Income Tax Appellate Tribunal - Delhi
Ge India Business Services Pvt. Ltd, New ... vs Dcit, New Delhi on 27 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
Delhi Bench"I-2", New Delhi
BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER
AND
SMT. BEENA A PILLAI, JUDICIAL MEMBER
I.T.A. No. 6906/Del/2014
A.Y.: 2010-11
GE India Business Services Pvt. Ltd Vs. Deputy Commissioner of Income
401, 402, 4th Floor, Aggarwal Tax, Circle-10(1), New Delhi
Millennium Tower, E-1, 2, 3 Netaji
Subhash Place, Wazirpur, New
Delhi
PAN: AAACI6748J
[Appellant] [Respondent]
Assessee by: Sh. Sachit Jolly, Advocate
Respondent by: Sh. H.K. Choudhary, CIT DR
Date of Hearing: 18 04 2018
Date of Pronouncement: 27 04 2018
ORDER
PER P.M. JAGTAP, A.M:
This appeal filed by the assessee is directed against the order of DCIT Circle 12(2), New Delhi dated 30.10.2014 passed under section 143(3) read with section 144(C) of the Income Tax Act, 1961 whereby he made addition of Rs. 4,80,19,591/- to the total income of the assessee on account of transfer pricing adjustment.
2. The assessee in the present case is a business process outsourcing company set up as a captive service provider to provide offshore outsourcing services primarily to GE Group entities / businesses worldwide. The primary ITA No. 6906/Del/2014 2 activity of the assessee company comprises of rendering I.T. enabled services and financial support services to various overseas GE companies on a cost plus basis. The return of income for the year under consideration was filed by it on 30.09.2010 declaring a total income of Rs. 12,16,81,262/-. Since the assessee had entered into international transactions involving provision of I.T. enabled services to its associated enterprises of the value of more than 15 Crores during the year under consideration, a reference was made by the AO to the TPO under section 92 CA of the Act for determining the arm's length price of the said transactions. In the TP study report furnished by the assessee, TNMM was adopted as the most appropriate method to determine the arm's length price of the international transactions entered into by the assessee with its AE for providing I.T. enabled services. In the said report, the assessee company was taken as a party and operating profit / total cost (OP / TC) was taken as the profit level indicator (PLI). Eight entities were selected as comparables and since their average OP / TC as worked out at 8.36% was well below the OP / TC shown by the assessee at 16.94%, the price charged by the assessee company to its associated enterprises of providing I.T. enabled services was claimed to be as at arm's length.
3. The eight comparables selected in the TP study report were analysed and examined by the TPO by applying various filters and the same were found to be not the suitable comparables by the TPO for the following reasons given in his order.:-
Sr. Name of the Comparable Remarks
No.
1 Aditya Birla Minacs Worldwide Ltd This company is having significant RPT
(33.53%) and it also fails the export
sales filter (71.57%). Hence, not a
suitable comparable.
2 Allsec Technologies Ltd. This company is having persistent losses.
ITA No. 6906/Del/2014 3
And failing export filter also (59.54%).
Hence, not a suitable comparable.
3 Caliber Point Business Solutions Ltd. This company is having financial year
ending other than March. Hence, not a
suitable comparable.
4. Cameo Corporate Services Ltd. This company is failing export filter.
Hence, not a suitable comparable.
5 Informed Technologies India Ltd This company is having sales below Rs. 5
crores. Hence, not a suitable
comparable.
6 Optimus Global Services Ltd This company fails export filter. Hence,
not a suitable comparable.
7 Professional Management Consultant This company fails export filter. Hence,
Pvt. Ltd not a suitable comparable.
8 Sparsh BPO Services Ltd This company fails export filter (0.0%).
Hence, not a suitable comparable.
