Income Tax Appellate Tribunal - Hyderabad
M/S Tns India Private Limited,, ... vs Assessee on 17 April, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 1875/Hyd/2012
Assessment Year: 2008-09
M/s TNS India Pvt. Ltd., vs. Dy. Commissioner of Income-
Hyderabad tax, Circle - 2(3),
Hyderabad.
PAN - AABCN2278F
(Appellant) (Respondent)
Assessee by : Shri Deepak Chopra
Revenue by : Smt. G. Aparna Rao
Date of hearing 30-03-2015
Date of pronouncement 17-04-2015
O RDE R
PER SAKTIJIT DEY, J.M.:
This appeal of assessee is against the assessment order passed u/s 143(3) read with section 92CA(3) and 144C(13) of the IT Act, 1961. The appeal pertains to AY 2008-09.
2. Briefly the facts are, assessee an Indian company was incorporated in the year 1992 as Oracle Research and Consultancy Pvt. Ltd. It was part of MBL group, which was acquired by NFO group in1997. NFO group, in turn, was acquired by TNS group in the year 2003. TNS group, as claimed, is one of the world's largest and leading custom market research specialists. It provides quality marketing information and innovative market research solutions across the product life cycle, from developing products to building brands and marketing communications. The group provides services across the globe. Assessee, on its part, is engaged in rendering a 2 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
range of comprehensive market research services to domestic and international clients through various offices in different cities across India. Assessee also provides IT enabled back office data processing services (ITES) through its Offshore Research Service Centre (ORSC) at Hyderabad, which is a 100% EoU registered under Software Technology Park of India (STPI) Scheme. For the AY under dispute, assessee filed its return of income originally on 29/09/08 declaring total income of Rs. 2,12,58,500. Subsequently, assessee filed a revised return of income on 31/03/10 declaring loss of Rs. (-) 3,21,01,031. During the relevant FY, assessee as per 3CEB report, disclosed the following international transactions with it AEs:
i) Provision of ITES(BPO services) to AEs Rs. 47,51,80,266
ii) Provision of market research (MR) services Rs. 8,79,06,893
iii) Payment towards overhead allocation charges and license fees (together referred to as 'management fees') • Group overhead allocation fee - Rs. 1,57,74,055 • Asia pacific overhead allocation fee-Rs.1,76,22,000 • Regional management allocation fee-
Rs.1,66,23,495
iv) Payment of trade mark license fee - Rs. 1,19,02,086
v) Payment of business solutions license fee - Rs. 93,96,576
vi) Reimbursement by AEs - Rs. 22,03,172
vii) Reimbursement to AEs - Rs. 42,943,052
2.1 For the purpose of benchmarking its international transactions with its AEs, assessee aggregated the revenue received from BPO services as well as market research services and conducted a TP analysis through an external consultant by choosing itself as the tested party. TNMM was adopted as the most appropriate method with operating profit to operating cost as the profit level indicator (PLI). A search in the data bases yielded 21 companies as comparables. As the weighted average margin of the comparables was found to be within the tolerance band of assessee's profit margin, the price 3 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
charged by the assessee was found to be within arm's length. During the assessment proceeding, AO noticing that assessee has entered into international transactions with AEs, made a reference to the Transfer Pricing Officer (TPO) to determine the arm's length price (ALP). In course of proceeding before him, TPO called for the books of account, financial statements, TP study, and various informations submitted by assessee. After examining the materials available before him and also considering the submissions of assessee, TPO, though, agreed with assessee that TNMM is most appropriate method, but, he nevertheless rejected TP report of assessee by observing that assessee has used multiple year data and applied inappropriate filters while selecting comparables as a result of which the TP analysis became unreliable. After rejecting the TP report, TPO undertook a search himself by applying some additional filters which yielded 20 comparables including some selected by assessee with arithmetic mean PLI of 29.16%. The final comparables selected by TPO with their OP to OC are as under:
S.No. Name of the comparable company Total PBIT/
income Cost%
(Rs. in
crores)
1 Accential Technologies Ltd. 51.04 44.50
2 Acropetal Technologies Ltd. (seg.) 20.80 35.30
3 Aditya Birla Minacs 183.17 -0.55
4 Asit C Mehta 4.82 9.10
5 Caliber Point Business Solutions (seg) 53.00 10.97
6 Coral Hub (Vishal Info) 13.07 51.84
7 Cosmic Global 5.86 24.30
8 Crossdomain Solution Pvt. Ltd. 27.40 26.96
9 Datamatics Financial (BPO Div.) 16.72 34.87
10 E4e (earlier known as Nitanny 25.99 17.50
Outsourcing)
11 Eclerx 123.45 66.50
12 Genesys International 47.52 51.91
13 HCL Comnet Systems & Services Ltd. 388.05 32.97
(seg)
14 ICRA Online Ltd. (seg) 82.29 11.22
15 Infosys BPO Ltd. 825.08 20.03
16 I-service India Pvt. Ltd. 13.39 10.92
4
ITA No. 1875/Hyd/2012
M/s TNS India Pvt. Ltd.
