Income Tax Appellate Tribunal - Delhi
Techbooks International Pvt. Ltd., ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'F
'F' : NEW DELHI
BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND
SHRI T.S. KAPOOR, ACCOUNTANT MEMBER
ITA No.
No.4990/Del/2011
Assessment Year : 2007-
2007-08
M/s Techbooks International Vs. Assistant Commissioner of
Private Limited, Income Tax,
O-100, 1st Floor,
Floor, Circle-
Circle-1,
Sector-
Sector-12, Noida.
Noida - 201 301,
Uttar Pradesh.
PAN : AABCT3774A.
(Appellant) (Respondent)
Appellant by : Shri C.S. Agarwal, Senior Advocate
and Shri Ravi Pratap Mall, Advocate.
Respondent by : Shri Piyush Jain, CIT-DR.
ORDER
PER A.D. JAIN, JM :
This is the assessee's appeal for A.Y. 2007-08, taking the following effective Grounds of Appeal:-
"1. That the learned Assistant Commissioner of Income Tax, Circle 1, Noida has erred both on facts and in law in computing the income of the assessee company at Rs. 5,97,19,420/- as against declared income of Rs. 59,93,597/-.
1. That the learned Assistant Commissioner of Income Tax has further erred both in law and, on facts in making an addition of Rs. 5,37,25,821/- on account of alleged understatement of arm's length price in respect of international transactions entered between the assessee company and its associated enterprises ("herein after referred to as AE") 3 That in making the aforesaid addition the learned Assistant Commissioner of Income Tax had erred in referring the matter to the learned TPO u/s 92CA of the Act on the
2 ITA-4990/Del/2011 following amongst other grounds, rendering the order of the TPO as unsustainable both in law and on facts:
a) As none of the conditions precedent laid down under section 92C(3) of the Act were satisfied, there was no occasion for determination of arm's length price by the AO and the value of the international transactions ought to have been accepted;
b) As the reference made by the learned AO to the learned TPO is not in accordance with the provisions of Section 92CA(1) of the Act;
c) As no opportunity of being heard was granted at any stage of the proceedings for this purpose, either at the stage of proposal or even at the stage of approval;
d) As no initial opinion was formed u/s 92C(3) of the Act which is a jurisdictional precondition;
e) By not furnishing the Letter of Reference ('LOR') to appellant.
4 That the learned Dispute Resolution Panel has failed to appreciate that adjustment proposed by the learned Transfer Pricing Officer and, learned Assistant Commissioner of Income Tax in his draft order of Rs. 7,68,20,717/- was wholly erroneous and, arbitrary.
5 That even other-wise the learned Assistant Commissioner of Income Tax has further mechanically and on complete misconstruction of provisions contained in section 92CA(4) of the Act made the impugned addition without appreciating that arm's length price determined by the learned Transfer Pricing Officer in an order under section 92CA(3) of the Act in pursuance to directions of the learned DRP was based on complete disregard of the facts of the case of the appellant and the statutory provisions of law.
5.1 That the learned Transfer Pricing Officer has failed to comprehend that the margin of profit entered between the assessee and its associated enterprises was as per the study of the accountant in his report submitted along-with the return and was further submitted on fresh study was within the range provided in the proviso under section 92C(2) of the Act.
5.2 That the learned authorities have failed to appreciate that inclusion of M/s Vishal Information Technology Ltd as a comparable to determine the arms length price by disregarding the submission of the appellant activities of such company were functionally dissimilar to the activities of the appellant company, despite the fact that during the 3 ITA-4990/Del/2011 course of proceedings before the TPO fresh study was undertaken.
5.3 That the learned authorities below have also erred both in law and, on facts in rejecting functionally comparable company namely M/s Ask me Info Hubs Ltd without assigning any valid basis and, appreciating the submission of the appellant company.
5.4 That on facts and in law, the learned TPO has erred in not discharging his onus, which lay upon his to establish that the Appellant's case is covered under any of (a) to (d) clause of Section 92C (3) of the Act, 1961 5.5 That on facts and in law, the authorities below have erred in rejecting the appellant's claim for use of multiple year data for computing the arm's length price and, instead used single year data of companies to conclude the arm's length price of the international transaction.
5.6 That on facts and in law, the Hon'ble DRP and learned TPO/AO have cherry picked comparables to accomplish pre-conceived conclusions, with the sole objective of rejecting comparables selected by the appellant and arriving at skewed results.
