Income Tax Appellate Tribunal - Hyderabad
Tns India Pvt. Ltd., Hyd, Hyderabad vs Acit, Circle-2(3), Hyderabad on 6 January, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
I.T.A. No. 1927/HYD/2011
Assessment Year: 2007-08
TNS India Private Limited, The Asst. Commissioner
HYDERABAD Vs of Income Tax,
[PAN: AABCN2278F] Circle-2(3),
HYDERABAD
(Appellant) (Respondent)
For Assessee : Shri Deepak Chopra &
Ms. Suvibha Nolkha, ARs
For Revenue : Shri P. Chandra Sekhar, DR
Date of Hearing : 18-10-2016
Date of Pronouncement : 06-01-2017
ORDER
PER B. RAMAKOTAIAH, A.M. :
This is an appeal by assessee against the order of the Assessing Officer passed u/s.143(3) r.w.s. 92CA(3) r.w.s. 144C (13) of the Income Tax Act (Act). Assessee has raised various issues with reference to Transfer Pricing adjustments as well as corporate issues.
2. Briefly stated, assessee is engaged in rendering market research and related back office services for domestic and international clients. The company was incorporated in 1992 and has Offshore Research Service Centre [ORSC] registered with :- 2 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited Software Technology Parks of India and provides ITES to its group companies. For AY. 2007-08, assessee filed its return of income disclosing net income of Rs. 9,01,92,405/- after claiming deduction u/s. 10A of the Act in respect of the profits from its ORSC unit. Since assessee has its international transactions with its Associated Enterprise [AE] to the tune of Rs. 59,79,99,396/- which includes both receipts and expenses and reimbursements, the matter was referred to the Transfer Pricing Officer [TPO] for determining Arm's Length Price [ALP] of its transactions. The TPO vide his order dt. 29-10-2010, has rejected assessee's comparables and made fresh search and arrived at 27 comparable companies having arithmetic mean of 30.21% after providing negative working capital adjustment of (-)0.21, the arithmetic mean was arrived at 30.42%. On a total operating cost including reimbursement of expenses of Rs. 95,24,16,536/-, the ALP sales were determined at Rs. 1,24,21,41,646/- and the adjustment proposed was at Rs. 17,08,62,793/-. On the basis of the TPO's report, AO has finalised the draft assessment order.
2.1. Assessee filed objections before the Dispute Resolution Panel [DRP]. DRP, Hyderabad vide its order dt. NIL has accepted assessee's objections with reference to management fee and license fee payments and also directed to delete two companies from its list of comparables. The DRP also directed to allow depreciation on the license fee payments treated as 'capital in nature'. Consequent to the above directions of the DRP, AO has finalised the assessment order, in which the assessed income was determined at 29,55,15,904/-. Assessee is aggrieved on this order and raised as many as 22 grounds and one additional ground. In the course :- 3 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited of present proceeding, assessee has placed on record that they do not wish to press Ground Nos. 6, 7, 9, 11, 12 & 14.
3. We have heard Ld. Counsel and Ld. DR in detail and perused the Paper Book placed on record. The ground-wise issues are decided as under:
4. Ground No. 1: Rejection of Transfer Pricing (TP) documentation maintained:
Rejecting the TP documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (Rules) and making an adjustment of Rs. 14,94,53,910 in relation to the following international transactions with its AEs.
• Provision of market research services and back-office processing services - Rs. 8,02,37,594;
• Payment of group overhead and regional overhead allocation costs - Rs. 4,39,80,890; and • Payment of license fees - Rs. 2,52,35,426 4.1. This ground is with reference to treating the market research services and overhead allocation cost and license fee at NIL. It was fairly admitted that the DRP has given relief on this issue vide its ground No. 2, therefore, the issue does not survive.
Accordingly, this ground is rejected. However, the DRP's direction to re-work out the margin of assessee by excluding the above amounts should be kept in mind by the AO/TPO while working out the ALP.
5. Ground No. 2: Non Consideration of internal uncontrolled transactions Not considering internal uncontrolled comparable transactions of the Appellant for determination of ALP of the international transactions with AEs;
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TNS India Private Limited
5.1. This ground is not pressed at the time of arguments.
6. Ground No. 3: Determination of Adjustment Determining the TP adjustment on transactions with non-AE's 6.1. This ground pertains to the issue of determination of TP adjustment on non-AE transactions as well. Assessee filed the segmental profits pertaining to ORSC division and Market Research division and submitted that for the purpose of claiming deduction u/s. 10A, separate accounts were maintained and therefore, TPO's contention that under TNMM, adjustment has to be made on entire turnover is not correct.
6.2. This issue has to be considered in favour of assessee and AO/TPO is directed to make adjustments only to the extent of transactions with AE and exclude the adjustment on the transactions with non-AEs. This issue is already decided in favour of assessee in assessee's own cases in earlier years and later years. AO/TPO is directed accordingly. Ground is considered allowed.
