Income Tax Appellate Tribunal - Delhi
Bt E-Serv (India) Pvt. Ltd., New Delhi vs Ito, New Delhi on 19 June, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-1' NEW DELHI
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No. 6690/Del /2016
Asstt. Year: 2012-13
BT e-Serv (India) Pvt. Ltd., vs ITO,
11th Floor, Eros Corporate Tower, Ward-5(2),
Nehru Place, New Delhi.
New Delhi.
(PAN: AADCB2533M)
(Appellant) (Respondent)
Appellant by: Shri Nageswar Rao, Adv., Adv
Shri Parth, Adv., Ms Sherry Goyal, Adv.
Respondent by: Shri Sanjay I. Prera, CIT DR
Date of hearing: 21.03.2018
Date of pronouncement: 19.06.2018
ORDER
PER SUDHANSHU SRIVASTAVA, J.M.
This appeal has been preferred by the assessee against the final assessment order passed subsequent to the directions of the Ld. Dispute Resolution Panel-I, New Delhi for assessment year 2012-13.
2. The facts in brief are that the assessee company was in the business of providing IT, ITes, Back office Support and other related services to group companies located outside India. The ITA 6690/Del/2016 Assessment year 2012-13 assessee company also had a unit registered in the Special Economic Zone which is operational since 1.4.2008. The return of income was filed declaring income of Rs. 21,650/- after claiming deduction u/s 10AA of the Income Tax Act, 1961 (hereinafter called 'the Act') amounting to Rs. 10,28,80,615/- by the assessee company. During the year, the company had undertaken the following international transactions:-
i) Provision of IT-enabled services - Rs. 650,738,706/-
ii) Reimbursement of expenses to
Associated Enterprise - Rs. 1,176,825/-
2.1 A reference was made to the Transfer Pricing Officer
(TPO) by the Assessing Officer (AO). The TPO made an
adjustment u/s 92CA of the Act amounting to Rs. 9,23,05,730/-
as under:-
i) Adjustment in respect of receivables - Rs. 4,49,57,277/-
ii) Adjustment in respect of IT enabled
services - Rs. 4,73,48,453/-
2.2 Aggrieved, the assessee approached the Ld. DRP and
raised various objections before it. However, the Ld. DRP upheld the comparables selected by the TPO by holding that the comparables selected by the TPO were justified. The Ld. DRP, 2 ITA 6690/Del/2016 Assessment year 2012-13 however, directed the TPO to correct the arithmetical errors as claimed by the assessee after giving an opportunity to the assessee to establish its claim.
2.3 The final assessment order was passed in terms of the directions of the Ld. DRP in which the final list of comparables included 12 companies with an average Profit Level Indicator (PLI) of 27.38% and, accordingly, the adjustment with respect to IT enabled services was computed at Rs. 4,73,48,453/- which was exactly the same as proposed by the TPO initially. Similarly, with respect to the transfer pricing adjustment on account of receivables, the same was calculated by applying SBI lending rate plus 300 basis points and the same was computed at Rs. 4,49,57,277/- which was also the same adjustment as was proposed by the TPO in the original transfer pricing proceedings. 2.4 Aggrieved, the assessee has now approached the ITAT and has challenged the directions of the Ld. DRP and the consequential final assessment order passed by the Assessing Officer/TPO by raising the following grounds of appeal:-
On the facts and circumstances of the case and in law, the learned Assessing Officer ("AO") has erred in passing the assessment order under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act') after considering the adjustments proposed by the 3 ITA 6690/Del/2016 Assessment year 2012-13 learned Transfer Pricing Officer ('TPO') in his order passed under section 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ('DRP').
Each of the ground is referred to separately, which may kindly be considered independent of each other and without prejudice to each other.
That on the facts and circumstances of the case and in law,
1. The transfer pricing adjustment of INR 9,23,05,730 made by the learned AO based on the order of learned TPO and confirmed by the learned DRP is defective in law inter-alia for the reason that:
(a) the order of the learned TPO is defective in law in as much as based on an invalid reference made by the learned AO without complying with the statutory requirements;
(b) Chapter X of the Act containing transfer pricing provisions are special provisions relating to avoidance of tax while the learned AO/TPO in their respective orders have not substantiated that the applicant has indulged in avoidance of tax.
2. The learned AO / TPO / DRP have erred by not accepting the economic Analysis undertaken by the appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("the Rules").
3. The learned AO / TPO / DRP have erred in making an adjustment under Section 92CA(3)of the Income Tax Act, 1961 ("Act") without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of Section 92C(3) of the Act.
4. The learned TPO / AO / DRP have erred in:
a. Not accepting the use of multiple year data, as adopted by the appellant in its Transfer Pricing ('TP') documentation; and b. Determining the arm's length margins / prices using 4 ITA 6690/Del/2016 Assessment year 2012-13 data pertaining only to financial Year ('FY') 2011-12 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements.
5. The learned AO / TPO/ DRP have erred by rejecting certain functionally comparable companies identified by the appellant, by applying the following filters:
a. rejecting companies with turnover lower than INR 1 crore b. rejecting companies with employee cost less than 25 percent of the total cost c. rejecting companies with diminishing revenue d. rejecting companies with export turnover lower than 75 percent of total turnover e. rejecting companies having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months)
6. The learned AO / TPO / DRP have erred in selecting certain companies which are earning super normal profits as comparable to the Appellant.
7. The learned AO / TPO / DRP have cherry picked comparables with the sole objective of rejecting comparables selected by the appellant and arriving at functionally incomparable companies showing skewed results.
8. The learned TPO/ AO have erred in not verifying and re-computing the margins of the comparables companies as directed by the DRP.
9. Without prejudice to ground no. 8, the learned TPO/ AO/ DRP have erred in not considering gains/ losses arising out of foreign exchange fluctuations, provision for doubtful debts and bank charges while computing the operating margins of the comparable companies as well as the appellant.
