Income Tax Appellate Tribunal - Mumbai
Hapag Lloyd Global Services P. Ltd, ... vs Department Of Income Tax on 28 February, 2013
आयकर अपील य अ धकरण,
धकरण, मंुबई यायपीठ 'के', मंुबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "K", MUMBAI
सव ी आर.एस. याल, लेखा सद य एवं अ मत शु ला, या यक सद य, के सम ।
Before Shri R.S.Syal, AM and Shri Amit Shukla, JM
ITA No.8499/Mum/2010 : Asst.Year 2005-2006
The Asstt.Commissioner of Income-tax M/s.Hapag Lloyd Global Services
Range 10(1) बनाम Private Limited
बनाम/
Mumbai. Vs. 401, Diamond Square, CST Road
Kalina, Santacruz (East)
Mumbai - 400 055.
PAN : AACCC1314L.
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से /Appellant by : Shri Ajeet Kumar Jain [CIT-DR]
यथ क ओर से /Respondent by : Shri Kanchan Kaushal
सनवाई
ु क तार ख / घोषणा क तार ख/
Date of Hearing : 26.02.2013 Date of Pronouncement : 28.02.2013
आदे श / ORDER
Per R.S.Syal (AM) :
This appeal by the Revenue arises out of the order passed by the Commissioner of Income-tax (Appeals) on 20.09.2010 in relation to the assessment year 2008-2009.
2. The only issue raised through various grounds is against the deletion of adjustment of `2,50,29,070 made by the Transfer Pricing Officer (TPO). Briefly stated the facts of the case are that CP Ships (UK) Limited is one of the world's leading container shipping companies providing international container transportation services in four regional markets i.e. TransAtlantic, Australia, Latin America and Asia. CP Ships (India) is a 100% subsidy of CP Ships (UK) Limited.
2 ITA No.8499/Mum/2010.M/s.Hapag Lloyd Global Services Pvt.Ltd.
It has been characterized as an IT enabled back office service provider, which is now known as Hapag Lloyd Global Private Limited, the assessee under consideration. During the previous year relevant to the assessment year under consideration, the assessee earned income, inter alia, from IT enabled services (ITES) amounting to `28,51,72,955 from CP Ships (UK) Limited. The Transactional Net Margin Method (TNMM) was considered by the assessee as the most appropriate method for benchmarking its international transactions. Operating profit to Total cost (OP/TC) was taken as Profit Level Indicator (PLI). The assessee showed margin of 15.19% in respect of such international transactions as against mean OP / TC of its chosen comparable cases at 15.46%. Some of the comparables selected by the assessee were rejected by the TPO. The TPO confronted the assessee with certain fresh comparable cases which are listed in his order. A final list of comparable cases was drawn by the TPO which is tabulated on pages 3 and 4 of his order. The arithmetical mean of such comparable cases, as per the table, was determined at 25.3% as against the assessee's OP/TC at 15.19%. This led to adjustment of `2,50,29,070. The Assessing Officer made such adjustment. However, the learned CIT(A) deleted the adjustment for the reasons cited in the impugned order.
3. At the outset we want to make it clear that both the sides are in agreement that the entire dispute in this appeal revolves around inclusion or exclusion of five comparable cases. First two cases, viz., Cepha Imaging Private Limited and Vishal Information Technologies 3 ITA No.8499/Mum/2010. M/s.Hapag Lloyd Global Services Pvt.Ltd.
Limited were introduced by the TPO in the final list of comparables which came to be excluded by the learned CIT(A). The other three cases, viz., CMC Limited, R Systems International Limited and Fortune Infotech Limited included by the assessee in its transfer pricing study which were rejected by the TPO as comparables but included by the learned CIT(A). Apart from the exclusion or inclusion of these five cases, there is no dispute either on any other aspect of this international transaction or any other international transaction. Accordingly, we will consider these five cases one by one.
4. Cepha Imaging Private Limited 4.1 The TPO observed that this company was in ITES both as per Board's Notification and also D&B Websites. As the assessee had not considered this case, the TPO held it as comparable and included it in the list of comparables. The assessee contended before the learned CIT(A) that the said company was functionally incomparable as it was mainly engaged in software and application development. The learned CIT(A) considered the Annual report of this company and observed that it referred mainly to the income from export sales of software as against the assessee's business of ITES. Accordingly this case was excluded from the list of comparables.
