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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM & MS. KAVITHA RAJAGOPAL, JM
O R D E R Per Kavitha Rajagopal, J M:
This appeal has been filed by the assessee, challenging the transfer pricing adjustment of Rs.3,28,79,224/- in pursuance to the direction of the learned Dispute Resolution Panel ('DRP' for short), relevant to Assessment Year (‘A.Y.’ for short) 2012-
13. The assessee has challenged the order under various grounds.
Brief facts are that the assessee company is engaged in providing development of computer software and Information Technology Enabled Services (ITES) and trading in license which includes accounts payable management, tax return processing, insurance claim processing, financial document processing, etc. The assessee is also into the business of trading in GSM/CDMA hand kit accessories and also provides logistic services including warehouse services. The assessee is also one of the leading providers
(A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT of third party logistics in India and has declared revenue from operations at Rs.163,88,36,866/-, other income at Rs.9,08,36,504/- and had calculated net profit at Rs.2,76,47,361/- in its profit and loss account. The assessee e-filed its return of income dated 30.11.2012, declaring total income of Rs.19,59,88,910/- and the return was processed u/s. 143(1) of the Act.
The assessee’s case was selected for scrutiny and the assessment order dated 31.01.2019 was passed by the Assessing Officer (A.O. for short) u/s. 143(3) r.w.s.
144C(13) of the Act. It is observed that the assessee had entered into International Transaction with its Associated Enterprises and the A.O. had referred the transactions in Form 3CEB to the Transfer Pricing Officer (TPO for short) for the purpose of computing arms length price (ALP for short) of the impugned transaction as per the provision of section 92CA(1) of the Act. The TPO made an upward adjustment to the ALP pertaining to the impugned international transaction and determined the ALP at Rs.3,38,12,201/-, pursuant to the direction given by the ld.DRP after disposing of the objection raised by the assessee before the ld.DRP. The following addition has been made by the A.O. as per the provision of section 92CA(4) of the Act:
Sr. No. Particulars Amount (in Rs.) 1 ITES Services 3,28,79,224/- 2 Interest Free Loan (U.K.) 4,66,400/- 3 Loan (Germany) 1,57,657/- 4 Corporate Guarantee 308,920/- Total Rs.3,38,12,201/- 4. The assessee is in appeal before us, challenging the impugned order.
Ground nos. 1, 2, 2.1, 2.2 and 3 are general in nature and requires no separate adjudication.
(A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT 6. The learned Authorised Representative (ld. AR for short) for the assessee has submitted before the Bench that Ground nos. 3.4, 3.5 and 4 are not pressed but with the liberty to argue on the said grounds in the subsequent years if need arises.
Ground no. 3.2, pertains to the rejection of the comparables of the assessee based on the application of the turnover filter pertaining to: a) Informed Technology India Ltd. and b) ACE BPO Services Pvt. Ltd. It is observed that the assessee has adopted Transaction Net Margin Method (‘TNMM’ for short) as a most appropriate method with Net Cost Plus (NCP) as the profit level indicator (PLI). The assessee has adopted internal TNMM and determined the ALP of its international transaction. The assessee has also used external TNMM as corroborative analysis and had identified 9 comparative companies whose average margin was 11.42% which is less than that of the margin of the assessee company, thereby holding that the assessee’s international transaction was at arm’s length. The ld. TPO has rejected the internal TNMM bench marking analysis and had computed the entity level of PLI of the assessee at 13.35%, thereby rejecting some of the comparable companies selected by the assessee in its transfer pricing study report (TPSR) and thereby proposed an adjustment of Rs.3,54,31,368/-, pertaining to the international transaction of the assessee to its AEs.
The ld. DRP upheld the TPO's order and directed the A.O./TPO to apply the correct margin of the comparable namely Jindal Intellicom Ltd., wherein the A.O./TPO passed the final assessment order in making the adjustment of Rs.3,28,79,224/-. The lower authorities have rejected the assessee’s comparables namely Informed
(A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT Technologies Ltd. and ACE BPO Services Pvt. Ltd. for the reason that the turnover is less than Rs.5 crores. The assessee has challenged the exclusion of the above mentioned comparables before us. It is observed that the assessee’s turnover was Rs.163.88 crores whereas the comparables selected by the assessee had a turnover lesser than Rs.5 crores.
