Income Tax Appellate Tribunal - Delhi
M/S. Genzyme India Pvt. Ltd., Gurgaon vs Acit, Gurgaon on 20 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-2", NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.892/Del/2014
Assessment Year : 2009-10
Genzyme India Pvt. Ltd., ACIT, Circle- 1(1),
1st Floor, Technopolis, Gurgaon.
Golf Course Road, Sector- 54, Vs.
Gurgaon.
PAN : AADCG0083D
(Appellant) (Respondent)
Assessee by : Shri Atul Jain, CA
Department by : Shri H. K. Choudhary, CIT-DR
Date of hearing : 30-01-2018
Date of pronouncement : 20-04-2018
ORDER
PER R. K. PANDA, AM :
This appeal filed by the assessee is directed against the order passed u/s 144C/143(3) of the I.T. Act, 1961 by the ACIT, Circle-1(1), Gurgaon for the assessment year 2009-10.
2. Facts of the case, in brief, are that the assessee is a company and filed its return of income on 30.09.2008 declaring loss of Rs.30,30,875/-. Since the assessee had undertaken international transactions with its AEs, the Assessing Officer made a reference to the TPO u/s 92CA(1) of the I.T. Act. The TPO observed that Genzyme India Private Limited ("Genzyme India" or "the company" or "the Assessee") was incorporated in year 2007 and is the 2 ITA No.892/Del/2014 subsidiary company of Genzyme Corporation, USA ("Genzyme International"
or "AE"). The assessee was engaged in rendering marketing and sale support services to Genzyme International. During F.Y. 2008-09, the assessee conducted various activities as per the arrangement with the AEs like procurement of market information, collecting, analyzing and reporting relevant market information, participation in creation of market analyses and market strategies, providing advice with respect to economic, financial, political and business environment and business practices and promote the products produced by the AE based on the instruction to be received from the AE. For rendering above services, the assessee was remunerated on cost plus 5% basis.
3. The TPO noted that the international transactions undertaken by the assessee with its AE during the F.Y. are as under :-
S. Associated Enterprise Transaction Arm's length Method No. price (as adopted determined by the assessee) (Lacs)
1. Genzyme Corporation Share Application Money 101654726 Massachussets
2. Genzyme Share Application Money 920101 International Merges Corporation, USA
3. Genzyme Corporation Rendering of services 84519535 CPM Massachussets
4. Genzyme Corporation Reimbursement of 6734187 Massachussets Expenses (received)
4. He noted that the assessee in its TP documentation has used OP/TC as PLI and selected four comparables namely Santram Infrastructure & Reality 3 ITA No.892/Del/2014 Ltd., Lurgi India Company Pvt. Ltd., Vision Technology India Ltd. and ICRA Management Consultancy Pvt. Ltd. with average profit level indicator of - 1.09%. As against this, the assessee has shown its own profit margin at 5.76% thereby demonstrating that its international transactions are at arm's length.
5. The TPO rejected all the comparables selected by the assessee and conducted a fresh search himself to identify new comparable companies. Based thereon, the TPO selected the following comparables and worked out OP/TC as PLI as under :-
S.No. Company Name OP/OC%
1 I D C (India) Ltd. 10.46
2 Indus Technical & Financial Consultants Ltd. 6.45
3 Choksi Laboratories Ltd. 23.19
4 Tata Consulting Services Ltd. (Segment) 26.08
5 WAPCOS Ltd. (Segment) 23.60
6 Basiz Fund Services Private Ltd. 46.75
7 HCCA Business Services Pvt. Ltd. 20.89
AVERAGE 22.48
6. Applying the above arm's length margin, the TPO worked out arm's length price of the international transactions and made an upward adjustment of Rs.1,33,65,056/-, the details of which are as under :-
Operational Cost for Market Support Service Segment 7,99,18,837 Arm's Length Price at a Margin of 22.48% 9,78,84,591 Price Received 8,45,19,535 Adjustment u/s 92CA 1,33,65,056
7. The assessee approached the DRP who directed the TPO to exclude one comparable namely Tata Consultancy Services Ltd. from the list of comparables 4 ITA No.892/Del/2014 as selected by the TPO. Similarly, they directed to include Keystone Integrated Marketing Services Pvt. Ltd. as a comparable. Thereafter, the TPO determined the arm's length price of the international transactions undertaken by the assessee on account of its marketing support services segment by considering the following comparables whose average margin was 18.18% :-
S.No. Company Name OP/OC%
1 I D C (India) Ltd. 10.46
2 Indus Technical & Financial Consultants Ltd. 6.45
3 Choksi Laboratories Ltd. 23.19
4 Kestone Integrated Marketing Services Pvt. Ltd. -4.09
