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Income Tax Appellate Tribunal, BANGALORE BENCHES “A”, BANGALORE
O R D E R
Per George George K, JM :
This appeal at the instance of the assessee is directed against final assessment order dated 22.11.2016 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2012-2013.
The brief facts of the case are as follows: The assessee is engaged in providing Information Technology Enabled Services (ITES) to Focus Enterprises Limited, USA, which is an Associate Enterprise (AE) of the assessee. For the assessment year 2012-2013, the return of income was filed declaring total income of Rs.23,99,94,900. The assessment was selected for scrutiny and notice u/s 2 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. 143(2) of the I.T.Act dated 14.08.2013 was served. During the course of assessment proceedings, it was noticed that the assessee had entered into international transactions with its AE. Accordingly, the case was referred to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the international transaction undertaken by the assessee with its AE’s. The TPO vide order dated 28.01.2016, passed u/s 92CA of the I.T.Act, proposed the following TP adjustments:-
(i) Interest chargeable on trade receivables Rs.4,14,87,100 (ii) ALP adjustment to the ITES segment of the assessee Rs.12,55,88,656.
The A.O. passed the draft assessment order in conformity with the TPO’s order.
Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP directed to make following adjustment to the ITES segment:- (i) Directed the TPO to treat foreign exchange as operating in nature in respect of margin of assessee as well as comparables; (ii) Exclude 2 companies namely, (a) Accentia Technology Ld., and (b) Informed Technologies India Ltd. as comparable.
Pursuant to the DRP’s directions, the ALP adjustment to the ITES segment of the assessee was reduced from Rs.12,55,88,656 to Rs.5,47,65,344. The A.O. passed the 3 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. impugned final assessment order dated 22.11.2016 making TP adjustment of Rs.9,62,52,440, as under:- Particulars Amount (INR) Returned income under 23,99,94,900 the normal provisions of the Act Add : TP adjustment on 4,14,87,100 interest on receivable Add : TP adjustment to 5,47,65,344 9,62,52,440 the ITeS segment Total Assessed Income 33,62,47,340
Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal. The assessee has raised 14 grounds. The assessee had also filed two additional grounds vide its applications dated 30.01.2019 and 17.03.2021. However, the additional grounds were not argued during the course of hearing. Grounds 1, 2 and 10 to 14 were not pressed. Grounds 3 to 5 regarding re- characterization of receivables as loan was not argued by the learned AR. The surviving grounds, namely, grounds 6 to 9, reads as follows:-
“6. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily adopting a notional rate @ 14.47% for imputing the interest, which is excessive and unreasonable. 6.1 That on the facts and circumstances of the case and in law, the AO / DRP have erred in applying the notional interest rate @ 14,47% using the information obtained under section 133(6) of the Act, from CRISIL without sharing or providing any opportunity to the Appellant to rebut I cross examine the information used to benchmark the alleged international transaction. 6.2 Without prejudice, the AO / DRP / TPO have erred in not appreciating that the alleged international transaction should have been benchmarked using LIBOR rate, as trade 4 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. receivables were USD denominated.
7. Without prejudice, the AO / TPO have erred on facts and in law in imputing the notional interest adjustment in relation to the alleged international transaction for the whole year without appreciating that the trade receivables were outstanding only for a period of four months in excess of the period agreed with the AE. The DRP further erred in upholding such an action of the lower authorities.
8. Without prejudice, the AO / DRP / TPO have erred on facts and on law in imputing the notional interest for the subject A Y without appreciating that even if such notional interest adjustment was to be made in relation to the alleged international transaction of outstanding trade receivable, the same could have been made in the A Y 2013-14. Transfer pricing adjustment relating to Information Technology Enabled Services 9. That on the facts and circumstances of the case and in law, the AO / TPO have erred in making the transfer pricing adjustments of INR 5,47,65,340, and the DRP erred in upholding the same in respect of information technology enabled services, alleging the said services to be not at arm's length in terms of the provisions of sections 92C(1) and 92C(2) of the Act, read with Rule 10B of the Income-tax Rules,1962 ("the Rules"). 9.1 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred, in arbitrarily rejecting certain functionally comparable companies identified by the Appellant on a subjective basis, inter alia, using unreasonable comparability criteria. 9.2 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily selecting comparable companies based on incorrect appreciation of functional, asset and risk profile, and arbitrary filters. 9.3 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in selecting company having abnormal profits. 9.4 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in selecting companies having significantly high turnover.