4.2 The ld. AR mainly relied on the decision of the Mumbai Bench of the tribunal in the case of ACIT v. Mearsk Global Service Centres (India) Private Limited [(2011) 133 ITD 543 (Mum.)] to bring home 4 ITA No.8499/Mum/2010. M/s.Hapag Lloyd Global Services Pvt.Ltd.
the point that the case of Cepha Imaging Private Limited should be excluded as the same has been held by the tribunal in that case as incomparable.
4.3. Sections 92 to 92F fall in Chapter X of the Income-tax Act, 1961 (hereinafter called `the Act') with the marginal note of `Special provisions relating to avoidance of tax'. The avowed object of such provisions is that the international transactions, that is, transactions between two associated enterprises, should be considered in such a way so as not to deprive India of its rightful share of taxes. It is ensured by computing income from international transactions having regard to arm's length price. Such arm's length price is computed by considering the price from similar transactions between unrelated parties. Choice of correct transactions between unrelated parties as a yardstick or in other words, choosing correct comparable cases is a vastly disputed area in the realm of transfer pricing. Whereas the endeavor of the assessee is generally towards picking up such comparable cases which are close to the price recorded by it in respect of international transactions, the Transfer Pricing Officer embarks upon finding such comparable cases which give more cushion for making adjustments. The role of superior/appellate authorities assumes significance in making it sure that only the correctly comparable cases get selected for the purposes of benchmarking. As there is a vast data of the cases available in the public domain, the comparable cases are selected by finding out such cases as are close to the assessee in terms of the nature of transactions 5 ITA No.8499/Mum/2010. M/s.Hapag Lloyd Global Services Pvt.Ltd.
and other attending circumstances. This is done by applying certain filters. Such filters may be general as well as specific. General filters may encompass choosing such cases whose nature of work is broadly similar to that of the assessee under consideration. After selecting such broadly comparable cases, then screening is done to separate grain from the chaff by short listing such cases as are really comparable. This is done by applying specific filters peculiar to the facts and circumstances of the assessee's international transactions. Such filters may include the ratio of the manufactured good sales to total sales at more than a particular level; companies with sales of more than or equal to a particular level; companies with net worth at or above a particular level; companies with exports at more than or less than a particular percentage of total sales; ratio of material cost or personnel cost to the total cost. It is with the help of such filters that comparable cases are finally identified for benchmarking the price or profit from the international transactions. It is quite possible that even within the broad category of cases of similar nature of goods or services, a particular case, say A, may be comparable to one case, say X, on the basis of a particular filter, but not comparable to another, say, Y on the basis of another filter. It is still further possible that the case A may be comparable to another case Z on the basis of still another filter. So, simply because one case has been found to be incomparable to a particular case within the overall category of cases of similar nature of goods of services, does not necessarily mean that such case becomes incomparable to all the cases under such broader category and vice versa. It may be quite 6 ITA No.8499/Mum/2010. M/s.Hapag Lloyd Global Services Pvt.Ltd.
possible that a case found to be incomparable to one case on the strength of one specific filter, may be comparable to another on the strength of the same specific filter. The contention that since a particular case has been rejected by the tribunal as comparable in one case, should invariably be rejected in all other cases, is not well founded. One needs to find out the filter on the basis of which such case was found to be incomparable in the first case. If such a filter is not relevant in the other case, then there can be no reason to outrightly reject it as comparable. If, however, the filter applied in one case for excluding a particular case is applicable and relevant in another case also, then such excluded case ceases to be comparable for such other case as well.
4.4. Adverting to the facts of the instant case we find that the assessee in Mearsk Global Service Centres (India) Private Limited (supra) was a service provider rendering back office support service to its Associated Enterprises (AEs). In para 29 of this order, it has been recorded by the tribunal that the activities undertaken by the assessee were essentially ITES, such as, data entry, transcription and data of shipping documents such as bill of leading etc. The instant assessee before us is also in the same line of business providing similar services as were rendered in the case of Mearsk Global Service Centres (India) Private Limited (supra). Further the A.Y. in both the cases is also similar, that is, 2005-2006. In that case also, the TPO introduced Cepha Imaging Private Limited as comparable. However, the Tribunal vide para 48 of its order observed that this 7 ITA No.8499/Mum/2010. M/s.Hapag Lloyd Global Services Pvt.Ltd.
company is "engaged in providing software development service as is evident from their annual report available on pages 52 onwards and 64 onwards of the paper book". We find that the finding recorded by the learned CIT(A) in the impugned order that Cepha Imaging Private Limited was mainly engaged in export of software tallies with that recorded by the tribunal in the case of Maersk. As the assessee is engaged in ITES, any company engaged in exporting software, cannot be considered as comparable. We, therefore, hold that this case was rightly excluded by the learned CIT(A).
