Income Tax Appellate Tribunal - Bangalore
Indegene Private Limited, Bangalore vs The Deputy Commissioner Of Income Tax, ... on 30 March, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH : BANGALORE
BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER
AND
MS PADMAVATHY S, ACCOUNTANT MEMBER
IT(TP)A No. 864/Bang/2022
Assessment Year : 2018-19
M/s. Indegene Pvt. Ltd.,
Aspen G-4 Block,
3rd Floor, The Deputy
Manyata Embassy Commissioner of
Business Park, Income Tax,
Outer Ring Road, Circle 3 (1)(1),
Nagawara, Vs. Bengaluru.
Bangalore - 560 045.
PAN: AAACI4552N
APPELLANT RESPONDENT
Assessee by : Shri Bharath .L, CA
Revenue by : Ms. Neera Malhotra, CIT-DR
Date of Hearing : 28-02-2023
Date of Pronouncement : 30-03-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal has been filed by assessee against the final assessment order passed by the Ld.AO u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act on 22.07.2022 for A.Y. 2018-19 on following grounds of appeal:
Page 2 IT(TP)A No. 864/Bang/2022 Page 3 IT(TP)A No. 864/Bang/2022 Page 4 IT(TP)A No. 864/Bang/2022 Page 5 IT(TP)A No. 864/Bang/2022
2. Brief facts of the case are as under:
2.1 Assessee is engaged in providing content development and technology support services, project development services and accounting support services to its associated enterprises. The content development services and the project development service segment are collectively referred to as software development service segment. The Ld.AO observed that assessee had international transactions exceeding Rs. 15 crores with its associated enterprise and accordingly a reference was made to the Ld.TPO.
2.2 On receipt of the reference, the Ld.TPO called for the economic details of the international transaction. From the details filed by the assessee, the Ld.TPO noted that assessee is engaged in providing technology based, clinical, commercial and marketing solutions to Global Life Sciences and healthcare organisations related to SWD segment. It was observed by the Ld.TPO that assessee core competency was in the area of scientific promotions, medical education solutions for pharmaceutical and healthcare organisations operating in both developed and emerging markets. The Ld.TPO noted that the Page 6 IT(TP)A No. 864/Bang/2022 following were the international transactions between the assessee and the associated enterprise.
Provision of content development and
1080111769
technology support services
Provision of product development and
261521272
support services
Provision of sales support services 5747727
Provision of accounting support service 16710796
Financial Assistance 42810244
Investment subsidiary 29232738
ESOP Expenses 10376460
Receipt of dividend 10619227
2.3 The Ld.TPO observed that assessee computed its margin to be at 12.96% by using OP/OC as the PLI. It used 8 comparables with an average margin of 9.17% and thus held the SWD transaction to be at arms length.
2.4 Dissatisfied with the comparability analysis carried out by the assessee, the Ld.TPO finalised a set of 20 comparables with a median of 23.6%, the details of which are as under:
Page 7 IT(TP)A No. 864/Bang/2022 F.Year wise OP/OC (%) Wt.
SI. No. Company Name
Average
2015-16 2016-17 2017-18
Infomile Technologies
1 9.86 11.06 8.64 9.69
Ltd.
Harbinger Systems
2 12.69 12.80 9.46 11.65
Pvt. Ltd.
Exilant Technologies
3 25.82 17.27 8.50 17.17
Pvt. Ltd.
4 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57
Larsen & Toubro
5 20.78 19.21 17.14 18.94
Infotech Ltd.
Great Software
6 17.88 23.87 17.31 19.73
Laboratory Pvt. Ltd.
Elveego Circuits Pvt.
7 8.3 40.17 6.75 20.19
Ltd.
Black Pepper
8 9.63 13.84 24.83 20.62
Technologies Pvt. Ltd.
9 Mindtree Ltd. 26.11 20.12 18.41 21.21
Aptus Software Labs
10 27.67 24.83 15.16 22.70
Pvt. Ltd.
11 Acewin Agriteck Ltd. 26.54 23.23 22.73 24.51
Persistent Systems
12 23.9 24.44 26.94 24.98
Ltd.
13 Wipro Ltd. 27.27 26.38 27.03 26.83
14 Tata Elxsi Ltd. 24.9 29.13 30.56 28.24
Infobeans
15 34.98 23.89 27.82 28.52
Technologies Ltd.
16 Nihilent Ltd. 24.46 30.8 35.11 30.17
Thirdware Solution
17 30.18 33.36 29.27 30.94
Ltd.
Threesixty Logica
18 Testing Services Pvt. 48.46 36.63 26.2 36.58
Ltd.
Page 8
IT(TP)A No. 864/Bang/2022
19 Infosys Ltd. 38.29 38.79 35.27 37.38
Cybage Software Pvt.
20 62.04 61.40 47.78 56.81
Ltd.
35th percentile 20.19
Median 23.60
65th percentile 26.83
2.5 The Ld.TPO thus computed the shortfall for SWD segment to be at Rs.12,66,84,552/- and proposed it as an adjustment. In respect of ITeS segment, as the margin earned by the assessee was at 20.97%, no adjustment was made in respect of the same.
On receipt of the 92CA order, the Ld.AO passed the draft assessment order wherein following additions were made. 2.6 The Ld.TPO recomputed the margin of the assessee by making an addition of corporate guarantee adjustment at 2% as under:
TP adjustment Sl.No. Particulars (in Rs.) Revision the computation of PLI for SWD segment (based 1 12,66,84,552 on comparables selected by the Ld.TPO) Corporate guarantee fee at 2 30,38,500 2% TOTAL 12,97,23,102 2.7 Against the draft assessment order, assessee filed objections before the DRP.