17 Mold Tek Technologies Ltd. 17.84 106.82
18 R System International Ltd. (seg) 21.33 4.30
19 Spanco Ltd. (seg) 42.27 8.94%
20 Wipro Ltd. 1158.80 30.23
Arithmetic Mean 29.16
2.2 After allowance of 0.43% towards working capital adjustment, the adjusted arithmetic mean PLI was worked out at 28.73% and the ALP of international transaction was determined at Rs. 144,94,01,963 and after excluding there from non AE sales of Rs. 56,58,92,732, the ALP of sales with AEs was determined at Rs. 88,35,09,231 as against price received by assessee from AEs of Rs. 56,75,46,826. The resultant short fall of Rs. 31,59,62,405 was treated as TP adjustment u/s 92CA. Further, the TPO also did not accept assessee's claim of payment towards intra group services (management fee and licence fee) amounting to Rs. 7,13,18,212 on the ground that the assessee has failed to furnish/substantiate with documentary evidence the need for such services and also whether such services were actually rendered by AEs. He further observed if at all any such services were rendered by AEs whether assessee derived any benefit there from. Thus, TPO being of the view that there is no necessity for making payment towards intra group services determined the ALP of such services at Nil. However, the TPO did not make any separate adjustment on this account since the amount in question already got merged in the adjustment made to the price received on account of transactions pertaining to sale of services. In consequence of the order passed by TPO, AO made a draft assessment order making addition of the TP adjustment of Rs. 31,59,62,405 to the ALP. That besides, AO also recomputed the deduction claimed u/s 10A of the Act, which resulted in addition of an amount of Rs. 6,81,37,974. Further, AO disallowed assessee's claim of expenditure on account of licence fee of Rs. 1,00,99,916 paid towards operating software and application software by treating the same as capital in nature. Being aggrieved of the draft assessment order, assessee filed objections 5 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
before the Dispute Resolution Panel (DRP) both on TP issues as well as corporate tax issues.
2.3 As far as assessee's objections with regard to TP issues are concerned, ld. DRP granted partial relief to assessee by accepting assessee's claim that other income of Rs. 28,69,633 is to be treated as part of operating revenue for computation of PLI. The DRP also accepted assessee's objections with regard to two of the selected comparables, namely, Mold Tek Technologies Ltd. and Coral Hub Ltd. and directed AO to remove them. As far as payment made towards intra group services are concerned, though, ld. DRP rejected assessee's objections with regard to determination of ALP at Nil but the ld. DRP directed exclusion of such payment from OC while computing ALP. All other objections of assessee on TP issues were rejected by ld. DRP. As far as corporate tax issues are concerned, ld. DRP granted partial relief to assessee. In pursuance to the directions of ld. DRP, AO finalized the assessment as per the impugned assessment order. Being aggrieved of the additions made, assessee is before us raising as many as 20 grounds.
3. Ground No. 1 to 15 are on TP issues where as ground No. 16 to 20 are on corporate tax issues. As far as TP issues are concerned, ground no. 1 being of general nature, no specific adjudication is necessary. As far as other grounds on TP issues are concerned, ld. AR at the time of hearing confined his argument to ground Nos. 3, 4, 9, 10 and did not press other grounds. Accordingly, these grounds are dismissed as not pressed.
4. Hereinafter we will deal with the surviving grounds on TP issues. In Ground No. 3, assessee has challenged the determination of ALP of management fee and licence fee paid to AE as Nil.
5. Briefly the facts relating to the issue are, during the assessment year under consideration, assessee claimed payment of management fee and licence fee of Rs. 7,13,18,212 towards various services 6 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
provided by AEs. TPO however rejected assessee's claim and determined ALP of such services at Nil by observing that assessee has failed to substantiate the need for services and further assessee failed to prove whether services were actually rendered and assessee derived any benefit from such services. Of course, the TPO did not make any separate adjustment while determining the ALP of such services at Nil. Ld. DRP though upheld the determination of ALP at Nil, a direction was given to exclude such expenditure incurred by assessee from operating cost.
