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Income Tax Appellate Tribunal, “C” BENCH, PUNE
Before: SHRI R.S.SYAL, VP & SHRI PARTHA SARATHI CHAUDHURY, JM
आदेश / ORDER PER PARTHA SARATHI CHAUDHURY, JM:
This appeal preferred by the assessee emanates from the directions of the Ld. Dispute Resolution Panel (DRP), Panel-3, Mumbai dated 09.06.2017 passed u/s.144C(5) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟) for the assessment year 2013-14 as per the grounds of appeal on record.
At the very outset, referring to the grounds of appeal
, the Ld. Counsel for the assessee submitted that the assessee is not pressing Ground Nos. 2, 5, 6, 7 and 8. After recording the submissions of the Ld. Counsel, these grounds are dismissed as “not pressed.”
3. Ground No.1 is general in nature and Ground No.9 is premature. Hence, these grounds do not call for any adjudication.
4. In Ground No.3, the Ld. Counsel for the assessee submitted that TPO had rejected Jindal Intellicom Pvt. Ltd. and R System International Limited as non comparable companies while determining the Arm‟s Length Price (ALP) of the assessee for the assessment year 2013-14. The assessee wants their inclusion in the final list of comparable companies in respect of the relevant assessment year.
The brief facts of the case are that the assessee is a captive entity (i.e. risk mitigated entity) mainly engaged in providing Information Technology (IT) enabled services in the nature of call center and low end back office support to its associated enterprises (AE) and billing them at cost plus 15%. Accordingly, as mentioned by the assessee in transfer pricing study report for FY 2012-13, it has classified itself as IT enabled/BPO service provider. During the year under consideration i.e. AY 2013-14, the assessee company has undertaken following international transactions:
Name of Transaction Amount(Rs.) Method Adopted Rendering IT 94,69,33,224/- TNMM enabled services to AEs.
5.1 The assessee used Transactional Net Margin Method (TNMM) to benchmark its international transactions with the Profit Level Indicator (PLI) of operating profit/operating cost (OP/OC). The assessee in its transfer pricing study report had determined PLI of the comparable companies using three years weighted average as at 10.45% as against that of the assessee of 15.17%. On this basis, the assessee stated that its international transactions of rendering IT enabled services (ITes) to AEs are to the arm‟s length (considering foreign exchange gains/losses and provision no longer required written back as operating in nature). The TPO in its Transfer Pricing Assessment order passed u/s.92CA(3) of the Act considered the foreign exchange gains/losses and provision no longer written back as non operating in nature and determined the average PLI of the comparable companies at 18.56% (single year), as against the PLI 14.28% of the assessee. Accordingly, the TPO made an adjustment of Rs.3,54,36,214/- to the value of the assessee‟s international transactions. The Assessing Officer incorporated the adjustment as Rs.3,54,36,214/- in the draft assessment order. He proposed to assess the assessee‟s income at Rs.18,51,69,180/- as against its return of income at Rs.14,97,32,970/-.
(A) JINDAL INTELLICOM PRIVATE LIMITED:
In respect of Jindal Intellicom Private Limited to be included in the final list of comparable, the assessee submitted that Jindal is an international call center for rendering voice and data services to overseas customers and holds certificate from Software Technology Parks of India recognizing the project as a 100% export oriented unit. The assessee has considered Jindal Intellicom Private Limited as comparable to it. The TPO in show cause notice has rejected Jindal Intellicom Private Limited for operational loss. The assessee submitted that Jindal Intellicom Private Limited during financial year 2012- 13 has earned profits. Further, the assessee submitted that the filter applied by the TPO for rejecting loss making companies lack economic rationality as there might be a case where a functionally comparable company might incur loss for a particular year. The assessee also submitted that a company incurring loss is nothing but a company earning negative profit, hence, a company cannot be rejected only because it has incurred losses in any particular year. The assessee placed reliance upon the decisions in the cases of (i) Cummins Turbo Technologies Limited Vs. DDIT (International Taxation), (ii) Goldman Sachs (India) Securities Private Limited Vs. ACIT, ITA No.7724/MUM/2011 (iii) Advance Power Display Systems Limited Vs. ACIT, ITA No.6732/MUM/2011 and ITA No.6542/MUM/2011 wherein the Mumbai Bench of the Tribunal held that companies having persistent loss only should be rejected. The assessee submitted that Jindal Intellicom Private Limited is not a persistent loss making company. That further, the assessee also submitted that Jindal Intellicom Private Limited was accepted as a comparable in TP order for assessment years 2010-11, 2011-12 and 2012-13.