5. Vishal Information Technologies Ltd.
5.1 The TPO included this case by observing that it was engaged in information technology enabled services. The assessee argued before the learned CIT(A) that this case was not comparable because it was outsourcing the services from third party vendors as against the assessee providing ITES at its own. It was also argued that the personnel cost incurred by the assessee accounted for 42.31% of its total cost, whereas in the case of Vishal Information Technologies Limited, it was only 1.38%. The learned CIT(A) ordered for the exclusion of this case from the list of comparables.
5.2 The learned Departmental Representative invited our attention towards Annual report of Vishal Information Technologies Limited, which is a division of Amex. It was stated that Vishal Information Technologies Limited was in its BPO Division with 500 seats in Chennai. As it was a full-fledged data processing unit, the ld. DR 8 ITA No.8499/Mum/2010. M/s.Hapag Lloyd Global Services Pvt.Ltd.
argued that the same was rightly included by the TPO in the list of comparables. The learned AR opposed the contention of the learned Departmental Representative by stating that Vishal Information Technologies Limited was basically outsourcing services as was apparent from the details of its expenses as per schedule 15 and 16 of the Profit and loss account for the relevant year. It was shown that Data entry charges and vendor payments were to the tune of `12.90 crore as against the Personnel cost at `19.70 lakh. He also invited our attention towards Prospectus of Vishal Information Technologies Limited, though relevant to the previous year ending for 31.03.2008, to contend that the expansion plan was embarked upon in a subsequent year when the employees strength increased to 210 as full time employees and 100 second-line operators as on 1st September, 2007. The learned AR contended that the mention of strength of 500 seats in the Annual report of Amex should be viewed not in relation to ITES segment alone as was evident from the prospectus of this company. He also relied on the Tribunal order in the case of Mearsk Global Service Centres (India) Private Limited (supra) in which this case has also been held as incomparable.
5.3 After considering the rival submissions and perusing the relevant material on record, we find that the case of Vishal Information Technologies Limited has been discussed in the case of Mearsk Global Service Centres (India) Private Limited (supra) and it was noticed by the tribunal from the annual accounts that it was outsourcing a considerable portion of its business. Accordingly this 9 ITA No.8499/Mum/2010. M/s.Hapag Lloyd Global Services Pvt.Ltd.
case was excluded from the list of comparables. This fact of outsourcing becomes evident when we consider the figures of expenses from the annual report of this company, which shows personnel cost at `19.70 lakh as against expenses under the head "Trading and operating expenses" being `Data entry charges and vendor payments' at `12.90 crore. Our attention has not been drawn by the learned Departmental Representative towards any material from the Annual report of this company to indicate that the `Data entry charges' pertained to the expenses incurred by the assessee on its own employees. Since the case of Vishal Information Technologies Limited has been considered as incomparable in the case of Mearsk Global Service Centres (India) Private Limited (supra) by recording a categorical finding that it was outsourcing a considerable portion of its business, which fact matches with the figures from its annual report, we are inclined to accept the view point of the learned CIT(A) in excluding this case from the list of comparables because the extant assessee is mainly engaged in rendering services at its own and not outsourced.
6. CMC Limited 6.1 The assessee included this case in its list of comparables which was rejected by the TPO on the ground that it was engaged in trading in computer peripherals and system integration services. The learned CIT(A) included this case in the list of comparables on the ground that its Annual report indicated information about ITES segment also.