7. Ground No. 4: Margin computation of the Appellant under TNMM Non consideration of Work-In-Progress (WIP) movement for the computation of the operating margin of the Appellant;
7.1. This ground pertains to computation of margin under TNMM. It was submitted that the WIP movement for the computation of operating margin of assessee was not considered by the TPO. Since this issue is required to be examined by the TPO, we direct the AO/TPO to examine this issue and work out the correct margin. Ground is allowed for statistical purposes.
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TNS India Private Limited
8. Ground No. 5: Incorrect computation of working capital adjustment Computing the working capital adjustment, by considering the total receivables and payables (including third party transactions) of the Appellant and making a negative working capital adjustment to the arithmetic mean of the companies selected;
8.1. This ground pertains to incorrect computation of working capital adjustment. It was submitted that working capital adjustment was wrongly considered by considering the total receivables and arrivals including third party transactions and making a negative working capital adjustment. AO/TPO is directed to examine this issue and work out the working capital adjustment afresh, as certain comparable companies are being considered separately. In case the working capital adjustment comes negative, AO/TPO is directed not to make any negative working capital adjustment as the same is not approved in various Co-ordinate Bench decisions. The Co-ordinate Bench of ITAT in the case of Adaptec (India) P. Ltd., Vs. ACIT in ITA. No. 206/Hyd/2014 (AY 2009-10) dt. 25-03-2015, has decided the issue of negative working capital as under:
"10. Ground No.8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under :
"14. Ground No.11 : Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under :
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TNS India Private Limited
"The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as :
• The company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. • The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement."
We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under :
"7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to t his situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made."
In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made."
11. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment".
8.2. Respectfully following the decision of Co-ordinate Bench, we direct the AO/TPO not to make negative working capital adjustment.
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TNS India Private Limited
9. Ground No. 8: Information obtained under section 133(6) Using information/documents which are not available in public domain by exercising powers under section (U/s) 133(6) of the Act;
9.1. This ground pertains to obtaining information u/s. 133(6) which was considered along with Ground No. 10.
10. Ground No. 10: Selection of comparables Not undertaking an objective comparative analysis and interalia selecting the following companies as comparable to the services of the Appellant:
a) Accentia Technologies Ltd
b) Accurate Data Convertors Pvt Ltd
c) Asit C Mehta Financial Services Ltd (seg)
d) Bodhtree Consulting Ltd
e) Eclerx Services Ltd
f) HCL Comnet Systems & Services Ltd (seg)
g) Informed Technologies India Ltd
h) Infosys BPO Ltd
i) Iservices India Pvt Ltd
j) Mold Tek Technologies Ltd (seg)
k) Vishal Information Technologies Ltd; and
l) Wipro Ltd (seg) 10.1. In this ground, assessee is objecting to various comparables selected by the TPO. The final selection of the comparables after the DRP's order is as under:
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Sl. Name of the Company TP order &
No. DRP direction
(Unadjusted
Margin)
1. Aditya Birla Minacs Worldwide Ltd 11.98%
(Transworks Information Services Ltd)
2. Allsec Technologies Ltd 27.31%
3. Apex Knowledge Solutions Pvt Ltd 12.83%
4. Apollo Health Street Ltd -13.55%
5. Caliber Point Business Solutions Ltd 21.26%
6. Cosmic Global Ltd 12.40%
7. Datamatics Financial Services Ltd (Seg) 5.07%
8. Flextronics Software Systems Ltd (Seg) 8.62%
9. Genesys Intl Corp Ltd (Seg) 13.35%
10. ICRA Techno Analytics Ltd (Seg) 12.24%
11. Nittany Outsourcing Services Pvt Ltd 11.50%
12. R Systems International Ltd (Seg) 20.18%
13. Spanco Telesystems & Solutions Ltd (Seg) 25.81%
14. Accentia Technologies Ltd (Seg) 30.61%
15. Accurate Data Convertors Pvt Ltd 50.68%
16. Asit C Mehta Financial Services Ltd (Seg) 24.21%
17. Bodhtree Consulting Ltd (Seg) 29.58%
18. Eclerx Services Ltd 89.33%
19. HCL Comnet Systems & Services Ltd (Seg) 44.99%
20. Informed Technologies India Ltd 35.56%
21. Infosys BPO Ltd 28.78%
22. Iservices India Pvt Ltd 49.47%
23. Mold Tek Technologies Ltd (Seg) 113.49%
24. Vishal Information Technologies Ltd 51.19%
25. Wipro Ltd (Seg) 29.70%
10.2. There is no objection with reference to comparables selected at items 1 to 13. The objection is with reference to comparables at 14 to 25. It was submitted that many of the comparables were already excluded by the decisions in HSBC Electronic Data Processing India P. Ltd., Vs. ACIT in ITA No. 1826/Hyd/2011 (AY. 2007-08) dt. 24-10-2014 and C3i Support Services P. Ltd. Vs. ACIT in ITA.No.2183/Hyd/2011 (AY. 2007-08) dt. 28-05-2014 which assessee has relied on. With reference to comparables at 15, 20 and 22, Accurate Data Convertors Pvt Ltd., :- 9 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited Informed Technologies India Ltd., and Iservices India Pvt Ltd., it was fairly admitted that these three comparables were remitted to the AO for examination. However, assessee is objecting that the information obtained u/s. 133(6) and not available in public domain could not be used.