5 WAPCOS Ltd. (Segment) 23.60
6 Basiz Fund Services Private Ltd. 46.75%
7 HCCA Business Services Pvt. Ltd. 20.89%
AVERAGE 18.18
8. During the course of DRP proceedings, it was observed that the assessee owns intangibles to the tune of Rs.3,90,00,000/- and the depreciation/deferred revenue to be apportioned for financial year 2008-09 on them apparently have not been included in the expenditure taken into account for the calculation of the profit margin. They noted from the profit and loss account read with schedule 3, 9 and 10 that expenditure related to depreciation is Rs.41,65,900/- and does not include depreciation on intangibles. The DRP noted that the same however has been taken in the computation of income read with Form 3CD, appendix 2 at a value of Rs.87,90,592/- claimed at the rate of 25% on such technical knowhow. The same according to the DRP should have been included in cost base for computing arm's length profit. However, the TPO has computed arm's 5 ITA No.892/Del/2014 length profit on cost base of Rs.7,99,18,837/- which does not include Rs.87,90,592/- claimed as depreciation by the assessee which resulted in lesser adjustment.
9. Accordingly, the assessee was served a notice dated 09.10.2013 requiring it to show cause why enhancement of upward TP adjustment should not be made. The assessee replied that company was incorporated on 21.11.2007. During F.Y. 2007-08, it incurred expenditure of Rs.3.9 crores to acquire know- how relating to business of marketing and promotion of Genzyme Corporation's products in India. This expenditure was wholly charged to P&L a/c for F.Y. 2007-08 as per Accounting Standard-26 on intangible assets. However, for income tax return purposes, this expenditure was added back and depreciation @ 25% was claimed for F.Y. 2007-08 and also for F.Y. under consideration. It was contended that entire expenditure has been charged to P&L a/c during F.Y. 2007-08 and it was considered for declaring revenue on cost plus basis for F.Y. 2007-08, depreciation claimed is only in accordance with IT Rules. 9.1 Rejecting the explanation given by the assessee, the DRP directed to include this expenditure in cost base while calculating the profit margin of the assessee for computation of ALP. The Assessing Officer accordingly made an upward adjustment of Rs.2,03,17,268/- to the ALP of the international transactions carried out by the assessee.
6ITA No.892/Del/2014
10. Aggrieved with such order of the Assessing Officer/TPO/DRP, the assessee is in appeal before the Tribunal by raising the following grounds :-
"General ground: Addition to total income of Rs 2,03,17,268
1. On the facts and in the circumstances of the case and in law, the Assistant Commissioner of Income Tax, Circle-I (I), Gurgaon, [hereinafter referred to as learned Assessing Officer ('AO')] and the Additional Commissioner of Income- tax, (Transfer Pricing - NWR), Chandigarh [hereinafter referred to as learned Transfer Pricing Officer ('TPO')] under the directions of the Hon'ble Dispute Resolution Panel ('DRP') have erred in making an addition to the Appellant's total income of Rs. 2,03,17,268/-.
2. On the facts and circumstances of the case, and in law, the learned AO and the learned TPO under the directions of the Hon'ble DRP erred in disregarding the benchmarking analysis and comparable companies selected by the Appellant based on the contemporaneous data in the transfer pricing study report maintained as per section 920 of the Act read with Rule 100 of the Income-tax Rules, 1962 ('the Rules') and thereby rejecting the transfer pricing documentation maintained by the Appellant.
3. On the facts and circumstances of the case, and in law, the learned AO and the learned TPO under the directions of the Hon'ble DRP erred in not providing any reasons to show that the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied before making an adjustment to the income of the Appellant.
4. On the facts and circumstances of the case, and in law, the learned AO and the learned TPO under the directions of the Hon'ble DRP erred in not allowing the use of multiple year data as prescribed under Rule 108(4) of the Rules read with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, for determining the arm's length price of international transactions of the Appellant.
Incorrect rejection of com parables by the learned TPO 5 On the facts and circumstances of the case, and in law, the learned AO and the learned TPO under the directions of the Hon'ble DRP erred in rejecting comparable companies selected in the transfer pricing documentation not appreciating that their functions, assets and risk profile was comparable to the Appellant.