The assessee has specified the following international transactions which are tabulated as under:
Sr. Name of the AE Nature of Amount (Rs.) Method adopted No. Transaction 1 Datamatics Global Technical Services 1,31,67,274 Transaction net Services GmbH. Rendered margin method 2 Datamatics Global Technical Services 27,82,90,760 Transaction net Services Inc. Rendered margin method 3 Datamatics Global Technical Services 26,61,689 Transaction net Services Pty. Ltd. Rendered margin method 4 Datamatics Global Technical Services 8,23,156 Transaction net Technologies Rendered margin method GmbH 5 Datamatics Global Technical Services 19,12,496 Transaction net Technologies Ltd. availed margin method 6 Datamatics Technical Services 1,26,53,208 Transaction net Infotech Ltd. Rendered margin method Technical Services 87,91,389 Availed 7 Datamatics Global Loan 67,90,000 Comparable Services GmbH (Interest – Uncontrolled Rs.1,35,418/-) Price Method 8 Datamatics Global Advances Given to 14,02,184 No method Services Inc. AE applicable Advances refunded 12,48,231 by AE 9 Datamatics Global Advances given to 10,80,294 No method Services Pty. Ltd. AE/ applicable Advances refunded 8,88,672 by AE 10 Datamatics Global Subrogated loan 1,15,89,480 No method Iinfotech Ltd. given to AE as applicable quasi equity Advances given to 86,08,290 AE Advances refunded 84,90,602 by AE 11 Datamatics Global Investment in 39,17,18,250 No method Technologies Ltd. Preference shares applicable Investment in 4,35,24,250 Equity Shares
(A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT
12 Datamatics Global Expenses 21,52,887 No method Services reimbursed to AE applicable Investment in 6,78,60,000 Equity shares 13 Datamatics Global Expense 13,84,952 No method Services Inc. reimbursed to AE applicable
The comparable selected by the assessee in its TPSR as under:
Sr. No. Name of the comparables 1 Informed Technologies India Ltd. 2 Jindal Intellicom Limited 3 Coalition Development Systems (India) Pvt. Ltd 4 ICRA Techno Anayltics Ltd. 5 ICRA Online Ltd. (segment info) 6 Caliber Point Business Solutions Ltd. (segment info) 7 Ace BPO Services Ltd. 8 E4e Healthcare Solutions Ltd. 9 Omega Healthcare Management Services Ltd.
The lower authorities have rejected the said comparables. The ld. AR contended that the comparability of the companies has to be made with reference to the functional analysis which according to the assessee was not disputed by the TPO nor was the functionality of the comparables distinguished by the lower authorities. The ld. AR further contended that the said comparables have performed similar functions as that of the assessee and that the rejection of these comparables by the TPO on application of lower filter at Rs.5 crores was not justifiable. The ld. AR in addition to this stated that the international transaction which was bench marked was merely Rs.30.77 crores, as against the turnover of Rs.163.88 crores and that the assessee was justified in applying the turnover filter of Rs.1 crore was to be considered and also reiterated that the bench marking has to be only with regard to the international transaction and should not be on entity vide basis. The ld. AR relied on the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisory India Ltd. vs. DCIT (in ITA No. 417/Del/2014)
(A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT and the decision of the co-ordinate bench in the case of Cadence Design Systems India (Pvt.) Ltd. vs. TS 955 ITAT 2018 (Del) – TP for the said proposition.
The learned Departmental Representative (ld. DR for short) for the Revenue, on the other hand, controverted this fact and stated that the ld.DRP and Transfer Pricing Officer (TPO for short) had rejected the said comparables on the filters of turnover less than Rs.5 crores.
We have heard the rival submissions and perused the materials available on record. It is evident that the ld. DRP / TPO had rejected the said comparables selected by the assessee by applying the filter of the turnover less than Rs.5 crores. The assessee has contended that though its turnover was Rs.163.88 crores, the impugned international transaction was only pertaining to Rs.30.77 crores. The assessee had contended that the turnover filter of Rs.1 crore was deemed to be justified for the facts of the present case.
We are of the considered opinion that the lower authorities have erred in rejecting the said comparables merely on the ground of low turnover when there was no functional dissimilarity pertaining to the assessee company and the comparable companies. It is also pertinent to note that various decisions have reiterated that a comparable company cannot be rejected merely on the ground of low turnover unless and until where the functional analysis are distinguished. It is also held that where in case the assessee has failed to apply the turnover filter on quantitative level then only the qualitative level based on the FAR analysis has to be made. In the present case in hand the ld. DRP/TPO has not differentiated the comparable company in view of the assets deployed, risk assumed effecting the cost or margin, the same cannot be rejected merely on the basis of low
(A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT turnover. We would like to place our reliance on the decision of the co-ordinate bench in the case of Cadence Design Systems India (Pvt.) Ltd. (supra) which has considered the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisory India Ltd. (supra) and also which has dealt with on identical issues, wherein it was held that a company cannot be held to be incomparable simply on the ground of low turnover, unless it is demonstrated that asset/risks are completely different and are incomparable.
