Income Tax Appellate Tribunal - Delhi
Keystroke Pro India Pvt. Ltd., New Delhi vs Ito, New Delhi on 10 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES: 'I-1', NEW DELHI
BEFORE SHRI N.K.SAINI, ACCOUNTANT MEMBER
AND SMT. BEENA A PILLAI, JUDICIAL MEMBER
ITA No. 537/Del/2015
A.Y. 2010-11
Keystroke Pro India Pvt.Ltd. ITO, Ward 14(3)
F-3/4, 1st & 2nd Floors vs. Room no.305,
Okhla Industrial Area C.R.bldg.
Phase I New Delhi
New Delhi
PAN: AAFCS0749G
(Appellant) (Respondent)
Appellant by Sh. Sanjeev Sapra, FCA &
Sh. Amit Mathur, FCA
Respondent by Sh. Kumar Pranav, Sr.DR
Date of Hearing 28.03.2018
Date of Pronouncement 10.04.2018
ORDER
PER BEENA A PILLAI, JUDICIAL MEMBER
Present appeal has been filed by assessee against final assessment order dated 29/12/14 passed by Ld. ITO, Ward 14 (3), New Delhi for assessment year 2010-11 under section 143 (3) read with s. 144C(5) of the Income Tax Act, 1961 (the Act) on the following grounds of appeal:
ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi
1. That the Ld. Assessing Officer (AO), Ld. Transfer Pricing Officer (TPO) and Hon'ble Dispute Resolution Panel (DRP) have erred on facts and under the law in:
(i) passing the impugned order which is bad in law;
(ii) passing the order without demonstrating that the Appellant Co. had motive of tax evasion;
(iii)rejecting two out of the three comparables selected by the Appellant and rejecting the transfer pricing analysis of the Appellant Co;
(iv) selecting inappropriate comparables from the list of rejected companies as given by the Appellant Co. in its transfer pricing study;
(v) not considering that for the purpose of determining arm's length price for international transactions, Cos. as selected by TPO performing high-end functions were not comparable with the Appellant Co. providing low-end transcription and data processing services;
(vi) not considering the facts/submissions/objections made before them that except for Cosmic Global Ltd., rest of the comparables selected by TPO ought to have been rejected on various grounds including functional dissimilarity, significantly high/large turnover, significantly high supernormal profits, non availability of segmental information etc;
(vii) not making proper adjustment for transactional level differences between the Appellant and the comparable companies;
(viii) inappropriately computing the operating margins of comparables of the Appellant and denying the mistakes/errors apparent from the record as duly pointed out while working out the operating margins of comparables;
(ix) not giving effect to the working capital adjustments to the operating margin of the Appellant Co. as duly pointed out including in rectification application u/s 154 of I. T. Act.
(x) not allowing economic adjustments for differences on account of risks assumed by the Appellant Co. vis-a-vis the comparable Cos.2
ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi
(xi) treating foreign exchange gain or loss as non-operating in nature;
3.That the addition on account of upward transfer pricing adjustment of Rs.76,57,655/- as made by the authorities below are arbitrary, unjust, illegal and at any rate, without prejudice, very excessive.
3.That the AO has erred on fact and under the law in disallowing net loss of Rs 4,44,536/- on account of foreign exchange by adjusting the same against the interest income of Rs.1,43,641/- shown under the head 'income from other sources'.
4. That the Appellant Co. reserves its right to add, amend/modify the grounds of appeal.
2. Brief facts of the case are as under:
Asessee filed its return of income declaring 'nil' income on 29/09/10 and claimed deduction under section 10 A of the Act. Book profit declared by assessee was of Rs.47,38,771/-under section 115 JB of the Act. The return was processed under section 143(1) and upon selection for scrutiny, statutory notices were issued to assessee in response to which Representatives of the assessee attended the assessment proceedings and filed details as called for.
2.1. Ld. A.O. observed that assessee is engaged in the business of providing various types of data as well as Information Technology Enabled Services (ITES) to its Associate being Keystroke Pro Ltd.
U.K. It was observed that during the year under consideration assessee undertook international transaction to the tune of Rs.5,23,06,598/-with its Associated Enterprise (AE). Ld. AO accordingly referred the matter to Ld. Transfer Pricing Officer 3 ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi (Ld.TPO) for determining the arm's length price of the international transaction entered into by assessee with its AE. 2.2. Ld.TPO accordingly on receipt of information, called for various details from assessee. It was observed that assessee was a subsidiary Company of Keystroke Pro Ltd. U.K., having necessary assets and normal risk undertaken to perform its function as IT enabled service provider. The international transaction undertaken by assessee was as under:
S.No International transaction Amount (in Rs.)