5.7 That on facts and in law, the Hon'ble DRP has erred in rejecting comparable company namely CG Vak Software & Exports Limited on account of having significant related party transactions without appreciating the fact that the Appellant has considered consolidated financial statement which nullify the effect of related party transactions at the standalone level.
5.8 That on facts and in law, the Hon'ble DRP has erred in applying the filter of rejection of Ace Software Exports Limited showing declining revenue trends.
5.9 That on facts and in law, the Hon'ble DRP and learned TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-à-vis the comparables and in the process also neglected the Indian transfer pricing regulations, OECD guidelines on transfer pricing and judicial precedence.
5.10 That on facts and in law, and without prejudice the Hon'ble DRP and learned TPO/AO have erroneously invoked the provisions of Chapter X and failed to appreciate the fact 4 ITA-4990/Del/2011 that there was no intention whatsoever on the part of the Appellant to shift profits outside India.
6. That without prejudice to each of the aforesaid ground, the authorities below have failed to comprehend that margin of profit with its associated enterprises was 15.58% and even on the basis of the order of the TPO it averaged at 20.79%, (even when one of the comparable as adopted in the Accountant Report is 'excluded' being functionally dissimilar and that another comparable is included by the TPO in his order) and thus it was within the range as per the statutory provisions contained in the proviso to section 92C(2) of the Act as it existed at the relevant time.
7. That the learned authorities below have failed to appreciate that assessee had been entering into such transactions with its associated enterprise wherein the margin of profit with its associated enterprise has been accepted by the authorities:
Assessment Margin of Profit
Year
2005-2006 16%
2006-2007 14.92%
8. That on facts and in law, the Hon'ble DRP and learned TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act.
9. Without prejudice and in the alternative, the directions issued by the Hon'ble DRP violate the rules of natural justice inter-alia in obtaining information which was not available in the public domain and relying on the information not available/accessible to the appellant for the purpose of determining comparability of companies and inconsistently following the above approach.
10. Without prejudice to the above grounds, the Hon'ble DRP has erred in confirming the conclusions drawn by learned AO in levying interest under section 234B and 234C of the Act while completely disregarding the provisions of the Act and the judicial precedents."
5 ITA-4990/Del/2011
2. The facts as per the relevant Orders and other documents on record are that: (i) the Assessee Company, M/s Techbooks International Pvt. Ltd. was incorporated on 12.6.2000 under the Companies Act, 1956. It is a wholly owned subsidiary of Aptara, Inc., USA., engaged in the business of provision of data conversion, data entry or keyboarding, reformatting and typesetting services, which was exported only to Aptara Inc, USA, i.e. its holding company. Apart from the above, the Assessee Company had no other business activity during the year under consideration, i.e., A.Y. 2007-08. To carry out the said activity, the Assessee Company had a 100% Export Oriented Undertaking or EOU (hereinafter referred to as 'the Undertaking') registered with the Software Technology Park of India. The income derived by the Assessee from the Undertaking is eligible for deduction under section 10B of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'). The assessment year under consideration is the sixth year of the claim of deduction under section 10B of the Act; (ii) On 31.10.2007,, the Assessee Company filed its return of income for the assessment year under consideration, declaring a total income of Rs. 59,93,597/-. In the computation of total income, income from export of the IT enabled Services and customized data had been declared at Rs. 15,44,86,701/- which was claimed as eligible for deduction under section 10B of the Act. Apart from the above, income derived from interest and scrap was declared at Rs. 59,93,597/-, which was offered for taxation under the income from other sources. A copy of the acknowledgement of return of income, audited financial statements along-with tax audit report are placed at pages 1, 10 to 37 and 81 to 98 of the Assessee's Paper Book ('APB', for short), respectively; (iii) During the financial 2006-07 relevant to AY 2007-08, the Assessee Company had entered into the following international transaction with its Associated Enterprise ('AE'):