From the above observation, we hold that Infosys Technology Ltd. and ACE BPO Services should be included as comparable company for determining the arms length price of the assessee’s international transaction. Ground no. 3.2 raised by the assessee is allowed.
Ground no. 3.6 pertains to the comparables Excel Infoways Ltd. and Infosys BPO Limited which were included by the TPO for determining the ALP of the international transaction of the assessee company. The assessee contended that Excel Infoways Limited was making super normal profits and has high fluctuations in profits as compared to earlier years. The assessee further stated that the company has low personnel cost and its ratio of personnel cost to turnover of 12.97 % as compared to 58.29% of the assessee. The assessee further stated that the said comparable has diversified its business into construction and real estate and has also considered to close it’s IT and BPO related services. The assessee laid emphasis on the employee cost to revenue ratio which was below 13% whereas the assessee’s employee cost to revenue ratio amounted to 58% and that the employee cost being a vital factor in such business, the said comparable has to be rejected on low employee cost ratio. The assessee placed its reliance in case of Baxter
(A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT India (P.)Ltd. vs. ACIT [2017] 85 taxman.com 285 (Delhi) and M/s. Willis Processing Services (India) Limited (in vide order dated 10.10.2014).
The ld. DRP rejected the contention of the assessee and held that segmental results of BPO segments were available for the said comparables and that the real estate segments pertains only to purchase and sale transaction and the personnel cost incurred by the company was primarily for BPO segment. Further, if the same was considered then the percentage of the turnover of the BPO segment exceeds 25% and further held that diversification will not have a material impact on the financials of the company. The ld. DRP/TPO held that Excel Infoways Ltd. was functionally comparable with the assessee and was held to be a good comparable thereby rejecting the objections of the assessee.
We have heard the rival submissions on this issue of exclusion of Excel Infoways Ltd. wherein the said comparable company was included by the AO/TPO for the reason that it had similar functionality with that of the assessee company though the said company was also not into business of construction and real estate. The lower authorities have held that the personnel amount incurred was mainly for BPO segment and not for the real estate segment which involves only purchase and sale transaction. The assessee’s contention that it had super normal profit due to diversified business, low personal cost, BPO service have been significantly reduced was not considered by the lower authorities.
The TPO has contended that only segmental results were considered for inclusion of the said comparables. The assessee has placed reliance on the decision of M/s. Willis Processing Services (India) Limited (supra) for this proposition and has also relied on (A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT Goldman Sachs Services Pvt. Ltd. [2020] 117 taxmann.com 535 (Bang) and Brigade Global Services Pvt. Ltd. vs. ITO [2013] 143 ITD 59 (Hyd.) The assessee has also relied on the decision of Baxter India Pvt. Ltd. (supra) which held that as the company has not allocated employee cost to infrastructure activity segment, the same was said to be highly impractical as 49% of its total revenue was from its infrastructure activities. It was held in Motorola Solutions Pvt. Ltd. [2014] 48 taxmann.com 248 (Del), wherein a comparable was rejected on contradiction of the facts or data sourced from its annual report and also as per the information obtained u/s.133(6) of the Act. The co-ordinate bench has rejected Excel Infoways Limited as a comparable in case of Willis Processing Services Pvt. Ltd. (supra) for the reason that it had not allocated employee cost to infra activity which amounted to 49% of its total revenue. On this observation, the tribunal has rejected the said comparable as being unreliable and not to be used to compute employee cost for ITES segment. The relevant extract of the said decision is cited hereunder for ease of reference:
25.1 Further, from the order of the TPO we find he has obtained the employee cost and the sale for the ITES segment by exercise of his powers u/s.133(6), wherein the said company has allocated entire employee cost to IT – BPO segment with no allocation to Infra Activity segment which accounts to 49% of Excel’s total revenue. In our opinion, it is highly impractical that no employee has been hired by Excel for Infra Activity segment. We, therefore, find merit in the argument of the ld. Counsel for the assessee that the information provided as per section 133(6) by Excel Infoways Ltd. is unreliable and should not be used to compute employee cost for ITES segment. The Delhi Bench of the Tribunal in the case of Motorola Solutions India Private Limited vide has held that a company should be rejected as comparable in case there is contradiction in the facts or data sourced from annual report and as per the information gathered u/s. 133(6). In view of above discussion, we hold that Excel Infoways Ltd. cannot be considered as comparable and should be excluded from the list of comparables. We hold and direct accordingly.