5 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. 9.5 That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in making negative working capital adjustment and not granting other economic / risk adjustments.” We shall adjudicate the above grounds / issues as under:
Ground 6 to 8 (Interest on receivables) 6. The TPO considered the closing balance of the receivables as on 26.09.2012 (i.e., in assessment year 2013- 2014) amounting to Rs.28,67,11,130 and alleging delay in receipt of the same had re-characterized it as an international transaction of loan. The TPO in this regard held hat CUP is being applied and therefore interest that would be charged by an unrelated party for lending a loan in open market is being applied. To consider the aforesaid rate government bonds credited with BBB rating by CRISIL were considered and the return on those bonds at 14.47% was applied by the TPO on the alleged delayed receivables. For computing the delayed receivables, the TPO applied the interest for a period of one year. The DRP confirmed the view taken by the TPO.
Aggrieved, the assessee has raised this issue before the ITAT. Before the Tribunal, the limited submission of the learned AR is that LIBOR rate should be applied in computation of interest against SBI PLI rate. Further, it was submitted that it would be appropriate to take interest rate of LIBOR+2%. In this regard, the learned AR placed reliance on the order of the jurisdictional Bench of the Tribunal in the case Bioplus Life Sciences Private Limited v. DCIT in (order dated 23.02.2022). Further, it
6 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. was contended that interest could only be charged for the period for which the invoice remain pending and the period after realization of the invoices cannot be considered. Reliance in this regard was placed on the order of this Bench in assessee’s own case for assessment year 2011-2012 in MP No.73/Bang/2018 (order dated 20.04.2018) in IT(TP)A No.307/Bang/2016 (order dated 28.11.2017). Lastly, it was contended that the interest which does not pertains to the said assessment year needs to be excluded for the determination of the ALP.
The learned Departmental Representative, on the other hand, relied on the orders of the TPO and the DRP.
We have heard rival submissions and perused the material on record. The submissions was limited to the adoption of the LIBOR rate against Indian interest rates (14.47% being return on BBB rate Bonds), as trade receivables where USD-denominated. The learned AR has placed reliance on the ruling of this bench in the case of M/s.Bioplus Life Sciences Private Limited v. DCIT (supra). The relevant extract of the ruling reads as follows:-
“6.3 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. (supra) by following the judgment of the Hon’ble jurisdictional High Court in the case of PCIT v. AMD (India) Pvt.Ltd. in (judgment dated 31.08.2018) held that deferred revenue from AE would constitute independent international transaction and the same needs to be benchmarked independently. Further, it was held by the Tribunal that the rate of interest to be adopted is at LIBOR + 2%. The relevant
7 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. finding of the co-ordinate bench of the Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. (supra), reads as follows:- “37. Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate (LIBOR) and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd. 99 CCH 0070 (mum HC). It is ordered accordingly.” 6.4 In view of the above co-ordinate bench order of the Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. (supra), we direct the A.O. to calculate the interest rate on outstanding receivable from AE by adopting LIBOR + 2%. It is ordered accordingly. In the result, ground No.6(d) is allowed.” 6.5
In view of the above coordinate Bench order, adoption of LIBOR plus appropriate markup is considered appropriate benchmark for international transaction of USD-denominated trade receivables as against the use of the rate of interest prevalent in India. With respect to the mark-up that has been charged over and above LIBOR, it is well accepted that such arbitrary numbers cannot be adopted without it being backed by a benchmarking exercise, which is a mandate of the law. However, the ruling in the case of M/s.Bioplus Life Sciences Private Limited v. DCIT (supra) pertains to the different financial year. Moreover, during the course of the TP assessment, the assessee has pressed for mark up of 300 to 400 basis points over and above the LIBOR rate (para 13.5 of the TP order) and the same cannot be brought down to 200
8 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. basis points merely on the basis of the strength of ruling given in different case considering the facts of that case. Given the variability of interest rate on a time-to-time basis, we direct the TPO to determine the appropriate mark up to be charged over and above the LIBOR rate. It is ordered accordingly.