The assessee submitted that even for the subsequent assessment year i.e. 2014-15, this company i.e. Jindal Intellicom Private Limited was also accepted by the DRP by observing as follows:
“………However, in this year, as discussed above, the TPO has not given any specific reason for the rejection of this comparable. In A.Y. 2013-14, the company was held as not comparable only on the ground of Directors Report that it is in IT as well as ITes sector and no segmental available. However, as reproduced in the submission of the assessee, this entity has been duly held as comparable in AY 2010-11, 2011-12 and 2012-13 also. Further, in this year page 6 of Annual report shows that it is in the call sector activity. No evidence is brought on record by the TPO regarding this entity being functionally different in this year. Therefore, we are of the opinion that this entity needs to be selected as a comparable. TPO to take action accordingly”
At the time of hearing, the Ld. Counsel for the assessee took us to the Directors Report placed at Page 75 of the paper book wherein in the Column of Conservation of Energy, it is stated that the company being a call center functions in the BPO industry. It consumes power only for call center equipment and for office requirements, therefore, furnishing information pertaining Conservation of Energy & Technology Absorption is not applicable to our company.
That further, at Page 76 of the paper book, it is stated that the company is an international call center for rendering voice and data services to overseas customers and holds certificate from Software Technology Parks of India recognizing the project as a 100% export oriented unit. That later on in the disclosure of general information about company i.e. Jindal Intellicom Private Limited on the Column Types of principal product or services, at Page 151 of the paper book, it is stated that description of product or service is Telephone Call Center services.
The statement of profit and loss account enclosed at Page 152 of the paper book wherein revenue from sale of products is Nil and revenue is generated only from sale of service which is very much evident. Similarly at Page 158 of the paper book, it is specified about this company i.e. Jindal Intellicom Private Limited that in accordance with Accounting Standard 17- Segment Reporting, the company has only one reportable business segment call center services.
8.1 That having all these submissions, the Ld. Counsel for the assessee vehemently submitted that this company should be included in the final list of comparables with that of the assessee company, since this company is doing call center services.
We are inconformity with the submissions of the assessee in this regard and we find that this company has been accepted as comparable company for assessment years 2011-12, 2012-13 and also 2014-15. That further, this company does not earn any revenue from sale of products. The only area of earning of revenue is from sale of services. This company is engaged in the call center business and hence, comparable company with that of the assessee. The TPO/AO is directed to include Jindal Intellicom Private Limited in the final list of comparables in respect of the assessee while determining the TP adjustment.
(B) R System International Limited:
The next company which the assessee wants to include in the final list of comparable is R System International Limited. The reason for rejection of this company by the TPO is that it is having different financial year. The TPO observed that the Rule 10B(4) requires that the comparable data should pertain to the financial year in which the international transaction have been taken place. This Rule has been interpreted in number of decisions and it is held that it pertains to the data of the only previous year in which international transaction have taken place and multiple year data is not to be used. Therefore, such companies cannot be considered comparable with the assessee.
When the matter travelled before the Ld. DRP, it was observed that the assessee follows the financial year ending with March 31, whereas income of the comparable companies considered by the assessee, the accounting year ends with June or September or some other month. Those companies whose accounting year does not end with March 31, 2013 are proposed to be rejected by the TPO. This filter has been proposed since the TPO was of the view that it ensures that the transactions being compared took place during the same period/financial year in conformity with the Rule 10B(4). The DRP on this issue observed as follows:
“Use of data of same financial year as that of international transaction has an inherent logic. Economic, political and business conditions vary substantially over a period of time changing the results of business substantially from one period to another. By a sudden change in exchange rate in a particular month (say April), a company may incur substantial forex losses and also its business may be impacted by higher prices of raw materials imported by it and lower prices of exports of finished goods manufactured by it. So, there may be substantial difference between the performance of a company having its accounting year ending in March and another company having accounting year ending in April. As per the assessee, contemporaneous data does not necessarily mean data pertaining exactly to the same financial year and covering the same period as the international transaction under consideration. However, Rule 10B(4) does not use the word "Contemporaneous Data". The Rule 10B(4) reads:- "The data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into:" As per the above rule, the data to be used for transfer pricing study is the data relating to the financial year in which the international transaction has been entered. The word "contemporaneously" is used in Rule 100 so as to mean that such documents mentioned therein have to be maintained as and when the business of the tax payer is carried on during the course of financial year. This word has thus been used in a different context. This view of the TPO has been upheld by the Hon'ble Bombay High Court in the case of PTC Software (I) (P.) Ltd. (75 taxmann.com 31 (Bombay). In cases of companies, the data in respect of which are available publicly and which maintain accounts other than in terms of the financial year, following adjustments are required to be carried out in order to bring the data at par with that of the assessee: i. While apportioning such data, adequate care needs to be taken so that the Profit Level Indicators are computed comparably. ii. While apportioning such data, adequate care needs to be taken so that the Profit Level indicators are computed comparably.