5 ITA 6690/Del/2016 Assessment year 2012-13
10. The learned AO / TPO / DRP have erred by not making suitable adjustments to account "for differences in the risk profile and working capital of the appellant vis-a-vis the comparable companies.
11. The learned AO / TPO / DRP have erred by considering outstanding receivables as a separate international transaction and benchmarking the same using CUP as the Most Appropriate Method.
12. The learned AO / TPO / DRP have erred by considering outstanding receivables as a loan extended by the appellant to its associated enterprise and imputing interest on the same, thereby making an adjustment of INR 4,49,57,277 to the returned income of the appellant.
13. The learned AO / TPO have erred in not appreciating the directions of the DRP wherein the DRP has directed the TPO to grant credit of the interest charged by the appellant on outstanding receivables from its AEs in subsequent years pertaining to the assessment year under consideration.
14. The CUP analysis undertaken by the TPO and upheld by DRP is flawed and does not represent an uncontrolled transaction.
15. The learned AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act."
3. The Ld. AR submitted that in the final set of comparables, the following 12 companies had been selected:-
1. Calibre Point Business Solutions Limited
2. e4e Healthcare Limited
3. Informed Technologies India Limited
4. Infosys BPO Limited
5. Jindal Intellicom Limited 6 ITA 6690/Del/2016 Assessment year 2012-13
6. Microgenetics Systems Limited
7. Accentia Technologies Ltd.
8. Acropetal Technologies Ltd.
9. BNR Udyog Limited
10. Eclerx Services Limited
11. Excel Infoways Limited
12. TCS e Serv Ltd.
3.1 The Ld. AR submitted that out of these 12 companies, the assessee was praying for exclusion of Infosys BPO Limited, BNR Udyog Limited, Eclerx Services Limited, Excel Infoways Limited and TCS e-Serv Ltd. The Ld. AR also submitted that the assessee was also praying for inclusion of R Systems International Limited (Segmental) which had been incorrectly rejected by the TPO/DRP.
3.2 The Ld. AR pleaded for exclusion of these companies as under:-
i) Infosys BPO Limited The Ld. AR submitted that this company was functionally dissimilar to the assessee company as this company was engaged in providing high-end integrated services. It was submitted that this company renders a wide array of BPO services in the nature of business platforms, customer service outsourcing, finance and 7 ITA 6690/Del/2016 Assessment year 2012-13 accounting, human resources outsourcing, legal process outsourcing, sales and fulfilment sourcing and procurement outsourcing etc whereas the assessee provided only back office support services in the nature of IT enabled services and it was a captive service provider. It was further submitted that in the case of Infosys BPO Limited, service-wise segmental details were not available. The Ld. AR also submitted that this was an exceptional year of operation for Infosys BPO Limited as it had acquired 100% voting interest in Portland Group Pty. Limited. It was further submitted that Infosys had a high brand value and our attention was drawn to the annual report of the company wherein in the balance sheet, goodwill had been reflected at an amount of Rs. 19.03 crore and brand building and advertisement expenditure of Rs. 5.53 crore had been expended. It was submitted that apart from this Infosys BPO Limited had significantly large scale of operations having a turnover of Rs.
1312.41 crore and, therefore, on these basic points of dissimilarity, this company was incorrectly considered as a comparable to the assessee company. Reliance was also placed on the orders of ITAT Delhi Bench in the case of Hays Business Solutions Pvt. Ltd. vs. DCIT in ITA No. 6600/Del/2016 and 8 ITA 6690/Del/2016 Assessment year 2012-13 Baxter India (P) Ltd. vs. ACIT in ITA 6158/Del/2016 wherein this company had been excluded.
ii) BNR Udyog Limited With respect to this company, it was submitted by the Ld. AR that this company had a substantial Related Party Transaction (RPT), and, therefore, it failed the RPT filter at entity-wide basis. It was submitted that RPT was 48.82% in the case of this company. It was further submitted that RPT filter has to be applied at entity level and not at segmental level which had been erroneously done. It was also submitted that this company was functionally dissimilar to the assessee company as this company was providing medical transcription service. It was also submitted that on similar ground, Accentia Technologies Ltd. had been excluded by the ITAT in assessee's own case for assessment years 2010-11 and 2011-12. With reference to RPT to be applied at the entity level, reliance was placed on the order of ITAT Bangalore Bench in the case of e4e Business Solutions in IT(TP)A 451/Bang/2017. The Ld. AR also submitted that this company had shown an exceptional growth of 2164% in the present year and, therefore, it was liable to be excluded on this ground also. 9 ITA 6690/Del/2016 Assessment year 2012-13
iii) Eclerx Services Limited The Ld. AR submitted that this company was functionally different from the assessee company as this company was engaged in Knowledge Process Outsourcing (KPO) services and was engaged in providing financial services like trade processing, reference data services like web content management and merchandising execution, web analytics, social media etc. It was submitted that this company was held to be KPO service provider by the Hon'ble Delhi High Court in Rampgreen Solutions Private Ltd. in ITA 102/2015. Reliance was also placed on the order of ITAT Delhi Bench in the case of Hays Business Solutions Pvt. Ltd. vs. DCIT in ITA 6600/Del/2016 wherein this company had been excluded.
iv) Excel Infoways Limited With respect to this company, it was submitted that this company was also functionally dissimilar as it was engaged in IT enabled BPO services and development of infrastructure facility. It was also submitted that this company failed the employee cost filter as well as it had purchased stock-in-trade of Rs. 7.48 crore during the assessment year under consideration. The Ld. AR also submitted that this was an exceptional year of operations for 10 ITA 6690/Del/2016 Assessment year 2012-13 this company as this company had diversified into new areas such as construction, development of property/real estate and the revenue had decreased by more than 60% in the case of this company. Reliance was placed on the order of ITAT Delhi Bench in the case of Baxter India Pvt. Ltd. in ITA 6158/Del/2016 wherein this company had been excluded.
v) TCS e Serv Ltd.