2.8 Before the DRP, assessee submitted for providing employee cost normalisation adjustment due to alleged abnormal employee cost expenditure incurred by assessee for the year under consideration, vis-a-vis the comparables.
Page 9 IT(TP)A No. 864/Bang/2022 2.9 It was submitted that the said claim was rejected by the Ld.TPO for various details filed by the assessee during the transfer pricing proceedings. Assessee had also sought explanation of various comparables. The DRP vide its order dated 22.06.2022
a) Rejected the submissions on the employee cost normalization adjustment;
b) Accepted that one company chosen by the Appellant ought to be considered as a comparable;
c) Remanded certain of the comparables chosen by the Appellant for fresh consideration;
d) Rejected certain of the comparables chosen by the Appellant as not comparable;
e) Remanded certain of the comparables chosen by the TPO for fresh consideration;
f) Affirmed the inclusion of certain of the comparables chosen by the TPO as being comparable; and
g) Upheld the adjustment of corporate guarantee fee at 2%. 2.10 On receipt of the DRP directions, the transfer pricing adjustment was reworked and addition to the extent of Rs.9,90,73,039/- was made in the hands of the assessee. 2.11 Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal.
3. The Ld.AR submitted that Ground nos. 1 to 4, 8 to 13, 15-16 are not pressed by assessee and accordingly these grounds stands dismissed.
4. Assessee is seeking exclusion of 8 comparables raised in ground no. 14 for not satisfying upper limit of turnover filter. Before we undertake the comparability analysis, it is sinequa non to understand the FAR of the assessee under SWD segment. Functions performed Strategic Management Functions These are those activities that drive the overall strategy and organization of the firm. Strategy development concerns selecting lines of business (product, technology and market combinations), choosing organizational Page 10 IT(TP)A No. 864/Bang/2022 structure and operating procedures, analyzing and undertaking acquisitions and divestitures, performing competitive analysis and responding to market forces. Indegene US drives the overall corporate strategy in respect of the product development function for the MCM proprietary software offerings. Indegene US identifies the market dynamics for its MCM offerings, the evolving needs of its customers in such a market and formulating the approach to be adopted to operate and manage the MCM offerings in an economically viaLle manner. In light of this, Indegene US identifies the product development services to be provided by the Company.
GOC) Marketing Functions Indegene US would be responsible for the marketing and business development services in respect of the MCM proprietary offerings. It carries out sales promotion and marketing activities for the MCM offerings, which includes customer identification and contract, solicit inquiries and marketing calls on clients and prospective clients and securing the orders.
Further, Indegene India based on directions / guidance from Indegene US develops marketing collateral in the form of support material, product presentation and product user manuals.
Customer Contract Pricing Function This function involves deciding on the end customer pricing. Indegene US undertakes and assumes the function of customer contract pricing.
Performance of services This function includes the provision of technology support services based on the direction received from Indegene US. The broad activities entail:
Coding and Documentation Indegene India would undertake the software coding according to the functional specifications and requirement analysis specified by Indegene US. All these activities are undertaken based on the service specifications approved by Indegene US.
Project Management The entire project supervision and coordination is the responsibility of Indegene India, with overall management by Indegene US as a client of Indegene India. Based on inputs from the Indegene US team, Indegene India provides technical support services to manage the Channel HQ and Aptilon HQ products.
Testing Page 11 IT(TP)A No. 864/Bang/2022 Indegene India undertakes systems testing and application testing for the products. Corporate Service Functions These functions assist in the day-to-day management of the organization (e.g. human resources, finance & information systems etc.). The overall corporate service functions like human resource management, accounting, finance controlling, treasury functions, legal and regulatory affairs and general administration work are the responsibility of the respective entities for their jurisdictions. Indegene India provides accounting supporting services to Indegene US under a separate arrangement.
Risks Assumed Business and market risk Market risk occurs when a firm is Subjected to adverse conditions due to external factors such as increased competition, adverse conditions within the marker, environmental factors and others.
Indegene US bears the general overall risk associated with the MCM offerings. Indegene US would be responsible for approaching and marketing the MCM products / services to customers and would therefore bear the market risks. Credit and Collection Risks The credit and collection risks arise when a firm supplies products or services to a customer prior to receiving consideration for the same. In such a case, the firm runs the risk of non-payment by the customer. Since Indegene India would provide product development services only to Indegene US, it would not bear credit and collection risk compared to the risk that independent Indian third-party technology/software product development service providers would bear in relation to receivables from customers.
Foreign exchange risk Foreign exchange risk occurs when purchases of materials, resources,, or services are denominated in one currency while sales of finished product are denominated in another currency.
Indegene India would bear the foreign exchange risk (if any). in the supply chain since its costs would be incurred in Indian Rupees but it would be b lling Indegene US in US Dollars. However, losses if any are adjusted with the cost base considered for the billing and thus the risk assumed by Indegene India in this regard is minimal.
Product Liability Risks Page 12 IT(TP)A No. 864/Bang/2022 Product liability risk arises when a company provides certain products, which fail to perform at accepted standards. The contracts are entered into by Indegene US and any risks associated with non-performance would be borne by Indegene US.
Assets employed The assets employed by the respective enterprises include office infrastructure, intangibles and personnel deployed for operations. The other assets employed by Indegene India include:
Net Block as on March Particulars 31, 2018 (in Rs.) Computers and Software 3,68,67,146 Office Equipment 45,37,350 Furniture 20,46,535 Leasehold improvements 3,00,94,712 Intangibles 15,73,802 Total 7,51,19,545 .
Entity characterization The functional analysis serves as a foundation to characterize entities participating in intercompany transactions. This characterization is necessary in determining the type of transfer pricing method that is most appropriate as well in selecting comparable data. The key question to be answered in this section is, therefore:
"Given the functions, risks, and intangible assets of each entity (both related and unrelated parties), how should group entities most accurately be characterized in relation to each controlled transaction?"