As regards grounds 7 & 8 are concerned, the learned AR has submitted that interest has been imputed for the entire year on the receivables instead of the remaining delayed beyond six months. The learned AR has further submitted that the benchmark of six months has been arrived at after considering the agreement between the assessee and its AE. It is the submission of the assessee that the amount received within a period of 180 days has not been considered for imputing the interest, as it has been realized within the period allowed under the agreement. However, the assessee has claimed that in a case where there is a delay beyond 180 days, the interest has been computed for one year. The learned DR has submitted that the benchmark of six months beyond which trade receivable has been considered as an international transaction, is without logic. It was argued that such a period has to be untainted and should usually be a period that is allowed by a comparable company while dealing with an independent third party. We find merit in the submission of the learned DR that the period mentioned in the agreement between the assessee and AE should not be considered for the purpose of benchmarking and even to 9 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. determine whether trade receivable constitutes an international transaction. The very purpose of undertaking benchmarking exercise is to compare the tainted transaction, i.e., the transaction between two related parties / AEs, with that of transactions that are carried on by independent parties on arm’s length basis. If we consider the period allowed in the agreement to benchmark the transaction which is also the subject matter of the same agreement, it would lead to absurd results. We accordingly direct the AO / TPO to determine the credit period allowed by the comparable companies and treat only such trade receivables that are outstanding beyond the arm’s length credit period, as international transactions. Once the above exercise has been done, we direct computation of interest for the delayed realization of trade receivable over and above the arm’s length credit period till the date of its realization or the financial year end, whichever is later. It is ordered accordingly. Therefore, the issue raised in grounds 7 and 8 are also allowed for statistical purposes.
Transfer pricing adjustment relating to ITES segment (Grounds 9.1 to 9.4) 9. The comparison of the TP study of the assessee and that of the computation of ALP and the adjustment made by the TPO are as under:- Particulars As per assessee As per TPO Methodology TNMM Sales (refer A/R at 79,35,97,751 79,35,97,751 296 of PB, TP study at pg.257 of PB)
10 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. Add : Exchange gain 8,69,03,616 8,69,03,616 Operating Revenue 88,05,01,367 88,05,01,367 (INR) Personal cost 47,62,39,234 47,62,39,234 Transcription 10,09,35,537 10,09,35,537 outsourcing expenses Transcription -- 8,32,459 outsourcing for prior period Other operating 7,45,76,095 7,45,76,095 expenses Depreciation 1,10,08,779 1,10,08,779 Operating Cost 66,27,59,645 66,35,92,104 Operating Profit (INR) 21,77,41,722 21,69,09,263 Margin considered 32.85% 32.69% (OP/OC) ALP as per TPO order 33.08% after DRP (refer pg 3 of PB) Working capital -7.86 adjustment ALP after working 40.94% capital adjustment TP adjustment (INR) 5,47,65,344
5 percent range computation Particulars Plus 5% Minus 5% Revenue (INR) (based 92,45,26,435 83,64,76,299 on TPO( order) Operating Expenses 66,35,92,104 66,35,92,104 (INR) PBIT (INR) 26,09,34,331 17,28,84,195 Plus / Minus 5% 39.32% 26.05% margin No of comparables ITeS Reference Selected by NTSIPL 11 Refer TP study at page 252-256 of PB Rejected by the TPO 6 Refer page 7 of the TPO order at page 58 of appeal set Rejected by PO 1 Refer TPO OGE at pursuant to DRP pg 1 of PB directions (suo moto) Accepted by the TPO 5 Refer page 7 of the TPO order at page
11 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. 58 of appeal set New comparables 4 Refer page 141 of introduced by the TPO PB Final set of TPO 8 Refer TPO OGE at pg 5 of the PB
10. The learned AR’s limited submission before the Tribunal as regards ITES segment is for exclusion of following four companies on the ground of turnover and functional incompatibility:-
(i) TCS E-serve Limited (ii) Infosys BPO Limited (iii) Universal Print Systems Limited (iv) Excel Infoways Limited (Segment) We shall consider each of the above companies as under:- TCS E-Serve Limited 11. The TPO held that the company is mainly engaged in providing BPO services in BFSI domain and therefore is functionally comparable. The DRP held that since DRP has held that Infosys is comparable, therefore, on the same basis TCS-E-Serve Limited is also directed to be comparable.