With respect to TCS e Serv Ltd., it was submitted that this company is also functionally dissimilar to the assessee company as this company provides KPO services to banking and financial services industry in the form of core business processing services, analytics and insights as well as support services for both data and voice processes. It was also submitted that service wise segmental details were not available in the case of this company. Ld. AR also submitted that this company was part of the Tata Group and hence it enjoyed certain brand value which contributed to its economic profitability. It was also submitted that during the year, this company had earned supernormal profit @ 65.82%. Ld. AR also submitted that this company was excluded by the ITAT in assessee's own case for assessment year 2011-12 and had also been excluded by the Ld. DRP in 11 ITA 6690/Del/2016 Assessment year 2012-13 assessment year 2010-11 on account of it being functionally dissimilar to the assessee company. Reliance was also placed on the orders of the ITAT Delhi Bench in the case of Hays Business Solutions Pvt. Ltd. vs. DCIT in ITA 6600/Del/2016 and Baxter India Pvt. Ltd. vs. ACIT in ITA 6158/Del/2016. 3.3 The Ld. AR also submitted that the assessee was praying for inclusion of R Systems International Limited (Segmental) which had been excluded erroneously as a comparable on the ground that it had a different financial year ending. Ld. AR submitted that ITAT, in assessee's own case for assessment years 2010-11 and 2011-12, had directed the TPO to verify whether the annual results for April 2011 to March 2012 can be computed and accordingly include in the final set of comparables. It was submitted that the assessee had filed a rectification application before the TPO seeking rectification of the alleged contention of the assessee that R Systems had a different financial ending. Ld. AR submitted that the results for financial year 2011-12 can be compiled based on quarterly results. Reliance was placed on the judgment of Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India Private Limited in ITA No. 217/214 for the proposition that a 12 ITA 6690/Del/2016 Assessment year 2012-13 different financial year ending is not an appropriate filter. Reliance was placed on the order of Delhi Benches in Hays Business Solutions Pvt. Ltd. vs. DCIT in ITA 6600/Del/2016 and Baxter India Pvt. Ltd. vs. ACIT in ITA 6158/Del/2016 wherein this company had been directed to be included. 3.4 Coming to ground nos. 10, 11, 12 and 13, the Ld. AR submitted that all these grounds related to denial of working capital adjustment to the assessee company. Ld. AR submitted that details of computation of the working capital adjustment had been submitted before the TPO and the TPO had rejected the same without pointing out any defect in the computation of the assessee. Our attention was drawn to pages 269 to 274 of the paper book wherein the computation of the working capital adjustment as submitted before the TPO was reproduced. The Ld. AR submitted that this ground was before the ITAT in earlier assessment years 2010-11 and 2011-12 also but due to a mistake apparent on record, this ground had not been adjudicated and Miscellaneous Application has been filed before the ITAT in this regard. Reliance was placed on the order of ITAT Delhi Bench in the case of Kadimi Tool Manufacturing Co. Pvt. Ltd. vs. DCIT in ITA No. 7068/Del/2014 to support the 13 ITA 6690/Del/2016 Assessment year 2012-13 assessee's contention that there was an error in considering outstanding receivables as a separate international transaction and also by considering the outstanding receivables as a loan extended to the AE and imputing interest on the same. Ld. AR prayed that suitable directions may be given to the lower authorities to allow the benefit of working capital adjustment to the assessee.
4. In response, the Ld. CIT DR, with respect to the comparables, submitted that comparability analysis does not require exact replica of the assessee company and minor differences, if any, are to be ignored. The Ld. CIT DR also submitted that the comparables included in the final set have passed all the filters applied by the TPO and even the Ld. DRP has upheld the final set of comparables and, accordingly, there was no requirement for disturbing the final set. Reliance was placed on the detailed findings of the TPO in respect of all the comparables being challenged. The Ld. CIT DR read out extensively from the TPO's order and vehemently argued that these comparables had been correctly selected. 4.1 With respect to the working capital adjustment, the Ld. CIT DR placed reliance on the findings of the TPO and submitted 14 ITA 6690/Del/2016 Assessment year 2012-13 that the assessee was not able to demonstrate that there was difference in the levels of working capital employed by it vis-a-vis the comparables and, further, the claim of working capital adjustment is not a matter of right. The Ld. CIT DR also referred to OECD guidelines and submitted that no adjustment can be allowed in absence of reliable data and since the assessee had failed to provide the date, the assessee's claim for working capital adjustment cannot be accepted.
5. We have heard the rival submissions and have also perused the material on record. We first take up the comparables selected by the TPO and sought to be excluded by the assessee:
5.1 Infosys BPO Limited It is the assessee's contention that this company was functionally dissimilar to the assessee company as this company was engaged in providing high-end integrated services. It has been submitted and demonstrated from the annual report of BPO Infosys Ltd that this company is rendering a wide array of BPO services in the nature of business platforms, customer service outsourcing, finance and accounting, human resources outsourcing, legal process outsourcing, sales and fulfilment sourcing and procurement outsourcing etc. On the other hand, it 15 ITA 6690/Del/2016 Assessment year 2012-13 is seen that the assessee provides only back office support services in the nature of IT enabled services and it is essentially a captive service provider. Although, the assessee has pleaded for exclusion of BPO Infosys Ltd. on other grounds also, it is our considered opinion that the wide functional dissimilarity between the two companies is sufficient to accept the asseessee's plea for exclusion of this company from the final set of comparables. We also find that BPO Infosys Ltd. was directed to be excluded by ITAT Delhi Bench in the case of Baxter India Pvt. Ltd vs. ACIT in ITA 6158/Del/2016 which also provided captive IT Enabled Services to its AE. The year under consideration before the ITAT in the case of Baxter India (P) Ltd was also AY 2012-13. The relevant observations are contained in Para 23 of the said order and the same are being reproduced for a ready reference:
"23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Further it was also submitted that the Infosys BPO Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd. We find the submissions of the Id. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPO Ltd. in the 16 ITA 6690/Del/2016 Assessment year 2012-13 market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd. being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based company M/s. Portland Group Pty Ltd. during financial year 2011-12. They provide sourcing and category management services in Sydney, Australia. Therefore, his company also failed the TPO's own filter of rejecting companies with peculiar circumstances. In view of the above i.e. functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that Infosys BPO Ltd. should not be included in the list of comparables. We accordingly direct the Assessing Officer/TPO to exclude Infosys BPO Ltd. from the list of comparables for the purpose of computing the average margin."