10.3. After considering the submissions, we are of the opinion that these comparables were already considered extensively in the case of HSBC Electronic Data Processing India P. Ltd., Vs. ACIT in ITA No. 1826/Hyd/2011 (AY. 2007-08) dt. 24-10-2014 (supra) and some of them are excluded and some of them are remitted to AO for fresh examination. The order in HSBC Electronic Data Processing India P. Ltd., Vs. ACIT in ITA No. 1826/Hyd/2011 (AY. 2007-08) dt. 24-10-2014 (supra) is as under:
1. Accentia Technologies Limited 6.1.1. The learned authorised representative of the assessee objecting to the aforesaid company being treated as comparable submitted that the aforesaid company is functionally different from the assessee as more than 64% of the operating cost of the company is towards overseas business expenses. The company receives substantial revenue from on-
site services which is more than 75%, hence cannot be considered as comparable on account of differences in geographical locations of the services. It was submitted that the employee cost of company is only 14% of its revenue. It was further submitted that the unaudited segmental information obtained u/s 133(6) of the Act has been used to compute margins which may not be authentic. It was further submitted that due to multiple acquisitions by the company during the year under dispute, it was an exceptional year impacting the profitability of the company. In this context, the learned authorised representative of the assessee referred to the annual report of Accentia Technologies Limited in the paper book. The learned authorised representative of the assessee also relied upon the decisions of Income-tax Appellate Tribunal, Hyderabad Bench in case of Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013, Zavata India P. Ltd., Hyderabad vs. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013 and M/s. Capital IQ :- 10 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited Information Systems India Pvt. Ltd., Hyderabad vs. DCIT (Int. Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012.
6.1.2 The learned departmental representative, on the other hand, submitted that there is no reason to exclude the aforesaid company as the TPO has given justifiable reasons for treating it as a comparable company.
6.1.3 We have heard the contentions of the parties with regard to the aforesaid company and perused the material on record. From the facts and material available on record, it is seen that two companies viz., Iridium Technologies and Geosoft Technologies amalgamated with M/s. Accentia Technologies Limited which resulted in a higher profit for the company during the year. In case of Capital IQ Information Systems India Pvt. Ltd., the co-ordinate bench of this Tribunal while considering the assessee's objection with regard to the aforesaid company held in the following manner:-
"10. It is the submission of the assessee that this company cannot be treated as a comparable because of un-comparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner-
"17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect form 1st October, 2006. There was a de-merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the de-merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3.2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the :- 11 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger."
On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded." 6.1.4 As can be seen from the order of the co-ordinate bench, the aforesaid company was excluded since ex-ordinary events like merger and demerger had taken during the relevant financial year which must have impacted the financial results of the company. That besides the high volume of on-site operation of Accentia Technologies Limited also makes it functionally dissimilar to the assessee. These facts are not considered either by the TPO or by the DRP. We therefore remit the matter to the file of the Assessing Officer who shall verify the fact whether merger has taken place during the year and if it found so, then the aforesaid company has to be excluded from the list of comparables. The Assessing Officer should also properly consider assessee's submissions with regard to functional difference also.
2. Accurate Data Convertors Private Ltd.
6.2.1. The learned authorised representative of the assessee objecting to the aforesaid company being treated as comparable submitted that this company was not identified in the search process either by the assessee or by the TPO. It was submitted that no opportunity was given to the assessee to examine whether these companies are comparable to the assessee. It was submitted that the TPO relying upon unaudited information has treated the aforesaid company as comparable only because the high margin of profit shown at 50.15%. The learned authorised representative of the assessee also relied upon the order of the Coordinate Bench decision of the Delhi Tribunal in the case of ACIT vs. M/s. Toshiba India P. Ltd., 2010-TII-14-ITAT-DEL-T.P. 6.2.2. The learned departmental representative however supported the orders of the revenue authorities in selecting the aforesaid company as comparable.
6.2.3 We have heard the contentions of the parties and perused the material on record. On a perusal of the observation made by the TPO of his order, it is seen that the aforesaid company was not initially selected as a comparable by the TPO. Subsequently, the TPO conducted search in the data bases for finding additional comparable by applying 25% employee :- 12 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited cost filter. After examining the information obtained from the company u/s 133(6) of the Act the TPO treated it as comparable by observing that the company is engaged in IT enabled services and qualifies all the filters adopted by the TPO. It is very much clear from the order of the Assessing Officer that the assessee was not given any opportunity/information to examine the comparability of the aforesaid company. Though the TPO is empowered under the provisions of the Act to obtain information with regard to selection of comparables, however before utilising the information obtained, he has to give fair opportunity to the assessee to have its say in the matter. The DRP has also over-looked this aspect. Another important aspect is the company has shown profit of 50.15% which may have weighed with the Assessing Officer for accepting this company as comparable. Be that as it may since the TPO has not given any opportunity to the assessee to raise its objections with regard to the aforesaid company, we are inclined to remit this issue to the file of the Assessing Officer who shall decide the acceptability or otherwise of the company as comparable after considering the assessee 's objections.