1. Provision of IT enabled services 5, 23, 06, 598 2.3. It was submitted by Ld.Counsel that this was the first year in which reference was made to Ld.TPO and there has been no order of either TPO or DRP in any of the earlier assessment years. 2.4. The only issue that is disputed before us raised by assessee is in respect of selection of comparables by Ld. TPO as well as exclusion of certain comparables that have been proposed by assessee.
2.5. Before discussing comparables objected for its inclusion by assessee as well as those comparables which have been submitted by assessee to be included, it is sine qua non to deal with FAR analysis of assessee before us.
3. FAR Analysis of Assessee The Transfer Pricing report of assessee for the year under consideration has been placed at page 24-49 of paper book volume I. It is observed that at page 51- 72 are copies of agreement entered 4 ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi into by assessee for its Delhi unit and Vadodara unit with its associated enterprise. The services rendered by assessee under both these agreements to the associated enterprise are as under:
(i ) Details of services to be provided by KSPIPL to KSPL KSPL will provide technical expertise, assistance, advice and where necessary software to KSPIPL to carry on its operations in India in such a manner as to be able to provide KSPL and its associate companies with necessary facilities for the following services as stated below:
· Data Processing, data base maintenance · Document analysis · Transcription services · Back office operations · Legal data base etc. · Book keeping and accountancy services · Any other ITES as may be requested.
Apart from the foregoing assistance to be rendered to KSPIPL, KSPL shall from time to time also provide KSPIPL with: · Source documentation necessary to undertake required work. · Technical and editorial training and assistance as required.
(ii) Functions:
Definite role played by associated enterprise and assessee in the international transaction are as under:
3. FUNCTIONS UNDERTAKEN/ PERFORMED BY EACH ENTERPRISE Details of functions undertaken/performed by KSPL:
• During F.Y. 2009 - 10, KSPL provided transcription and data processing services to its clients based out of UK and US. • KSPL functions comprised mainly of identification of potential clients, conducting sales & marketing activities, promoting & procuring business, arranging for funding as required for business, negotiating terms with clients, collecting payments from clients, project management, managing client relationships, preparing design 5 ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi work flow systems & reporting in response to specific client needs, confirming to quality standards as agreed with clients and taking instructions & feedback from clients.
• In order to provide services to clients, KSPL has taken certain services from KSPIPL and for such purposes, it provides technical expertise, assistance, advice to KSPIPL to carry on its operations in India in such a manner so as to be able to provide KSPL with necessary services as sought.
• Apart from the foregoing assistance rendered to KSPIPL, KSPL also provides KSPIPL with:
- Source documentation necessary to undertake required work like providing digital voice files to enable KSPIPL to convert it into written documents.
- Technical and editorial training and assistance as required. Details of functions undertaken/performed by KSPIPL: • During F.Y. 2009 - 10, KSPIPL provided the following services to KSPL only:
- Transcription Services (including legal, medical, medico legal, surveyours etc.) Data Processing Services • For providing such services, KSPIPL relies upon the instructions, authorizations, approvals or other information provided to it by or on behalf of KSPL.
• The staff as engaged by KSPIPL is trained with the help and guidance of KSPL. Such staff members are primarily typists/data entry operators, who are assigned the task of converting digital voice files as received into written documents during the course of providing transcription and data entry services, which requires basic skills and it is therefore a low margin business. It may be clarified here that translation work is not carried out by KSPIPL, which requires higher skill levels and may command higher margins.6
ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi
(iii) Assets:
It is observed that assets owned by assessee are only such assets to enable it to render services to its AE like computer equipments, furniture, fixtures and fittings and office equipments. All intellectual property created by assessee or its employees in the process of rendering services to associated enterprise, continues to be owned by AE and not by assessee.
(iv) Risks:
It has been submitted by assesse in the FAR analysis that assessee provides services only and does not enter into direct contracts with any 3rd parties. It is therefore not exposed to any direct market/business risk. And hence market/businesses risk/losses are entirely borne by AE.
It has been submitted that assessee provides services as per service contract with AE whereby all direct and indirect costs and expenses incurred by assessee are charged to AE on actual cost by applying cost plus margin basis. Hence assessee does not bear any credit and collection risk since payments to assessee is not contingent upon payment to be received by AE from its customers. Assessee being a captive unit of KSPL it gets remunerated even for the cost of idle/unutilised capacity. Hence assessee does not bear any capacity utilisation risk, but by its AE since it guarantees a certain turnaround time for providing transcription services to its client.7
ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi Assessee does not enter into any contract with end customer which are contracted directly and therefore AE is solely responsible for any liability arising out of customer contracts. HR management risk arises on account of high staff turnover. The staff engaged by assessee needs to be extensively trained with the help and guidance of AE. In order to retain trained staff, additional costs are required to be borne in the form of higher salaries etc. which are passed on by assessee to AE by way of charging them on actual cost plus margin basis. Hence all HR management risks are entirely borne by AE only.