Based on the above FAR, we shall undertake the comparability of the comparables sought for exclusion by the assessee. It is submitted that the assessee is seeking exclusion of following 8 comparables on turnover filter:
a) Tech Mahindra Ltd.
b) Larsen & Toubro Infotech Ltd.
c) Elveego Circuits Pvt. Ltd.
d) Aptus Software Labs Pvt. Ltd.
e) Persistent Systems Ltd.
Page 13 IT(TP)A No. 864/Bang/2022
f) Wipro Ltd.
g) Tata Elxsi Ltd.
h) Infosys Ltd.
4.1 The Ld.AR referred to the recent decision of this Tribunal in case of M/s. Altair Engineering India Pvt. Ltd. vs. ACIT in IT(TP)A No. 1025/Bang/2022 by order dated 09.01.2023 for A.Y. 2018- 19, identical companies have been excluded by applying the turnover filter by placing reliance on the decisions referred to by the Ld.AR. This Tribunal observed and held as under:
"18. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra):
"41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:-
"9. Having heard both the parties and having considered the rival contentions and also the Page 14 IT(TP)A No. 864/Bang/2022 judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study."
42. The Assessee's turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of Page 15 IT(TP)A No. 864/Bang/2022 comparable companies is held to correct and such action does not call for any interference."
19. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations:
"17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non- jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.
17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view Page 16 IT(TP)A No. 864/Bang/2022 contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)."
20. In view of the aforesaid decision, we hold that companies listed in Ground No.10.5.1 of the original grounds of appeal whose turnover in the current year is admittedly more than Rs.200 Crores should be excluded from the list of comparable companies."
4.2 Based on the above observations, we are of the view that the companies listed hereinabove that has turnover exceeding Rs.
Page 17 IT(TP)A No. 864/Bang/2022 200 crores deserves to be excluded from the final set of comparables.
Accordingly, Ground no. 14 raised by assessee stands allowed.
5. Ground no. 17 - Corporate Guarantee It is submitted that the Ld.TPO considered the transaction of corporate guarantee as an international transaction and proposed an adjustment of Rs.30,38,550/- as commission for corporate guarantee.
5.1 The Ld.AR submitted that assessee entered into an agreement with three non-resident lenders to issue the guarantee in respect of the promissory notes of 6 million dollars to its indirect subsidiaries in Canada, Indegene Skura Inc. ('Skura Canada'). As a condition to advance the funds, assessee had agreed to guarantee the obligations of Skura Canada. The Ld.AR submitted that no guarantee commission is charged on Skura Canada by assessee.
5.2 It was also submitted that the assessee do not incur any cost on the guarantee issued by it to Skura Canada. The Ld.AR submitted that there was no occasion to invoke the guarantee by the beneficiary. He thus submitted that the present arrangement do not involve an international transaction. However, without prejudice, the Ld.AR submitted that in the event it is treated as international transaction, the ALP had to be computed by adopting one of the prescribed methods determined under Chapter 10 of the Act vis-a-vis adhoc 1% adopted by the Ld.TPO. He also submitted that this Tribunal has been consistently Page 18 IT(TP)A No. 864/Bang/2022 following a rate of 0.5%. In support he placed reliance on the following decisions of this Tribunal.
i) Everest Kanto Cylinder Ltd. vs. Dy.CIT reported in 34 taxmann.com 19
ii) Godrej Household Products Ltd. vs. Addl. CIT reported in 41 taxmann.com 386
iii) Four Soft Ltd. vs. Dy.CIT reported in 44 taxmann.com 479
iv) Rain Commodities Ltd. reported in 65 taxmann.com 240
v) Trianz Holdings Pvt. Ltd. in IT(TP)A No. 322/Bang/2022 by order dated 22.11.2022.
5.3 On the contrary, the Ld.DR submitted that the issue may be remanded to the Ld.AO for fresh consideration. 5.4 We have perused the submissions advanced by both sides in the light of records placed before us.
5.4.1 Primarily, we reject the argument of assessee that corporate guarantee is not an international transaction. WE find that section 92(1) requires that any income arising from an international transaction shall be computed having regard to the arms length price. To this extent, there is no dispute that the transaction in the present facts are is the transaction to the assessee and the associated enterprises and therefore falls within the ambit of section 92(1). The decision of Hon'ble Kolkata Special Bench in case of Instrumentarium Corporation Ltd. vs. DDIT in ITA Nos. 1548 & 1549/Kol/2009 & ITA No. 2058/Kol/2010 by order dated 03.08.2018 deals on this aspect at great length and therefore any transaction that has an impact on the profit or loss of the assessee has to be considered as per Page 19 IT(TP)A No. 864/Bang/2022 section 92(3) of the Act. Accordingly, the decision relied by the Ld.AR under this proposition cannot be of any assistance. 5.4.2 A corporate guarantee is a legal agreement between a borrower, lender, and guarantor, whereby a corporation takes responsibility for the debt repayment of the borrower provided it faced bankruptcy. A personal guarantee is a similar document to the corporate guarantee.