5.1.1 Respectfully following the order of the co-ordinate Bench, on identical facts, we direct the AO/TPO to exclude BPO Infosys Ltd from the final set of comparables. BNR Udyog Limited Apart from assesse's objections regarding BNR Udyog Ltd having substantial RPT and application of the RPT filter at the segmental level by the TPO, it is also the assessee's contention that that this company was functionally dissimilar to the assessee company as this company was providing medical transcription service. We 17 ITA 6690/Del/2016 Assessment year 2012-13 find that, undisputedly, BNR Udyog Ltd is carrying out medical transcription, medical billing and coding whereas the assessee is a captive service provider. ITAT Delhi Bench had the occasion to consider the comparability of another company providing medical transcription service i.e. Accentia Technologies Ltd. with the assessee company in assessee's own case for AY 11-12 in ITA No. 99/Del/2016 by holding that the functions of medical transcription are not at all comparable to the functional profile of the assessee company. The relevant observations of the co- ordinate Bench in assessee's own case for AY 11-12 are as under:
"12. We have carefully considered the rival contentions and perused the annual accounts of the Accentia Technologies Limited submitted at page No. 1 to 108 of the paper book. As per page no 42 of the annual report the nature of services performed by this company are functions of medical transcription. 'Medical transcription' services are IT enabled services that require specialized skills in utilizing information technology in converting the voice data of the doctors who are located anywhere across the globe, consisting of patient history "and medical advices into electronic documents. Such confidential information is converted in to a written text document by medical transcription. This written text may be printed and hand placed in the patient's record, archived and/or retained only as an electronic medical record. The medical transcription can be performed in a hospital via remote transmission to the hospital or directly to the actual providers of services i.e. doctors etc. Medical transcription is still the primary mechanism for physician to clearly communicate with other health care providers accessing the patient's records to advise 18 ITA 6690/Del/2016 Assessment year 2012-13 them on the state of the patient's health and past, current treatment and assure continuity of care. Further it is mentioned that a medical transcriptionist must be aware of the latest drugs introduced in the concerned market. This can be done with the pharmacology reference books which should always be part of its library. It is further mentioned that because of the diverse nature of the activities concerned the medical transcription profession is considered a skilled work which can be done only after undergoing 6 to 8 months of rigorous training. The next service that is being provided by this company is medical coding. The above company has already developed a sizeable number of certified coders deployed in outsourced medical coding work. It is further mentioned that as the margin from medical coding is on a higher side compared to medical transcription, medical coding is also known as insurance coding because it is assigning codes to diagnose and procedures which help in financial reimbursement from insurance companies and other government organizations, consulting firm, software companies etc. The next service area of the above company is medical billing which is a medical practice management and the doctor's key to getting paid and it maintains patient's financial accounts for collecting money. On looking at the income stream of the assessee on perusal of the profit and loss accounts, it is apparent that its earnings are from medical transcription, billing and collection and coding. On looking at the functional profile of medical transcription which is required to be carried out by well- trained persons who must be knowledgeable in the field of pharmacology. Further the comparable company has considered all the 3 segments as one segment. On perusal of page No. 78 of the annual report of the company it is noted that w.e.f. 1st April 2008 the company which is engaged in the similar line of business has been amalgamated with this company. However, we do not find any reason to exclude this company for the reasons of amalgamation because the functions performed by the amalgamated company and amalgamating company are similar. But on comparison 19 ITA 6690/Del/2016 Assessment year 2012-13 of the functional profile of the comparable with assessee company, which provides corporate services, marketing and business development services etc which are of routine administrative nature, we find that functions of the assessee company are not at all comparable with the medical transcription function of the comparable company. But same cannot be said with respect to the medical coding and medical billing activities of the comparable company which are almost similar to the support functions performed by the assessee. However, in absence of segmental information available in case of comparable company with respect to the medical transcription business and medical coding and medical billing, it deserves to be rejected. It is apparent that financial results of the comparable company include profits of medical transcription business as well as medical coding and billing activities. As the functions of the medical transcription are not at all comparable with the functions performed by the company as already stated by us above, the above comparable company is required to be excluded on account of functional dissimilarity and non availability of segmental results, with the assessee. In view of this, we direct the Ld. Transfer pricing officer to exclude the Accentia technologies from the comparability analysis."