6. We have considered the submissions of the parties and perused the materials on record. Ld. Counsels of both the parties agreed before us that the issue is squarely covered in favour of the assessee by the orders of ITAT in assessee's own case for AY 2003-04 to 2005-06 and 2009-10. As can be seen while considering identical nature of dispute, the coordinate bench of ITAT in assessee's own case in ITA No. 944/Hyd/2007, 194/Hyd/08 and 798/Hyd/09 dated 22/01/14 for AYs 2003-04 to 2005-06 held as under:
"16. We have considered the issue. We are unable to accept the contention of the Assessing Officer/TPO with reference to the services provided by AEs. Assessee has provided the agreements which were entered not during the year but in earlier year and has been paying the service fee termed as management fee accordingly. This claim is not arising for the first time in this year but, is also there in earlier years and later years. Assessee is part of a worldwide group and they have placed some corporate centers for guidance of various units run by them across the globe. It was submitted that the costs being incurred by the centers are being shared by various units and assessee's share in this year has come to 5% of the receipts payable to NFO Worldwide Inc USA and at 4% to NFO Asia Pacific Ltd. Hongkong on the net revenues. These amounts are within the norms prescribed for payment of fees to various group companies of similar nature. There is no dispute with reference to services being provided by the group companies to assessee and assessee also paid various other amounts including royalty. As submitted by assessee, even though some correspondence was placed on record with reference to the advise given to assessee, providing a concrete evidence with reference to the services in the nature of specific activities is difficult, like proving the role of an anesthesian in an operation conducted by a surgeon. There may be an evidence of operation being performed by the Doctor in the form of sutures or scars etc, which can be proved later but the role of an anesthesian before operation and after gaining consciousness is difficult to prove as that is not tangible in nature. Likewise, for the advise given by various group centers to the group companies in day-to-day manner is difficult to place on record by way of 7 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
concrete evidence but the way business is conducted, one can perceive the same. Assessee has given a detailed write-up as well as the services provided and benefit obtained which were not contradicted. The Assessing Officer did not believe the same in the absence of concrete evidence. Unless the Assessing Officer steps into assessee's business premises and observes the role of these companies/ assessee's business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations. What sort of evidence satisfies the AO is also not specified. Assessee has already placed lot of evidence in support of claims. Therefore, on that count, we are not in agreement with the Assessing Officer and TPO that services were not rendered by the group companies to assessee.
16.1. Even otherwise, the role of Transfer pricing Officer is to determine the arms length price of a transaction. He cannot reject the entire payment under the provisions of sec. 92CA as held by the Hon'ble Delhi High Court in the case of EKL Appliances ltd (supra) wherein the Hon'ble Delhi High Court, on similar facts where the TPO also determined the ALP at Nil, has held as under :
"21. The position emerging from the above decisions is that it is not necessary for assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for assessee to show that any ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd. expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above.
22. Even Rule IOB(l)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule lOB. Whether or not to enter into the transaction is for assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.8 ITA No. 1875/Hyd/2012
M/s TNS India Pvt. Ltd.
23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee / royalty payment was not warranted. Assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine.
24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee l royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs".
17. Respectfully following the above, we are of the opinion that the TPO went beyond his jurisdiction in denying the payment out-rightly, whereas, his role is limited to determining the ALP. In the guise of determination of ALP, the TPO cannot question the business decision of payment and determine that no services were rendered. In that view of the matter, the direction of the TPO cannot be upheld at all. 17.2 Be that as it may, the TPO also invoked Rule 10B to analyse the transactions on TNMM method. Accordingly, few of the transactions particularly, provisions for data processing services and royalty etc., were analysed under TNMM and accepted that assessee's PLI is more than the comparables. While determining the PLI, payment of management fees is also considered as an expenditure. In that sense, even after paying the management fee at 4%, the profit level indicator is more than the comparable cases. Therefore, assessee's transactions are deemed to be at arm's length. Considering that also, denial of management fees is not proper on the part of the TPO/ Assessing Officer. Considering the above, we are of the opinion that the action of the TPO in determining the ALP at NIL is not according to the provisions of law and also on facts. Therefore, we direct him to allow the claim.
18. However, as seen from the pricing pattern of the agreement, the methodology prescribed is not as fixed percentage of assessee's turnover/ net receipts. The costs are ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd. to be worked out in the group concern or service provider and are allocated to specific group companies. Neither the TPO nor Assessing Officer examined whether the payment of fee paid is according to the agreement or not. What we noticed, as per the invoice placed, is that assessee was given invoices at a fixed amount where as the agreement provides otherwise. There may be adjustments at the end of year based on over all cost incurred by AEs. This requires examination as TPO/AO denied the claim 9 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
itself. Therefore, in order to verify the pricing methodology as prescribed in the agreement and payment of the amounts, the matter is restored to the file of the Assessing Officer to examine this aspect and allow the amounts, if the payment is according to pricing methodology agreed between the parties. Therefore, while allowing the ground on the question of claim of management fees as such, the quantification thereof is restored to the Assessing Officer to examine with reference to the agreement between the parties. Accordingly, grounds 2 to 5 are considered allowed for statistical purposes."
Similar view was also expressed by ITAT in assessee's own case for AY 2009-10 in ITA No. 604/Hyd/2014 dt. 13/02/2015. As the issue in dispute is materially same, respectfully following the aforesaid decisions of coordinate bench in assessee's own case, we remit the issue back to the file of the AO/TPO to determine the quantum of management fee and licence fee with reference to agreement between the parties. This ground is allowed for statistical purposes.