5.4.3 We refer to the decision of Hon'ble Mumbai Tribunal in case of Siro Clinpharm Pvt. Ltd. vs. DCIT reported in (2017) 88 taxmann.com 338, decision of Hon'ble Hyderabad Tribunal in case of Four Soft Ltd. vs. DCIT reported in (2014) 44 taxmann.com 479 and Nimbus Communications Ltd. vs. ACIT reported in (2017) 85 taxmann.com 237 wherein the Tribunal took view that providing corporate guarantee to its AE by the assessee is an international transaction, however the ALP of such transaction is to be computed having regard to the financial consideration between the related parties. The Tribunal also took a view that the guarantee fees for providing corporate guarantee should not exceed 0.5%. In the present facts, the Ld.TPO has charged an adhoc rate of 1% on the corporate guarantee amount issued by the non-resident lenders to the subsidiaries of assessee outside India. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to the bank guarantee provided by the bank cannot be applied. We refer to the observations of this Tribunal in case of Xchanging Solutions Ltd. vs. DCIT reported in (2017) 78 taxmann.com 54 wherein Coordinate Bench of this Tribunal on identical issue held as under:
Page 20 IT(TP)A No. 864/Bang/2022 "15. We have considered the rival submissions as well as the relevant material on record. At the outset we note that the assessee has raised the objection before the DRP as recorded in paras 6.1 and 6.2 as under :
'6.1 Grounds 1, 2 and 3 are considered together for convenience. Briefly stated the assessee provides software development and information technology enabled services (ITES) to its AEs. During the FY 2005-06 the assessee provided a corporate guarantee to a third party bank on behalf of an AE but failed to charge a fee for the guarantee. The assessee conducted a TP study and concluded that this transaction was at arm's length however during audit proceedings the TPO rejected the analysis of the assessee and made adjustments to this transaction. The taxpayer cites the order of Four soft Ltd wherein the Hon'ble ITAT Hyderabad observed as under: "We find that the TP legislation provides for computation of income from international transaction as per section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution."
6.2 It has also been submitted by the assessee that the transaction arising on account of ownership linkage and which derives large from the reputation of the group necessarily implies that there can be no guarantee acceptable to the banker which can be provided by the independent third party. The guarantee provided by financial institutions are characteristically different compared to the guarantee provided by the parent. The advantages arising to the parent itself from providing guarantee in lieu of equity support or financial support is also not capable of being evaluated satisfactorily. These differences between the alleged controlled transaction and the guarantee provided by independent parties in the uncontrolled transaction are not capable of being evaluated so as to arrive at determination of the fair uncontrolled price. In the circumstances, computation methodology of TP exercise may fail. It is undisputed that failure of computation mechanism results in failure of the charge.' Thus it is clear that grievance of the assessee against the order of the TPO on the issue of ALP in respect of guarantee fees is limited only regarding the correct ALP. We further note that prior to the decisions of Mumbai Bench in the case of Siro Clinpharm Pvt. Ltd. Vs. DCIT (supra) there are series of decisions of this Tribunal including the decision in cases of Four Soft Pvt. Ltd. Vs,. DCIT (supra) and Nimbus Communication Ltd. Vs. ACIT (supra) wherein the Tribunal has taken a consistent view that providing corporate Page 21 IT(TP)A No. 864/Bang/2022 guarantee to AE is an international transaction however, the ALP of such transaction was to be computed having regard to the financial consideration as the nature of transaction between the related parties. The Tribunal has taken a view that the guarantee fees for providing corporate guarantee should not be more than 0.5%. The Hyderabad Benches of this Tribunal in the case of Four Soft Pvt. Ltd. Vs.DCIT (supra) has considered an identical issue in paras 24 to 26 as under :
24. It is noted by the TPO, during the F.Y. 2005-06 the assessee has provided bank guarantees on behalf of its Overseas subsidiary, Foursoft BV, Netherlands for an amount of Rs.69,81,16,000/- which is continuing for the year under consideration also. The TPO following the order passed for A.Y. 2006-07 treated the commission changed by ICICI Bank at 3.75% arms length price for the corporate guarantee provided by the assessee to its AE worked out the TP adjustment of Rs.2,61,79,350/-. The DRP also rejected assessee's objection on the issue.
25. We have heard the parties and perused the material on record. The sum and substance of the submissions made by the learned AR is, the corporate guarantee provided by the assessee cannot be equated to bank guarantee and resultantly the commission rate for bank guarantee cannot be applied to the corporate guarantee. It was submitted that the corporate guarantee is nothing but an additional guarantee provided by the parent company and it does not involve any cost or risk to the shareholders. It was submitted that since the corporate guarantee was given keeping in view paramount business interest of the parent company it has to be allowed as business expenditure. It is the further submissions of the learned AR that the retrospective amendment effected to section 92B of the Act, by Finance Act, 2 012 by insertion of Explanation (i)(c) to section 92B also has not enlarged the scope of the 'international trans action' to include the corporate guarantee in the nature provided by the assessee.
The learned AR further contended that the issue is covered in favour of the assessee b y virtue of the order passed by the Tribunal in assessee's own case for AY 2006-07 (supra).
25. 1 The learned DR, on the other hand, submitted that by virtue of the amendment made to section 92B of the Act with retrospective effect from 01/04/2002, the corporate guarantee provided by the assessee is to be considered as an international transaction, and, therefore, the Assessing Officer was justified in determining arm 's length price of such transaction.