4. Assessee raises invoice on AE in GBP and receive payment in GBP, which is then converted to INR. Hence assessee assumes such foreign exchange fluctuation risk when GBP is converted into INR but such risk is mitigated/passed onto AE because fees discharged by assessee to its AE on the basis of profit margin (which varies from 5% to 15%) on all actual direct and indirect cost incurred by assessee (including loss incurred due to changes/fluctuation in foreign exchange rates). Hence foreign exchange fluctuation risk is entirely borne by AE.
5. Based on the above functions, assessee used TNMM as the most appropriate method and OP/TC as PLI. Assessee then arrived at a set of 3 companies with an average margin of 6% viz-a-viz assessee's margin worked out at 9.84%. Based on the analysis, assessee submitted that the international transactions were at arm's length.
8ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi
6. Ld. TPO rejected 2 companies selected by assessee on following reasoning and agreed for Cosmic Global Ltd. to be a suitable comparable:
Sl. Name of the comparable Remarks
No.
1. Cigniti Technologies Ltd. This company is into software
development, and fails export
sales filter. Hence rejected.
2. Cosmic Global Limited This is a suitable comparable.
3. Infotech BPO Private Ltd. This company fails export
filter (0.0%).
Hence not a suitable
comparable.
Ld.TPO thereafter conducted search on arrived at comparables
having average margin of 24.63% as under:
Sl. Company Name OP/OC
No.
1. E4e Healthcare Pvt.Ltd. 31.03%
2. Jindall Intellicom 13.62%
3. ICRA TechnoAnalytics Ltd. (Seg.) 28.77%
4. Cosmic Global Ltd. 18.28%
5. Infosys BPO 31.46%
AVERAGE 24.63%
7. During Transfer Pricing proceedings, assessee objected for
inclusion of Cosmic Global Ltd. as comparable since it was not strictly comparable due to high-risk of services and was receiving revenue for translation charges which was different from a low-end transcription services provided by assessee.
9ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi
8. Ld.TPO considered foreign exchange gain as non-operating for the reason that it did not have any bearing on the transaction. Ld.TPO thus proposed adjustment of Rs.76,72,093/-. 8.1. Ld.TPO rejected the claim of loss arising on foreign exchange conversion of the amount that was kept in EEFC account by assessee as income from other sources. Instead Ld. TPO considered it to be a part of business loss.
8.2. It was submitted by assessee that foreign exchange gain of Rs.8,55,729/- on account of exchange fluctuation of export proceeds was to be netted against the foreign exchange loss of Rs.4,44,536/- on account of exchange fluctuation due to conversion of funds as income from other sources.
8.3. Aggrieved by adjustments proposed by Ld. TPO, assessee raised objections before DRP. DRP upheld the adjustments suggested by the TPO and accordingly directed Ld. AO to pass final assessment order.
8.4. Aggrieved by final assessment order passed by Ld. AO, assessee is in appeal before us now.
9. Ground No. 1 &2 are in respect of the selection/rejection of comparables and adjustment that has been made of Rs.76,57,655/- being difference in margin of comparables finally selected by Ld TPO vis-a-vis that of the margin computed by assessee.
9.1. Ld.Counsel objects for inclusion of the following comparables:
1. E4 Healthcare Business Services Pvt.Ltd
2. Jindal Intellicom Pvt.Ltd 10 ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi
3. ICRA Techno Analytics Ltd.,
4. Cosmic Global Ltd.
5. Infosys BPO Ltd.
9.2. Ld.Counsel placed reliance upon the decision of :
· Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd vs. CIT reported in 377 ITR 533;
· decision of Coordinate Bench of Bangalore Tribunal in DCIT vs Goldman Sachs Services Pvt.Ltd., reported in 82 Taxmann.com 380, Wherein it has been held that company engaged in providing high- end services involving specialized knowledge and domain expertise should not be regarded as comparable to an assessee rendering IT enabled services to its AE which could be categorised as a low end BPO.
9.3. We shall consider each of the comparables by comparing it with the functions, assets and risks assumed by these comparables vis-a-vis that of assessee.