6 ITA-4990/Del/2011 Sr Nature of Value Margin Method . international (in Rs.) of Used N transaction Profit o 1 Provision of 105,06,72, 15.58 TNMM IT enabled 355 % Using data Operatin conversion g services Profit/Op erating Cost as PLI
(iv) For the purpose of establishing arm's length price (ALP) of the international transactions entered into by the Assessee with its AE, the Assessee had undertaken a Transfer Pricing study (APB 38-80), carried out by the accountant as provided under section 92E of the Act and, had also furnished the requisite Form 3CEB (APB 2-9), ), as per Rule 10E of the Income Tax Rules, 1962 (hereinafter referred to as 'the Rules'); (v) For determining the ALP of the international transaction entered into by the Assessee with its AE, and having regard to the nature of the transaction, it had applied the Transactional Net Margin Method (TNMM), using Operating Profit/Operating Cost (OP/TC) as profit level indicator, the said method being the most appropriate method as per the Assessee and after a detailed analysis on the basis of the functions performed, the risks assumed and the assets utilised (FAR analysis) and the nature of services rendered, the Assessee arrived at a separate set of 15 comparable companies undertaking comparable activities, vis-a-vis the provision of IT enabled data conversion services by the Assessee to its AE and the weighted average margin of profit for the years ending in 2005, 2006 and 2007 was calculated at 21.51% and allowing a variance of +/-5% variance from the mean ALP, the range of ALP of the comparables would fall between 115.43% and 127.58%, translating to a range of operating margins between 15.43% and 7 ITA-4990/Del/2011 27.58% on operating cost (APB 79), the margin of profit declared by the Assessee at 15.58% was at arm's length. The comparables selected by the Assessee are as follows:
S.No. Particulars 3 years' data as per 3 years' latest data Using latest Transfer Pricing available in the contemporaneous Study without public domain data(FY 2006-07) capital adjustment without working available in the capital adjustment public domain without working capital adjustment 1 Ace Software Exports Limited 11.88% 5.59% -7.04% 2 Allsec Technologies Ltd 27.47% 27.47% 27.21% 3 Apex Advanced Technology 17.44% 26.95% 39.73% Private Limited 4 BNR Udyog Ltd. NC* NC* NC* 5 CG Vak Software & Exports 4.48% 4.48% 4.97% Limited 6 Cosmic Global Ltd 17.49% 14.56% 11.31% 7 Flextronics Software Systems 3.61% 3.61% -0.89% Ltd 8 Fortune Infotech Ltd. NC* NC* NC* 9 Genesys International -1.29% 3.59% 12.52% Corporation Ltd 10 Maple eSolutions Ltd 36.64% 35.08% 33.96% 11 R Systems International Ltd 11.94% 11.94% 13.54% 12 Spanco Telesystems and 21.52% 22.33% 24.82% Solutions Ltd 13 Transworks Information 14.27% 14.05% 13.41% Services Ltd.
14 Tricom India Ltd. NC# NC# NC#
15 Triton Corp Ltd 19.94% 26.34% 34.49%
16 Vishal Information 46.94% 48.57% 51.11%
Technologies Ltd
Arithmetic Mean 17.87% 18.81% 19.93%
TIPL's Transfer Pricing Margin 15.58%
Lower range -5% 11.98% 12.87% 13.94%
Within range Within range Within range
NC* The company has not been considered comparable on account of significant related party transactions.
NC# The company has not been considered comparable on account of being functionally dissimilar.
(vi) Vide letter dated 9.12.2009,, the Assessing Officer referred the international transaction entered into by the Assessee Company to the Transfer Pricing Officer ('TPO') to determine the arm's length price 8 ITA-4990/Del/2011 thereof; (vii) By virtue of Order dated 29.10.2010 (APB 126 to 139), passed under section 92CA(3) of the Act, the TPO did not agree with the analysis undertaken by the Assessee Company. He made the following observations/adjustments in respect of the TP analysis undertaken by the Assessee as regards its international transaction:
a) The margin earned by the Assessee from the IT enabled data conversion services was very low.
b) In determining the arm's length nature of the international transaction of the Assessee, the financial information of comparable companies pertaining to only FY 2006-07 ought to have been used, since it was contemporaneous and, was in accordance with the requirements under Rule 10B(4) of the Rules.
c) Considered a functionally different company as a company comparable to the Assessee Company.