25. 2 Having considered the submissions of the parties, we are unable to accept the contention of the learned AR that corporate guarantee of the nature provided by the assessee will not come within the meaning of international transaction in term s with section 92B of the Act. It is not disputed that section 9 2B of the Page 22 IT(TP)A No. 864/Bang/2022 Act has been amended by the Finance Act, 201 2 with t he insertion of Explanation I (c) with retrospective effect from 01/ 04/200 2. Explanation (i)(c) t o section 92B, reads as under:
"capital financing, including any type of long-term or short- term borrowing, lending or guarantee , purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. "
25. 3 A reading of the aforesaid clause from the Explanation would make it clear that the corporate guarantee provided by the assessee comes within the scope and ambit of ' international transaction' as per the aforesaid clause. Therefore, the contention of the learned AR that the issue is covered in favour of the assessee by virtue of the order passed in assessee 's own case for A Y 2006-07 no longer holds good since the order passed by the coordinate bench is prior to the amendment made to provision of sect ion 9 2B of the Act. It will be pertinent to mention here that this issue was also considered by the ITAT Mumbai Bench in case of Mahindra & Mahindra Vs. DCIT in ITA No. 8597/Mum/2010, 54 SOT (UR) 146. The coordinate bench of this Tribunal while considering similar argument advanced on behalf of the assessee by placing reliance on the decision of the Four Soft Ltd.(supra), held as under:
"15. 2 After hearing the rival submissions we feel that Assessing Officer will have to follow the decision of the ITAT Hyderabad or the amended provision of the Act in this regard. If the Finance Bill of 2012 is passed by the Parliament amending the provisions of section 92B, with effect from 1st April , 2002, he will have to ignore the decision of the ITAT Hyderabad. In case section 92B is not amended with retrospective effect, he should grant relief to the appellant. "
25.4 In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B. However, it appears that the TPO has applied the rate of 3.75 %, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to bank guarantee provided by the bank cannot be applied to corporate guarantee which is provided by a group company. In case of Glenmark Pharmaceuticals V s. ACIT in ITA No. 5031/Mum / 2012, dated 13/11/2013, the Mumbai Bench of the Tribunal after analysing the facts in that case had held that 0.53 % corporate guarantee rate in that case was appropriate. The ITAT Hyderabad Bench in case of Infotech Enterprises Ltd. in ITA No.115/Hyd/ 2011 and in ITA No. 2184/Hyd/ 2011, dated 16/01/2014 while considering Page 23 IT(TP)A No. 864/Bang/2022 identical issue of determining ALP of corporate guarantee provided by the assessee to its AE followed the ratio laid down in case of Glenmark Pharmaceuticals Vs. ACIT (supra) and remitted the issue back to the TPO to decide the quantum of corporate guarantee rate by following the method adopted in case of Glenmark Pharmaceuticals (supra).
26. Since the issue in the present case is identical to the issue decided by the ITAT, Hyderabad Bench in case of Infotech Enterprises (supra), following the same, we also remit this issue to the file of the TPO to decide the quantum of corporate guarantee rates accordingly. If the assessee is able to bring on record any comparables with regard to corporate guarantee, the TPO may also consider the same while determining ALP of corporate guarantee. The TPO must provide a reasonable opportunity of being heard to the assessee before deciding the issue. This ground is allowed for statistical purposes." It is pertinent to note that in case of corporate guarantee provided to a bank or financial institution on behalf of the AE, the assessee creates a charge on its assets in favour of the bank/financial institution and to that extent the transaction of providing corporate guarantee is having bearing on the assets of the assessee and in turn the assessee cannot use those assets under charge for the purpose of availing further financial credit/loans from the bank/financial institution. Thus this Tribunal held that by providing corporate guarantee falls in the definition of international transactions as per Section 92B(1) without considering the Explanation to the said Section. As we have discussed in the foregoing part of this order that the Tribunal has been taken a consistent view that corporate guarantee provided to the AE falls in the ambit of international transactions as per Section 92B(1) even without considering the Explanation inserted vide Finance Act, 2012. The Mumbai Bench of this Tribunal in the case of Siro Clinpharm Pvt. Ltd. Vs. DCIT (supra) has restricted its finding only to the applicability of Explanation in the cases where the assessment was completed prior to the insertion of the said Explanation retrospectively. Even otherwise the earlier decisions of the Tribunal on this issue were not considered by the Delhi Bench of the Tribunal. In the case of M/s. Nimbus Communication Ltd. Vs. ACIT in ITA Nos.6816/Mum/2010 and 7105/Mum/2011, the Tribunal vide order dt.7.8.2013 has considered an identical issue in paras 4 & 5 as under :
" 4. As regards the issue raised in ground No. 2 relating to TP adjustment made on account of guarantee commission in respect of corporate guarantee given by the assessee to its Associated Enterprises (AEs) for obtaining bank loans, the ld. representatives of both the sides have agreed that a similar issue was involved in assessee's own case for the immediately preceding year i.e. A.Y. 2005-06 and the Tribunal vide its order dated 12-06-2013 passed in ITA No. 3664 & 2359/Mum/2010 has already decided the same vide para No. 9 & 10 which read as under:-
Page 24 IT(TP)A No. 864/Bang/2022 "9. We have considered the rival submissions and also perused the relevant material available on record. For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial benefits secured for future. In support of this stand of the assessee, the ld.
counsel for the assessee has contended that business strategy should be taken into consideration while making any TP adjustments in respect of such transactions and has relied on the OECD Transfer Pricing Guidelines issued in 2010. As stated in para 1.59 of the said guidelines, the business strategies should also be examined in determining comparability for transfer pricing purposes and certain illustrations of such business strategies are also given therein. As stated in para 1.60 of the said guidelines which has been relied upon by the ld. Counsel for the assessee, business strategies also could include market penetration schemes and taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. As explained further, a tax payer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs and hence achieve lower profit levels than other taxpayers operating in the same market. In our opinion, the relevant facts of the present case do not indicate that there was any such business strategy adopted by the assessee in not charging commission in respect of guarantees issued for its Associated Enterprises. As a matter of fact, there is nothing to suggest that any such business strategy was adopted by the assessee with specific intention or motive and the case has been sought to be made out merely on the basis of commercial expediency by claiming that the assessee was benefited as a result of giving the guarantees in the form of commercial benefits secured for future. In our opinion, such commercial expediency cannot be equated with business strategy, which is specific and well laid out. As rightly held by the ld. CIT(A), a financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which "price" has to be charged. Even the OECD Transfer Pricing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating of Associated Enterprise is due to a guarantee by another group member, such association positively enhances the profit making potential of that Associated Enterprise. We, therefore, find ourselves in agreement with the contention of the ld. D.R. that there was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the Page 25 IT(TP)A No. 864/Bang/2022 said Associated Enterprises, guarantee commission should have been charged at arm's length price. The commercial relationship between the assessee and its Associated Enterprises is distinct and separate from the transactions of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm's length price.