4. On further analysis and examination, the TPO found that some of the comparables that had been rejected in the TP study report furnished by the assessee on qualitative grounds were actually suitable comparables. The reasons given by the AO for arriving at this conclusion in respect of 7 such comparables were as under:-
Sr. Name of the Comparable Remarks of this office No. 1 Accentia Technology You have rejected this company on the ground mentioned in Accept/Reject matrix that 'Performs Dissimilar Functions'. However, the annual report 2 Cosmic Global Limited of the company has been perused. This is very much an ITES company and it passes all filters also. Hence, this is a robust comparable in your case.
3 Fortune Infotech Limited You have rejected this company on the ground mentioned in Accept/Reject matrix that company is having RPT in excess of 20%. However, the annual report of the company has been perused. RPT of the comparable company has been computed and it found to be less than 25% of Sales ITA No. 6906/Del/2014 4 (24.52%). Hence, this is a suitable comparable in your case.
4 Igate Global Solutions Limited You have rejected this company on the ground mentioned in Accept/Reject matrix that engaged in Consulting and BPO segment and proper segmental results are not given. However, the annual report of the company has been perused and it is found that this company is dominantly an ITES company and passes all filters also. Hence, this is a suitable comparable in your case.
5 Infosys BPO Limited You have rejected this company on the ground mentioned in Accept/Reject matrix that 'Significant difference in scale of operations. Assessee in its search itself has not applied High turnover Filter'. As per the functional profile of the company this is very much on ITES company and it passes all filters also. Hence, this is a suitable comparable in your case.
6 TCS E-Serve International Ltd. You have rejected these companies on the ground mentioned in Accept/Reject matrix that 'these company are having RPT in excess of 20%. However, the 7 TCS E-Serve Ltd. annual report of the companies has been perused and it is found to be less than 25% of Sales (12.09% and 2.70% respectively). Hence, these are suitable comparables in your case.
5. The TPO accordingly selected the above 7 entities as final comparables and worked out their average profit margin at 36.80% as under:-
Sr. No. Company Name OP/OC
1 Accentia Tech 43.07%
2 Cosmic Global 18.28%
3 Fortune Infotech Limited 22.80%
4 Igate Global Solutions 24.54%
Limited
ITA No. 6906/Del/2014 5
5 Infosys BPO Ltd 31.44%
6 TCS E-Serve International Ltd. 54.03%
7 TCS E-Serve Ltd. 63.42%
Average 36.80%
By applying the average profit margin of 36.80% of the comparables selected by him to the operational cost of the assessee, the arm's length price of the international transactions entered into by the assessee company with its AE's was worked out by the TPO at Rs. 31,27,96,065/- as against the price of Rs. 26,45,93,552/- received by the assessee and TP adjustment on account of difference of Rs. 4,82,2,513/- was proposed by him in his order dated 9.1.2014 passed under section 92 CA of the Act. Accordingly, in the draft assessment order 31.1.2014 passed by the AO, addition of Rs. 4,80,19,591/- was made by the AO after some adjustment to the total income of the assessee on account of transfer pricing adjustment.
6. Against the draft order of the AO dated 31.1.2014, objections were raised by the assessee which were overruled by the DRP vide its order dated 24.10.2014 passed under Section 143(C)(5) of the Act. The DRP thus confirmed the transfer pricing adjustment proposed by the TPO and consequently in the final assessment order passed by the AO under section 143 read with section 144(C) of the Act vide an order dated 30.10.2014, addition of Rs. 4,80,90,591/- was made by the AO to the total income of the assessee by way of transfer pricing adjustment. Aggrieved by the same, the assessee has referred this appeal before the Tribunal.
7. We have heard the arguments of both the sides and also perused the relevant material available on the record. Although there are several grounds raised by the assessee while challenging the addition made on account of transfer pricing adjustment, the learned counsel for the assessee has ITA No. 6906/Del/2014 6 submitted that what the assessee is seeking effectively is exclusion of 5 of the 7 comparables selected by the TPO. In support of the assessee's case for the exclusion of the said 5 comparables, he has made elaborate submissions and has also relied on the various decisions of this Tribunal wherein the said 5 entities have been excluded by the Tribunal from the list of final comparables. In reply, the learned DR has also made the detailed submission in support of the Revenue's case that the concerned 5 entities selected by the TPO and confirmed by the DRP are suitable comparables which cannot be excluded.