(a ) E4 Healthcare Business Services Pvt. Ltd Ld.Counsel objects for inclusion of this company, as it is engaged in providing outsourcing services for healthcare industries in US. It is submitted by the Ld.Counsel that revenues earned by this comparable are from multiple business activities for which segmental results are not available. Ld.Counsel submitted that assessee is only providing back-office support of transcribing the medical prescriptions dictated on telephonic conversation by doctors located outside India and therefore is rendering a low-end 11 ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi service whereas the comparable under consideration renders health services like providing ambulance and doctors services on call etc., He submitted that this company cannot be considered as a fit comparable for purposes of determining arm's length price for assessee's transaction with its AE.
On the contrary Ld. CIT DR submitted that transcription activity cannot be simply equated to a back-office service, as it requires streaming to be provided to its employees for rendering specialised services.
We have perused the submissions advanced by both the sides in the light of records placed before us.
It is observed that this comparable provides services in the field of healthcare and assessee before us is rendering services relating to transcription of medical prescription. We do not find any similarity in the service functionality of both these companies and therefore we hold that they are functionally dissimilar. As the functionality test is not satisfied between these companies, we direct Ld. TPO to exclude this comparable from the list.
(b) Jindal Intellicom Pvt.Ltd Ld.Counsel do not wish to press this comparable. Accordingly we direct the ld.TPO to retain this comparable in the final list.
(c ) ICRA Techno analysis Pvt.Ltd This company is disputed by assessee to be included as it is engaged in software development and consultancy, engineering services, Web development and hosting and subsequently diversify 12 ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi itself into the domain of business analytics and business process outsourcing. Ld.Counsel submitted that functions of this comparable is not similar with that of assessee which is in the services of transcription/data processing. On the contrary Ld. CIT DR placed reliance upon observations of Ld. TPO for inclusion of this comparable.
We have perused submissions advanced by both the sides and observed that this comparable is involved in providing software development and consultancy services, engineering services, Web development and hosting services. Further it is also observed that segmental information in respect of each of these services are not available and therefore it is not possible to segregate income earned by this company under each segment. It is also observed that this company holds intangible asset in the form of software whereas in the case of assessee any intangibles that may be developed during the process of rendering services to its AE are owned by AE. We accordingly hold this comparable to be excluded from final list.
(d) Cosmic Global Ltd., This company has been held to be not comparable with that of assessee. It has been submitted by Ld.Counsel that this company assumes high-risk services and revenue earned by this company also includes translation charges which are more knowledge-based in nature.
On the contrary Ld. CIT DR submitted that this company was originally included by assessee in TP report which has now been 13 ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi agitated by Ld.Counsel as not comparable. He placed reference to the Schedule 7 of accounts of this company which is at page 194 of paper book volume-1. It has been submitted that revenues from the operations of this company are from 2 segments being medical transcription and consultancy services amounting to Rs. 5,87,162/- and translation charges amounting to Rs.5,45,41,023/-. He submitted that this company is providing both services of medical transcription as well as translation of the medical report from experts, for which revenue has been segregated. Ld. CIT DR is of the opinion that revenues earned by assessee from medical transcription and consultancy services segment are comparable with that of the services rendered by assessee to its AE. We have perused the submissions advanced by both the sides in the light of the records placed before us.
From the financials of this company it is observed that it has separate segmental information in respect of income earned under 2 different heads. For that reason we agree with the arguments advanced by Ld. CIT DR in respect of the comparison that could be drawn between assessee and revenue generated by this company under the head medical transcription and consultancy services. Since services rendered by assessee as well as this comparable under segment medical transcription and consultancy services are similar, we do not find any infirmity in including this company in the list of comparable. However ld.TPO is directed to consider revenue earned by this company under the segment medical 14 ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi transcription and consultancy services only for purposes of determining the arm's length price.
(e) Infosys BPO Ltd Ld.Counsel submitted that this company is not comparable due to high turnover which is approximately 215 times that of assessee. It has been submitted that revenues earned by this company are from software services and are one of the big giants in software industry. It has been also submitted that this company assumes all risks leading to higher profits and also owns a lot of intangibles. Ld. CIT DR supported inclusion of this comparable by placing reliance upon observations of Ld. TPO.
We have perused the submissions advanced by both the sides in the light of the records placed before us.
On perusal of financials, it is observed that this company has got huge turnover and goodwill being one of the giants in the software industry. It is observed that this company has not been considered as comparable for low-end BPO services.
We are therefore of considered opinion that this company should be excluded from list of comparables.