d) Did not agree with the Assessee's contention that a few functionally comparable companies, for which data was now available, should be considered for the purpose of conducting an economic analysis;
(viii) Thus, out of the 15 comparables used by the Assessee in its Transfer Pricing Study, the TPO rejected one comparable, i.e., Tricom India Limited, stating it to be functionally dissimilar to the Assessee Company. Two, i.e., Flextronics Software Systems Ltd. and Transworks Information Services Ltd. were disregarded. Two companies, i.e., BNR Udyog Ltd. and Fortune Infotech Ltd. were rejected for having related party transactions. Further, the TPO took CG Vak Software and Exports Ltd. as a comparable and computed the margin at 23.29% and made an adjustment of Rs. 7,08,27,120/-; (ix) The AO, vide his Draft Order dated 22.12.2010, relying on the TP analysis undertaken by the TPO, determined the ALP of the international transaction of 9 ITA-4990/Del/2011 the Assessee to be far greater than the ALP determined by the Assessee. This resulted in determination of income of the Assessee at Rs. 7,68,20,717/-; (x) Aggrieved against the aforesaid Draft Order of the AO, the Assessee filed its Objections before the Dispute Resolution Panel (DRP). A copy thereof has been placed at APB 154 to 251; (xi) The DRP, vide Order dated 30.08.2011 (APB 252 to 281), allowed working capital adjustment. The margin was computed at 21.41%, as against that of 21.51% computed in the TP study of the Assessee.. However, the DRP did not allow the benefit of -5% to the assessee under the Proviso to section 92C(2) of the Act. Apropos the comparables, out of the 15 comparables used by the Assessee in its Transfer Pricing Study, the DRP rejected four, namely Tricom India Ltd., BNR Udyog Ltd., Fortune Infotech Ltd. and M/s Ace Software Exports Ltd. Further, the DRP also excluded CG Vak Software and Exports Ltd., a comparable adopted by the TPO in his Order and not by the Assessee in its study.
M/s Vishal Information Technologies Ltd. was selected as a comparable, though the Assessee had rejected the same. M/s Ask Me Info Hubs Ltd. was not accepted as a comparable; (xii) Pursuant to the directions of the DRP, by virtue of Assessment Order dated 21.10.2011, the AO made an addition of Rs. 5,37,25,821/- on account of adjustment of ALP in respect of the Assessee's transaction with its AE. The income of the Assessee was thus determined by the AO at Rs. 5,97,19,420/-; (xiii) Aggrieved, the Assessee is before us by way of the present Appeal.
3. The parties have made oral submissions before us and written submissions have also been filed. The ld. Counsel for the Assessee has 10 ITA-4990/Del/2011 contended that the adjustment made by the AO on the basis of the directions issued by the DRP is unsustainable;
REGARDING CG VAK AND ACE SOFTWARE that the DRP has acted without jurisdiction in rejecting CG VAK as a comparable, for the reason of its having related party transactions of more than 25%; that there were no related party transactions in the consolidated financial statements considered by the Assessee for analysis; that the Assessee Company had used the BPO services segment of CG Vak to compute the comparable operating margins; that the revenue earned by CG Vak in its BPO services segment was exactly the same as that earned by it in the BPO services segment, as given in the consolidated financials; that thus, the comparable operating profit could not be influenced by the related party transactions; that the Working Capital Adjusted Margin of CG Vak was 3.30%; that the DRP wrongly rejected Ace Software as a comparable for the alleged reason of declining revenues; that this is an arbitrary reason for rejection; that the Assessee, in its Transfer Pricing Report, had already applied the filter of excluding the Companies having persistent operating losses; that revenues might fluctuate due to any, or some, or all of various factors, like volatile market, economic conditions, political conditions, demand/supply conditions, etc.; that then, neither the Act, nor the OECD Guidelines provide the revenue trend to be a determinant of comparability; that otherwise too, in the Assessee's case, the Assessee had extracted data of Ace Software for the earlier three years from the 'moneycontrol' website, from which data, it was observed that there was an average annual decrease of 11.67%, which might have been due to adverse business conditions existing at that time; that also, Ace Software was found not to have been making losses in any of these three years; that both these Companies had been originally considered by the TPO in his set of comparables; that the DRP illegally rejected these comparables 11 ITA-4990/Del/2011 without giving any notice; that the DRP has failed to consider that if both CG Vak and Ace Software are considered as comparable, the Assessee's transfer price would be within arm's length;
REGARDING VISHAL INFORMATION that the DRP has made an erroneous selection of M/s Vishal Information Technologies Ltd., which had been rightly rejected by the Assessee as a comparable, on the alleged basis that it was a Company which was functionally comparable to the Assessee Company, whereas it was not; that though this Company had been selected by the Assessee as a comparable while preparing its TP documentation, when the updated margins for FY 2006-07 were submitted before the TPO, it was not taken by the Assessee as a comparable Company; that if Vishal is not considered as a comparable Company, the operating margin of the Assessee Company would fall within arm's length range, as required by the Transfer Pricing Rules;
REGARDING ASK ME INFO that the DRP has further erred in not accepting M/s Ask Me Info Hubs Ltd. as a comparable, for the alleged reason that the said Company did not have export revenues for FY 2006-07; that this is an arbitrary reason for rejection; that domestic Companies are equally good comparables for ALP; that for the purpose of comparability, it is essential to consider the activity/functions performed, by the entities to be compared, rather that the customer location; that the mere fact that a comparable does not have foreign exchange income and caters only to customers based in India, is not sufficient for discarding the company as a comparable; and that if Ask me is considered as a comparable, the operating margin of the Assessee would be within arm's length range.
