Income Tax Appellate Tribunal - Mumbai
Mindcrest (India) Pvt. Ltd., Mumbai vs Assessee on 12 December, 2014
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई Ûयायपीठ , मुंबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI
सव[ौी ǒवजय पाल राव, Ûयाियक सदःय एवं नरे Ûि कुमार ǒबãलैáया, लेखा सदःय के सम¢
BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND
SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER
आयकर अपील सं./I.T.A. No. 7289/Mum/2012
िनधा[रण वष[ / Assessment Year : 2008-09
(िनधा[
Mindcrest (India) Pvt Ltd., बनाम/बनाम The DCIT-9(2),
106, Peninsula Centre, Aayakar Bhavank,
Vs.
Dr. S.S. Rao Road, Mumbai-400 020
Parel,
Mumbai-400 012
ःथायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AACCM 5872D
(अपीलाथȸ /Appellant) .. (ू×यथȸ / Respondent)
अपीलाथȸ ओर से/ Appellant by: Shri Nitesh Joshi
ू×यथȸ कȧ ओर से/Respondent by: Shri K.C.P. Patnayak
सुनवाई कȧ तारȣख / Date of Hearing :04.12.2014
घोषणा कȧ तारȣख /Date of Pronouncement :12.12.2014
आदे श / O R D E R
PER N.K. BILLAIYA, AM:
This appeal by the assessee is preferred against the assessment order dt.31.10.2012 made u/s. 143(3) r.w. Sec. 144C(13) of the Act pertaining to A.Y.2008-09.
2. The assessee is aggrieved by the Transfer Pricing Adjustment of Rs. 6,70,40,907 made on account of the arm's length price.
2 ITA No. 7289/M/20123. The assessee is a wholly owned subsidiary company of Mindcrest Inc. providing offshore support services to its parent company for the use of clients of the parent company. During the year under consideration, the assessee supported its Associated Enterprises (parent company) by uploading the generic judgements on the given Website.
3.1. The assessee entered into services agreement with its parent company vide agreement dt. 1.4.2006. It was agreed that in consideration of the services provided by the assessee to its parent company, the parent company shall pay to the assessee an amount equivalent to the operating cost incurred by the assessee in providing such services including related costs and expenses of its personnel, parent company shall in addition pay 12.50% mark up on the Operating costs till agreement is in force.
3.2. Mindcrest Inc (Parent company) entered into a services agreement on 12.9.2006 with Bloomberg LP. It was agreed that Mindcrest shall be responsible for researching key words and phrases provided by Bloomberg using cases regulations, legislative, administrative materials. It was further agreed that Mindcrest Inc. shall create a list of extracted information from the sources that best explain and define the keywords and phrases. Service provider (Mindcrest Inc) shall edit and rewrite extracted text so that copy is clear, concise, well formed and grammatically correct. It was also agreed that there will be a total of 20 Assigned Employee and all services provided by the Service Provider to Bloomberg will be provided from the Service provider's location in India for which Service Provider shall bear all costs and expenses incurred by it providing such services.
3 ITA No. 7289/M/20123.3. The consideration was agreed at the rate of 12 US Dollar per hour. Thus, during the year under consideration, the assessee was primarily engaged in limited operations of creating data base of certain generic case laws on behalf of the AE for the client. The assessee also assisted in maintaining and updating the legal content on a regular basis. For the purpose of rendering these services, the activities performed by the assessee primarily involved gathering of information from case laws and standardize templates and populating the same in various process and systems provided by the AE. The International Transactions entered into between the assessee and its AE during the year is as under:
i) Provision for support services amounting to Rs.
20,40,96,686/-.
For bench marking the above mentioned international transaction, the assessee adopted cost plus method to be the most appropriate method. For the purpose of application of cost plus method operating profit to cost ratio was considered as the profit level indicator.
The assessee chose the following set of comparables S. Company name Finance year Sale OP/OC% No.