6 On the facts and circumstances of the case, and in law, the learned AO and the learned TPO under the directions of the Hon'ble DRP erred in rejecting fresh comparables selected by the Appellant based on the filters applied by the learned TPO in his show cause notice without appreciating that the functions, assets and risk profile of the said comparables was comparable to the Appellant. Fresh search and incorrect procedure / filters adopted by the learned TPO for identifying comparables companies.
7 On the facts and circumstances of the case, and in law, the learned AO and the learned TPO under the directions of the Hon'ble DRP erred in conducting a fresh comparability analysis based on information available at the time of assessment which was not available at the time of preparation of the transfer pricing documentation by the assessee.7 ITA No.892/Del/2014
8 On the facts and circumstances of the case, and in law, the learned AO and the learned TPO under the directions of the Hon'ble DRP erred in carrying out a fresh search to identify companies comparable to the Appellant's business activities by applying inappropriate filters.
9 On the facts and circumstances of the case, and in law, the learned AO and the learned TPO under the directions of the Hon'ble DRP erred in not sharing the process driven search (i.e. accept / reject matrix) undertaken by the learned TPO to identify the comparable companies to the Appellant's business activities. Incorrect selection of comparables by the learned TPO
10. On the facts and circumstances of the case, and in law, the learned AO and the learned TPO under the directions of the Hon'ble DRP erred in identifying new companies as comparable to the Appellant without appreciating the fact that the said companies were actually not comparable to the Appellant.
11. On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in not appreciating that the learned TPO had cherry picked 2 companies (HCCA Business Services Private Limited and Basiz Fund Services Private Limited) as comparable to the Appellant which was evident from the fact that the said 2 companies were not mentioned in the initial Show Cause Notice dated 8 January 2013 issued by the learned TPO and were subsequently introduced vide a Show Cause Notice dated II January 2013.
Adjustments as per Rule 10B of Income-tax Rules, 1962 ('the Rules') 12 On the facts and circumstances of the case, and in law, the learned AO and the learned TPO under the directions of the Hon'ble DRP erred in not allowing relevant adjustments as per the provisions of Rule 10B(I) and Rule 10B(3). Incorrect enhancement of cost base for computing the Arm's Length Profit 13 On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the learned TPO to enhance the Appellant's cost base for computing the Arm's Length Profit by an amount of Rs. 87,90,592/- being the amount of depreciation claimed on intangible assets by the Appellant only under Section 32 of the Act and ignoring book depreciation as used for computation of PLI (Profit Level Indicator) for the comparables.
Other Grounds:
14 On the facts and circumstances of the case, and in law, the Hon'ble DRP, the learned AO and the learned TPO have not allowed the assessee the benefit envisaged in the proviso to Section 92C(2) of the Act.
15 On the facts and circumstances of the case, and in law, the DRP, the learned AO and the learned TPO have erred on the facts and in law in initiating penalty proceeding under sections 274 read with see 271 (1)( c) of the Act and levying interest under section 234A, 2348. 234C and 234D of the Act.
Relief
a) The Appellant prays that the addition made by the learned AO and TPO and upheld by the learned DRP be deleted.
b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, above grounds of appeal, either before or during the hearing of the appeal."
8ITA No.892/Del/2014
11. So far as ground relating to selection of comparables are concerned, ld. counsel for the assessee submitted that the selection of certain comparables by the TPO are not comparable to the functional profile of the assessee company. Similarly the TPO/DRP incorrectly rejected certain comparables as suggested by the assessee.
12. So far as Choksi Laboratories Ltd. is concerned, he submitted that it is a commercial testing house engaged in rendering laboratory-based chemical testing and engineering services which are highly technical in nature. Referring to page 12 of the Annual Report Compilation, he submitted that the above company offers services like testing of products, contract laboratory services, instrument calibration & validation services, assaying & hallmarking, environment management services and clinical research services to a broad spectrum of industries. He submitted that services of the assessee are purely in nature of the marketing support services. The assessee does not engage in providing any technical services as Choksi does. The two companies are completely in different domains and cannot be compared for the TNMM purposes. Referring to page 20 of the Annual Report Compilation, he drew the attention of the Bench to the nature of expenses incurred by Choksi so as to prove the functional incomparability. He submitted that Choksi incurred significant expenditure on purchase of inventory such as glassware, chemicals and laboratory consumables used for testing purposes. Referring to page 18 of 9 ITA No.892/Del/2014 the Annual Report Compendium, he submitted that 65% of the asset base are instruments that are used for chemical testing purposes. However, in the case of the assessee the assets are of routine nature namely computer and office equipment etc.. Referring to the decision of the Delhi Bench of the Tribunal in the case of Yum! Restaurants (India) Pvt. Ltd. vide ITA No.6168/Del/2012, he submitted that the Tribunal in the said decision has held that Choksi Laboratories Ltd. is engaged in chemical testing services which are highly technical and therefore cannot be compared with that of the assessee company.
13. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Roche Products (India) Pvt. Ltd. vs. ACIT vide ITA No.7035/Mum/2012, he submitted that Choksi Laboratories Ltd. was excluded from the list of comparables on account of its investment in providing testing services for various products and was also offering services in the field of pollution-control.
14. Referring to the decision of the Delhi Bench of the Tribunal in the case of Ciena India Pvt. Ltd. vide ITA No.3324/Del/2013, he submitted that giving similar reasoning Choksi Laboratories Ltd. was excluded from the list of comparables. He accordingly submitted that Choksi Laboratories Ltd. should be excluded from the list of comparables.
15. So far as WAPCOS Ltd. is concerned, he submitted that the above company is a Government of India undertaking and engaged in providing high end technical engineering services in the field of water, power and infrastructure 10 ITA No.892/Del/2014 sectors. It is a capital intensive company which performs specialized engineering functions and assumes significant risk. The WAPCOS identifies new areas of research and development assignment every year, sponsors research work in educational institutions and ties up with leading R&D organizations, which can be verified from page 82 of the Annual Report Compendium. Further, the above company receives grants and aid from Government in respect of its activities envisaging increase in profits and turnover, which is not the case with the assessee. He submitted that the assessee on the other hand performs routine marketing support services and neither requires nor employs huge asset base. Therefore, the above company should be excluded from the list of comparables. Referring to the decision of the following decisions, he submitted that the WAPCOS Limited which are excluded from the list of comparable being a Government company which provides hand to hand solutions and, therefore, cannot be compared with those assessees who are into providing market support services to the parent company :-
(i) Yum! Restaurants (India) Private Ltd. (ITA No.6168/Del/2012).
(ii) Nortel Networks India P. Ltd. vs. Addl.CIT (ITA No.4765/Del/2011 & 427/Del/2013).
(iii) Actis Advisors Pvt. Ltd. vs. ACIT (ITA No.6390/Del/2012).
(iv) Roche Products (India) Private Limited vs. ACIT (ITA No.7035/Mum/2012).
(v) Avaya India (P.) Ltd. vs. ACIT (ITA No.5150/Del/2010).11 ITA No.892/Del/2014
16. Referring to the decision of the Delhi Bench of the Tribunal in the case of Bechtel India Pvt. Ltd. vs. DCIT vide ITA No.1477/Del/2015, he submitted that the WAPCOS Limited was excluded from the list of comparables being a Government company. Relying on various decisions, he submitted that the WAPCOS Limited should be excluded from the list of comparables.
17. So far as Basiz Fund Services Private Limited is concerned, he submitted that the above company is into different streams of operations namely preparation of financial statements, Liquidity Monitoring Services, NAV Accounting for International funds, Consulting charges, US Taxation, Domestic PMS Accounting, etc. which can be verified from page 145 & 150 of the Annual Report Compendium. He accordingly submitted that a functionally incomparable company cannot be included in the list of comparables since the assessee is into business of provision of routine marketing support services. Referring to page 151 of the Annual Report Compendium, he submitted that the above company formulated and applied for copyrighting its financial statement proprietary process under the title "SpiceC by Basiz" to the Registrar of Copyrights, Government of India and was awarded the copyrights on 08.04.2008. Therefore, it develops and owns unique intangibles/intellectual property/process which cannot be compared with the assessee as the former would derive significant advantage from this unique proprietary process vis-à- vis the assessee which does not own any intangible and merely performs routine 12 ITA No.892/Del/2014 market support services. Referring to page 141 of the Annual Report Compendium, he drew the attention of the Bench to the significant R&D activities undertaken by Basiz to develop its own proprietary intellectual property and technical know-how. Referring to the same pages, he submitted that the company has developed intellectual property that accounts for 60% of its total asset base. Further, the company has earned abnormal profits i.e. 15% for the year ending 31st March, 2007, 101% for the year ending 31st March, 2008 and 44.63% for the year ending 31st March, 2009. Referring to the following decisions, he submitted that Basiz Fund Services Private Limited was excluded from the list of comparable on account of developing its own intellectual property/assets etc. :-
(i) Rolls Royce Marin India Pvt. Ltd. (ITA No.1384/Mum/2014.