12 ITA-4990/Del/2011
4. It has further been contended on behalf of the Assessee that the Authorities below have failed to appreciate that Assessee had entered into such transactions with its associated enterprise in the earlier years also and the margin of profit with its associated enterprise was accepted by the Authorities at 16% for A.Y. 2005-06 and at 14.92% for A.Y. 2006-07.
5. It has then been submitted that the ld. DRP has erred in not allowing the benefit of -5% available under the proviso to section 92C(2) of the Act, considering which, the transaction of the assessee would be at arm's length; and that the DRP has failed to apply the proviso to section 92C correctly and has erroneously failed to allow to the Assessee an option for the downward variation of 5 percent in determining the arm's length price.
6. The Assessee had next averred that the DRP has erred in rejecting multiple year data of comparable companies.
7. It has also been submitted that the ld. DRP has failed to make appropriate adjustments to account for the varying risk profiles of the Assessee vis-a-vis the comparables and has, while doing so, illegally ignored the Indian transfer pricing regulations and judicial pronouncements; and that the DRP has failed to consider that the Assessee does not undertake risks like market risk, contract risk, credit and collection risk and risk of infringement of intellectual property etc., due to which fact, benefit of the same vis-a-vis the comparables ought to have been allowed to the Assessee.
8. Lastly, the Assessee has argued that the addition made is wholly untenable, since it has been made and confirmed, erroneously overlooking the fact that entire income of the Assessee is exempt u/s 13 ITA-4990/Del/2011 10B of the Act and as such, there could have been no justification for the Assessee to retain profits out of the country.
9. On the other hand, on behalf of the Department, strong reliance has been placed on the orders of the Authorities below. It has been contended in the arguments addressed and in the Written Submissions filed, that with regard to safe harbour, it is pointed out that law has been amended, and the issue is conclusively settled in favour of Revenue; that in fact, the same has been held so by the ITAT, Special Bench, Delhi in the case 'IHG IT Services (India) Pvt. Ltd. vs. ITO', vide order dated 30.04.2013, in ITA No. 5890/D/2010, that the assessee's operating margin at 15.58% (OP/OC) is, as admitted by the assessee itself, less than its own benchmarking margin arrived at (by the assessee itself) at 21.51%; that the assessee's strategy is to pull down the benchmarking margin anyhow, by seeking exclusion of certain comparables, and by inclusion of certain comparables; that this is with a view to project that its international transactions are at arm's length; that use of multiple year data is not permitted and the DRP has appropriately deliberated on this issue. (Paras 29 till 31, Pages 8 till 10 of the order of the DRP; that this is the settled position of law; that with regard to consistency, even the benchmarking margin arrived at by the assessee itself was varying every year; that besides, the ITAT, has held that consistency is not a valid argument in a transfer pricing situation; that reliance in this regard is placed on orders of the ITAT, Delhi in the case of M/s. Carraro India Ltd. vs. DClT (2008) -TIOL -519-ITAT-DEL; that further, the assessee itself has relied on the order of ACIT, Range- 10(1), Mumbai Vs. Hapag Lloyd Global services (P.) Ltd., order dated 28/02/2013, A.Y. 2005-06, in ITA No. 8499/M/2010; that in this case, it has been held, amongst other things, that filters are necessary and that comparables vary from year to year and from case to case; that reliance is also placed on the order of the Mumbai Tribunal, in 'Onward Technologies Ltd.', ITA No. 7885/M/2010, order dated 30/04/2013, 14 ITA-4990/Del/2011 wherein they have relied upon order of the Hon'ble Delhi High Court in the case of 'M/s CWT vs. Meattles Pvt. Ltd.', 156 ITR 569 Delhi; that it has also been held in the case of M/s Advance Power, ITAT Mumbai, in ITA No. 6542/6732/M/2011, order dated 8.5.2013, that comparability of an entity is to be tested in each assessment year; that further, it has been held in the case of M/s DHL Express India Pvt. Ltd. vs. ACIT, 46 SOT 379 (Mum), that if two companies were compared as comparable in one year, it is not necessary that they should be considered as comparable in the other year also; that it has also been held in the case of DCIT vs. Firmenich Aromatics India Pvt. Ltd., 53 SOT 269 URO, Mumbai, that there is no merit in the argument that the operating profit shown by the assessee should be accepted solely on the ground that in the subsequent year, the TPO has accepted the operating margin shown by the assessee; that with regard to risk analysis, reliance is placed on the order of the DRP; that the argument that the assessee's income was exempt from tax, and that it had no motive for tax evasion is not relevant in a transfer pricing situation; that reliance is placed on the following orders: -
• ITO vs. Tianjin Tianshi India (P) Ltd. - 2011 -64-DTR 98, 133 lTD 123 Delhi Tribunal Establishment of motive of tax evasion, is not required before invoking TP provisions. Aztech Special Bench order, 107 ITO 141, Bangalore sB, paras 127 till 129. • Coca Cola India {P} Ltd. 309 ITR 194{ Hon'ble P&H High Court ).