1. Linkson International 20.08.03 47.57 1.48%
2. Cameo Corporate 20.08.03 17.08 8.06% Service Ltd.
3. Shreejal Info Hubs Ltd. 20.08.03 1.57 8.22%
4. Maple Esolutions Ltd. 20.08.03 33.65 22.33%
5. Cosmic Global Ltd. 20.08.03 5.86% 23.91%
6. Isoft Tecdhnologies Ltd. 20.08.03 1.89 35.66% 4 ITA No. 7289/M/2012
7. Datamatics financial 20.08.03 13.7 12.64% Services ltd.
8. Alisec Technologies Ltd. 20.08.03 99.02 12.25%
9. Optimus Global Services 20.08.03 55.85 1.32% Ltd
10. ICRA Online Ltd. 20.08.03 10.75 8.46% Average PLI 10.98% Mindcrest India 13.00% Accordingly, since the operating margin over cost ratio of the assessee at 13% is higher than the average of the comparable companies at 10.98%, the international transaction undertaken by the assessee was considered to be at arm's length.
3.4. On receiving a reference u/s. 92CA(1) of the Act, the Transfer Pricing Officer issued a notice alongwith a questionnaire to the assessee whereby the assessee was required to submit details/explanation to support the arm's length price computed by it in the audit report. The assessee filed a detailed explanation alongwith necessary details stating that the assessee has charged a mark- up of 12.56% of cost and has bench marked the transaction using TNMM method where the average profit margin of the comparable companies is 10.98%. The assessee concluded that its transactions were at arm's length.
3.5 After considering the facts and the submissions and the TP study report, the TPO was of the firm belief that the assessee is engaged in legal process outsourcing which is a high end service akin to KPO. The TPO applied the following filters or criteria in searching for the comparables.
- Companies whose data is not available for the FY 2007-08 were excluded and the date for the FY 2007-08 has been considered for the period from 01.04.2007 to 31-03-2008.
5 ITA No. 7289/M/2012- Companies whose IT enabled service income <10.00 cr and >250 crores were excluded.
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- Companies whose IT enabled service revenue is less than 75% of the total operating revenues were excluded.
- Companies who have more than 25% related party transactions(sales as well as expenditure combined) of the operating revenues were excluded.
- Companies who have less than 75% of the revenues as export sales were excluded.
- Companies who have diminishing revenues/persistent losses for the period under consideration were excluded.
- Companies having different financial year ending (i.e. not March 31,2008) or data of the company does not fall within 12 month period i.e. 01-04-2007 to 31-03-2008, were rejected.
- Companies that are functionally different from that of taxpayer or working in peculiar economic circumstances, after giving valid reasons, were excluded.
- Companies that are not mainly engaged in KPO services were excluded.
3.6. The TPO rejected all the comparables but one, considered by the assessee for the following reasons:
i) The assessee's comparables do not stand scrutiny of FAR analysis mainly because they are not into knowledge process outsourcing.
ii) The assessee has selected companies with pre-dominant domestic operations though the assessee is mainly export oriented IT Enabled Service provider.6 ITA No. 7289/M/2012
The TPO was of the opinion that the information or data used in the computation of arm's length price by the assessee is neither reliable nor correct. The TPO made its own search by using Prowess Data base and after considering the companies search, following comparables were proposed by the TPO.
S.No. Name of the Functional Lines
Comparable
1. Acropetal Technologies The engineering designing services (Seg.) segment of the company is engaged in engineering design services.
2. Coral Hub Ltd. The company is mainly engaged in (Formerly Vishal data processing services.
Information Technologies Ltd.
3. Crossdomain Solutions The company is mainly engaged in Ltd. data processing, insurance claims processing and payroll processing services.
4. Eclerx Services Ltd. The company is mainly engaged in data analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management and data analytics are some of the offerings to Retail and Manufacturing clients. To its Financial Services clients, it offers real-time capital markets, middle and back office support, portfolio risk management services and various critical data management services 3.7. The assessee raised objections before the DRP. The DRP considered the scope of work of the assessee vis-à-vis parent company. The assessee strongly contended that the search undertaken by the TPO is not contemporaneous as per the TP regulations. Further, it was brought to the notice of the DRP that the agreement between the AE and 7 ITA No. 7289/M/2012 Bloomberg is for rendition of services from India and for which fee agreed was 12 US Dollar per hour. It was claimed that the consideration itself show that it was providing low- end services.
3.8. After considering the facts and the submissions and the objections raised by the assessee, the DRP directed to exclude Coral Hubs Ltd. from the list of comparables used by the TPO and issued directions accordingly.