8. After considering the rival submissions and perusing relevant material on record, we find that the issue relating to the inclusion or exclusion of the concerned 5 entities in question has already been considered and decided in the various decisions of this Tribunal. In one of such decisions rendered for the same assessment year i.e. A.Y. 2010-11 in the case of M/s Rampgreen Solutions Pvt. Ltd. (ITA No. 1066/Del/2015 dated 4.11.2015), an assessee engaged primarily in providing I.T. enabled services to its parent company, like the assessee in the present case, M/s Accentia Technologies was excluded by the Tribunal from the final list of comparables for the following reasons given in paragraph no. 16 to 20 of its order.
"As regards Accentia Technologies Ltd., ld. counsel referred to pages 350 & 351 of the PB-II, wherein the annual report of this company is contained. He pointed out that in the year under consideration Asscent Infoserve Ltd. amalgamated with this company w.e.f. 1-4-2008. He pointed out that Accentia Technologies Ltd. was engaged in the business of medical transcription and coding and had softwares which were being used by the Accential Technologies Ltd. in serving the end to end results. Thus, functionally amalgamating company and amalgamated companies were different as performing different functions.
17. The effect of amalgamation has been pointed out in the annual accounts and it is merely stated therein that in view of the amalgamation being effective the figures for the year ended 31-3-2010 were inclusive of the figures relating to the amalgamating company and, thus, were not comparable with those of the previous year.
18. Ld. counsel further referred to page 355 of the PB, wherein fixed asset schedule of the said company is contained in which, in the block goodwill/ brand/ IPR an addition ITA No. 6906/Del/2014 7 of Rs. 19,651,057/- has been shown. Thus, he pointed out that the asset base had substantially increased in the year under consideration and, therefore, this could not be taken as comparable because of the extraordinary event. Ld. counsel further referred to the decision of the ITAT dated 6-7-2015 in the case of Techbook International Pvt. Ltd. for AY 2010-11, contained at pages 649 to 699 of the PB, wherein this comparable has been excluded on account of this event, observing as under:
"10. 1.2 . We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company, a copy of which has been placed .on page 435 onwards of the paper book. Notes to Accounts of this company, which have been placed on page 443 of the paper book, indicate about the amalgamation or Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. D'Cl'T (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal 'in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables."
19. Having gone through the annual report and keeping in view the extraordinary event in the year under consideration, we are in agreement with ld. counsel that this comparable cannot be taken into consideration while determining the average margin earned by the comparables. Ld. counsel has submitted that in the case of Techbook International Pvt. Ltd. (supra), this company has been excluded and, accordingly, in the present case also this should be excluded, because the functional profile of Techbook International Pvt. Ltd. (supra) and that of assessee is similar. We find that Tribunal in the case of Techbook International Pvt. Ltd. (supra), in regard to the business profile of Techbook International Pvt. Ltd. (supra), has observed as under:
Succinctly, the assessee was incorporated as a wholly owned subsidiary of Aptarausa. It is engaged in the development of customized electronic data. It converts data from hard copy or files into XML/SGML/HTML, creating electronic style files and modifying the user interface for CD-ROM delivery. In the process, raw data received from the customers in hard copy / electronically, is converted into electronic form. Thereafter, the data is arranged and formatted. Thus, it can be said that the assessee is primarily engaged in providing ITES to its associated enterprise (AE)."
20. The assessee's business profile has been considered in para 2 this order and a comparison of the business profile of Techbook International Pvt. Ltd. (supra) with ITA No. 6906/Del/2014 8 assessee clearly shows that both are providing ITES services to its AEs. Therefore, the finding in Techbook International Pvt. Ltd. (supra), regarding various comparables is applicable to the present set of facts. Therefore, respectfully following the order of the ITAT in the case of Techbooks International Pvt. Ltd. (supra), we direct this comparable to be excluded from the final list of comparables.