(ii) Global Logic India Pvt. Ltd. vs. DCIT (ITA No.122/Del/2013.
(iii) Capita India Pvt. Ltd. vs. ACIT (ITA No.356/Mum/2016.
(iv) Actis Advisors Private Limited (ITA No.5277/Del/2011).
18. So far as HCCA Business Services Private Limited is concerned, he submitted that the operation of the above company comprises of payroll processing services. It cannot be established from the Annual Report that the company is engaged in marketing support services which is the activity carried on by the assessee. Referring to page 177 of the Annual Report Compendium, he submitted that the Annual Report also mentions that it is not possible to give 13 ITA No.892/Del/2014 quantitative details of sales and certain other information separately. He accordingly submitted that in the absence of any facts on record, it would be reasonable to conclude that functions and business activity are different from the routine marketing supporting services undertaken by the assessee. He submitted that during the course of its business, HCCA developed software for rendering such payroll services and the software development expenses constitutes approximately 21% of the total operating cost, which can be verified from pages 165, 166 & 177 of the Annual Report Compendium.
19. Referring to the decision of the Bangalore Bench of the Tribunal in the case of M/s Aruba Networks India Pvt. Ltd. (IT(TP)A No.57/Bang/2015, he submitted that HCCA was excluded from the list of comparables on the ground that payroll processing services was main part of the operations of the company and quantitative details of sales and certain information as required under Part 11 of Schedule VI of the Companies Act was not possible. Therefore, in absence of any contrary fact on record it was held that the said company cannot be compared with company having business of marketing and sales support services. He accordingly submitted that the above company also should be excluded from the list of comparables.
20. So far as rejection of the comparables selected by the assessee are concerned, ld. counsel for the assessee submitted that the Cyber Media India Online Limited was rejected by the TPO on the ground that it was engaged in 14 ITA No.892/Del/2014 event management which though being service by itself cannot be compared to marketing support service function. He submitted the DRP in its directions has accepted an event management company, Keystone Integrated Marketing Services Private Limited which earns majority of its income from providing event management functions. He submitted that Cyber Media India Online Limited is engaged in providing advertising and marketing services including event management, relationship and fulfillment management in various forms of media to its clients and thereby also directly promotes the brands by incurring expenses. Therefore, going by the logic of the DRP by accepting Keystone Integrated Marketing Services Private Limited as a comparable, by the same logic Cyber Media India Online Limited also should be included in the list of comparables.
21. So far as ICRA Management Consulting Services Limited is concerned, he submitted that the above company is functionally similar. ICRA is a management consulting firm, offers, business support services like risk management, process consulting, regulation & reforms and development consulting along five verticals namely infrastructure, banking & finance, corporate advisory and energy group. This company deals in a single business segment of provision of consultancy services and thereby, broadly similar to support functions of the assessee. He submitted that the above company was accepted as comparable by the TPO in the succeeding assessment year 2011-12 15 ITA No.892/Del/2014 and assessment year 2012-13 and there was no dispute for considering it as a comparable company. Therefore, following the rule of consistency and in the absence of any disagreement between the Department and the assessee in subsequent assessment years, ICRA should be included as a comparable. He submitted that the DRP inadvertently rejected the company for allegedly not passing the RPT filter. However, it has RPT of merely 14.03%. Therefore, this company should be included in the list of comparables. Referring the decision of the Mumbai Bench of the Tribunal in the case of Lloyds TSB Global Services Pvt. Ltd. vs. DCIT (ITA No.5928/Mum/2012, he submitted that the Tribunal in the said decision has held that ICRA Management Consulting Services Limited is also engaged in the business support services like strategy risk management, process consulting, transaction advisory policy and regulation and development consulting. These functions are by and large similar to the activities of the Lloyds TSB Global Services Pvt. Ltd. which is engaged in providing support services relating to overall management of LTSB's business in India.
22. Referring to the decision of the Delhi Bench of the Tribunal in the case of Hyundai Rotem Company (ITA No.1722/Del/2015), he submitted that ICRA Management Consultants Ltd. was directed to be included as a comparable following the rule of consistency.