For the determination of profit level indicators, certain entries having bearing on the cost and income are- interest, provisions, losses/ gains on account of foreign exchange etc, which 'normally are accounted for at the end of the accounting year as per the business practice. Under both the situations, whether the data pertaining to the period prior to the accounting year or subsequent to the accounting year is integrated with the relevant portion of the accounting year of the comparable, the same gives a lopsided picture of the accounts so far as the financial data is concerned. Since there is no requirement as per company law or as per accounting standards that the data pertaining to a particular quarter needs to be closely compartmentalized by providing for various· provisions ete. for each quarter, the validity of such data for the purpose of comparability will be a matter of question mark. Also, some of the companies provide for depreciation at the end of the accounting period Apportionment of such depreciation on prorata basis to a particular quarter or month wm be a difficult proposition. Most importantly, many of the companies which maintain accounts other than on financial year basis do not keep such data in public domain. Such inaccessibility of vital information in public domain may not render the comparison the warranted judicious effect and creates a hurdle wherein the effort required to search for such comparables data for the financial year is not commensurate with the result. In addition, in order to reach at such uncontrolled comparables. the assessee as well as the TPO apply certain filters in accordance with the provisions of Rule 10B, For e.g, the filter of export income realization is applied for comparison of an international transaction involving export of goods and services; filter of related party transaction is applied for the purpose of identifying only those comparables which are functioning in a relatively Uncontrolled environment It is difficult to apportion information required for applying such filters, If the accounting period is not congruent to the accounting period of the assessee. In order to carry out FAR analysis, assessees and the TPOs apply the filter of Net worth. Generally net worth of a company is determined on the last day of the accounting year. Therefore, appointment of data will again lead to lopsided indicators for comparability analysis. Rule 10C(2)(c) provides for the requirement of "the availability, coverage and reliability of data necessary for app1ication of the method." In the Light of the discussion made in the above paragraphs, the reliability of such data is a question mark and as such the requirement of the rule will not be fulfilled if the comparable does not maintain its accounts in terms of financial year. Therefore, it will be very difficult to carry out adjustments to such comparables to bring the transactions at par with the international transactions in such situations. The Hon’ble ITAT Mumbai in the case of Petro Araldite P. Ltd. (ITA No.6217/MUM/2012) has held that where close comparables have been identified, there is no need to dilute the same by selecting additional companies which are not fully comparable. In view of the above discussion, we hold that companies whose accounting year ends on a different date, as compared to the assessee company, should normally not be taken as a comparable unless for such companies the accounts for the accounting period of the assessee can be determined to a reasonable degree of accuracy from the duly audited quarterly results.”
The assessee heavily placed reliance on the decision of the Mumbai Bench of the Tribunal in the case of Pangea3 & Legal Database Systems Pvt. Ltd. Vs Income Tax Officer, and ITA No.1958/M/2014 for the assessment year 2009-10 wherein at Para 29.13 of the order, the Tribunal observed that “though a comparable company following a different financial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March, and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction.”. The Mumbai Bench of the Tribunal was of the opinion that “if the financials of the corresponding period is available then it cannot be rejected simply on the ground that it has a different financial year.”
The Hon‟ble Bombay High Court in the case of CIT Vs. PTC Software (I)(P) Ltd., 395 ITR 176 has held that data to be used for comparability analysis should be of same financial year in which international transaction were entered into by the tested party. Their Lordship vide Para 11 of the order has observed that in terms of Rule 10B(4) of the Income Tax Rules, 1962, the analysis for comparison shall be on the data relating to the financial year in which the international transaction has been entered into. The provision of Section 10B(4) of the Rules are clear in as much as it obliges that the data to be used for comparability analysis should be of the same financial year in which the international transactions were entered into by the tested party. In this case, when the matter came up before the Hon‟ble High Court in appeal by the Revenue, the Tribunal had held that the Company i.e. M/s. Transwork Ltd. cannot be treated as comparable with that of the assessee company since the financial year during which the international transactions were entered into were different. The Revenue before the Hon‟ble High Court contended that the mandate of Rule 10B of the Rules can be ignored as the difference is only of three months. Thereafter, Their Lordship has held that this argument of the Revenue is without any basis and no such liberty is granted in terms of Rule 10B(4) of the Rules. The findings of the Tribunal being on the basis of the unambiguous mandate of Rule 10B(4) of the Rules, this was upheld by the Hon‟ble Bombay High Court.