9. By its order passed in the case of M/s Rampgreen Solutions Pvt. Ltd. (supra), the Tribunal also excluded M/s I-gate Global Solutions Limited and M/s Infosys BPO Limited from the list of comparables vide para no. 32 to 35 which read as under:-
32. i-Gate Global Solutions:- In the case of Techbook International Pvt. Ltd. (supra), the Tribunal has excluded this company from the list of comparables by observing as under:
"10.4.2: We have gone through the Annual report of this Company, which is available on page 446 onwards of the paper book. Notes to accounts or this company indicate amalgamation of i-Gate Global Solutions Sdn. Bhd. This amalgamation took place with the approval of the members of the company on 12.8.2009 and subsequently sanctioned by the Hon'ble High Court by its order dated 24.2.2010. As the financial results of this company also include the results of amalgamating company, in our considered opinion, this is an extraordinary financial event, which renders it unfit for comparison with the assessee company. While discussing the comparability of Accentia Technologies Ltd. (supra), we have referred to certain decisions in which it has been held that a company loses the tag of comparability due to amalgamations, mergers, etc., taking place during the year in question. Adopting the same reasoning, we order for the exclusion of this company from the list of comparables".
33. Respectfully following the Tribunal's decision in the case of Techbook International Pvt. Ltd. (supra), this company is excluded from the list of comparables.
34. Infosys BPO: In the case of Techbook International Pvt. Ltd. (supra), the Tribunal has excluded this company from the list of comparables by observing as under:
10.5.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, which .is available on page 449 onwards of the paper book, that there was acquisition by this company of McCamish Systems LLC. Such information is available on page 456 of the paper book. Acquisition of Mcf.amish Systems LLC during the year, being an extraordinary financial event, renders it incomparable.
Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables."
ITA No. 6906/Del/2014 935. Respectfully following the Tribunal's decision in the case of Techbook International Pvt. Ltd. (supra), this company is excluded from the list of comparables."
10. As regards the other two entities namely viz TCS E-serve international limited and TCS E-Serve limited, the Tribunal in its order passed in the case of M/s Rampgreen Solutions Pvt. Ltd. (supra) found that TCS E- Serve international limited which was providing software development services was not functionally similar to the assessee company which was engaged in providing non development software services. The Tribunal accordingly excluded the said entity from the list of final comparables. The issue relating to inclusion from exclusion of the other entity i.e. TCS E-Serve limited however was remitted by the Tribunal back to the Assessing Officer for deciding the same afresh after taking into consideration certain business characteristics of the said entity.
11. As the functional profile of the assessee company is similar to that of M/s M/s Rampgreen Solutions Pvt. Ltd. (supra) and even the relevant assessment year involved in both these cases i.e. A.Y. 2010-11 is also same, we respectfully follow the decision of the coordinate Bench of this Tribunal rendered in the case of M/s Rampgreen Solutions Pvt. Ltd. (supra) and direct exclusion of 4 entities namely Accentia Technologies, I-gate Global Limited, Infosys BPO Limited and TCS E-Serve international limited from the list of final comparables. The issue relating to inclusion or exclusion of TCS E-Serve is remitted back to the AO / TPO for considering the same afresh after taking into consideration all the relevant aspects affecting the comparability analysis. The learned counsel for the assessee has also raised one issue relating to substantial related party transactions in the case of TCS E-Serve Limited by relying on Section 92 B(2). The AO / TPO is directed to consider and decide this issue also.
ITA No. 6906/Del/2014 1012. In the result, the appeal of the assessee is treated as allowed as indicated above.
Pronounced in the open court on 27.04.2018.
Sd/- Sd/-
[BEENA A PILLAI] [P.M. JAGTAP]
Judicial Member Accountant Member
DATED: 27.04.2018
SH
Copy forwarded to:-
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
Assistant Registrar