10. On the basis of the above analysis, we direct Ld. TPO to consider/exclude comparables as directed above. We also direct ld.TPO to consider working capital adjustments between assessee as well as companies selected as comparables on the basis of the risk assumed.
11. Accordingly ground No. 1 raised by assessee stands partly allowed.
15ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi
12. Ground No.3 This ground has been raised by assessee against disallowance made by Ld. TPO of Rs.4,44,536/-on account of foreign exchange fluctuation by adjusting the same against the interest income of Rs.1,43,641/-, shown under the head 'income from other sources'. Ld.Counsel submitted that TPO has given different treatment for the foreign exchange fluctuation loss as well as gain earned by assessee. It has been submitted that foreign exchange gain earned by assessee on the revenue earned from services rendered. It was submitted that assessee had earned loss of Rs.4,44,536/-on account of conversion of funds from EEFC account to INR account. It was submitted by Ld.Counsel that if such funds were directly kept in rupee account, there would be no further gain or loss on account of foreign exchange fluctuation. The fluctuation as submitted by Ld.Counsel was as a result of assessee keeping a portion of receipts of exports in EEFC account and that is the reason why the said loss was treated as loss under the head 'income from other sources'. Ld.Counsel further submitted that gain of Rs.8,55,729/-on account of foreign exchange fluctuation till the date of realisation of export proceeds in rupee account of the assessee was treated as part of business income. It was thus submitted by Ld.Counsel that the loss amounting to Rs.4,44,536/- was not a business loss and hence ought to be adjusted against interest income of Rs.1,43,641/-as declared under the head 'income 16 ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi from other sources'. Ld.Counsel placed reliance upon following decisions for considering foreign exchange gain as a part of operating income while computing operating margin. · Decision of Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt.Ltd reported in (2009) 312 ITR 254;
· Decision of Hon'ble Delhi High Court in the case of Principal CIT vs. Agilis Information Technologies International Pvt.Ltd in ITA No.907/2015 vide order dated 08.02.2016. 12.1. On the contrary Ld. CIT DR submitted that both foreign exchange loss and gain earned by assessee is on account of realisation of export proceeds in rupee account. He submitted that different treatment cannot be allowed to gain and loss earned by assessee from its business income. He submitted that foreign exchange gain and loss has been derived from trading activity. He submitted that therefore loss cannot be treated as income from other sources instead has been rightly considered as business loss. Insofar as considering the gain as non-operative income, assessee has not been able to provide any details regarding foreign exchange risk faced by comparables. Therefore Ld. TPO has rightly rejected the inclusion of foreign exchange gain while computing the operating margin of assessee.
12.2. We have perused the submissions advanced by both the sides in the light of records placed before us. 12.3. We have analysed risk assumed by assessee in terms of foreign exchange as recorded in the TP documentation vis-a-vis the 17 ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi gain and loss earned by assessee during the year under consideration. Ld.Counsel placed reliance upon page 18 of paper book volume-1 wherein the details of foreign exchange fluctuation rate for year under consideration from export proceeds have been listed. It is observed that loss as well as gain has been earned by assessee from its export proceeds being its business income. 12.4. On one hand assessee projects itself to be a risk-free company wherein all the direct, indirect costs incurred by assessee including foreign exchange fluctuations are included in the cost remunerated by its AE. On the other hand assessee is considering loss earned due to foreign exchange fluctuation on conversion of its export revenues into INR as income from other sources. In our considered opinion assessee cannot blow hot and cold at the same time. We are therefore of the considered opinion that Ld. TPO was right in considering the loss incurred by assessee due to foreign exchange fluctuation as business loss.
12.5. There is no doubt that foreign exchange gain/loss has to be considered as part of operating income for purposes of computing margin of assessee. Insofar as providing adjustment in terms of foreign exchange fluctuation is concerned in respect of comparables, assessee is directed to provide necessary details in respect of any such risk assumed by such comparables that has been finally selected hereinabove for purpose of benchmarking international transaction. Ld.TPO shall then verify the same and accordingly grant risk adjustment while computing margin of assessee.
18ITA 537/Del/2015 A.Y. 2010-11 M/s Key Stroke Pro India P Ltd. vs. ITO, New Delhi
13. We accordingly partly allow the ground raised by assessee.
14. In the result appeal filed by assessee stands partly allowed. Order pronounced in the Open Court on 10.04.2018.
Sd/- Sd/-
(N.K.SAINI) (BEENA A PILLAI)
Accountant Member Judicial Member
Dated: 10th April, 2018.
· mv
Copy of the Order forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
6. Guard File
By Order
Asst. Registrar
ITAT, Delhi Benches, New Delhi
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