3. Asit C Mehta financial services Ltd. (Seg).
6.3.1. The learned authorised representative of the assessee objecting to the aforesaid company being selected as comparable submitted that the employee cost of the company is only 24.78% of its revenue compared to assessee's 56%. The learned authorised representative of the assessee further submitted that in many other cases for asst. year 2008-09 the DRP has excluded this company from the list of comparables. The learned authorised representative of the assessee also relied upon the decisions of Income-tax Appellate Tribunal, Hyderabad Bench in assessee's own case ITA.No.1624/Hyd/10 and S.A.No.210/Hyd/2012 dated 28.06.2013, Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013 and Zavata India P. Ltd., Hyderabad vs. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013.
6.3.2 The learned Departmental Representative, on the other hand, supported the orders of the revenue authorities.
6.3.3 We have considered the submissions of the parties and perused the material on record. From the information obtained u/s 133(6) of the Act by the TPO, it is seen that the company has a employee cost of 24.78% compared to assessee's 56%. That besides it is also a fact that the DRP in many similar cases for asst. year 2008-09 has excluded this company. Therefore, considering the totality of facts and the circumstances, we direct the exclusion of the aforesaid company from the list of comparables.
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4. Bodhtree Consulting Limited:-
6.4.1 With regard to the aforesaid company, the learned authorised representative of the assessee submitted that the company is functionally different as it is into software services and provide services using the developed products. It was further submitted that in the information submitted in response to the letter issued u/s 133(6) of the Act, it has submitted that the company has developed a software tool used for providing data cleansing services and it involves an element of software development. The company is also engaged in providing e-paper solutions. It was further submitted that the annual report of the company also reveals that it has only software development segment. It was further submitted that the company has undergone re-organisation and cross booking of expenses unlike previous year which has impacted the profitability. It was submitted that un-audited segmental information has been used to compute margins which may not be authentic.
6.4.2 We have heard rival submissions of the parties and perused the material on record. From the annual report of the aforesaid company as submitted in the paper book, it is seen that the said company earns its revenue from software development. Therefore, as it appears the aforesaid company is functionally different from the assessee. This fact was not properly considered either by the TPO or DRP. We therefore remit the matter back to the file of the Assessing Officer who shall consider the acceptability or otherwise of the company after properly considering the objections of the assessee.
5. Eclerx Services Limited:-
6.5.1 Objecting to the aforesaid company being treated as comparable, the learned authorised representative of the assessee submitted that the company is engaged in providing knowledge process outsourcing (KPO). It was submitted that the assessee is providing data analytics, operations management and audit reconciliation. It was submitted that besides being functionally different from the assessee, the aforesaid company has shown extraordinarily high profit at 88.11% hence cannot be treated as comparable. In support of such contention, the learned authorised representative of the assessee relied upon the decisions of Co-ordinate Bench of Hyderabad Tribunal in cases of Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013, Zavata India P. Ltd., Hyderabad vs. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013, M/s. Capital IQ Information Systems India Pvt. Ltd., Hyderabad vs. DCIT (Int.Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012 and also Special Bench decision of the Mumbai Tribunal in the case of Maersk Global Centres (India) P. Ltd., Mumbai vs. ACIT, Circle 6(3), Mumbai dated 07.03.2014.
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6.5.2 The learned departmental representative however supported the orders of the revenue authorities with regard to the aforesaid company.
6.5.3 We have heard rival submissions of the parties and perused the material on record. It is seen that in case of Capital IQ Information Systems (supra), the co-ordinate bench accepted the objection of the assessee with regard to the aforesaid company being treated as a comparable by holding that not only the said company is functionally different being engaged in providing KPO services but it has also shown extraordinary high profits. Following the aforesaid decision of co-ordinate bench of Tribunal in case of Capital IQ Information Systems, we hold that this company cannot be treated as comparable.
7. Informed Technologies India Limited and
9. Iservices India Private Ltd:-
6.6.1 Objecting to the aforesaid companies being treated as comparables, the learned authorised representative of the assessee submitted that both the companies have exceptional year of operation. With regard to Informed Technologies India Limited, it was submitted that the company had shown operating losses of (-)72.98% and (-) 43.96% in the financial year 2004-05 and 2005-06, whereas during the year under dispute, it has shown operating margin of 35.56% which indicates that this has been an year of exceptional operations. So far as I-services India Private Ltd., is concerned, the learned authorised representative of the assessee submitted that the margin of the company is more than one and half times the arithmetic mean of the comparable companies selected by the TPO. It was further submitted that the company is a private limited company with no information for the prior and future years to evaluate trend is available.