• Haworth India (P) Ltd. 131 ITO 215, Delhi • DCIT vs. Indo American Jewellery (2010) 41 SOT 1 (Mumbai) • ACIT vs. Tara Ultima (P) Ltd. - 201163 DTR 333 - Mumbai Tribunal;
that the assessee has desired the exclusion of M/s. Vishal Infotech ltd., as it finds that it will benefit by exclusion of this entity as a comparable; that the assessee had itself found this entity as a comparable entity in its own benchmarking analysis for A.Y. 2007-08; that besides, the DRP has given detailed reasons in this regard (pages
15 ITA-4990/Del/2011 3-6 of the DRP's order, paras 9-15); that reliance is also placed on the order of the Hyderabad Tribunal in the case of DClT vs. M/s. Deloitte Consulting India (P) ltd., Hyderabad, in ITA No. 1082/1082- 1084/Hyderabad/2010, order dated 22-07-2011; that the assessee has desired inclusion of M/s. Ask Me Info Hubs (P) ltd. as a comparable; that the DRP has given detailed reasoning for exclusion of this entity in paras 18 & 19, on pages 6 & 7 of its order; that even the assessee itself, in its own benchmarking analysis, had found this entity to be not comparable (page 64, item No. 49, APB); that this entity fails the export earnings filter; that incidentally, the assessee itself is in the situation of substantial export earnings; that the export earnings filter has been approved in the case of M/s. Vedaris India (P) Ltd., para 55, 131 TTJ Delhi 309; that it has also been so held in the case of DClT vs. Indo American Jewellery India (P) Ltd., ITA No. 6194/Mumbai/2008, order dated 31/05/2010; that the assessee has desired inclusion of M/s. Ace Software (P) ltd.; that the reasons of the DRP for exclusion thereof are explicit (pages 7 & 8, paras 20-25 of the DRP's order); that relying on multiple year data for working out the trend such as persistent losses or persistent decline in sales is not the same as use of multiple year data for arriving at benchmark margin; that the assessee has desired exclusion of M/s. CG Vak Software; that the reasons of the DRP for not excluding are comprehensive; that the assessee has cleverly and inappropriately worked out the RPT quantum in this case; that it has been held in the case of M/s Nextlink India P ltd, ITAT Bangalore , ITA NO 454/Bang/2011, AY 2005-06 dated 19-10-2012, that even a 40% margin is normal in the case of ITES; that while choosing comparables, only a broad comparability is required (page 4, para 10 of the DRP's order); that in fact, the assessee itself has chosen broadly comparable entities; that the filter of diminishing revenue and persistent losses has been approved by ITAT Delhi in case of Navisite, vide order dated 31-05-2013; that powers of the DRP to enhance variation has been manifest as per law and the intent, is available to 16 ITA-4990/Del/2011 DRP from 1.4.09; that reference may be made to 'Further clarification to Finance Bill, 2012'; and that CBDT Circular No 3/2012, dated 12/06/2012 is also eloquent in this regard.
10. The Department's Ground-wise counter is as under:
'Counter to Ground No.1 & 2These are general in nature.
Counter to Ground No.3 This is a settled issue. The Hon'ble DRP has considered this in paras 5 till 8, pages 2 & 3 of their order. This issue has been considered in detail in the Special Bench order of M/s Aztec Software & Technology Services vs. ACIT, 2007,107 lTD 14l. Reliance is also placed on the order of Ranbaxy Laboratories Ltd. vs. Addl.CIT, 2008, 110 ITO 428 Delhi. Further, as held in the case of M/s Aztec, there is no requirement for the AO to hear the assessee, or record reasons before making reference to TPO.Counter to Ground No.4 & 5
The general discussion, as detailed in this letter is relevant.
Counter to Ground No.6 This ground relates to functional comparability, and selection of com parables. The general discussion in this letter is relevant. Further, the provisions relating to safe harbour, have been conclusively settled in favour of Revenue, as being retrospective as detailed in this letter.