4. Aggrieved by this, the assessee is before us.
5. The Ld. Counsel for the assessee vehemently submitted that the Revenue authorities have grossly misunderstood the nature of the services provided by the assessee to its AE. The Ld. Counsel stated that the assessee is providing low-end services to its AE and therefore the comparables selected by the assessee are in the line of the nature of services provided by the assessee. It is the say of the Ld. Counsel that it is incorrect to hold that the assessee is providing high end services akin to KPO. In support, the Ld. Counsel for the assessee referred to the agreement between the Mindcrest Inc (AE) and Bloomberg and pointed out that the consideration for the services is US Dollar 12 per hour only which itself suggest that it is a case of low-end services. The Ld. Counsel further explained why the comparables used by the TPO should not be accepted. It is the say of the Ld. Counsel that in the subsequent years i.e. A.Y. 2009-10 and 2010-11 the TPO himself has taken certain comparables, the average of which comes to 23.75% in A.Y. 2009-10 and 18.69% in A.Y. 2010-11. The Ld. Counsel concluded by saying that when the TPO himself has accepted the ALP by using the margin at 23.75% and 18.69%, the same should be adopted in the year under consideration.
8 ITA No. 7289/M/20126. The Ld. Departmental Representative supported the directions of the DRP. It is the say of the Ld. DR that the assessee is definitely providing high end services because legal research services could not be considered as low-end services. Referring to the scope of work undertaken by the assessee with its AE, the DR submitted that the assessee has not clarified which of the services it has rendered. It is the claim of the DR that the comparables used by the assessee are also not in line with the services provided by the assessee and therefore the comparables of the assessee have rightly been rejected by the Revenue authorities.
7. Having heard the rival submissions, we have carefully perused the orders of the lower authorities and the relevant documentary evidences brought on record before us. The main dispute is whether the services provided by the assessee are high end services or whether they are low end services. If the scope of the work of the assessee vis-à-vis its AE is considered, then definitely it appears that the assessee is providing high- end services. But the fact of the matter is that we have to consider only those services which were actually provided by the assessee during the year under consideration to its AE. The AE entered into an agreement with Bloomberg. The scope of the services have already been mentioned by us elsewhere. The consideration is pegged at 12 US Dollar per hour. It cannot be denied that looking into the consideration, the nature of services appear to be low-end services. It is also an undisputed fact that during the year under consideration, there was only one client i.e. Bloomberg.
9 ITA No. 7289/M/20127.1. Let us now consider the company's used as comparables by the TPO to see whether they can be accepted or not:
1. M/s. Acropetal Technologies (Seg.) A perusal of the Annual report of this company shows that it is engaged in the development of Computer Software. The company has also shown inventories as work-in-progress in its balance sheet and there is also increase/decrease in inventories in its profit and loss account and under the head employees related onsite development charges, there are onsite development expenses amounting to Rs. 31.45 crores.
Considering these facts, it can be safely concluded that this company has totally different business model. It is also seen that this company does not pass the test of 75% export turnover which is used as a filter by the TPO himself. This company was also rejected by the Tribunal in ITA No. 7016/M/2012 wherein the Tribunal has held that the ratio of onsite to total employee related expenses of this company comes to 86.2%k, thus failing the onsite filter. The Tribunal, Bangalore Bench in ITA No. 1316/Bang/2010 in the case of Symphony Marketing Solutions India Pvt. Ltd. has observed that the functions performed by the Engineering Design Services segment of this company cannot be considered as comparable to the ITES/BPO functions performed by the assessee. Considering all these facts in totality, we direct for the exclusion of this company from the final list of comparables.
2. Crossdomain Solutions ltd.
A perusal of the Director's report of the company show that this company has been acknowledged as niche service provider and 10 ITA No. 7289/M/2012 has started building on brand EXDION to target the Insurance Industry in United States. Further, under the head 'fixed assets' schedule, it can be seen that this company has shown software as intangible assets. On these facts itself, this company cannot be considered as comparable. This company was also rejected as a comparable by the Tribunal Bangalore Bench in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) wherein the Tribunal has observed that the business profile of this company is re-engineered payroll services which ranges from high-end KPO services development of product suites and routine low and ITES service. This decision of the Tribunal was followed by the Hyderabad Bench in the case of Hyundai Motors India Engineering Pvt. Ltd. in ITA No. 1850/Hyd/2012 and also by Mumbai Bench in the case of M/s. Willis Processing Services (India) Pvt. Ltd. in ITA No. 2152/M/2014. Considering all these facts in totality, we direct for the exclusion of this company from the list of comparable.