The learned Authorised Representative has relied on the order of the Coordinate Bench of Delhi Tribunal in the case of Actis Advisers P. Ltd., in ITA.No.527/Del/2011 for the proposition that companies with significant variation in margins are to be rejected.
6.6.2 The learned departmental representative however strongly supporting the orders of the revenue authorities submitted that the assessee has not raised any objection with regard to the aforesaid companies being treated as comparable either before the TPO or before the DRP. Hence, assessee's contention should not be entertained.
6.6.3 We have considered the submissions of the parties with regard to the aforesaid two companies and perused the material on record. On going through the orders of the TPO as well as DRP, we find the submissions made by the ld. DR to be valid. As can be seen from materials on record, the assessee has not raised any objection either before the TPO or before the DRP in respect of aforesaid companies. However neither the TPO nor :- 15 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited DRP has examined why this year the company has exceptional profits. Whether due to mergers or any events or happenings the profit was exceptional require verification. The assessee has also not made any objection before the authorities. Hence, we are of the view that these two companies are to be reexamined by TPO/AO before being selected as comparables. TPO/AO is directed to consider the objections of assessee and decide the issue afresh.
10. Mold-Tek Technologies Limited:-
6.7.1 Objecting to the aforesaid company being treated as comparable, the learned authorised representative of the assessee submitted that during the year, the company has shown super normal profit of 117.29% compared to the assessee as well as other comparable companies. It was further submitted that apart from having extraordinarily high profit Mold-
Tek is also functionally different as it is engaged in providing structural engineering consulting services under the KPO division. It was submitted that M/s Mold Tek is providing highly technical and specialised engineering services and use of information technology is only incidental. The learned authorised representative of the assessee submitted that the Income-tax Appellate Tribunal, Hyderabad Bench considering these aspects has held M/s Mold Tek is not to be treated as comparable in case of M/s Capital IQ Information Systems Pvt. Ltd. (supra). The learned authorised representative of the assessee further submitted that even in assessee's own case for asst. year 2008-09, the DRP has directed for exclusion of M/s Mold-Tek from list of comparables. In support of such contention, the learned authorised representative of the assessee relied upon the decisions of Co-ordinate Bench of Hyderabad Tribunal in cases of Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013, Zavata India P. Ltd., Hyderabad vs. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013, M/s. Capital IQ Information Systems India Pvt. Ltd., Hyderabad vs. DCIT (Int. Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012 and also Special Bench decision of the Mumbai Tribunal in the case of Maersk Global Centres (India) P. Ltd., Mumbai vs. ACIT, Circle 6(3), Mumbai dated 07.03.2014.
6.7.2. The learned departmental representative however supported the orders of the revenue authorities.
6.7.3 We have heard contentions of the parties and perused the material on record with regard to the aforesaid company being treated as comparable. As can be seen from the facts on record M/s Mold-Tek during the year had shown extraordinarily high profit of 117%. The activities of M/s Mold-Tek is also found to be functionally different as it is engaged in providing highly technical engineering consultancy services. In case of Capital IQ Information systems (supra) the co-ordinate bench of the Tribunal held as under:-
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"13. On careful consideration of the submissions of the assessee we find that the DRP, as already stated earlier, in the proceedings for the assessment year 2008-09 has accepted the assessee's contention that this company cannot be treated as comparable because of exceptional financial result due to merger/de-merger. In view of the aforesaid, we accept the assessee's contention that this company cannot be treated as comparable. That apart, it is also a fact that this company has shown super normal profit working out to 113%. The Income-tax Appellate Tribunal, Mumbai Bench in the case of Teva India Pvt. Ltd.(supra) has observed that companies showing supernormal profit cannot be treated as comparable. The relevant observations of the Tribunal in that case are extracted hereunder for convenience "32. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that although a detail submission was made on behalf of the assessee before the learned CIT(A) on the basis of FAR analysis to show that the selection of M/s. Vimta Labs as comparable is not justified, the learned CIT(A) has not accepted the stand of the assessee on the issue without giving any cogent or convincing reasons. In its recent decision rendered in the case of Adobe Systems India Pvt. Ltd. (ITA No.5043/Del/2000 dtd. 21.01.2011) + (2011-TII-13-ITAT-DEL-TP), Delhi Bench of ITAT has held that exclusion of comparables showing supernormal profits as compared to other comparable is fully justified. We, therefore set aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the learned CIT(A) and keeping in view the Delhi Bench of ITA in the case of Abode Systems India Pvt. Ltd. (supra).
In this view of the matter, we accept the contentions of the assessee that this company cannot be treated as a comparable."
As can be seen from the aforesaid finding of the Tribunal M/s Mold-Tek was not treated as comparables as it has shown extraordinarily high profit. It is also a fact that the DRP in assessee's case for asst. year 2008- 09 has directed for removal of the aforesaid company from the list of comparables. Therefore, following the decision of co-ordinate Bench in case of Capital IQ (supra), we direct the Assessing Officer to exclude M/s Mold-Tek Technologies Limited from the list of comparables.
11. Vishal Information Technologies Ltd.
6.8.1 Objecting to the aforesaid company being selected as comparable by the TPO, the learned authorised representative of the assessee submitted before us that the aforesaid company is not only functionally different on account of employee cost filter as the employee cost of the company is only 2% of its revenue, but it also has huge vendor payment for data entry which is indicative of the fact that it does not provide IT enabled services by itself but outsources the work with a third party vendor. It was submitted that the DRP in assessee's own case for AY 2008-09 has rejected this company as comparables. The learned authorised :- 17 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited representative of the assessee also relied upon the observation made by the Income-tax Appellate Tribunal, Hyderabad Bench with regard to aforesaid company in cases of In support of such contention, the learned authorised representative of the assessee relied upon the decisions of Co- ordinate Bench of Hyderabad Tribunal in cases of Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013, Zavata India P. Ltd., Hyderabad vs. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013, M/s. Capital IQ Information Systems India Pvt. Ltd., Hyderabad vs. DCIT (Int. Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012.
6.8.2 The learned departmental representative however supported the orders of the DRP and TPO.
6.8.3 We have heard rival submissions and perused the material on record. In case of Capital IQ Information Systems (India) Pvt. Ltd.,(supra) the co-ordinate bench after considering the objections of the assessee in respect of the aforesaid company held in the following manner :-
"17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows-
"18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped form the final list of comparables."
In case of ACIT V/s. M/s. Maersk Global service Centre (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner-
"Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded."
In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable".
As could be seen from the findings of the co-ordinate bench, the aforesaid company unlike the assessee has outsourced considerable portion of its business to third party vendor. Hence, it cannot be considered as a comparable. That besides the DRP in assessee's own case for asst. year :- 18 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited 2008-09 has held that this company cannot be treated as a comparable. Therefore, considering the aforesaid fact, we are of the view that M/s Vishal Information Technology Ltd., cannot be taken as a comparable and direct for excluding the same from the list of comparables.
6. HCL Comnet Systems & Services Limited,
8. Infosys BPO Limited and
12. Wipro Limited:-
6.9.1 Objecting to the aforesaid companies being treated as comparables, the learned authorised representative of the assessee submitted that HCL Comnet System is functionally different as it is engaged in the business of providing telecommunication and remote infrastructure management services. So far as Infosys BPO is concerned, it was submitted that this company cannot be compared with the assessee as there is differences in functions, risks and assets profile. It was submitted that Infosys brand has a premium and hence cannot be considered as comparables to risk mitigated contract service provider which do not own or take risks to develop intangibles. It was further submitted that Wipro Limited is also functionally different as the company owns significant intangibles and hence enjoys premium pricing. It was submitted that 28% of the BPO revenue is from product engineering services. It was further submitted that, manually corrected and unaudited data from its TP report has been considered which cannot be said to be authentic. In support of his contention for excluding the aforesaid three companies as comparables, the learned authorised representative of the assessee relied upon the decision of Capital IQ Information Systems India P. Ltd. vs. Addl. CIT, Circle 1(2), Hyderabad (ITA No.124/Hyd/2014 and ITA.No.170/Hyd/2014 dated 31.07.2014.
6.9.2 We have heard rival submissions of the parties and perused the material on record. It is not disputed that these three companies are having huge turnovers like that of assessee during the year. Therefore turnover filter as considered in other cases does not apply here. However as submitted the functional profile of companies as such is different. But, if the BPO division is similar to assessee the same can be considered after proper FAR analysis. Therefore we are of the opinion that TPO/AO can reconsider the comparables after giving due opportunity to assess and fairly analyzing its objections. In case the data (segmental or unit) is incomplete or functional profile etc are different AO/TPO should exclude the same. With these observations the issue of selection of these companies as comparables is restored to TPO/AO to do the needful.
7. In ground no 10 assessee is seeking adjustment for differences in functions and risks undertaken. With reference to the risk adjustment, it was the submission of the assessee that assessee functioned under a limited risk environment with most of the risks being assumed by its AEs :- 19 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited and comparables selected for analysis include companies which have fairly diversified areas of specialisation, bearing risks akin to any third party independent service provider. Since assessee is operating in a risk mitigated environment vis-à-vis the comparable companies performing entrepreneurial risk taking functions, the assessee seeks adjustment for the risk being taken by the comparable, whose profit would be more dependent on the risk involved. Since the assessee does not bear any risk of incurring losses and since comparable companies work in the market environment, the margins earned by the comparable companies would be comparatively more to reflect the higher level of functions and risks. It was further submitted that in the TP documentation submitted by the assessee, no risk adjustment was made as comparable selected were within the arm's length range. The assessee relied on a host of cases to submit that adjustment needs to be made to the margins of the comparables to eliminate difference on account of different functions, assets and risks.