Counter to Ground No.7 The aforesaid ground has been countered earlier in this letter. Merely because profits of the assessee have been accepted in earlier years, or in a subsequent year, does not in itself, imply that the transactions in this year too are at Arm's Length. It has been held in the case of DClT vs. Firmenich Aromatics India {P} Ltd., 53 SOT 269 URO, Mumbai, para 17 ITA-4990/Del/2011 9 & 10, that there is no merit in the argument that the operating profit shown by the assessee should be accepted, solely on the ground that in subsequent year the TPO has accepted the operating margin shown.
Counter to Ground No.8 This issue relates to safe harbour, and has been detailed earlier in this letter Counter to Ground No.9 The information as obtained from Vishal lnformation, as reproduced in DRP"s order in para ll, and pages 4 & 5 is only supportive of Departmental view point. Moreover reliance is placed even by the DRP on the case of Deloitte Consultant {P} Ltd., Hyderabad, ( para 13 of DRP, page No.5). Copy of this order is being placed.'
11. We have heard the parties and have perused the material on record. One of the contentions raised before us by the assessee is that if Vishal is not considered as a comparable Company, the operating margin of the Assessee Company would fall within arm's length range, as required by the Transfer Pricing Rules. The Department's response to this submission is that the assessee had itself found this entity as a comparable entity in its own benchmarking analysis for A.Y. 2007-08; that besides, the DRP has given detailed reasons in this regard (pages 3-6 of the DRP's order, paras 9-15). In this regard, reliance has been placed on the order of the Hyderabad Tribunal in the case of DClT vs. M/s. Deloitte Consulting India (P) ltd., Hyderabad, in ITA No. 1082- 1084/Hyderabad/2010, order dated 22-07-2011.
12. In this regard, it is seen that the TPO observed that the functions performed by Vishal are similar to the assessee; that wages to cost ratio cannot be adopted to accept/reject the comparables; that the assessee has itself chosen Vishal in its TP study. The assessee objected before the DRP that execution of contracts was outsourced by 18 ITA-4990/Del/2011 the assessee to external vendors - the company does not perform comparable functions; that work in progress is significant part of operating cost clearly demonstrating that the company is following a very different model of business. The DRP's findings are that the company is rendering ITES services using its own assets and human resources (may not be on the roll of the company) and is functionally similar to the taxpayer; and that RPT more than 25% as corporate guarantee is not acceptable, as this transaction does not have effect on profit & loss.
13. We find that M/s Vishal Information Technologies Limited has a different business model than that of the assessee, as it outsources execution of contracts to external vendors to save cost on employees which is also evident from the fact that employee cost for Vishal is 3% to the total cost, whereas in case of assessee, it is 60% to the total cost.
14. In the following cases, the assessee was involved in the business of Information Technology Enabled Services, and revenue sought to include M/s Vishal Information Technologies as comparable to compute the mean margin of the comparables, it was held by the ITAT that such comparable is functionally not comparable. The aforesaid conclusion has been arrived at by the Tribunal on the ground that it was outsourcing a considerable portion of its business and as such, it was held that the same was not comparable :
(i) M/s Maersk Global Service Center (India) P.Ltd. - 145 TTJ 64.
(ii) ITO Vs. Zydus Altana Healthcare (P) Ltd. - 44 SOT 132 (Mum).
(iii) ACIT Vs. Hapag Lloyd Global Services (P) Ltd. - [2013] 34 taxmann.com 241 (Mum).
19 ITA-4990/Del/2011
(iv) Capital IQ Information System (India) P.Ltd. Vs. DCIT (International Taxation) - [2013] 32 taxmann.com 21 (Hyd).
15. In First Advantage Offshore Services Ltd. Vs. CIT - ITA No.1086/Bang/2011, dated 30.3.2013, it has been held that in the case of an ITES company, employee cost should definitely be more than 25% of the total expenses as in the ITES segment, the entire work is to be done by the employees and companies whose employee cost is less than 25% must be excluded. Following the aforesaid order of the Tribunal, the Bangalore Bench of the Tribunal, in the case of Symphony Marketing Solutions India (P) Ltd. Vs. ITO - [2013] 38 taxmann.com 55, has again held that since the employee cost/operating sales of M/s Vishal Information Technologies Ltd. is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%, the same is liable to be excluded.
16. Further, as held in SAP Labs India Pvt.Ltd. Vs. ACIT (ITA No.398/Bang/2008), Vishal is also an exceptionally high profit making company and should not be considered.