10 ITA No.8499/Mum/2010.M/s.Hapag Lloyd Global Services Pvt.Ltd.
6.2 After considering the rival submissions and perusing the relevant material on record, we find from the annual accounts of CMC Limited that its related party transactions (RPTs) are much more than 25% of the total revenue. The Delhi Bench of the Tribunal in the case of ACTIS Advisers Pvt. Ltd. v. DCIT [2012-TII-136-ITAT- DEL-TP] has held that a case can be taken as uncontrolled if its related parties transactions do not exceed 25% of the total revenue. In reaching this conclusion, the Tribunal took assistance from various provisions of the Act. Thus, it is discernible that the limit of 25%, though not expressly set out in the statute, cannot at the same time be branded as ad hoc. The Delhi Bench of the tribunal has taken assistance from certain other provisions of the Act for the adoption of such limit. This decision has been followed by the Mumbai bench of the tribunal in its recent order passed on 27.02.2013 in Thyssen Krupp (ITA No. 6460/M/12). Respectfully following the precedents, we approve the filter of 25% related transactions. Even though CMC Ltd. is engaged in ITES but still it cannot be considered as comparable because of its related party transactions exceeding 25%. We, therefore, overturn the impugned order on this issue and direct that this case be excluded from the list of comparables.
7. R Systems International Ltd.
7.1 This case was included by the assessee in its transfer pricing study. The TPO excluded this case because of different financial year ending in that case. The learned CIT(A) ordered for the inclusion of this case by recording that even though this company was following 11 ITA No.8499/Mum/2010. M/s.Hapag Lloyd Global Services Pvt.Ltd.
different financial year ending but the following different financial years could not be a reason to exclude this case.
7.2 The learned Departmental Representative contended that unless the financial year end of a comparable case matches with that of the assessee, it cannot be considered as comparable because the figures of different financial year endings are distorted. He relied on an order passed by the Mumbai Bench of the Tribunal in the case of Sandstone Capital Advisors Private Limited v. ACIT in ITA No.6315/Mum/ 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule 10B(4) and an another case of Pune Bench of the Tribunal in Honeywell Automation India Ltd., has held that it is mandatory for the purposes of comparing the data of an uncontrolled transaction with an international transaction that the same must relate to the financial year ending similar to that of the assessee. The ld. DR contended that since the case of CMC Limited has a different financial year ending vis-a-vis that of the assessee, the same ought to have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by the ld. DR in this regard was not seriously challenged by the ld. AR. Respectfully following the precedent, we hold that this case should be excluded from the list of comparables.
8. Fortune Infotech Limited 8.1 The TPO rejected this case from the list of comparables on the ground that there were 100% related party transactions. The learned CIT(A) included this case in the list of comparables.
12 ITA No.8499/Mum/2010.M/s.Hapag Lloyd Global Services Pvt.Ltd.
8.2 After considering the rival submissions and perusing the relevant material on record, we find that there is no dispute that this case has 100% related party transactions. Going by our view taken above for the exclusion of the case of CMC Limited, we hold that this case cannot be considered as comparable. This case is also directed to be excluded from the list of comparables.
9. As substantial part of the working done by the TPO for computing the ALP as modified by the learned CIT(A) has undergone change to some extent in view of our above decision on the five comparable cases, we deem it appropriate to set aside the impugned order and restore the matter to the file of AO / TPO. We hold accordingly and direct for the computation of fresh ALP in respect of these transactions in the light of our above discussion. Needless to say the AO /TPO will allow a reasonable opportunity of being heard to the assessee.
10. In the result, the appeal is partly allowed for statistical purposes.
Order pronounced on this 28th day of February, 2013.
आदे श क घोषणा दनांकः को क गई ।
Sd/- Sd/-
(Amit Shukla) (R.S.Syal)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मंुबई Mumbai; दनांक Dated : 28th February, 2013.
Devdas*
13 ITA No.8499/Mum/2010.
M/s.Hapag Lloyd Global Services Pvt.Ltd.
आदे श क त ल प अ े षत/
षत Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ
/ The Respondent.
3. आयकर आयु (अपील) / The CIT(A)15, Mumbai.
4. आयकर आयु / CIT
वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / DR, ITAT, Mumbai
5.
6. गाड फाईल / Guard file.
/ BY ORDER,
आदे शानसार
ु
स या पत त //True Copy//
उप/
उप/सहायक पंजीकार ( Dy./Asstt. Registrar)
आयकर अपील य अ धकरण,
धकरण, मंुबई / ITAT, Mumbai