7. In ground No. 4, assessee has raised the issue of non consideration of other receipts of Rs. 28,69,633 as part of operating revenue for computing the margin.
8. We have heard the parties and perused the materials on record. As can be seen from the financial statements of the assessee, during the year assessee earned certain income which was shown as other income, the details of which are as under:
Particulars Amount
Interest 340,176
Profit on sale fixed assets/investment 15,203
Sale of scrap, questionnaires 364,991
Reimbursement of travelling & other 2,149,263
expenses by clients
Total 2,869,633
8.1 The TPO while computing the PLI excluded the aforesaid other income shown by assessee from operating revenue. In the objections raised before ld. DRP assessee claimed that the other income shown are also from the operations of the business, hence, should be treated as part of operating revenue. Ld. DRP after considering the 10 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
submissions accepted assessee's claim and directed TPO to treat the other income shown by assessee as part of operating revenue. However, the directions of ld. DRP were not implemented by AO in the final assessment order. In our view, when ld. DRP has specifically directed TPO to treat the other income shown by assessee as part of operating revenue for computing PLI, AO/TPO are duty bound to comply to the directions of ld. DRP. That being the case, we direct AO/TPO to compute PLI by treating the other income as part of the operating revenue.
9. The next issue as raised in ground No. 9 is with reference to certain comparables selected by TPO. As already stated hereinbefore, out of the 20 comparables selected by TPO, DRP excluded two comparables by accepting assessee's objection. However, before us, assessee has objected to selection of 8 more comparables. Hereinafter we will deal with each of the comparable objected to by assessee.
9.1. Accentia Technologies Ltd.: Ld. AR submitted before us that this company is functionally different as it is engaged in healthcare research management services and software products. Further, company's segmental information is not available in public domain. Ld. AR submitted, the company is also not comparable as it is an exceptional year of operation for the company due to extraordinary event. Further explaining, it was submitted during the relevant PY, Geo Soft Technologies (Trivandrum) Ltd. and Iridium Technologies India Pvt. Ltd. were merged with the said company and the company also purchased business of Thunga Software Pvt. Ltd., GSR Systems Inc., GSR Physician Billing Services Inc. Denmed Transcription Services Inc. and Accentia FZE. In support of such submission, ld. AR referred to the annual report of the company as submitted in the paper book. Ld. AR submitted, the increase in the turnover and profit margin of the company is due to merger and acquisition. Thus, it was submitted the company cannot be treated as comparable. In support 11 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
of such contention, assessee relied upon the decision of ITAT, Hyderabad Bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT, ITA NO. 1647/Hyd/12 dated 24/10/14. He also submitted that in assessee's own case for AY 2009-10, the Tribunal has excluded this company from the list of comparables.
9.2 The ld. DR though agreed that the company has been held to be not a comparable with a ITES company in case of HSBC but she nevertheless supported the reasoning of TPO and DRP on the issue of selection of the aforesaid comparable.
9.3 We have considered the submissions of the parties and perused the materials on record. The main thrust of argument of ld. AR for rejecting the aforesaid comparable is on account of extraordinary event arising out of merger and acquisition during the year which could have impacted the profit margin of the company. We find merit in the aforesaid submissions of ld. AR. On a perusal of the annual report of the company, it is found that during the year the company has made acquisitions which might have impacted the profit making of the company. Therefore, in our view, this company cannot be treated as a comparable to assessee. We are supported in our view by the order of the coordinate bench for the same AY in case of HSBC Data Processing India P. Ltd. Vs. ACIT (supra). We, therefore, direct AO/TPO to exclude this company.
10. Acropetal Technologies Ltd. (Seg.): Objecting to the selection of this company, ld. AR submitted before us that this company is functionally different as it is engaged in the business of engineering design services. Further, in response to notice issued u/s 133(6) by the TPO, the company has admitted that it provides services in the area of software development. Ld. AR submitted that even otherwise also the annual report of the company shows that 71% of the total expenditure of the company is in foreign currency under the head 'onsite development expenses' which suggest that the company 12 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
provide substantial onsite services and also could have outsourced services. Thus, it was submitted the company cannot be considered as comparable. In support of such contention, ld. AR relied on the decision of ITAT in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT, ITA NO. 1647/Hyd/12 dated 24/10/14, Triology E Business Services Software Ltd. vs. DCIT, ITA 1054/Bang/2011 and Hello Soft India Pvt. Ltd. ITA No. 645/Hyd/09 and ITA 1411/Hyd/10.
10.1 The ld. DR, on the other hand, relying upon the reasoning of TPO and DRP justified selection of the aforesaid company.
10.2 We have considered the submissions of the parties and perused the material on record. The main grievance of assessee against the selection of the aforesaid company is on the issue of functionality. On a perusal of the segmental revenue as evident from the annual report of the company, the company derives income from engineering design services and software development services. Therefore, the services provided by the company are in the nature of high end services coming within the category of knowledge process outsourcing (KPO) whereas assessee is providing low end (BPO) services. In fact, TPO himself in his order has stated that companies providing high end (KPO) services cannot be treated as comparable to ITES (BPO) service providers. Considering these aspects the coordinate bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra) held the aforesaid company as not comparable to a BPO service provider. Respectfully following the view expressed by the coordinate bench as aforesaid, we also direct AO/TPO to exclude this company.
11. Cosmic Global Ltd.: Ld. AR submitted before us, the company is functionally different as it is predominantly into translation services. Further, he submitted that the company fails the employee cost filter as employee cost is only 17.32% of the total expenditure. Ld. AR submitted, such low employee cost is suggestive of the fact that the 13 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
company does not provide BPO services by itself but outsources the work. He further submitted, the segmental details as available from the financials of the company reveal that the revenue earned from BPO services is only Rs. 19.63 lakhs. Hence, it cannot be considered as a comparable to assessee.
11.1 Ld. DR, however, supported the reasoning of the TPO on the selection of this company.
11.2 We have considered the submissions of the parties and perused the material on record. As can be seen, the first objection of assessee for selection of the aforesaid company is on the issue that it fails the employee cost filter. However, on a perusal of the order of TPO, it is seen that the TPO has not applied the employee cost filter at all. Therefore, assessee's contention that the company fails employee cost filter cannot be accepted. However, we find merit in the other contention of ld. AR that the turnover from BPO services is less than 1 crore. As can be seen, the TPO while applying filters for selection of comparable have excluded companies having less than 1 crore turnover from BPO services. It is the contention of ld. AR before us, in the assessment year under consideration revenue of this company from BPO services is only Rs. 19.63 lakhs. Hence, it fails the less than 1 crore BPO services turnover applied by TPO. We find that this aspect has not been verified properly before selecting the company as comparable. It is also pertinent to note here, for this very reason this company was excluded as a comparable in assessee's own case for AY 2009-10 by the ITAT in ITA No. 604/Hyd/2014 dated 13/02/2015. In view of the aforesaid, we restore the comparability of the aforesaid company to AO/TPO for fresh examination and if it is found that the revenue earned by this company from BPO services is only Rs. 19.63 lakhs, as claimed by assessee, then, this company cannot be considered as a comparable.
14 ITA No. 1875/Hyd/2012M/s TNS India Pvt. Ltd.
12. Eclerx Services Ltd.: ld. AR objecting to selection of this company, submitted before us, the company is engaged in KPO services in the field of data analytics, operations management and audit reconciliation. It was submitted, the business model of the company as per its own admission are completely different from the BPO services provided by assessee. In this context, ld. AR referred to the annual report of the company. Thus, ld. AR submitted, the company cannot be treated as comparable to assessee. In support of such contention, he relied upon the decision of the coordinate bench of ITAT, Hyderabad in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra).
12.1 Ld. DR, however, relied upon the order of TPO and DRP.
12.2 Having considered the submissions of the parties in the context of facts and materials on record, we are of the view that this company cannot be treated as comparable to assessee not only due to the fact that it is involved in high end (KPO) services but it also earned super normal profits due to extraordinary event. For the aforestated reasons, the coordinate bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra) following the decisions in some other cases excluded this company. Respectfully following the view expressed by coordinate bench we direct AO/TPO to exclude this company from the list of comparables.
13. Genesys International Corporation Ltd.: Objecting to selection of this company, ld. AR submitted, the company cannot be treated as a comparable to assessee as it is functionally different. It was submitted the company is engaged in the niche business of geographical information services comprising photogrammetry, data conversion, data migration, data maintenance, application development, outsourcing services and other related services. In this context, he referred to the annual report of the company as submitted in the paper book. He further submitted that the company is working 15 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
closely with Microsoft, Nokia, Digital Globe and Google Earth, which provide geo data. In fact it was submitted, the company is exclusive reseller for Navteq Data for enterprise space in India. Thus, it was submitted the company is not at all a comparable to assessee. In support of such contention, he relied upon a decision of the coordinate bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra).
13.1 The ld. DR justified the selection of aforesaid company by relying upon the finding of TPO.
13.2 We have considered the submissions of the parties and perused the materials on record. On a detailed analysis of the functionality of the aforesaid company as revealed from the annual report and other materials brought on record, it is noticed that this company is not at all functionally similar to assessee as the services provided by this company is in the nature of geospatial services which requires skilled man power and scientists, civil engineers, whereas, assessee is basically engaged in providing services related to human resources and does not require skilled man power. Moreover, it is further revealed that this company is also involved in R&D services and owns intangibles. Thus, as can be seen, this company being totally different in its functionality cannot be a comparable to assessee. For the very same reason, the coordinate bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra) has held that this company cannot be comparable to a BPO service provider. In view of the aforesaid, we direct AO/TPO to exclude this company from the list of comparables.
14. HCL Comnet Systems and Services Ltd.(Seg.) and Wipro Ltd.: Objecting to the selection of the aforesaid companies, ld. AR submitted, as far as HCL Comnet Systems and Services Ltd. is concerned, it is functionally different as it is engaged in providing telecommunication and remote infrastructure management services.
16 ITA No. 1875/Hyd/2012M/s TNS India Pvt. Ltd.
He submitted, the company has been rated as a leading company in the field of managed security services and infrastructure outsourcing. That besides, the company has considerably high turnover of about 495 crores for the relevant PY compared to assessee's turnover of 113 crores. Thus, it was submitted, the company cannot be treated as comparable to assessee. As far as W ipro Ltd. is concerned, ld. AR submitted, the company is functionally different as it owns significant intangibles and the information on the intangibles relating to the BPO segment is not available. He submitted, audited segmental data of the company was not available and manually corrected and unaudited data from its TP report has been considered, which cannot be said to be authentic. That besides, it was submitted the company has significantly high turnover of Rs. 1158 crores during the relevant PY. Thus, ld. AR relying upon a decision of the Hyderabad Bench in case of Hyundai Motors India Engg. P. Ltd. Vs. ITO, ITA No. 1850/Hyd/12 dated 21/02/14, sought removal of these two companies.
14.1 Ld. DR, submitted that as the TPO has selected these two companies on valid reasoning, there is no need to exclude them.
14.2 We have considered the submissions of the parties and perused the materials on record. As can be seen, in case of Hyundai Motors India Engg. P. Ltd. Vs. ITO (supra) these two companies were excluded by applying the turnover filter considering the fact that assessee's turnover was only Rs. 15 crores. However, in the present case, assessee's turnover is also quite high i.e. 113 crores. While HCL Comnet's turnover is about four times higher than assessee, that of the Wipro is about ten times more. Whereas, TPO has selected some companies which have considerably less turnover than assessee. For example, turnover of Asit C. Mehta is 4.82 crores and that of I Services India Ltd. is 13.39 crores. Compared to these two companies assessee's turnover is higher by about 22 times and 8 times respectively. Therefore, when the assessee is not objecting to such low turnover compaines, applying the same logic he should not 17 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
object to high turnover companies also, when the difference in turnover is more or less within the same range. Thus, in our view, HCL Comnet and Wipro cannot be considered to be uncomparable to assessee only on the basis of turnover. However, assessee's claim of functional difference of the companies requires examination. As could be seen, in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra) the coordinate bench expressing similar view remitted the matter back to the file of AO/TPO with a direction to exclude these two companies as comparables in case the data (segmental or unit) is found to be incomplete or functional profile are different. With a similar direction, matter is remitted back to AO/TPO for examining afresh after due opportunity of being heard to assessee.
15. Infosys BPO Ltd.: Objecting to the selection of the aforesaid company, ld. AR submitted before us, Infosys is a tier one IT company and its brand and intangibles enjoy a premium pricing. Ld. AR submitted, for brand value of Infosys it cannot be a comparable to assessee. In support of such contention, ld. AR relied upon the decision of Hon'ble Delhi High Court in case of Agnity India Technologies pvt. Ltd., ITA No. 1204/2011. He also submitted that in assessee's own case for AY 2009-10, ITAT has held the aforesaid company not to be a comparable to assessee.
15.1 Ld. DR, however, supported the reasoning of TPO 15.2 Having considered the submissions of the parties and perused the materials on record, we are of the view that this company cannot be treated as comparable to assessee as not only it is a giant company having the Infosys Brand behind it but it is also functionally different. The Hon'ble Delhi High Court in case of CIT Vs. Agnity India Technologies pvt. Ltd., [2013] 219 Taxman 26 has held that Infosys cannot be treated as comparable to other small companies. Various benches of ITAT have also expressed similar view. In the aforesaid 18 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
view of the matter, we direct AO/TPO to exclude this company from the list of comparables. Ground No. 9 is accordingly disposed of.
16. In Ground No. 10, assessee has objected to rejection of certain companies by TPO. Though in the ground raised, assessee has challenged the rejection of 10 comparables, but, at the time of hearing before us Ld. AR confined his argument to only two of the companies, namely, Accurate Data Convertors Pvt. Ltd. and Informed Technologies Ltd. In view of the above, we propose to restrict our finding to these two companies only.