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23. Ld. DR on the other hand heavily relied on the order of the TPO/DRP for rejection of the comparables.
24. So far as Choksi Laboratories Limited is concerned, he drew the attention of the Bench to the observation of the DRP and submitted that the above company is performing a wide spectrum of consultancy and analysis services and, therefore, was retained as a comparable.
25. So far as WAPCOS Limited is concerned, he submitted that the TPO in the instant case has used only the segmental results pertaining to service segment which is performing business support services. Therefore, it has rightly been retained by the ld. DRP.
26. So far as Basiz Fund Services Private Limited is concerned, he submitted that as per the Annual Report of the above company it is into provision of marketing support services and preparation of financial reports, providing fund accounting services, to fund administrators, insurance companies, prime brokers and private equity funds etc. Therefore, the functional profile of the above company is comparable to the functional profile of the assessee company. Merely because it has earned high profit the same cannot be the basis for reject the company.
27. So far as HCCA Business Services Private Limited is concerned, he submitted that it was rightly retained by the DRP since it provide support services in areas of HR Operations and administrations, Accounting Services, 17 ITA No.892/Del/2014 Management of labour and legal compliances, etc. which qualify to be as market/business support services.
28. So far as Cyber Media India Online Limited is concerned, he submitted that the company is online media company, promoted by the Cyber Media. The company is the provider of IT-related news, information and services to the vast community of IT-savvy individuals and a value transformation platform for the IT vendors, solutions providers, services companies and individual. The support services differ entirely from that of the assessee company. Therefore, it was rightly rejected by the TPO/DRP.
29. So far as ICRA Management Consulting Services Limited is concerned, he submitted that it was rejected by the DRP on account of RPT filter. However, he has no objection if the comparable is restored to the file of the Assessing Officer with a direction to verify the RPT filter and if the assessee fulfilled the RPT filter then the company can be retained as a comparable.
30. We have considered the rival arguments made by both the sides and perused the material available on record. So far as Choksi Laboratories Limited is concerned, we find from the various details furnished by the assessee that it is a commercial testing house engaged in rendering laboratory based chemical testing and engineering services which are highly technical in nature. It has incurred significant expenditure on purchase of inventory and laboratory consumables used for testing purposes. Further, it is a heavy-asset based 18 ITA No.892/Del/2014 company and 65% of the asset base are instruments that are used for chemical testing purposes. We, therefore, find merit in the submissions of the ld. counsel for the assessee that Choksi Laboratories Limited cannot be considered as a comparable with that of the assessee company whose services are purely in nature of market support services.
31. We find the Delhi Bench of the Tribunal in the case of Yum! Restaurants (India) Private Limited (supra) has excluded Choksi Laboratories Ltd. from the list of comparable on the ground that it was engaged in chemical testing services which are highly technical and not comparable to the assessee company. Similar view has been taken by the Mumbai Bench of the Tribunal in the case of Roche Products (India) Private Limited (supra) and the Delhi Bench of the Tribunal in the case of Ciena India Pvt. Ltd. (supra). We, therefore, direct the Assessing Officer to exclude Choksi Laboratories Ltd. from the list of comparables.
32. So far as WAPCOS Limited is concerned, it is an admitted fact that it a Government of India undertaking. The Co-ordinate Benches of the Tribunal following the decision of the Mumbai Bench of the Tribunal in the case of M/s Thyssen Krup Industries India Pvt. Ltd. in ITA No.6460/Mum/2010 and Delhi Bench of the Tribunal in the case of M/s Avaya India Private limited in ITA No.5150/Del/2010 are excluding Government companies from the list of comparables. Further, WAPCOS is providing engineering consultancy and 19 ITA No.892/Del/2014 undertake turnkey contracts. We, therefore, find force in the arguments of the ld. counsel for the assessee that it cannot be compared with that of the assessee company which is purely in the nature of marketing support services. We, therefore, direct the TPO to exclude WAPCOS Limited from the list of comparables.
33. So far as Basiz Fund Services Private Limited is concerned, we find from the website of the company that it provides services such as financial reporting, NAV support services, investment accounting, SEC filling and legacy conversion services, etc. Further, it has formulated and applied for copyrighting its financial statement proprietary process under the title "SpiceC by Basiz" to the Registrar of Copyrights, Government of India and was awarded the copyrights on 08.04.2008. Further, it performs significant R&D activities to develop its own proprietary intellectual property and technical know-how. We find merit in the argument of the ld. counsel for the assessee that the above company cannot be included in the list of comparables.