From the above observation, we are of the considered view that the TPO's comparable of Excel Infoways Limited has been rejected for the reason that it had not bifurcated employee cost for infra activities segment, which according to the said
(A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT decisions were highly impractical and contradictory in facts or data sourced from the annual report. On identical facts, we are of the considered view that Excel Infoways Limited should be rejected as a comparable company for determining the ALP of the international transaction of the assessee company.
In Ground no.3.6(b) – It is observed that Infosys BPO Limited was selected as a comparable company by the TPO which was objected by the assessee on various grounds. The assessee contended that the said company was engaged in LPO activities and was into payment of managerial services and also for the fact that the major income of the said company is from BPO services. The assessee further contended that the comparable company has acquired Australian Company M/s. Potland Group Pvt. Ltd. which provides sourcing and category management services in Sydney, Australia. The TPO has relied on the director’s report which states that the acquisition has enhanced the company’s global sourcing and procurement capabilities which has an impact on client’s business, efficiency and effectiveness which has resulted in increase in the business. It is also submitted by the assessee that the said company possess brand value which has a high influence in the market, business operation and margins earned which cannot be compared with that the assessee company. It is also stated that some directors of the company have provided managerial services at no cost which if accounted would have resulted in the reduction of the profit. The assessee further stated that the LPO business of the said comparable company had considerable traction during the impugned year. The assessee prayed that the said comparable company should be rejected on the above mentioned grounds. The lower authorities have held that the acquisition of the Australian
(A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT company is not an amalgamation and that the same has not impacted the profitability of the company. Further, it was held that the free managerial services rendered by some of the directors would have negligible impact on the profitability compared to the higher turnover of the said company. Further, the DRP held that there is nothing on record to prove that the LPO business has a significant impact on the overall profitability of the company with regard to the brand value of the comparable. The assessee also had a good reputation which is evident from the fact that the non AE business is more than four times its AE business. The TPO upheld the inclusion of the said comparable.
Having heard the rival submissions and perused the material on record. It is observed that Infosys BPO Limited is a subsidiary of Infosys which is backed by Infosys Ltd. to offer integrated IT-BPO delivery model where it processes a brand value which will definitely have an impact on the market position, business operation and pricing policy. The assessee has relied on the decision of the Hon'ble Jurisdictional High Court in the case of Principal Global Services Pvt. Ltd. [2018] 95 taxmann.com 315 (Bom), wherein it was held that the huge turnover difference between the comparable company namely M/s. Infoys Technology Ltd. with the assessee along with the fact that the assessee was only providing services to its AE unlike the comparable company Infosys Technology does not entitle the same to be a good comparable. The said decision also relied on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. (in vide order dated 10.07.2013) and Pentair Water India (P) Ltd. vs. Addl. CIT [2014] 47 taxmann.com 132 (Panaji), where the said proposition has been considered. We have also placed our reliance on the (A.Y. 2012-13) Datamatics Global Services Ltd. vs. Dy. CIT decision of the co-ordinate bench in the case of Baxter India Pvt. Ltd. (Supra), wherein Infosys BPO Limited was excluded as a comparable company for the reason that it was functionally not comparable and the presence of brand and extraordinary event of acquisition of the Australian company.
It is pertinent to point out that the assessee has alleged that TPO has included both the comparables without notices or neither any data base nor any such process was conducted by the TPO. It is also evident that the Hon’ble DRP has also not given a specific finding on the objection raised by the assessee. By respectfully following the above said decision on identical facts, we hereby direct the A.O./TPO to exclude Excel Infoways Ltd. and Infosys BPO Limited as comparable company to the assessee for the above mentioned reasons. Hence, ground no. 3.6 raised by the assessee is hereby allowed.
At the time of hearing, the ld.AR had stated that if the two comparables selected by the TPO namely Excel Infoways Limited and Infosys BPO Limited are excluded, then the assessee would not press ground no. 3.3 where the TPO has rejected ‘Caliber Point’ Business Solutions Ltd. included by the assessee in its TP study. Hence, ground no. 3.3 requires no adjudication.
The remaining grounds are general in nature and requires no separate adjudication.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 17.03.2023