The Assessee;
(2) The Revenue;
(3) The CIT(A);
(4) The CIT, Mumbai City concerned;
(5) The DR, ITAT, Mumbai;
(6) Guard file.
True Copy
By Order
Pradeep J. Chowdhury
Sr. Private Secretary
(Dy./Asstt. Registrar)
ITAT, Mumbai