17. Then, over 20% of operating costs of M/s Vishal Information Technologies Ltd. consist of 'Work in Progress' and such a significant part of operating costs being 'work in progress' clearly signifies that the company is following a very different operating model from that of the assessee. Further, it has provided a Corporation Guarantee of ` 10.85 crores (amount to 35% of its turnover) on behalf of its holding company.
18. It is, further, noteworthy that as observed in DCIT Vs. Quark Systems Pvt.Ltd. - 132 TTJ 1, while preparing the TP report by an 20 ITA-4990/Del/2011 oversight the business model of M/s Vishal was not properly taken into account and hence, merely because it is chosen by the assessee in its TP study, the same cannot be held to be comparable and the taxpayer is entitled to point out that the said enterprise has wrongly been taken as a comparable.
19. Then, merely because M/s Vishal Information Technologies Ltd. has been selected as comparable in the transfer pricing study, this does not ipso facto establish that the same is an inappropriate comparable. The Chandigarh Bench of the ITAT, in the case of DCIT Vs. M/s Quark Systems Private Limited reported in 32 TTJ 1, has held that even if the taxpayer or its counsel had taken Datamatics as comparable in its TP audit, the taxpayer is entitled to point out to the Tribunal that the above enterprise has wrongly been taken as a comparable, and as such, the assessee is entitled to contend that the aforesaid comparable is not comparable, as being functionally dissimilar.
20. Too, in essence, in the case of Vishal, execution of contracts has been outsourced to external vendors and, as such, the company does not perform functions comparable to the assessee. A major portion of the execution is outsourced by it vis-a-vis the established in-house capability of the assessee to perform the execution of work. Also, as Vishal has been making high margins consistently, on this score itself, the same ought to be excluded from the set of comparables. Then, in the case of Vishal, over 20% of its operating costs in its audited financials consist of "work in progress". Such a significant part of operating costs being "work in progress" clearly signifies that the company is following a very different operating model vis-a-vis the tested party and it should be deemed to be functionally incomparable.
21 ITA-4990/Del/2011
21. In M/s Maersk Global Service Center (India) P.Ltd. - 145 TTJ 64, it has been held that "Insofar as the cases of Tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out the entire operations itself, in our considered opinion, these two cases were rightly excluded".
22. The DRP has referred, at page 4 of its order, to the information obtained by the department from M/s Vishal Information Technologies Ltd. This purported information was provided by Vishal Information letter dated 23.3.2010, which has not been made available to the assessee company and, as contended and not disputed, therefore, per- se, the same cannot be relied on. Moreover, such information pertains to AY 2008-09 and not AY 2007-08 and it has no applicability for the year under consideration. There are discrepancies in the profit and loss account. Thus, once it is admitted that there is discrepancy in respect of the information available in the public domain, the same can be excluded.
23. Last, but not the least, if Vishal, which has a different business model than that of the assessee, and is also an exceptionally high profit making company, is excluded as a comparable, the arithmetic mean will become 19.54%. This would fall within the range of +/- 5% both, according to the old proviso, as well as the amended proviso to Section 92C of the Act and the margin of profit declared would be at arm's length. Consequentially, no adjustment will have to be made.
24. The department has not been able to refute the above position before us. In view of the above, finding the same to be perfectly reasonable, we direct the exclusion of M/s Vishal Information Technologies Ltd. as a comparable. Since the exclusion of M/s Vishal 22 ITA-4990/Del/2011 Information Technologies Ltd. from the set of comparables, as above, brings the assessee within the prescribed range of +/- 5%, the merits of the comparability of the other comparables need not be gone into and we are not doing so. As a consequence thereof, the grievance of the assessee in this regard is found to be justified and ground Nos.2 and 4 to 9 taken by the assessee are accepted. Ground No.1 is general, whereas ground No.3 is rendered academic. Ground No.10 is consequential.
25. In the result, the appeal of the assessee is allowed.
Decision pronounced in the open Court on 02nd April, 2014.
Sd/- Sd/-
(T.S. KAPOOR)
KAPOOR) (A.D. JAIN)
JAIN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 02.04.2014
dk
Copy forwarded to: -
1. Appellant : M/s Techbooks International Private Limited, O-100, 1st Floor, Sector-
Sector-12, Noida Noida - 201 301, Uttar Pradesh.
2. Respondent : Assistant Commissioner of Income Tax, Circle-
Circle-1, Noida.
3. CIT
4. CIT(A)
5. DR, ITAT Assistant Registrar