The learned AR has sought exclusion of this comparable company on the basis of application of high turnover filter. The assessee has demonstrated that the turnover of the comparable selected by the TPO is 20 times its turnover. While the assessee has an operating revenue of Rs.79 crore, it was submitted that it cannot be compared with TCS-E-serve Limited which has turnover of Rs.1598 crore. The assessee
12 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. has placed reliance on the order of the Bangalore Bench of the ITAT in the case of M/s.Fulcrum Fund Services (India) Private Limited v. ITO [IT(TP)A No.2521/Bang/2017 – order dated 12.04.2019] reported in (2019) 108 taxmann.com 445 (Bangalore ITAT).
The learned Departmental Representative has placed reliance on the orders of the subordinate authorities claiming that turnover does not influence the margins of companies engaged in the service sector, more precisely ITES.
We have heard rival submissions and perused the material on record. The Bangalore Bench of the ITAT in the case of M/s.Fulcrum Fund Services (India) Private Limited v. ITO (supra) has directed exclusion of this comparable for the assessment year in question. The relevant finding of the Tribunal in the case of M/s.Fulcrum Fund Services (India) Private Limited v. ITO (supra) reads as follows:-
“7.3.1. The sum and substance of the conclusion of the ITAT in the passage quoted above is that the decision rendered by the Tribunal in the case of Genesis Integrated Systems (I) P. Ltd. (2012) [53 SOT 159] lays down the correct law on the application of turnover filter and that decision has to be followed. In the decision rendered in the case of Genesis Integrates Systems (I) Pvt.Ltd., it has been held that companies with turnover of above Rs.200 crores cannot be compared with companies with turnover of less than Rs.200 Crores. In view of the aforesaid decision of the Tribunal, we hold that the CIT(A) erred in not accepting the claim of assessee for excluding of companies, whose turnovers were more than Rs. 200 Crores and those companies remain un-comparable with assessee, because assessee’s turnover was only Rs. 27.61 Crores. The 02 companies which would stand excluded by the application of turnover filter from the set of 10 set of companies chosen by the TPO are – (i) M/s. Infosys BPO Limited, whose turnover is Rs.1312 Crores and (ii) TCS E-Serve Limited, whose turnover is Rs.1578.40 Crores. Accordingly, we hold that the aforesaid two companies should be removed from the list of comparable
13 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. companies. The TPO is directed to compute the average Arithmetic Mean profit of the comparable companies chosen by the TPO, after excluding the aforesaid two companies. 15. In view of the above order of the Coordinate Bench of the Tribunal, we direct to exclude this company from the list of comparable companies.
Infosys BPO Limited 16. The learned AR has submitted that a company with a turnover of Rs.1290 crore cannot be comparable to the assessee company, which has a turnover of Rs.79 crore. Respectfully following the ruling of the coordinate Bench of the Tribunal in the case of M/s.Fulcrum Fund Services (India) Private Limited v. ITO (supra), we direct the AO / TPO to exclude this company from the list of comparables.
Universal Print Systems Limited
The learned AR has submitted that the company is not functionally comparable as it is involved in providing labeling, pre-press activities and other integrated printing solutions. Though the TPO has selected the pre-press BPO segment, it is contested that TPO has not provided any information as to how the segment under consideration has been selected as a comparable. The assessee has placed reliance on the ruling of Bangalore Bench of the Tribunal in the case of XLHealth Corporation India Private Limited v. ACIT in IT(TP)A No.2311/Bang/2017 (order dated 09.02.2018) for assessment year 2012-2013.
14 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited.
The learned Departmental Representative has reiterated the submissions made before the lower authorities.