3. M/s. Eclerx Services Ltd.
A perusal of the business view of this company shows that this company is a leading Indian provider of Knowledge Process Outsourcing using a mix of custom designed processes and delivery teams. This company is providing services to the banking, finance, manufacturing, retail, travel and hospitality verticals. This company has dedicated knowledge management team which is responsible for overseeing training and process documentation systems, structures and policies. The Chairman in his message to the shareholders has observed that this 11 ITA No. 7289/M/2012 company is a very different company with industries specialized services for meeting complex client needs. The Chairman admitted that sometimes this company is compared to a BPO or a IT offshoring company which infact this company is not. We further find that this company has acquired UK based Igentic Travel Solutions Ltd. on July 27th 2007 which is considered as an abnormal feature for the purpose accepting any company as comparable. The Tribunal, Special Bench, Mumbai in the case of Maersk Global Centres (India) Pvt. Ltd. Vs ACIT in ITA No. 7466/M/12 has obsderved that this company is mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with companies which are mainly engaged in providing low-end services to the group concerns.
The Tribunal, Bangalore Bench in ITA No. 1316/Bang/2010 in the case of Symphony Marketing Solutions India Pvt. Ltd. has observed that this company has acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company and finally held that this company cannot be regarded as a comparable for the reason that it was functionally different. Considering the abnormal features which exist during the year under consideration in this company, in the light of the fact and the decisions discussed hereinabove, we direct for the exclusion of this company from the list of comparables.
4. M/s. Mold Tex Technologies Ltd.
12 ITA No. 7289/M/2012A perusal of this company's Annual Report shows that the related party transactions are at 25.71% which breaches of RPT at 25%. We further find that this company has entered into a Scheme of Arrangement involving amalgamation between Teck- men Tools Pvt. Ltd. demerger between this company and Moldtek Plastics Ltd. The business and the assets and liabilities of Teck-men Tools stand transferred to and vested in this company. This makes it an abnormal feature for the consideration of this company as a comparable company.
The Tribunal Special Bench in the case of Maersk Global Centres (India) Pvt. Ltd. (supra) has also rejected this company as a comparable because of the abnormal features mentioned hereinabove. Considering these facts, it is directed to exclude this company from the final list of comparables.
5. M/s. Datamatics Financial Services Ltd.
This company was considered as a comparable by the assessee and accordingly the DRP considered the same. However, we find that this company fails the 75% plus export turnover filter laid down by the TPO himself. Therefore, this company is also directed to be excluded from the final list of comparables.
8. Having said all that and after rejecting the comparables used by the TPO/DRP, we find that the only comparable surviving is that of M/s. Allsec Technology Ltd. with OP/OC - 12.25%. Here we would like to mention that looking to the nature of the services provided by the assessee, no direct comparables are available. In such a situation, in our considered view, the undisputed comparables adopted by the TPO and 13 ITA No. 7289/M/2012 accepted by the assessee in subsequent years should also be considered during the under consideration including M/s. Allsec Technology Ltd. only for the limited purpose of determining ALP for the year under consideration, 8.1. We accordingly direct the TPO to determine the arm's length price adopting the comparables used by him in the subsequent assessment years for the determination of the arm's length price of the international transaction entered into by the assessee. Accordingly, we set aside the matter to the file of the AO/TPO with the above direction.
9. In the result, the appeal filed by the assessee is treated as allowed for statistical purpose.
Order pronounced in the open court on 12th December, 2014 Sd/- Sd/-
(VIJAY PAL RAO ) (N.K. BILLAIYA) Ûयाियक सदःय /JUDICIAL MEMBER लेखा सदःय / ACCOUNTANT MEMBER मुंबई Mumbai; Ǒदनांक Dated : 12th December, 2012 व.िन.स./ RJ , Sr. PS