5.2.1 On similar reasoning, we direct the AO/TPO to exclude BNR Udyog Ltd. from the final set of comparables. 5.2 Eclerx Services Limited With respect to this company, it has been again submitted that this company was functionally different from the assessee company as this company was engaged in Knowledge Process Outsourcing (KPO) services and was engaged in providing financial services like trade processing, reference data services 20 ITA 6690/Del/2016 Assessment year 2012-13 like web content management and merchandising execution, web analytics, social media etc. It has also been submitted that this company was held to be KPO service provider by the Hon'ble Delhi High Court in Rampgreen Solutions Private Ltd. in ITA 102/2015. We note that this company was directed to be excluded as a comparable by the Delhi Bench of the ITAT in assessee's own case for Assessment Year 11-12 in ITA No. 99/Del/2016 with the following observations:
"38. We have carefully considered the rival contentions and also perused the orders of the lower authorities with respect to his comparable. With respect to this comparable coordinate bench in ITA No. 2010/Del/2014 for assessment year 2009 - 10 in case of Ameriprise India private limited (who is also an ITES company) was excluded this comparable holding as under.:-
"14.2 After considering the rival submission and perusing the relevant material on record, we find that it is a knowledge process outsourcing (KPO) company providing data analytics and data process solutions to global clients. This company provides end to end support through trade life cycle including trade confirmation and settlements etc. it also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability services. From the above narration of the nature of business carried on by e-Clerx Services Ltd, it is manifest that the same being a KPO company is quite different from the assessee, providing only IT enabled services to it AE. Apart from that, it is further observed that this company has significant intangible which it uses in rendering KPO services, against which the assessee does not have any 21 ITA 6690/Del/2016 Assessment year 2012-13 intangibles. As such, e-Clerx Services ltd. cannot be considered as comparable. The same is directed to be eliminated."
39. We also find that assessee is also engaged in this appeal in ITES industry and therefore the judgment of the coordinate bench cited by the Ld. authorized representative appropriately applies to the facts of this case also. In the above decision, it has been held that the e- Clerx services Ltd. is a knowledge process outsourcing company providing data analytics and data process solutions to global clients. It is further held that it is a KPO company and is quite different from the assessee providing only IT enabled services. Therefore, respectfully following the decision of the coordinate bench we direct the Ld. transfer pricing officer/assessing officer to exclude the above comparable from the comparability analysis."
5.3.1 In view of the above and respectfully following the order of the co-ordinate Bench in assessee's own case, we direct the AO/TPO to exclude this company from the final set of comparables.
5.3 Excel Infoways Limited With respect to this company, it has been submitted that this company was also functionally dissimilar as it was engaged in IT enabled BPO services and development of infrastructure facility. It has also been submitted that this company fails the employee cost filter as well as the diminishing revenue filter. We find that Excel Infoways Ltd was directed to be excluded by ITAT Delhi Bench in the case of Baxter India Pvt. Ltd vs. ACIT in ITA 22 ITA 6690/Del/2016 Assessment year 2012-13 6158/Del/2016 which also provided captive IT Enabled Services to its AE. The year under consideration before the ITAT in the case of Baxter India (P) Ltd was also AY 2012-13. The relevant observations are contained in Para 24 and 25 of the said order and are being reproduced for a ready reference:
"24. So far as exclusion of Excel Infoways Ltd. is concerned, we also find merit in the submissions of the ld. Counsel for the assessee that the above company should be excluded from the list of comparables. This company fails TPO's own filter of diminishing revenue and abnormal volatility in revenue and margins. We find from the order of the TPO at para 7.5 (page 24 - 25 of the TPO order) where the TPO has observed that the department has applied consistent diminishing revenue/loss making filter wherein the companies with losses/diminishing revenue for the last three years upto and including the financial year 2010-11 were rejected as comparables. The department has excluded such companies with consistent losses/diminishing revenue in an environment where Indian economy is growing at consistent rate. Having held so, the Assessing Officer included Excel Infoways Ltd. as a comparable without considering the fact that the said company does not pass the diminishing revenue filter. From the submissions of the assessee before the TPO (at page 232 of Volume - 1 of the Paper Book) we find the details of the operating margin of the company from financial years 2009-10 to 201-15 are as under :-
Particulars Financial Years
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
(INR'000) (INR'000) (INR'000) (INR'000) (INR'000) (INR'000)
Revenue 204,161.34 203,526.39 79,096.95 76,098.95 52,792.12 22,994.38
Operating 43,986.99 50,571.24 55,991.57 47,539.99 41,355.78 22,895.57
Cost
23
ITA 6690/Del/2016
Assessment year 2012-13
Operating 160,174.35 152,775.14 23,105.38 28,558.55 11,436.34 98.81
Profit
OP/OC(%) 364.14% 301.03% 41.27% 60.07% 22.65% 0.43%
25. From the above, it is clear that above company does not pass the diminishing revenue filter as adopted by the TPO himself since its revenue has decreased consistently from financial years 2009-10 to 2011-12 i.e. including the year under consideration. Further, the above company has super normal profits. We further find the submissions of the assessee that Excel Infoways Ltd. has super normal profits during the current year has not been controverted by the Revenue. We find the Mumbai Bench of the Tribunal the case of Willis Processing Services (India) Pvt. Ltd. (supra) has upheld the order of the DRP rejecting Excel Infoways Ltd. as comparable company on the ground that the company has a super normal profit of 203.80% and low employee cost 10.02%. We, therefore, find merit in the submissions of the Id. counsel for the assessee that Excel Infoways Ltd. should be excluded from the list of comparable on account of super normal profit of the said company in the preceding year."
5.4.1 Respectfully following the order of the co-ordinate Bench, on identical facts, we direct the AO/TPO to exclude Excel Infoways Ltd from the final set of comparables. 5.4 TCS e- Serv Ltd.