7.1. To the extent of principles involved, we agree with the assessee's submissions that some of the comparables may be undertaking market risks/entrepreneurial risks, which are not there in the case of the assessee. However, the issue boils down to quantification of such adjustment. In the written submissions, the assessee based on the decision of the ITAT Bangalore in the case of Philips Software Centre Private Ltd. Vs. ACIT (119 TTJ 721)(Bang), which provided for 4.5% of the risk adjustment as the difference between the average prime lending rate and average bank rate, as the basis. Since this working was not accepted by the ITAT Mumbai Bench in the case of Willis Processing Services India Private Ltd. Vs. DCIT, vide its order dated 17.12.2012 in ITA No.8772/Mum/2010 for assessment year 2006-07. This adjustment of 4.5% cannot be considered based on prime lending rate, which cannot be considered as a market risk adopted. However, the assessee is relying on two more cases of the coordinate Benches in the case of Sony India Ltd.
(114 ITD 448)-Del, wherein the Tribunal determined the risk adjustment at 20% of the ALP for a risk mitigated distributor. It also relied on the decision of the Delhi Bench in the case of Rolls Royce Plc V/s. DCIT (90 SOT 42), wherein it was determined at 35% of the company's profitability allocated towards marketing activities. Therefore, it was submitted that since assessee does not have any marketing activities, a 35% adjustment is warranted for the difference in risks. It also submits that risk adjustment can also be computed under the Capital Asset Pricing Model (CAPM)/Sharpe Model for risk adjustments. In the previous year also matter was restored to TPO/AO in assessee own case. Since the application of the above decisions and facts herein are to be examined vis- à-vis the assessee's business model, we, without giving any direction with reference to the risk adjustment and amount of risk adjustment required, restore the matter to the file of the Assessing Officer to re-examine this adjustment issue afresh, after considering the assessee's submissions and decide the issue in accordance with the principles on the subject.
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TNS India Private Limited
10.4. Since the above comparables were already considered in the Co-ordinate Bench decision, we direct the AO/TPO to examine the inclusion of items at 15, 20 and 22 as directed above in the above case and exclude the other comparables listed at 14, 16 to 19, 21, 23 to 25. We direct accordingly.
11. Ground No. 13: Adjustment for risk differences Not adjusting the net margins of the comparable companies taking into account the functional and risk differences between the international transaction of the Appellant and the comparable transactions in accordance with the provisions of Rule 10B(1)(e);
11.1. With reference to risk adjustment, it was fairly admitted that after exclusion of certain comparables, assessee's margin is within the ALP, therefore, this ground becomes academic. Similarly, Ground No. 15 also becomes academic. Accordingly, these are treated as withdrawn.
12. Ground No. 16: Applicability of proviso to Section 92C(2):
Not allowing the option under the proviso to section 92C(2) of the act in limiting the adjustment at a variation of 5 percent to the arm's length price:
12.1. This ground pertains to applicability of proviso to Section 92C(2). Even though assessee has asked for deduction of 5% as a standard deduction, the same cannot be allowed.
However, AO/TPO is directed to keep in mind the proviso to section 92C(2) while arriving at the ALP adjustment. With these directions, ground is considered allowed for statistical purposes.
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Corporate Matters:
13. Deduction u/s. 10A:
Ground No. 17: Denying the deduction u/s. 10A of the Act to the Offshore Research Service Centre (ORSC) unit by concluding that the ORSC unit has been formed by reconstruction of the existing business:
Ground No. 18: Without prejudice to Ground 17, assuming that the ORSC unit has been formed by reconstruction of existing business, in non- considering the Appellant's submission to treat the same as conversion of Domestic Tariff Area (DTA) unit into STPI unit and allowing the deduction u/s. 10A of the Act, for the unexpired period of years:
13.1. These grounds pertain to the issue of deduction u/s. 10A of the Act on the ORSC unit. AO has considered that ORSC unit has been formed by re-construction of existing business. Assessee also raised additional ground No. 1 with reference to additional claim. AO rejected the exemption claimed u/s. 10A in respect of ORSC unit by holding that as the aforesaid unit have been set up by splitting up/reconstruction of the existing business, the exemption claimed cannot be granted. Assessee objected to the denial of exemption before the DRP. DRP extracted the submissions in its order however, has upheld the AO's contentions stating that the issue was not free from doubt and has approved the AO's action as the appeals are pending on the issue.
13.2. Ld. Counsel while stating that ORSC unit has come up afresh in Financial Year 2004 and claimed the deduction for the first time in AY. 2006-07, however, submitted that the AO in AY. 2008-09 has passed a detailed order u/s. 154 stating that ORSC unit which is not eligible for deduction as the eligibility u/s. 10A has got expired by AY. 2004-05 itself and the deduction in AY.