10. As regards the rate of guarantee commission, it is noted that the arm's length price of guarantee commission was determined by the TPO by applying CUP method and the arithmetic mean of 1.5% of the guarantee commission charged by the HSBC Bank in the range of 0.15 to 3% was taken as arm's length price. The ld. CIT(A) upheld the CUP method applied by the TPO but adopted the rate of 0.25% of guarantee fee as arm's length price relying on the decision of French Court in the case of Societe Carrefour. The ld. D.R., at the time of hearing before us has relied on the decision of the co- ordinate Bench of this Tribunal in the case of M/s Everest Kanto Cylinder Ltd. (supra) wherein while accepting the CUP method as the most appropriate method for benchmarking the guarantee fee, the Tribunal accepted 0.5% guarantee fee/commission to be at arm's length after taking into consideration the rates of guarantee commission charged by various banks including the guarantee commission charged by the HSBC Bank in the range of 0.15% to 3%. Since the facts involved in the present case are materially similar to the facts involved in the case of Everest Kanto Cylinder Ltd. (supra), we prefer to follow the decision rendered by the co- ordinate Bench of this Tribunal in the said case over the decision of French Court in the case of Societe Carrefour (supra). We, accordingly modify the impugned order of the ld. CIT(A) on this issue and direct the A.O. to recompute the commission for guarantee given by the assessee to its Associated Enterprises @ 0.5% being the arm's length price. Ground No. 1 of Revenue's appeal is thus partly allowed whereas ground No. 2 of assessee's appeal is dismissed".
5. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to A.Y. 2005-06, we respectfully follow the order of the co-ordinate Bench of this Tribunal for A.Y. 2005-06 and direct the A.O. to restrict the TP adjustment by recomputing the commission for guarantee given by the assessee to its AEs at 0.5% being the arm's length price. Ground No. 2 of the assessee's appeal for A.Y. 2006-07 is partly allowed." As it is clear that the Tribunal has followed the decision of the Tribunal for the earlier assessment year and while taking a consistent view held that guarantee provided by the assessee gives the benefit to the AE and such benefit was passed on by the assessee to the said AE and therefore should have been charged at ALP." 5.4.4 In the above decision, this Tribunal has considered the view taken by the Hon'ble Hyderabad Tribunal and Hon'ble Mumbai Page 26 IT(TP)A No. 864/Bang/2022 Tribunal in case of Four Soft Ltd. vs. DCIT (supra) and Siro Clinpharm Pvt. Ltd. vs. DCIT (supra).
5.4.5 Since the issue in the present case is identical to the issue decided by various Tribunals in the decisions referred to and relied on hereinabove, we direct the Ld.AO to consider the commission on corporate guarantee fee at 0.5%. 5.4.6 In view of the above, the Ld.AO/TPO is directed to recomputed the commission attributable to the corporate guarantee in the present facts of the case at 0.5% based on the above discussion.
Accordingly, this ground raised by assessee stands allowed.
6. Ground nos. 5-6 are in respect of adjustment sought by assessee towards employee cost base that laid to a relatively lower margin under software development service segment. The Ld.AR vide written submission submitted as under:
13. The lower profit margins for the Company in this segment in FY 2017-18 at 11.46% is due to the peculiar business circumstances for the Company in FY 2017-18.
These are summarised as follows:
Customer contracts that would typically be renewed by customers were not renewed. As a result, there was a fall in the revenue for the Company.
The addition of new customer contracts and revenues happened at a relatively slower pace vis-a-vis earlier years.
The Company had anticipated uptake in the revenues and business and hence had factored an increment in the employee compensation. However, this increase in the employee cost was not commensurate to the growth in revenue.
As a 'good corporate' decision, despite the loss of revenue, the Company had not retrenched employees. A contract from a key client J&J was not renewed. As a result, a team of approx. 100 personnel did not contribute to revenue until about November 2017. Thus, apart from the loss of the contract which resulted in a decrease in the revenue, the cost of employees who Page 27 IT(TP)A No. 864/Bang/2022 were servicing the said contract / client were borne without additional revenue from March 2017 to November 2017.
14. In addition to the above, the Company submits that substantial margins were particularly attributable to two customer contracts, viz. J&J and Horizon. The two contracts were distinct vis-a-vis other contracts entered into by the Company in that the gross profit margins from these contracts were in excess of 50%. FY 2016-17 was the first year of these contracts. In this backdrop, the Company's margins were particularly higher in FY 2016-
17. However, in FY 2017-18, the contract with JNJ was terminated; as stated previously, the team which was engaged in providing the services to JNJ continued to be employed with IPL. As such, costs continued to be borne by the Company while the Company was deprived of revenues. The personnel engaged with A] had to be upskilled by additional cost and effort. These personnel could be redeployed fully only by February 2018 on other customer contracts. Thus, margins could be seen again only in FY 2018-19. A similar instance was witnessed with the contract from Horizon. As such, FY 2017-18 is an extraordinary year of operations for the Company.
15. These business circumstances are unconnected to inter-company pricing should be considered and no TP adjustment should be undertaken in the Company's case.
16. Without prejudice to the above, a significant number of companies considered by the Learned TPO have witnessed a relatively higher year-on-year growth in revenue. As such, such companies ought not to be considered as comparable to the Company or a normalization adjustment to factor the external factors faced by the Company should be considered.