With respect to TCS e Serv Ltd., it has been submitted that this company is also functionally dissimilar to the assessee company as this company provides KPO services to banking and financial services industry in the form of core business processing services, analytics and insights as well as support services for 24 ITA 6690/Del/2016 Assessment year 2012-13 both data and voice processes. It has also been submitted that service wise segmental details were not available in the case of this company. It has also been submitted that this company was excluded by the ITAT in assessee's own case for assessment year 2011-12 and had also been excluded by the Ld. DRP in assessment year 2010-11 on account of it being functionally dissimilar to the assessee company. We find that the averment of the Ld. AR with respect to the exclusion of this company from the final set of comparables in assessee's own case is correct. ITAT Delhi Bench in assessee's own case for AY 11-12 in ITA No. 99/Del/2016 has directed exclusion of TCS -serve. The relevant observations of the co-ordinate Bench are contained in Para 40, 41 and 42 which are being reproduced as under:
"40. Now we come to the next comparable contested by the assessee by the name of TCS e-serve Ltd., The Ld. authorised representative submitted that above comparable has a margin of 69.06 percentage and same was not included in the transfer pricing study report of the assessee, but it is included by the Ld. transfer pricing officer stating that it is functionally comparable to the assessee and does not own any significant intangibles. The contentions of the Ld. transfer pricing officer for inclusion of the above company were also upheld by the Ld. dispute resolution panel. Before us. The Ld. authorized representative submitted that this company is functionally different as it earns revenue from 4 different activities such as financial information processing, customer contract voice services, business process management and analytics. It was further stated that during 25 ITA 6690/Del/2016 Assessment year 2012-13 the year it was taken over by the TCS Ltd and therefore it has an exceptional year of operation. It was further contested that it be high risk and also earns super normal profit and further it has insufficient segmental information. He further held that this comparable has been excluded by the Ld. dispute resolution panel in assessment year 2010 - 11 on account of being functionally dissimilar to the assessee. He further relied on the decision of the coordinate bench in case of capita India private limited versus ACIT and Actis global services private limited versus ITO.
41. The Ld. departmental representative vehemently contested the arguments of the Ld. authorized representative and submitted that above comparable is functionally carrying on the same activities and therefore has rightly been included by the Ld. transfer pricing officer for comparability analysis.
42. We have carefully considered the rival contention and also perused the orders of the lower authorities with respect to this comparable. We also perused the direction given by the Ld. dispute resolution panel for assessment year 2010 - 11 in case of the assessee dated 30-11- 2014 at page No. 26 of the direction with respect to this comparable. It has been held by the Ld. dispute resolution panel in case of the assessee that the comparable companies is involved in both high end services including transaction processing, technical services involved software testing, verification and validation of software at the time of implementation and management activities and also low and services. Therefore it can be seen that such a high-end service which require personnel with those set of technical expertise cannot be compared to the simple back-office support and procurement support services provided by the taxpayer. Therefore, the Ld. dispute resolution panel directed the Ld. transfer pricing officer to exclude the above company from the list of comparable for that year. Before us the Ld. departmental representative could not point out that how the finding of the Ld. dispute resolution panel given in assessment year 2010-- 2011 are not pertinent with respect to the functional profile of the assessee as well as the comparable company for this year. In view of this we direct the Ld. transfer pricing 26 ITA 6690/Del/2016 Assessment year 2012-13 officer/assessing officer to exclude the above comparable for the similar reasons given by the Ld. dispute resolution panel for this year also."
5.5.1 On identical facts and respectfully following the order of the co-ordinate Bench in assessee's own case as above mentioned, we direct the AO/TPO to TCS e-serve from the final list of comparables.
5.6 The assessee has also prayed for inclusion of one comparable i.e. R Systems Ltd which, although selected by the assessee, was rejected by the AO/TPO on the ground of different financial year ending. We find that this comparable was directed to be included by the ITAT Delhi Bench in assessee's own case for AY 10-11 in ITA No 565/Del/2015 and the same was followed by the ITAT in AY 11-12 also in ITA No 99/Del/2016. The relevant observations of the ITAT in its order for assessment year 10-11 are contained in Para 13 and 14 of the order and the same are being reproduced as under:
"13. Another comparable M/s R Systems was included by the assessee in its transfer pricing study; however, the ld. TPO rejected the same stating that it has a different financial year compared to the appellant. The Id DRP upheld the action of the Id TPO. Before us the Id AR submitted that different year end is not an appropriate filter, anyway, he submitted that audited results of R 27 ITA 6690/Del/2016 Assessment year 2012-13 System for the comparable period are available. Ld DR did not state that this company is functionally not comparable with the functions of the assessee but stated that only reason for its exclusion is unavailability of the audited accounts.
14. We have carefully considered the rival contentions. Undisputedly the R Systems Ltd is having different financial year. However, this company is listed company and quarter to quarter its financial results are available in public domain. Such financial results are also produced by the Id AR before us. In view of this we are of the opinion that once a comparable is found functionally similar and further authentic and reliable financial data are available relevant to the accounting period of the appellant then merely the comparable has different financial year, it cannot be excluded. In view of this we direct the assessee to produce this information and demonstrate before ld TPO that relevant, authentic and reliable information with respect to the comparable is available in public domain and the ld Transfer Pricing Officer to verify the same, if found appropriate, to include the above comparable."
5.6.1 On similar facts, we direct the assessee to produce the relevant information before the TPO and also direct the TPO to verify the same and if found appropriate, include R Systems Ltd in the final list of comparables.
5.7 Coming the ground nos. 10, 11, 12 and 13 which are related to denial of working capital adjustment to the assessee company, it has been submitted that details of computation of the working capital adjustment had been submitted before the 28 ITA 6690/Del/2016 Assessment year 2012-13 TPO and the TPO had rejected the same without pointing out any defect in the computation of the assessee. Our attention has been drawn to pages 269 to 274 of the paper book wherein the computation of the working capital adjustment as submitted before the TPO was reproduced. Reliance has also been placed on the order of ITAT Delhi Bench in the case of Kadimi Tool Manufacturing Co. Pvt. Ltd. vs. DCIT in ITA No. 7068/Del/2014 to support the contention that there was an error in considering outstanding receivables as a separate international transaction and also by considering the outstanding receivables as a loan extended to the AE and imputing interest on the same. It is seen that ITAT Delhi Bench in assessee's own case for AY 10-11 in ITA No. 565/Del/2015 had rejected the assessee's claim for working capital adjustment with the following observations:
"15. With respect to the risk adjustment as well as the working capital adjustment to the operating margin of the appellant as well as the comparable companies the ld Authorised Representative vehemently argued that same may be granted to the assessee. The ld Transfer Pricing Officer has rejected both the above adjustment as para No. 15 and 16 of his transfer pricing order for the reason that assessee could not demonstrate that there is difference in the level of working capital employed by the assessee company vis-a-vis comparable.