That therefore, the law as it stands now that in order to be comparable company, it should have the same financial year in which the international transactions were entered into by the assessee company. Respectfully following the decision of the Hon‟ble Bombay High Court (supra.), the Company i.e. R Systems International Limited having different financial year cannot be a comparable company with that of the assessee company. It has been, therefore, rightly rejected by the TPO as well as DRP and that view is, hereby, sustained. Thus, ground No.3 raised in appeal by the assessee is partly allowed.
(C) Ninestars Information Technologies Limited :
The assessee vide Ground No.4 submitted for exclusion of Ninestars Information Technologies Limited which was taken by the TPO as comparable company to the assessee. The Ld. DRP on this issue has held as follows:
“5.2.1 We have considered the order of the TPO and the contentions of the assessee. The comparability of this company Viz. Ninestar Information Technologies Ltd. is discussed as under after examining the relevant issues raised by the assessee. i) Whether the company is functionally comparable to the assessee
In the notes forming part of accounts of the company’s Annual Report for the FY 2011-12, the following information has been provided under the head “Background”: “Ninestars Information Technologies Limited (the Company) was incorporated as a limited company in 1999 under the Companies Act 1956. The Company is primarily engaged in the transformation of content from print media to digitization. The company is also engaged in the process of supplying enterprise management solutions and media monitoring services. It is also actively involved in the innovation of new technologies for the transformation of content from radio, video & internet media also. In the annual report for the current financial year 2012-13, the following information has been provided in the Director’s report under the head “Performance’: “During the year under review the company had entered into significant contracts with various Digitization, media monitoring clients across the globe and Telecom business ….” From the above, it is clear that the company is primarily engaged in the transformation of content form print media to digitization which is clearly an ITes activity. Further it is seen from the information available in the website of this company that the other activity engaged in by the company i.e. media monitoring services, is also in the nature of IT enabled services. This is evident from the following extract from the website of the company which is available under the link “solutions” and sub link “media monitoring services”. “Ninestars is the # 1 offshore global media monitoring service provider. The company provides global media monitoring firms with completely managed services clipping, summary, transcription and analytics across media.” It has been further stated in the "tech-capabilities" appearing in the above mentioned section of the website that Ninestars has been bringing in optimum levels of automation and accuracy to the process of med is monitoring to help achieve timely delivery, scale, quality and cost efficiency. Thus, it is seen that both the Digitization and Media Monitoring Services activities carried out by this company are IT enabled services (ITES) only. In the “segment reporting-secondary segment appearing in Note 32(B) of the Notes forming part of Financial statements in the annual report for the current FY 2012-13, it has been stated that the revenue from Media Publishing & Enterprises (Digitization) segment is of Rs.26.91 Crores, and Media Monitoring Services Segment is of Rs.18.93 Crores. Thus, it is seen that the revenues to the extent of Rs.45.71 Crores (Rs.26.91 Crores+ Rs.18.93 Crores) out of the amount of Rs.58.98 crores shown in the Profit & Loss Account as "Operational Revenue" 'pertain to Digitization and Media Monitoring Services, which fall under the category of ITeS activities. These ITeS services therefore account for 77.72% of the total operating revenue of the company. As the revenue from ITeS services accounts for a significant part of the overall revenue of the company, the non-availability of segmental financial results in the annual report has no bearing on the comparability of this company with the BPO services activity of the assessee. Thus, the company is clearly functionally comparable with the BPO activities of the assessee.
Therefore, the Ld. DRP had opined that Ninestars Information Technologies Limited was primarily engaged in the transformation of content from print media to digitization which is clearly an ITes activity. That further, the company was also engaged in media monitoring services which is also in the nature of IT enabled services. It was further held that both the digitization and media monitoring services activities carried out by this company are in the nature of IT enabled services (ITes) only. This ITes services therefore account for 77.72% of the total operating revenue of the company. That as the revenue from ITeS services accounts for a significant part of the overall revenue of the company, the non-availability of segmental financial results in the annual report has no bearing on the comparability of this company with the BPO services activity of the assessee. Thus, this company was held to be functionally comparable with the BPO activities of the assessee.