17. In service companies, typically, there is a positive correlation between increase in employee costs vis-à-vis increase in revenue. A contrary result would therefore indicate that either the companies are operating in exceptional economic conditions or that the companies are facing adverse business situations unique to their markets / operations. We submit that this principle is squarely applicable in the Company's case in the content development services segment. This is because the year-
on-year increase in revenue is inversely correlating to the year-on-year increase in employee cost. In the Company's case, the increase in revenue in the content development Page 28 IT(TP)A No. 864/Bang/2022 segment is Rs. 7,69,71,824/- while the increase in employee cost is Rs. 14,20,21,296/-. Contrasted to the comparable companies, the Company is clearly an outlier. A summary of the analysis undertaken by the Company is tabulated below.
Change in
SI. Change in
Name of the company employee Difference
No. revenue
cost
INDEGENE LIMITED 1,56,23,048 14,08,48,313 901.54%
1 Infomile Technologies Ltd 1,02,52,766 87,81,446 85.65%
2 Harbinger Systems Pvt Ltd 9,12,68,408 6,56,47,545 71.93%
3 Exilant Technologies Pvt Ltd (41,37,04,072) (16,70,25,479) 40.37%
4 Tech Mahindra Ltd 8,064 3,621 44.90%
Backoffice IT Services India Pvt
5 4,22,29,517 1,73,72,053 41.14%
Ltd
6 Larsen & Tourbo Infotech Ltd 9,181 5,262 57.31%
7 Great Software Laboratory Pvt Ltd 12,37,40,455 13,32,07,309 107.65%
8 XS Cad India Pvt Ltd 56,42,579 70,49,964 124.94%
9 Temenos India Pvt Ltd 1,25,06,50,449 81,41,80,926 65.10%
10 Black Pepper Technologies Pvt Ltd 22,37,27,117 9,35,97,329 41.84%
11 Elveego Circuits Pvt Ltd 1,52,533 74,78,832 4903.09%
12 Mindtree Ltd 3,093 1,511 48.85%
13 Nihilent Ltd 249 71 28.58%
14 Aptus Software Labs Pvt Ltd (28,28,259) 39,71,906 -140.44%
Smartstream Technologies India
15 17,00,02,990 11,66,96,582 68.64%
Pvt Ltd
16 AcewinAgriteck Ltd 61,40,810 2,82,007 4.59%
17 Anjana Software Solutions Pvt Ltd (42,09,86,785) (14,82,46,944) 35.21%
18 Persistent Systems Ltd 321 (88) -27.51%
19 Infobeans Technologies Ltd 13,03,32,788 7,25,25,246 55.65%
20 Wipro Ltd (15,196) (982) 6.46%
21 Tata Elxsi Ltd 18,883 8,306 43.99%
22 Thirdware Solution Ltd (113) 20 -17.47%
ThreesistyLogica Testing Services
23 (4,93,63,946) (1,66,81,230) 33.79%
Pvt Ltd
24 Infosys Ltd 2,999 1,528 50.95%
25 CybageSoftware Pvt Ltd (21,33,15,130) 20,91,11,398 -98.03%
26 Consilient Technologies Pvt Ltd (44,06,015) 1,36,590 -3.10%
18. The Company proposes that an adjustment be undertaken to normalize the excess employee cost borne by it vis-à-vis comparable companies. The same is Page 29 IT(TP)A No. 864/Bang/2022 tabulated below. The detailed analysis is provided in page 230 of the compilation.
Weighted Weighted
average of average of
Sl. No. Name of the company
OPM before OPM after
adjustment adjustment
1 Black Pepper Technologies Pvt Ltd 20.61% -1.96%
2 Harbinger Systems Pvt Ltd 11.65% 8.04%
3 Mindtree Ltd 21.41% 9.88%
4 Infomile Technologies Ltd 9.89% 11.18%
5 Backoffice IT Services India Pvt Ltd 19.44% 12.93%
6 Tech Mahindra Ltd 19.43% 13.64%
7 Temenos India Pvt Ltd 20.60% 14.17%
8 Exilant Technologies Pvt Ltd 17.17% 14.41%
9 Nihilent Ltd 22.10% 14.65%
10 Great Software Laboratory Pvt Ltd 19.73% 14.74%
11 Larsen & Tourbo Infotech Ltd 19.59% 16.34%
12 XS Cad India Pvt Ltd 20.40% 16.84%
Smartstream Technologies India Pvt
13 23.04% 18.76%
Ltd
14 AcewinAgriteck Ltd 24.51% 18.78%
15 Wipro Ltd 27.78% 20.01%
16 Persistent Systems Ltd 25.94% 20.64%
17 Infobeans Technologies Ltd 26.82% 21.04%
18 Tata Elxsi Ltd 28.65% 21.87%
19 Elveego Circuits Pvt Ltd 21.19% 22.57%
20 Aptus Software Labs Pvt Ltd 22.44% 25.09%
21 Thirdware Solution Ltd 29.27% 28.59%
22 Infosys Ltd 37.79% 32.26%
ThreesistyLogica Testing Services Pvt 23 36.75% 34.47% Ltd 24 CybageSoftware Pvt Ltd 53.93% 51.95% 25 Consilient Technologies Pvt Ltd 55.68% 52.43% 26 Anjana Software Solutions Pvt Ltd 24.84% 77.37% We have perused the submissions advanced by both sides in light of materials placed on record.
6.1 The Ld.AR submitted that the AE had entered into contract with JNJ and Horizon. It is submitted that AE retains cost + 10% markup and the balance is passed to the assessee.