16. With respect to the risk adjustment the ld Assessing Officer rejected the contention of the assessee that 29 ITA 6690/Del/2016 Assessment year 2012-13 appellant is a risk mitigating entity as it has a single customer risk.
17. Before us Id DR vehemently relied upon those paragraphs of the order of the ld TPO and submitted that in absence of proper relevant details these adjustments cannot be given to the assessee.
18. We have carefully considered the rival contentions and specifically sought the details of such workings from the assessee. We also asked ld AR that whether working of such adjustment claim was given to the Assessing Officer or not. We have also sought copies of such claim for the workings of adjustment. However, no such working was also given to us. In view of this we reject the request for adjustment of margins of the comparable on account of working capital and risk."
5.7.1 However, in the proceedings before us for this year, it has been demonstrated by the Ld. AR that the working of the working capital adjustment claim was submitted before the TPO/AO. We also note that the claim of the assessee was rejected without assigning any reason. In such a circumstance, it is our considered opinion that the TPO/AO should consider the claim of the assessee with regard to working capital adjustment afresh after duly examining the computation as submitted by the assessee and after giving due opportunity to the assessee. 5.8 The assessee has also raised grounds against the action of the TPO in making transfer pricing adjustment on account of interest on receivables. Although, the Ld. AR has 30 ITA 6690/Del/2016 Assessment year 2012-13 placed vehement reliance on the order of Delhi Bench of the ITAT in the case of Kadimi Tool Manufacturing Co. Pvt. Ltd. vs. DCIT in ITA No. 7068/Del/2014 to support the assessee's contention that there was an error in considering outstanding receivables as a separate international transaction and also by considering the outstanding receivables as a loan extended to the AE and imputing interest on the same, we note that the Ld. AR has not pointed out before this Bench that the issue had been held against the assessee in assessee's own case for AY 10-11 by the ITAT Delhi Bench in ITA No. 565/Del/2015. Although the Ld. AR had been placing extensive reliance on the order of the co- ordinate Bench of the ITAT in assessee's own case for Assessment Years 10-11 and 11-12 in ITA Nos. 565/Del/2015 and 99/Del/2016 respectively while pleading for similar relief with respect to the comparables, the issue of interest on receivables was not argued at all and a plea was made to restore the issue to the TPO/AO with appropriate directions conveniently side- stepping the fact that this issue had been decided against the assessee in AY 10-11 in the very same order on which the Ld. AR had placed extensive reliance. However, we also note that the Ld. CIT DR also had not pointed out that this issue was covered 31 ITA 6690/Del/2016 Assessment year 2012-13 against the assessee. While dismissing the assessee's grounds, the ITAT Delhi Bench, in its order for AY 10-11 (supra) has made the following observations:
"19. The grounds No. 10 to 13 are with respect to adjustment made by the Ld Transfer Pricing Officer against the adjustment made by the Id TPO on account of interest on receivables. It was found during the course of transfer pricing audit that certain invoices raised by the assessee were outstanding as on 31.03.2009 and realized in FY 2009-10 and further certain invoices raised during the year were outstanding for more than 30 days. Therefore, Ld TPO computed interest @ 14.88% on such amount considering the outstanding receivable beyond stipulated period as a separate 'international transaction' and computed interest of Rs. 31577050/-. The Ld Dispute Resolution Panel also confirmed the above adjustment.
20. The Ld Authorised Representative submitted before us that there is no time limit prescribed by the RBI with respect to the realization of export proceeds of units in SEZ. He referred to the Master Circular on export of goods and services issued by the Reserve Bank of India and referred to the condition of the export proceeds repatriation pertaining to SEZ units. He further relied upon the decision of the Hon'ble Delhi High Court in case of CIT Vs. Bechtel India Pvt. Ltd dated 21.07.2016 and of Pr. CIT Vs. Ameriprise India Pvt. Ltd in ITA NO. 461/2016 dated 19.10.2016. He therefore submitted that such delay in receiving outstanding receivable is not an 'international transactions', hence, it cannot be benchmarked separately, further there is no interest cost which can be imputed.
21. The Ld DR vehemently contested that outstanding sum of invoices is akin to loan advanced by the assessee to its foreign AE., hence it is an international transaction as per explanation to section 92 B of the act. He therefore, 32 ITA 6690/Del/2016 Assessment year 2012-13 submitted that TP adjustment on that account is required to be made in view of the decision of Special Bench of ITAT in case of Instrumentation Corporation Ltd Vs. ADIT (TS-467-ITAT-2016-Kol-TP). He further submitted that Master Circular of the RBI does not determine whether there is an international transaction or not. He submitted that Id Transfer Pricing Officer as well as the Ld DRP has given detail reasons for the same. With respect to the decision of the Hon'ble High Courts he referred that in case of Ameriprise there was a specific clause in the agreement of credit period up to 60 days and in case of Bechtel there is a agreed period of 60 days whereas in the case of the assessee there is no such period stated by the assessee. He therefore, submitted that in such event the assessee has kept the outstanding amounts for more than 300 days under many cases. He vehemently referred to page No. 111 of the order of the Id. Transfer Pricing Officer. He further submitted that whether the assessee is a debt free company or debt laden company, is not at all a criterion for imputing interest on outstanding.