We have heard rival submissions and perused the material on record. We note that the AO / TPO has selected the BPO segment. However, the ITAT in the case of M/s.MLHealth Corporation India Private Limited v. ACIT (supra), has not considered / adjudicated the availability of segment information. In the interest of natural justice, we deem it appropriate to remand the matter back to the file of AO /TPO to examine the applicability of the ruling as referred above in the view of the availability of segment information. If the segment information is not reliable or if the company fails employee / any filter at a segment level, we direct the TPO to exclude this as comparable. It is ordered accordingly.
Excel Infoways Limited (Segment) 20. The TPO held that Excel Infoways Limited (EIL) is engaged in providing voice based services, customer services which include outbound sales, marketing, voice, email response, real time chat, knowledge management and other value added services. Hence, it is comparable. The employee cost of the ITES segment is 26% and therefore it passes the employee cost filter. The DRP upheld the view taken by the TPO.
Aggrieved, the assessee has raised the issue before the Tribunal. The learned AR submitted that the total employee
15 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. cost of EIL is Rs.202,15,300 as against the total turnover of Rs.15,49,21,000. Thus, the employee cost ratio is 13%. It is further submitted that the TPO has considered only ITES segment with turnover of Rs.7,90,96,950. However, while computing the employee cost ratio of the segment, he has allocated the entire employee cost to the ITES segment with no allocation of Infra Activity segment which accounts to 49 per cent of EIL’s total revenue on the basis of information obtained u/s 133(6) of the Act. It was stated that it is highly impractical that no employee has been hired by EIL for Infra Activity segment, hence, the information provided as per section 133(6) by EIL is unreliable and should not be used to compute employee cost for ITES segment. The learned AR further submitted that EIL has a declining trend in the operating revenue from financial year 2009-2010 to 2013- 2014. Therefore, it was submitted that EIL should be excluded from the comparable list.
The learned DR was duly heard.
It is the submission of the learned AR that the company Excel Infoways Limited fails the employees filter and has unreliable data. This contention of the assessee, which is elaborated at para 21 (supra) was not raised before any of the authorities. Therefore, for necessary verification of the matter, the issue of exclusion of Excel Infoways Limited is restored to the files of the TPO. The TPO is directed to examine the contentions raised, which mentioned supra, and shall verify whether Excel Infoways Limited satisfies the employees cost
16 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. filter. It is ordered accordingly.
In views of the above, ground 9 and its sub-grounds are partly allowed as indicated above.
Negative Working Capital Adjustment (Ground 9.5) 25. It was submitted that the assessee is a captive service provider, which is entirely funded by the AE and it does not have any borrowings. Therefore, it was stated that the assessee did not bear any working capital risk. It was contended that the assessee was running the business without any working capital risk as compared to the comparables. Hence, it was stated that the TPO has erred in making negative working capital adjustment of (-) 7.86%, which resulted in imputing an additional cost, which entirely enhances the ALP artificially. In this context, the learned AR relied on the following judicial pronouncements:- (i) Outsourcepartners International Private Limited v. DCIT [IT(TP)A No.2171/Bang/2019 (order dated 24.11.2021)] (ii) ACIT v. e4e Business Solutions India Private Limited [IT(TP)A No.2900/Bang/2018 (order dated 08.12.2020)] (iii) GXS India Technology Centre Private Limited v. ACIT [IT(TP)A No.128 & 331/Bang/2018 (order dated 16.11.2021)] 26. The learned Departmental Representative supported the orders of the TPO and the DRP.
We have heard rival submissions and perused the material on record. The nature of the assessee, its 17 IT(TP)A No.173/Bang/2017. M/s.Nuance Transcription Services India Private Limited. arrangement with its AE and financial particulars to allow the relief on the basis of which the above rulings have been rendered, are not forthcoming from the documents available on records. There is no whisper in the orders of the lower authorities with respect to these factual aspects. As the issue requires examination of various facts, we direct the AO / TPO to consider the same in the light of the jurisdictional rulings on negative working capital adjustment in the case of captive service providers and allow the relief to the assessee. Accordingly, ground 9.5 is allowed for statistical purposes.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on this 10th day of August, 2022.