The assessee has submitted that Ninestars Information Technologies Limited does not satisfy certain comparability filters adopted in the SCN and TP study and should be excluded from the final list of comparable companies for ITes on account of the following reasons :
“1.1.9 Functionally different: The Assessee wishes to submit your goodself that Ninestars Limited is primarily engaged in providing following services : a) Digitization b) Digital solutions and c) Media monitoring The details of services provided by Ninestars are also evident from the website extract of the company which is extracted in the TPO’s order. As evident from the extract Ninestars is engaged into providing digital transformation solutions. Further, the assessee submits that Ninestars is engaged into providing media monitoring services which includes high end services in the digitization area and conversion of available media content into a formal digitized version so as to assist the clients in their business requirements. Accordingly, as evident from the above, the said services as rendered by the Ninestars do not bear similarity with routine ITes provided by the assessee to its AEs.
A) Key propriety adopted by Ninestars
Further, the assessee submits that Ninestars owns and utilizes certain distinguishable key propriety tools such as star view, star chive, star clips etc into its business to assists its business in, inter alia the following activates : Media intelligence platform :Enables wire services and media houses to screen content and provide insights based on consumption of their content A proprietary article matching algorithm and image matching engine to derive consumption patter and brand influence. Image matching solution to derive photo and ad consumption Live service platform : converts print, audio and video content to tagged digital clips. Streamlines zoning, clip generation, editing, validation, upload and delivery of clipping content Broadcast monitoring and transcription, logo/image matching, sentiment analysis provided High automation also ensures live dashboards, categorized streams, 100% data security indexing and feed management. Based on the above, it is evident that Ninestars engages high end tools to function its business capabilities. The same is further evident from the extract which is extracted in the TPO’s order. B) Unique revenue share model Further it is also significant to note that Ninestars follows unique revenue model in its business. The same is evident from the extract of the website and extracted in the TPO’s order. Based on the extract, it can also be inferred that Ninestars engaged an inhouse R & D team for its internal process improvement. Also it follows a unique revenue share model through ads and subscriptions which cannot be compared to the cost plus model of the assessee. Further as per the definition of information Technology enabled services provided in Rule 10TA of the Income Tax Rules, 1962 (the Rules) (a copy of the relevant extract of the said rule is enclosed as Attachment 7 for your good self ready reference), Ninestars rendered services other than those classified as ITes hence cannot be considered as comparable to the assessee’s back office services segment. It can be seen from the above paras in relation to the business operations of Ninestars that the services rendered are not only limited to BPO services and are non comparable to the services rendered by the assessee to its AE 1.1.10 Non availability of a reliable segmental report
On perusal of page 34 of the annual report of Ninestars for FY 2012-13, it is observed that the segmental information does not identify the expenses or the segmental results incurred by the segments of Ninestars thus rendering the segmental information unusable for the purpose of discussion of comparability. The same is extracted in the TPO’s order. 1.1.11 Conclusion In view of the above analysis the assessee would like to submit that Ninestars cannot be considered as comparable to the assessee for FY 2012-13 on account of following reasons: Ninestars is functionally non comparable to the assessee company. Services rendered by Ninestars does not classify as ITes as per Rule 10TA Non availability of a reliable segmental report and Full copy of Annual report of Ninestars for FY 2012-13 is provided in soft copy in CD.”
Taking us to Page 400 of the Paper book, wherein extraction from website of Ninestars Information Technologies Limited has been placed on record, the Ld. Counsel for the assessee demonstrated the main domain of the activities of this company being a leading digital transformation solutions company. In the Director‟s report placed at Page 171 of the Paper book, it is clearly stated regarding the performance of this company that during the year under review the company had entered into significant contracts with various digitization, Media monitoring clients across the globe and Telecom business. That in the same report at Page 173 of the paper book in Column Energy Conservation, Technology and Foreign Exchange, it is specified that the Research and Development team is working continuously to design and develop new solutions for digital archival and clipping business on the newspapers industry for introduction of several techniques that will enhance the quality and will reduce the cost.
The assessee further contended regarding this company that no segmental information is available as is evident from the report placed at Page 191 of the paper book. The Ld. Counsel for the assessee also demonstrated referring to page 195 of the paper book wherein Net block assets for this company has been mentioned and therein, list of tangible and intangible assets has been provided. The intangible assets consist only 25% of the total block assets of the company. We are of the considered view having going by the relevant documents placed on record in relation to this issue that this company is functionally non comparable with that of the assessee company. That also, there is also non availability of reliable segmental report in respect of this company. We direct the TPO/AO to exclude this company from the final list of comparables with that of the assessee company. Thus, ground No.4 raised in appeal by the assessee is allowed.
In the result, appeal of the assessee is partly allowed.
Order pronounced on 19th day of January, 2021. Sd/- Sd/- R.S.SYAL PARTHA SARATHI CHAUDHURY VICE PRESIDENT JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 19th January, 2021. SB आदेश की प्रनिलऱपप अग्रेपषि / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2.
The CIT(Appeals)-13, Pune.