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2008-09 was not allowable to assessee. The issue is being contested. It was submitted that assessee was eligible for deduction on the new ORSC unit which was approved as STPI and therefore, the claim is entirely different than that of earlier one.
13.3. Ld. DR referring to the order of the ITAT in AY. 2006-07 in ITA No. 108/Hyd/2011 dt. 27-06-2014 submitted that ITAT has given finding that ORSC is not a new unit but is eligible for un- allowed portion of the deduction u/s. 10A which was an alternate contention of assessee.
13.4. We have considered the rival contentions and perused the order on record. As far as the unit of ORSC is concerned in AY. 2006-07 ITAT in ITA No. 108/Hyd/2011 dt. 27-06-2014 has held as under:
"8. We have heard the parties and perused the materials on record as well as the orders of the DRP on this issue. So far as the first contention of the assessee that ORSC is a new unit, we are unable to accept such contention in view of the specific finding of the AO, which has not been controverted by the assessee by bringing sufficient material to substantiate its claim. However, so far as alternative contention of the assessee for allowing claim of deduction u/s 10A of the Act due to conversion from DTA unit to STPI unit, we find force in such contention of the learned AR. It is not in dispute that ORSC unit is recognized as a STPI unit. On perusal of the order passed by the DRP for the AY 2008-09, it is seen that in para 12 of the said order, the DRP has held that when ORSC unit is converted from domestic tariff area to STPI unit, it is eligible for deduction u/s 10A of the Act for the remaining period out of 10 consecutive assessment years starting from the year in which it was approved as STPI unit. In view of such finding of the DRP for the AY 2008- 09, we direct the AO to allow deduction u/s 10A of the Act for the impugned assessment year also.
8.1 The assessee has raised one more additional ground at the time of hearing before us which is as under:
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"With reference to Ground No. 18 and 19, we request the Hon'ble Tribunal to direct the learned AO to consider the appellant's revised claim in respect of deduction u/s 10A of the Act made during the assessment proceedings."
8.2 In this context, learned AR has referred to the working of computation u/s 10A deduction as contained in reply dated 17/12/2005 before the Additional Commissioner of Income-tax, a copy of which is placed at page 119 of the paper book.
8.3 Considering the submissions of the assessee, we remit this issue to the file of the AO with a direction to look into this aspect and take a decision in the matter after verifying the claim of the assessee and after giving due opportunity of hearing in the matter to the assessee".
13.5. AO/TPO is directed to examine the issue in the light of the facts and if any un-availed portion was available for STPI unit, the deduction will be allowed. Accordingly, this issue is restored to the file of the AO to examine in the light of the directions given in the above order in AY. 2006-07. Grounds are considered allowed for statistical purposes.
14. Ground No. 19: Capitalisation of license fees Disallowance the license fees of Rs. 34,23,815 by considering the same capital in nature 14.1. This ground pertains to the disallowance of license fees of Rs. 34,23,815/- by considering the same as capital in nature.
14.2. It was submitted that this issue is covered by the directions of the ITAT in the case of M/s. TNS India Pvt. Ltd., Vs. DCIT (AY. 2008-09) in ITA No. 1875/Hyd/2012 dt. 17-04-2015 vide paras 21 to 23. The decision of the Co-ordinate Bench is as under:
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"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. 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 :- 25 -: I.T.A. No. 1927/Hyd/2011 TNS India Private Limited 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 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".
14.3. In view of that, we uphold the direction of the DRP to treat the amount as 'capital in nature' to allow the depreciation. However, the rate of depreciation is to be determined at 60%. With the above directions, the ground is considered partly allowed.
15. Ground No. 20: Adjustment of refund Adjusting an amount of Rs. 51,96,176 being refund issued u/s. 143(1) in the order while computing the tax payable, whereas the Appellant has not received any such refund 15.1. This ground pertains to adjustment of refund of Rs. 51,96,176/- being refund issued u/s. 143(1) which assessee states that it has not received. This matter is to be verified by the AO and accordingly, AO is directed to verify and give proper credit to the amounts paid as well as refunded to the assessee in the consequential order. With these directions, ground is considered allowed for statistical purposes.
16. In the result, appeal of assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 6th January, 2017 Sd/- Sd/-
(D. MANMOHAN) (B. RAMAKOTAIAH)
VICE PRESIDENT ACCOUNTANT MEMBER
Hyderabad, Dated 6th January, 2017
TNMM
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TNS India Private Limited
Copy to :
1. TNS India Private Limited, 2nd Floor, Shree Prashanthi Sai Towers, Plot No. 68, H.No. 8-2-248, Sree Nagarjuna Co-operative Housing Society, Panjagutta, Hyderabad.
2. The Asst. Commissioner of Income Tax, Circle-2(3), Hyderabad.
3. Dispute Resolution Panel (DRP), Hyderabad.
4. The Director of Income Tax, International Taxation, Income Tax Towers, Hyderabad.
5. The Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad.
6. D.R. ITAT, Hyderabad.
7. Guard File.