34. We further find the Mumbai Bench of the Tribunal in the case of Rolls Royce Marine India Pvt. Ltd. (supra) has directed the Assessing Officer/TPO to exclude Basiz Fund on account of functional dissimilarity. The Delhi Bench of the Tribunal in the case of Global Logic India Pvt. Ltd. (supra) has directed the TPO to exclude Basiz Fund Services Private Limited from the list of comparable by observing as under :-
20ITA No.892/Del/2014
"20. ...........However, the fact remains that this company own significant IPRS in the form of patents which are obviously used in the rendering of software development services. Apart from that fact, this company is engaged in R&D activity. Per contra, the assessee in question is only a captive software development service provider not (ITA No.122/Del/2013) owning any IPRS. Owning or not owning IPRS in the form of patents in software developed by a company has an important bearing on the profit earned by it from the 'Software development services' segment. A company which does not own any IPRS and carries on the activity of rendering software development services at its own cannot be compared with a company which provides software development services by using its own IPRS in the form of patents of software. Under such circumstances, we hold that this company cannot be considered as comparable at segment level. The same is ex consequenti directed to expelled from the set of comparables."
35. Further Co-ordinate Bench of the Tribunal in the case of Capita India Pvt. Ltd. (supra) has held that this company having huge intangibles assets cannot be compared with the assessee who has no significant intangibles. In view of the above discussion, we hold that the Basiz Fund Services Private Limited cannot be considered as a comparable on account of huge intangibles. We, therefore, direct the TPO to exclude Basiz Fund Services Private Limited from the list of comparables.
36. So far as HCCA Business Services Private Limited is concerned, we find its operations comprise of payroll processing services. Further, it cannot be established from the Annual Report that the company is engaged in marketing support services. It is seen that it has developed software for rendering payroll services and such software development expenses constitutes approximately 21% of the total operating cost which is verifiable from page 165, 166 & 177 of the Annual Report Compendium.
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37. We find the Bangalore Bench of the Tribunal in the case of M/s Aruba Networks India Pvt. Ltd. (supra) has directed the TPO to exclude HCCA by observing as under :-
"32. The learned counsel submitted that HCCA Business Services is engaged in Payroll processing. Therefore this company is functionally different from the Appellant and should be rejected. Reliance is placed on ITAT decision in the case of DCIT v. M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11, wherein it is held as under :
(1) HCCA Business Services Pvt. Ltd.
13. The assessee objected against inclusion of this company in the list of comparables on the ground that this company is engaged in providing payroll process services and therefore it is functionally different. In support of its contention, the assessee referred to Notes to the Accounts wherein the company's operations comprise of payroll processing services is mentioned and hence it is not possible to give the quantitative details of sales and certain information separately.
14. The DRP after considering the annual report noted that except the Note 2.14, there is no other observation in the annual report from which it can be established that the company is engaged in marketing and sales support services comparable to the assessee. Accordingly, the DRP directed the AO to exclude the said company from the comparables.
15. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has considered the fact that payroll processing services was main part of the operations of the company and quantitative details of sales and certain information as required under Part II of Schedule VI to Companies Act was not possible. Thus, in the absence of any contrary fact on record brought before us, we do not find any reason to interfere with the finding of the DRP, when the functions and business activity of this company was found to be different from marketing and sales support services of the assessee. Accordingly, the objection of the Revenue is rejected."
38. In view of the above discussion, we direct the TPO to exclude HCCA Business Services Private Limited from the list of comparables.
39. Now, coming to the inclusion of Cyber Media India Online Limited as argued by the ld. counsel for the assessee is concerned, we find it was rejected by the TPO on the ground that it was engaged in event management. A perusal 22 ITA No.892/Del/2014 of the order of the DRP shows that it has directed the TPO to include Keystone Integrated Marketing Services Private Limited by observing as under :-
"The company is engaged in helping companies selling technology products to engage with their customers and partners across multiple touch points. The company integrates different marketing services. These marketing services include event management, customer relationship management (CRM) campaigns and extended sales force team who work for their Clients. The company's approach is to build long term relationships with Clients, understand their business issues and add value at critical pints to their sales and marketing operations. The nature of services described as above functionally quite close to that of the assessee. Therefore, the TPO is directed to include this company as a comparable."