16.1 Accurate Data Convertors Pvt. Ltd.: Challenging the rejection of this company, ld. AR submitted before us, the company is engaged in the data processing activity like assessee. He submitted, as per information submitted in response to notice issued u/s 133(6), the company's entire revenue is from export of BPO services. He submitted, the company was not selected by assessee in its TP study. The TPO himself called for information from the said company. Though, as per the information submitted by the said company, it satisfies all the filters applied by TPO but the company has not been included in the list of comparables without assigning any reasons. In support of his contention, ld. AR referred to the information submitted by the company in response to notice issued u/s 133(6) by TPO, a copy of which is placed at page 439 of assessee's paper book.
16.2 Ld. DR on the other hand submitted before us, assessee has not objected to rejection of aforesaid company either before TPO or before ld. DRP.
16.3 In the rejoinder, ld. AR contested the claim of the ld. DR by submitting that assessee did object to rejection of this company before ld. DRP. In this context, he referred to the letter dated 23/05/12 filed before ld. DRP, a copy of which is placed at page 376 of assessee's paper book.
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16.4 Having considered the submissions of the parties, we are of the view that the issue of comparability of the aforesaid company requires examination considering assessee's claim that as per the information submitted in response to the notice u/s 133(6), the company satisfies all the filters applied by TPO. We, therefore, restore the matter back to the file of the TPO to examine the issue after due opportunity of being heard to assessee.
17. Informed Technologies Ltd.: Ld. AR submitted, the only reason for which the TPO considered this company as uncomparable is because the revenue earned by the company is only 66.45% thereby it fails more than 75% ITES revenue filter applied by TPO. Ld. AR submitted, the TPO has arrived at the BPO ITES service revenue at 66.45% by treating the rental income as operational revenue. However, the entire export revenue of this company is earned from BPO services only, hence, the rental income cannot be considered as part of operational revenue. He further submitted, TPO has also selected companies whose exports sales are more than 25% of the revenue. Thus, as the revenue earned by this company from export is more than 25% it cannot be excluded as a comparable. To substantiate his claim, ld. AR referred to the financials of the company as submitted at page 470-475 of the paper book.
17.1 Ld. DR, however, supported the reasoning of TPO.
17.2 We have considered the submissions of the parties and perused the materials on record. It is very much evident from the order of TPO that he has rejected this company solely for the reason that revenue from BPO services is less than 75% of the total operational income. However, we find merit in the contention of ld. AR that entire export revenue of this company is earned from BPO services alone. Hence, rental income cannot be treated as part of operational income. Further, there is also substance in the submissions of ld. AR that the company satisfies more than 25% revenue earned from export filter 20 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
applied by TPO. As neither TPO nor DRP have examined the aforesaid aspects while rejecting the aforesaid company as comparable, we think it appropriate to restore the issue of comparability of this company to AO/TPO for considering afresh after due opportunity of being heard to assessee. We make it clear, if on examining the information available on record TPO finds that this company satisfies all the filters applied by him, then, he may consider this company as a comparable.
17.3 We direct the AO/TPO to compute the ALP of the international transaction entered into by assessee with its AEs keeping in view the observations made by us in the preceding paragraphs. Further, while doing so AO/TPO is directed to consider assessee's claim with regard to any allowance with reference to function, assets and risks in accordance with law.
Corporate tax issues
18. In ground No.16, assessee has raised the issue of non- consideration of its claim of deduction u/s 10A as per the revised return of income.
19. Briefly the facts are, originally, assessee has filed the return of income claiming deduction u/s 10A of the Act for an amount of Rs. 1,47,74,443 for its off-shore research service centre (ORSC). However, subsequently, finding mistake in the deduction claimed u/s 10A of the Act, assessee filed a revised return on 31/03/2010 revising its claim of deduction u/s 10A of the Act, to Rs. 6,81,37,974. In the draft assessment order, AO however rejected assessee's claim of deduction u/s 10A. The DRP while deciding the objections raised by assessee against the draft assessment order, directed AO to allow deduction claimed u/s 10A for the ORSC unit. While implementing the directions of DRP in the assessment order, AO however allowed assessee's claim of deduction u/s 10A as per the original return and 21 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
in the process rejected assessee's claim of deduction as made in the revised return.
20. We have considered the submissions of the parties and perused the materials on record. There is no dispute to the fact that assessee has filed a revised return of income before AO revising the claiming deduction u/s 10A of the Act. Further, during the assessment proceeding assessee has also submitted a revised Form 56F. In our view, AO without examining assessee's claim of deduction u/s 10A as per the revised return could not have proceeded to allow the claim as per the original return when he does not dispute the fact that the revised return is a valid return as per the provisions of section 139(5) of the Act. In course of hearing, ld. AR brought to our notice that assessee has also filed a petition u/s 154 of the Act raising the very same issue before AO, which is still pending. Considering the aforesaid facts, we are inclined to remit this issue back to the file of AO with a direction to consider assessee's claim as per revised return and in accordance with law after due opportunity of being heard to assessee. This ground is allowed for statistical purposes.
21. The issue raised in ground No. 17 is with regard to treating the software licence fee paid as capital expenditure and allowing depreciation @ 25%.
22. Briefly the facts are, during the assessment proceeding, AO noticed that in the profit & loss a/c, assessee has debited an amount of Rs. 2,21,29,855 towards computer maintenance charges. From the break-up submitted by assessee, it was noticed by AO that assessee has claimed an amount of Rs. 1,00,99,916 on account of licence fee. AO asked assessee to explain why the expenditure claimed should not be disallowed as it is in the nature of capital expenditure. Though assessee objected to such view of AO, but, AO rejecting the objections of assessee disallowed the expenditure claimed and added the amount of Rs. 1,00,99,916 by treating it as capital expenditure.
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Assessee objected to the addition made before DRP. Ld. DRP, though, upheld AO's decision that the expenditure incurred is capital in nature, but, directed AO to allow depreciation at appropriate rate. The AO while completing final assessment in pursuance to the directions of ld. DRP, allowed depreciation @ 25% on the software licence fee by mentioning that it falls in the block of intangible assets.
23. We have considered the submissions of the parties and perused the materials on record. It is very much evident from record that the software licence fee has been paid towards operation as well as application software. That being the case, the rate of depreciation applicable is 60% (as applicable to computer) and not 25% as allowed by AO. Moreover, this issue is more or less covered in favour of assessee by the decision of the coordinate bench in assessee's own case for the AY 2009-10. The coordinate bench in ITA No. 604/Hyd/14 while deciding the issue held as under:
37. We have considered the submissions of the parties and perused the materials on record as well as the decisions relied upon by ld. AR. As far as assessee's claim that the expenditure claimed has to be treated as revenue expenditure, we are of the view that as per the ITAT Special Bench decisions in case of Amway India Ltd. Vs. DCIT (supra), whether a particular expenditure in relation to acquisition of software will be revenue or capital, cannot be decided by either the ownership test or enduring benefit test. The functional test has also to be applied.
ITAT Special Bench went on to lay down certain tests for deciding whether the expenditure incurred has to be treated as revenue or capital. In the present case, assessee has not brought any material on record to establish that by applying the functional test, the expenditure can be said to be of a revenue nature. Moreover, after 01/04/2003 computer software has been specifically brought into the schedule at par with computer as far as eligibility of depreciation is concerned. Therefore, after 01/04/2003, computer software in the nature of application software and not mere licence for renewal have to be treated as capital assets eligible for depreciation at the same rate as of computer. Therefore, expenditure incurred for acquiring such asset will be capital expenditure. However, we accept ld. AR's alternative contention that depreciation should be allowed at 60%. As per the new appendix applicable from AY 2006-07, depreciation on computer and computer software is to be 23 ITA No. 1875/Hyd/2012 M/s TNS India Pvt. Ltd.
allowed at 60%. As AO has not brought any material on record to show that computer software acquired by assessee is not in the nature of software as mentioned in the appendix, in our view, AO is not justified in allowing depreciation at 25%. We, therefore, direct AO to allow depreciation on the computer software at 60%. This ground is partly allowed.
In view of the above, we direct AO to allow depreciation @ 60% on the software licence fee. This ground is partly allowed.
24. In ground No. 18 assessee has raised the issue of wrong adjustment of refund and in Ground No. 19 assessee has challenged the levy of interest u/s 234D on such wrong adjustment of refund.
25. At the time of hearing before us, ld. AR submitted that assessee has also raised the same issue before AO in a petition filed u/s 154 of the Act on 07/01/2013. Considering the nature of dispute and also the fact that assessee has filed a petition u/s 154 of the Act before AO, we direct AO to verify assessee's claim and grant relief accordingly if assessee's claim is found to be correct on verification of facts and materials on record. While examining the issue, AO should also examine the necessity of charging interest u/s 234 D of the Act.
26. Ground No. 20 is on initiation of penalty proceedings u/s 271(1)(c) of the Act. The issue raised in this ground being premature at this stage of the proceeding, there is no need to adjudicate the same. Accordingly, this ground is dismissed as infructuous.
27. In the result, assessee's appeal is partly allowed for statistical purposes.
Pronounced in the open court on 17 th April, 2015
Sd/- Sd/-
(B. RAMAKOTAIAH) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 17 th April, 2015
24
ITA No. 1875/Hyd/2012
M/s TNS India Pvt. Ltd.
kv
Copy to:-
1) M/s TNS India Pvt. Ltd., Plot No. 17, Road No. 3, Banjara Hills, Hyderabad - 500 034.
2)DC IT,Circle - 2(3), Hyderabad
3)DRP, Hyderabad
4) TPO, Hyderabad
4) DIT (International Taxation), Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.