22. We have carefully considered the rival contentions. The service agreement dated 01st August 2009 is placed at page No. 294 to 311 of paper book. The service fees are governed by clause 4 of the agreement. According to clause No. 4.9 subsequent to confirmation of the invoices it is provided that the paying party will pay the invoice amount to the invoicing party in accordance with the BT group policy for the settlement of intra-group transaction. Schedule 1 of that agreement is with respect to the services, Schedule -2 is with respect to BTGS transfer pricing policy. According to para No. 3.4 of that policy the service fee for the provision and receipt of services are calculated in the order that BT, BT Ltd and OPCO receive an arm's length return for the services provided and received. Therefore, according to that policy it is evident that the policy of the group is to charge the services at arm's length. In this background it needs to be examined that whether a third party in a given circumstances would allow it's outstanding to drift to such an extent.33
ITA 6690/Del/2016 Assessment year 2012-13 The apparent answer to this query would be emphatic 'No'. Further on reading the transfer pricing study report prepared by the assessee, in the credit and collection risk it has been mentioned that when an entity supplies products or services to a customer in advance of customer payment, the firm runs the risk that the customer will fail to make payment. BT e-serv provides service for in house consumption and invoices its AEs. It bears no credit and collection risk since it received charges from its AEs. Therefore it is evident that assessee has not stated credit and collection risk in its TP report. Looking at the period of outstanding invoices it is apparent that it is the not the case of mere sale but it is a case of sales as well as loan to its AE in the form of overdue outstanding receivables. The argument that assessee is an interest free entity and does not pay any interest and therefore no interest shall be imputed in the outstanding invoices is also devoid of merit because it is not a case of allowance of interest expenditure in the hands of the assessee but an 'international transaction' to be benchmarked at arm's length. It is a case of determination of arm's length price of a transaction. Undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an 'international transaction'. The natural corollary would be of imputing interest on such 'capital financing', if same is not charged at arm's length. Therefore, we reject the contention of the assessee that outstanding receivable is not an 'international transaction' and therefore, hence, according to us, interest on it requires to be imputed. Now the next question arises is that if outstanding receivables are within the terms of agreement of rendering of services than it may be argued that interest on such outstanding is already covered in the sale price of the goods. Naturally such is not the case of the assessee before us as some of the outstanding are for more than 300 days.34
ITA 6690/Del/2016 Assessment year 2012-13 Decision relied upon by the Ld AR in the case of Ameriprice and Bechtel are distinguishable on the facts as they had credit period as per agreement but in case of assessee it is not so. The arguments that master circular of RBI does not prescribe any conditions for repatriation of exports proceeds for SEZ, it cannot be said that for determining ALP of export receivable, which becomes capital financing, if outstanding is beyond agreed or reasonable time limit, does not have any impact on the benchmarking of the same, as the purposes of RBI policy and Income Tax Act are on different footings. However, even if the agreement does not specify the term of the payment even then assessee must be given benefit of credit period which is accepted business practice in the trade. Before the Id Transfer Pricing Officer as well as before the Id DRP the assessee could not establish what is the accepted business practice in its trade about the credit period and what the group policy is in this regard. Therefore, there cannot be any grievance where the Id Transfer Pricing Officer has considered as 30 days credit period. Even before us this credit period was not challenged. In view of this we do not find any infirmity in the order of the Id Transfer Pricing Officer of considering 30 days as normal credit period. The subsequent question arises about the benchmarking analysis and computing the arm's length price. In the present case the Id Assessing Officer has computed interest @14.88% applying the CUP method using external CUP. Before us as well as before the Ld DRP the assessee could not demonstrate how the method employed by the Id Transfer Pricing Officer using external CUP is erroneous. In view of this we do not have any hesitation in confirming the Transfer Pricing adjustment made by the Id. Transfer Pricing Officer on outstanding receivable beyond 30 days credit period applying the interest rate of 14.88% p.a. and computing the interest receivable at Rs. 31577050/-. In the result, grounds Nos. 10 to 12 of the grounds of the appeal are dismissed."35
ITA 6690/Del/2016 Assessment year 2012-13 5.8.1 Although, initially we were inclined to dismiss the grounds raised by the assessee by following the order of the co- ordinate Bench, we also note that no detailed arguments were made by either of the parties on this issue and it is not discernible from the records if there are any distinguishable facts in this year as compared to the facts in AY 10-11 on this issue. Therefore, it is our considered opinion that in the interest of justice, the issue of adjustment in respect of interest on receivables should be re-examined by the TPO/AO after giving adequate opportunity to the assessee to present its case and also after giving due consideration to the order of the ITAT in assessee's own case for AY 10-11 (supra) on this issue. 5.8.2 Accordingly, ground nos. 10, 11, 12 and 13 are allowed for statistical purposes.
6. In the final result, the appeal of the assessee stands allowed in terms of our observations contained in the preceding paragraphs.
36 ITA 6690/Del/2016 Assessment year 2012-13 Order is pronounced in the open court on 19th June, 2018.
Sd/- Sd/-
(R.K. PANDA ) (SUDHANSHU SRIVASTAVA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 19th June, 2018
'GS'
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order
ASSISTANT REGISTRAR
37
ITA 6690/Del/2016
Assessment year 2012-13
DaDate of dictation
DatDate on which the typed draft is placed before the dictating Member DatDate on which the typed draft is placed before the Other Member DaDate on which the approved draft comes to the Sr.PS/PS DatDate on which the fair order is placed before the Dictating Member for pronouncement Da Date on which the fair order comes back to the Sr.PS/PS DatDate on which the final order is uploaded on the website of ITAT Da Date on which the file goes to the Bench Clerk Da Date on which the file goes to the Head Clerk Th The date on which the file goes to the Assistant Registrar for signature on the order Da Date of dispatch of the Order 38