40. We find from page 209 of the Annual Report Compilation that the Cyber Media India Online Limited is engaged in providing advertising and marketing services (including event management, relationship and fulfillment management) in various forms of media to its clients and thereby, also directly promotes the brand by incurring expenses.
41. Therefore, we find merit in the argument of the ld. counsel for the assessee that going by the same logic taken by the DRP in the case of Keystone Integrated Marketing Service (P) Ltd. Cyber Media India Online Limited should be included in the list of comparables. We accordingly direct the TPO to include this company in the list of comparables.
42. Now, coming to inclusion of ICRA Management Consulting Services Limited is concerned, we find the same was rejected on account of RPT filter exceeding 25%. However, it is the submission of the ld. counsel for the assessee that the RPT is only 14.03%. We, therefore, restore the issue to the file 23 ITA No.892/Del/2014 of the Assessing Officer/TPO with a direction to verify the RPT filter and if the assessee fulfills the RPT filter criteria then to retain this company as comparable. The first issue raised by the assessee is accordingly allowed.
43. So far as second issue is concerned, the same relates to incorrect enhancement of cost base for computing the arm's length price. It is the submission of the ld. counsel for the assessee that it has incurred an expenditure of Rs.3.90 crores during the financial year 2007-08 for acquisition of certain know-how relating to business of marketing and promotion. The entire amount of INR 3.90 crores are completely charged to Profit & Loss Account in financial year itself. It is also his submission that after filing the complete written synopsis on 26.10.2013, the DRP passed the order on 25.11.2013 and no further hearing took place nor any clarification was asked from the assessee. Since, it has already been considered in the preceding year, therefore, no addition was called for. Further, the TPO in the subsequent assessment year had not added the tax depreciation to the costs base of the assessee. Without prejudice to the above, he submitted that in case an adjustment for depreciation is undertaken while computing the profit margin of the assessee, similar adjustment should also be required while computing the profit margin of comparable companies following the rule of consistency. However, the tax audit report or income computation statement of the comparable companies are not available in the public domain. Considering the non-availability of the tax audit report and 24 ITA No.892/Del/2014 computation of income of comparables in public domain there would exist disparity while computing the profit margins and would distort the arm's length price leading to absurd results. He also referred Rule 10B(1)(b) of the I.T. Rules, 1962. He accordingly submitted that order of the DRP enhancing the cost base with the amount of tax depreciation for computing the arm's length price should be rejected.
44. Ld. DR on the other hand heavily relied on the order of the ld. DRP. In his alternate contention he submitted that the matter may be restored to the file of the TPO.
45. After hearing both the sides, we find there was no such addition to the taxable income by the TPO/Assessing Officer. Only the DRP during the course of hearing before them issued enhancement notice and directed the TPO to include this expenditure in cost base while computing the profit margin. It is the submission of the ld. counsel for the assessee that after submitting the written reply on 26.10.2013, the DRP passed the order on 26.11.2013 and no further hearing took place. Further, an amount of Rs.3.90 crores was considered by the assessee for computing transfer prices in financial year 2007-08 itself for computing the tax depreciation and tax computation. The marketing fee paid was amortized only at the rate of 25% on WDV starting financial year 2007-08. It is also the submission of the ld. AR that in subsequent assessment years, the TPO has not added the tax depreciation to the cost base of the assessee 25 ITA No.892/Del/2014 company. In our considered opinion, the matter requires a re-look at the level of the DRP considering the past assessment year as well as subsequent assessment year of the assessee company on this issue. We, therefore, restore this issue to the file of the DRP with a direction to adjudicate the issue afresh after giving due opportunity of being heard to the assessee. Needless to say, the DRP shall decide the issue as per fact and law. The second issue raised by the assessee in the grounds of appeal is allowed for statistical purposes.
46. So far as other issues are concerned such as levy of interest under various sections of the I.T. Act and initiation of penalty proceedings u/s 271(1)(c) are concerned, the same were not argued by the ld. counsel for the assessee. Thus, these grounds are dismissed being mandatory and consequently in nature.
47. In the appeal, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open Court on this 20th day of April, 2018.
Sd/- Sd/-
(KULDIP SINGH) (R. K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 20-04-2018.
Sujeet
Copy of order to: -
1) The Appellant
2) The Respondent
3) The DRP-III, New Delhi
4) The DR, I.T.A.T., New Delhi
By Order
//True Copy//
Assistant Registrar
ITAT, New Delhi