Page 30 IT(TP)A No. 864/Bang/2022 6.2 It is submitted that due to this model of billing this year was an abnormal year since the assessee incurred huge employee cost and could not generate revenue as expected from two companies being JNJ and Horizon. The Ld.AR submitted that, the revenue declined/became nil, that led to the increase in the employee cost. The assessee worked its employee absorption rate at 41% during the year under consideration. The details are placed at page 228 of the PB. The Ld.AR submitted that the assessee is a risk bearing entity in India and therefore the adjustment would be necessary to be considered. For the sake of convenience the same is reproduced as under:
Particulars 2017-2018 2016-2017
Revenue 1,08,58,59,499 1,00,88,87,675
Employee cost 56,02,37,862 41,82,16,567
Absorption rate 51.59% 41.45%
Increment 10.14%
6.3 Before us the assessee is seeking employee cost
normalisation adjustment in the hands of the comparables based on the financial results of the comparable companies in their respective annual reports under TNMM. The assessee is seeking to reduce the operating costs of the comparables by considering the employee cost in respective comparables vis-à-vis that of assessee on proportionate basis and submits that such reduced operating costs of the comparables be used to compute their margin. The Ld.AR filed before this Tribunal a chart computing the operating margin of the comparables which has been annexed to this order as Annexure A placed at page 230 of PB Page 31 IT(TP)A No. 864/Bang/2022 6.4 It is the submission of the assessee that the employee normalisation cost adjustment as computed in Annexure A would bring the comparable cost to be on par with that of assessee and then the margin could be comparable. The assessee is seeking the adjustment is this manner to the comparable that remains in the final list.
6.5 Rule 10B(2) (i) provides that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to certain factors which have been enumerated therein. Rule 10B(3) states that an uncontrolled transaction shall be comparable to an international transaction, if either there are no differences between the two or a 'reasonably accurate adjustment can be made to eliminate the material effects of such differences.' On reading Rule 10B(1)(e) (ii) & (iii) in juxtaposition to Rule 10B(2) & (3), the position that emerges is, the net operating profit margin of comparable companies calls for adjustment in such a manner, so as to, bring both the international transaction and comparable cases at the same pedestal. In case there are some differences between the comparables and the assessee, then the effect of such differences should be ironed out by making suitable adjustment to the operating profit margin of comparables. That is the way to bring both the international transaction of the assessee and the comparable uncontrolled transactions, on the same platform for effective comparison.
6.6 In the present facts of the case, the assessee is seeking adjustment to normalise the employee cost due to the risk that the assessee undertook during the year, due to the contracts with Page 32 IT(TP)A No. 864/Bang/2022 JNJ and Horizon, which did not materialise. The assessee is seeking an adjustment in the operating cost of the comparables on the absorption rate, computed by assessee. 6.7 The Ld.AR submitted that assessee is a risk bearing company. However, on perusal of FAR analysis in the T.P. study filed, all major risks are assumed by Indegene US as observed from pages 132 to 133 under the SWD segment. Further at page 134 of the paper book, the assessee has been characterised to be a limited risk bearing company.(We have already reproduced the FAR analysis of the assessee under SWD segment in the preceding part of this order).
6.8 We also note from page 120 of the paper book the Entity characterisation is different from the characterisation of the assessee under SWD segment. For sake of convenience, we reproduce the same.
"Entity characterization The functional analysis serves as a foundation to characterize entities participating in intercompany transactions. This characterization is necessary in determining the type of transfer pricing method that is most appropriate as well in selecting comparable data. The key question to be answered in this section is, therefore:
"Given the functions, risks, and intangible assets of each entity (both related and unrelated parties), how should group entities most accurately be characterized in relation to each d transaction?"
Overseas entities would be the "front-ends" for the business from a marketing, sales and .7-stomer relationship management perspective.
The profit centers would primarily reside in India. Also, from a functional perspective, the value and the intangibles are based in India. Indegene India as the central delivery arm would perform majority of the functions, assumes higher risk and employ relatively more Page 33 IT(TP)A No. 864/Bang/2022 assets. It would be responsible for the overall quality of the deliverables.
However, with respect to the US subsidiary, Indegene Inc., US, performs certain on-site support required and the cost of resources engaged in the US market is critical and hence on-site support provided by the US subsidiaries has a significant influence on the profit earning capabilities of the Indegene Group. Thus, the US subsidiary shares the risk of Indegene India though the subsidiaries primarily a revenue center. Similarly, the subsidiaries, Indegene Canada and Indegene China, being delivery centers, also operate partially as profit centers. However, the quantum of transactions is minimal on comparison with transaction of the group at a consolidated level."
6.9 From the above contradiction, we are not able to appreciate the argument of the assessee that, it is a complete risk bearing entity under SWD segment.
6.10 Now coming to the computation of employee cost in Annexure A, we note that the assessee considered standalone figures form the financials of the comparables. We note from the details that are available in respect of the assessee that, it is possible to determine the employee cost incurred excessively by the assessee. But in so far as the comparables are concerned, it is not possible. The financials of the Comparable companies, does not reveal the circumstances that arose or existed for increase or decrease in the employee cost. It is therefore not discernable. The computation of adjustment filed by the assessee therefore cannot be accepted as it is. Further, such details cannot be obtained by the assessee and no purpose will be served by remanding the issue to the Ld.AO/TPO.
6.11 The Act, Rules and set transfer pricing principles, warrant the adjustment to be made in the comparables, to iron out any differences. The necessary details to ascertain the actual Page 34 IT(TP)A No. 864/Bang/2022 employee cost in the comparables are not available. The argument of the Ld.AR that based on the absorption rate computed in respect of the employee cost in case of the assessee, a proportionate adjustment is to be made in the comparables is therefore unacceptable.
6.12 Moreover, out of 20 comparables most of the comparables will stand excluded based on the observations made herein above in Ground 13(i) & 14 and the assessee would be in desirable margin.
Accordingly we dismiss this ground raised by the assessee. In the result, the appeal filed by the assessee stands partly allowed.
Order pronounced in the open court on 30th March, 2023.
Sd/- Sd/-
(PADMAVATHY S) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 30th March, 2023.
/MS /
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore