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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI B. R. BASKARAN, AM & SHRI ABY T. VARKEY, JM
O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee challenging the assessment order dated 28.01.2015 passed for AY. 2010-11 by AO u/s 143(3) r.w.s 144C (13) of the Income Tax Act, 1961 (hereinafter “the Act”) in pursuance to the directions given by the Ld. Dispute Resolution Panel (DRP).
The ground of appeal raised by the assessee is as under: - 2.
“1. On the facts and circumstances of the case and in law, the learned AO, after considering the directions issued by the Hon'ble DRP, has erred in making an upward transfer pricing adjustment of INR 29,289,858 in determining the arm's length price (ALP) of the Marsh McLennan Global Services Pvt. Ltd. international transaction pertaining to administrative support and back- office services provided by the Appellant to its associated enterprises.
In making an upward adjustment of INR 29,289,858 pertaining to administrative support and back-office services provided by the Appellant to its associated enterprises, the learned AO, inter alia, erred on following grounds: In rejecting the transfer pricing documentation maintained by the Appellant, which is not in conformity with the provisions of section 92C(3) of the Act; in rejecting the certain companies selected by the Appellant in the TP documentation by applying certain inappropriate filters; in identifying additional comparable companies, whose functions are not similar to that of the Appellant, in determining the ALP of the impugned international transaction; and In rejecting the use of contemporaneous and multiple year data available for computing the ALP as on the date of filing of return of income and relying only on single year data (i.e. for the year ended 31March 2010) for the purpose of determining the ALP.”
Brief facts, as noted by the DRP are that, the assessee company Jardine Lloyd Thompson India Pvt. Ltd. (hereinafter referred to as “JLT India”) is a wholly subsidiary in India belonging to the JLT group which is engaged in risk management advisory, insurance, reinsurance brokering and is a major provider of employee benefit administration and related consultancy advice. The assessee provides services of administrative and back office support to the group entities. The assessee has set-up a branch office in UK which is also engaged in providing administrative and back office support services.
Marsh McLennan Global Services Pvt. Ltd. The branch is stated to be an interface between JLT India UK and JLT India vis-a-vis the administrative support and back office support services of JLT India. Hence, the income arising from its operation is consolidated in the account of JLT India. For the period relevant to AY. 2010-11, the assessee filed its return of income on 15.10.2010 declaring a total income of Rs.9,32,667/-. The assessee had entered into following transactions with its Associated Enterprises (AE): - Sr. No Nature of service Amount in Rs. 1 Provision of administrative support and office support 300,025,077 service 2 Cost allocation 6,217,782 3 Interest on debentures 1,459,399 4 Recovery of expenses 18,234,090 5 Reimbursement of expenses 133,011
The international transaction involving ‘provision of administrative support and back office support services’ was benchmarked using the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (‘MAM’) to determine the Arm’s Length Price (‘ALP’). The assessee had taken Operating Profit to Total Cost (‘OP/TC’) ratio as the Profit Level Indicator (‘PLI’) under TNMM which worked out to 14.36% on total cost. The assessee had identified eleven (11) comparables whose PLI was computed at 11.39%. It was thus claimed that the aforesaid international transaction was at arm’s length. The AO had referred the international transactions undertaken by the assessee to the TPO for the purpose of determination of the ALP. The TPO however was not agreeable to the search conducted by the assessee on the Prowess and Capital Line Plus Database and also the computation of the PLI i.e. Marsh McLennan Global Services Pvt. Ltd. OP/TC. The TPO accordingly applied additional filters which resulted in exclusion of some comparables identified by the assessee in their TP study, and also inclusion of new comparables as identified by the TPO. After examining the submissions put forth by the assessee, the TPO finally identified seven (7) comparables. Taking OP/OC as the arm’s length PLI, the TPO determined the arm’s length value of the services at Rs. 34,11,63,393/- as opposed to Rs. 30,00,25,077/- in his order passed u/s 92CA(3) dated 27.01.2014, resulting in TP adjustment of Rs.4,11,38,316/-. Incorporating the recommended TP adjustment, the draft assessment order was passed by the AO on 27.03.2014 in which further disallowances/additions were made. The assessee filed objections against the proposed variations to the total income of the assessee before the Ld DRP. The objections raised by the assessee with regard to the inclusion/exclusion of comparables which were included/excluded by TPO were dismissed by the Ld DRP. Aggrieved, the assessee is now in appeal before us.
At the time of hearing, the Ld. AR appearing on behalf of the assessee objected to the action of the TPO/DRP against the rejection of two concerns i.e. M/s. CG-Vak Software and Exports and M/s. R. Systems International which identified as suitable comparables by the assessee in the transfer pricing study report. According to the assessee, the TPO/DRP had erred in holding that these two concerns were functionally different from the assessee. The Ld. AR took us through the annual reports of these two concerns to show that, Marsh McLennan Global Services Pvt. Ltd. although they were engaged in the diverse activities but one of their identifiable business segments was provision of business process services. The Ld. AR submitted that the segmental results of the BPO segment of both these concerns were also available in their annual reports. He thus urged that such segmental results were functionally comparable and hence ought to have been considered as comparable to the assessee. For this, he relied on the decision of this Tribunal in American Express (I) (P) Ltd. Vs. DCIT, Circle-2(2) (108 taxmann.com 305). He further submitted that M/s Acropetal Technologies Ltd and M/s Infosys BPO Ltd identified by the TPO and upheld by the Ld DRP ought to be rejected as they were functionally incomparable.
Per contra the Ld. Sr. AR appearing on behalf of the Revenue vehemently supported the orders of the lower authorities. He pointed out that the Ld. DRP had rightly observed that, only 14% of the revenue of M/s. CG-Vak Software & Exports and less than 11% of the revenue of M/s. R. Systems International was derived from their respective BPO related business activities, whereas the bulk of the activities of both these concerns were software services and therefore there were rightly categorized by the lower authorities as functionally different. He invited our attention to the findings of the Ld. DRP wherein it was noted that, the business structure of both these concerns would be geared for their primary activity. According to the DRP, the segmental accounts wherein the financials relatable to the BPO segments are typically derived, using allocation keys, are from Marsh McLennan Global Services Pvt. Ltd. the overall revenues and relatable expenses of the entire business. Such derived BPO segmental results of concerns primarily engaged in software service like the two presently under consideration would not be comparable to an entity like the assessee which is wholly or predominantly operating in the back office support segment. He also referred to the findings given by the Ld. DRP accepting M/s Acropetal Technologies Ltd and M/s Infosys BPO Ltd as suitable comparables. The Ld. Sr. DR thus supported the orders of the lower authorities and claimed that it does not call for any interference.
We have heard both the parties and perused the material placed on record. We have also gone through the decisions cited before us. On the question of exclusion of M/s. CG-Vak Software and Exports and M/s. R. Systems International as comparables, it is noted that similar issue had come up for consideration before this Tribunal in American Express (I) (P) Ltd. Vs. DCIT (supra). In the decided case also, that assessee (American Express) was rendering back office support services to its group entities which was functionally characterized as ITES segment and TNMM was taken as the MAM with OP/OC as the suitable PLI. In the decided case also, the TPO rejected M/s. CG-Vak Software and Exports and M/s. R. Systems International as comparables on the same line of reasoning as adopted by the TPO/DRP in the present case before us. On appeal this Tribunal however did not agree with the lower authorities and held that the BPO segments of M/s. CG-Vak Software and Exports and M/s. R. Systems International was functionally comparable. The turnover filter of 15% Marsh McLennan Global Services Pvt. Ltd. applied by the TPO in the decided case was also rejected by this Tribunal. The relevant findings are as follows:
“29. Now coming to the entities which were found to be comparable, as stated above, among the six comparables rejected by the ld. TPO, assessee is challenging such rejection in respect of R. Systems, CG Vak Software, Informed Technologies ltd. and Micro Genentic Systems Ltd. Firstly, in respect of M/s R. Systems, ld. TPO rejected the same on the ground that this company is having financial year ending other than March and, therefore, not a suitable comparable. Ld. DRP also felt that the applicability of different financial year ending filter is applicable and, therefore, this company cannot be a good comparable.
Contention of the assessee has been that this company files return of income and such parties prepare the accounts as required under the Income-tax Act and, therefore, it is within competency of the ld. AO to seek requisite information by invoking the powers u/s 133(6) of the Act, so long as the company is functionally comparable with the assessee. It is further submitted that M/s R. System’s comparability was considered at length and accepted on the very same ground by a coordinate bench of this Tribunal in for Asstt. Year 2009-10 and the Tribunal recorded that inasmuch as this company has not been rejected on the ground of functionality, if the quarterly results are available in the public domain wherein the figures for the relevant quarter are also available, there cannot be any difficulty to work out the proportionate margin. While placing reliance on the decision of this Tribunal in the case of Cadence Design Systems India Ltd., the Tribunal directed the TPO to consider the quarterly results and work out the proportionate margin results.
Marsh McLennan Global Services Pvt. Ltd.
We have gone through the order and also the facts involved in this matter. The rejection of this comparable is not on the ground of functional dissimilarity, but only because of a different accounting period. Facts being similar, we are of the considered opinion that it is a fit case to direct the ld. AO to consider the quarterly results and work out the proportionate profit margin for this purpose, we remand the matter to the file of the ld. TPO/AO for compliance of our direction.
In respect of CG Vak Software, observations of the ld. TPO for rejecting this company is that under ITeS segment, sale was only just Rs.82.78 lakhs and on that ground this company was rejected. Assessee contended that inappropriateness of the turnover filter has not been considered by the ld. TPO. Ld. DRP on a perusal of the financials found that CG Vak Software is mainly involved into software development and earns major portion of its revenue from the same and the revenue from ITeS/BPO is only 15% i.e. Rs.83 lakhs and, therefore, it fails the turnover filter.
Assessee assails the application of turnover filter so long as functional dissimilarity is not attributable to this company and submitted that a similar contention of the revenue was considered by the Tribunal in assessee’s own case for the AY 2009-10 wherein the Tribunal by placing reliance on Chrys Capital Investment Advisors (I) P. Ltd. vs ACIT, reached a conclusion that if the company is functionally comparable, the same cannot be rejected on the basis of turnover and therefore, directed ld. TPO to include CG Vak Software as a comparable company.
We have gone through the financials of this CG Vak Software. At page No.21 of the Annual report of this company, the income from Marsh McLennan Global Services Pvt. Ltd. software development product and services is separately mentioned and was also at page 26, the segment revenue and segment results are also provided. In these circumstances, we are of the considered opinion that in the absence of any finding that this company is functionally dissimilar, ld. TPO should have considered these figures to identify whether CG Vak Software is a suitable comparable with the assessee. We, therefore, direct ld. TPO to consider this entity for benchmarking the international transaction.”
Respectfully following the decision of the Tribunal (supra), we direct the TPO/AO to consider these two entities for benchmarking the international transactions.
As regards M/s Acropetal Technologies Ltd (hereinafter “Acropetal”), it is noted that the TPO has taken the operating margin at an entity level, which goes on to show that the revenue considered is Rs 106.57 crores which is the entity level revenue and it is based on that TPO computes 37.30% as the margin of the assessee company. It eas brought to our notice that M/s. Acropetal was rejected as a comparable in the assessee’s own case by this Tribunal in their order dated 29-11-2016 in for AY. 2008-09. This Tribunal had held that Acropetal had high onsite development charges and low employee cost ratio which makes it incomparable to assessee which has no onsite development charges and high employee cost.
It was also brought to our notice that the Acropetal was rejected as a comparable by this Tribunal in the case of Swiss Re Services Marsh McLennan Global Services Pvt. Ltd. India Pvt. Ltd. vs. DCIT (114 taxmann.com 640) for AY. 2010-11 on the ground that Acropetal did not have ITeS segment but it was only rendering Engineering Design Services. The relevant observations of the Tribunal are as under: - “22. Now turning to the comparability of Acropetal Technology Ltd. we have seen that the ld. TPO while considering the functional comparability has considered all of its three segments including the IT Segment. The ld. AR vehemently submitted that the segments of this comparable are provided at page 24 of this comparable company are the segments for AY 2009-10. And that ld. TPO has wrongly mentioned the IT segment of Acropetal as ITeS segment which is factually incorrect. It was also argued that there are three segments of this comparables; namely, (i) Engineering Design Service, (ii) Information Technology Services (‘IT Segment’) and (iii) Healthcare. For the concerned year three segments of Acropetal are provided at Page 23 of its Annual Report and that IT segment of Acropetal cannot be compared to the assessee company, which is undisputedly an ITeS company. The TPO while including Acropetal Technology perused the page no.24 of its Annual Report and concluded that this company operates in two segments namely Engineering Design segment and ITeS. The ITeS segmental results were considered. The objection of assessee about the high turnover, the ld. TOP concluded that assessee failed to demonstrate as to in what way turnover impact the profitability of the comparable company. Before the ld. DRP, the assessee objected for inclusion of this comparable. The DRP concluded that the TPO has considered only ITeS segment as comparable. There is nothing in the annual report to suggest that ITeS segment of this comparable has exported any software product. There Marsh McLennan Global Services Pvt. Ltd. is nothing to indicate that there is expenditure of Rs. 4.23 crore on Site Development Expenses in ITeS segment.
On perusal of page no. 23 & 24 (page no.387 & 388 of PB) of Annual Report of Acropetal, we find that these reports pertaining to AY 2009-10 and relates to Engineering Design Services and Information Technology Services (IT Services) and healthcare. Thus. we find force in the submission of ld. AR of the assessee that TPO wrongly mentioned IT Segment of Acropetal as ITeS segment. Accordingly the activities undertaken by Acropetal as reported at page no. 23 of Annual Report (PB 387) are not comparable with the function of assessee, which is primarily in ITeS Services. We have noted that this fact was demonstrated before ld. DRP. However, the ld DRP concluded the ITeS segmental results were considered, which is factually incorrect. In our view in absence of reliable segmental data with regard to ITeS services, the Acropetal cannot be considered as valid comparable. Thus, we direct the AO/TPO to exclude this comparable from final list of comparable.”
Respectfully following the decisions of this Tribunal (supra), we accordingly hold that M/s Acropetal cannot have been considered as a valid comparable, and therefore, we direct the TPO to exclude the same.
Now coming to M/s Infosys BPO Ltd, it was brought to our notice that Ld. DRP has rejected this company as a comparable in assessee’s own case for AY. 2008-09 and, the order of the Ld. DRP was accepted by the Revenue and no further appeal was filed before Marsh McLennan Global Services Pvt. Ltd. this Tribunal challenging the same (Page 244 & 257 of PB). It was also brought to our notice that the M/s Infosys BPO Ltd has been rejected by the TPO himself in assessee’s own case for the subsequent AY. 2012-13, copy of the order is found to be placed at Pages 327-330 of the paper book. The Ld. AR also drew our attention to the decision of the Tribunal in Swiss Re Services India Pvt. Ltd. vs. DCIT (supra) wherein on similar facts and circumstances, Infosys BPO was rejected as a comparable as it was a huge company with different risk profile and nature of services, having its own brand value and IPs, unlike the assessee which broadly provided only back office support services to its AEs. The findings recorded in this regard, by this Tribunal are as under:
21.So far as exclusion of Infosys BPO is concerned, we have seen that the assessee itself included Infosys BPO Ltd. in its TP study and furnished related data about this comparable. For exclusion of this comparable, the assessee raised additional ground of appeal, which we have admitted for adjudication. Before us, the ld. AR of the assessee vehemently submitted that the assessee inadvertently included as a comparable by the assessee itself in its Transfer Pricing Study, and there is no estoppel in law to exclude the comparable, if the same is not comparable with the assessee on functional comparability. Infosys BPO is a giant company with different risk profile and nature of services, has brand value and owns IPs unlike the assessee who broadly provides back office support service and hence not comparable to the assessee. We have seen that the Tribunal in case of Stream International Services (P.) Ltd. vs. ADIT (141 ITD 492 Mum-Trib), while considering the functional similarity/dissimilarity excluded this Marsh McLennan Global Services Pvt. Ltd. comparable by taking view that Infosys BPO is a market leader and a giant company with a different risk profile and nature of service, has brand value and hence not comparable to the assessee due to huge difference in the size and scale of the company. Further, we have noted that the TPO himself in A.Y. 2009-10 himself rejected this comparable on account of Multiple Functional Segments with huge allocated items. The Hon’ble Bombay High Court in CIT vs. Pentair Water India (P.) Ltd. (supra) while considering the question of law relating to the exclusion of this comparable on size and turnover filter affirmed the exclusion. The Hon’ble Delhi High Court in Sanvih Info Group (supra) also confirmed the exclusion of Infosys BPO being a giant company. We have further noted that by following the decision of Hon’ble Bombay High Court in CIT vs. Pentair Water India (P.)Ltd. (supra), the co-ordinate bench of Tribunal in Hapag Lloyd Global Services Ltd. vs. DCIT (ITA No. 7539/Mum/2014 held that the turnover of Infosys BPO is very high comparative to tested party and excluded and excluded this comparable. Considering the consistent view of Hon’ble Delhi High Court, Hon’ble Bombay High Court and co-ordinate bench of Tribunal, we are of the view that Infosys BPO is a market leader and a giant company with a different risk profile and nature of service, has brand value and hence not comparable to the assessee due to huge difference in the size and scale of the company. Therefore, we direct the AO to exclude Infosys BPO from final set of comparable as the same is not comparable with assessee, which is proving captive services.
Having regard to the above, we accordingly direct the AO to exclude M/s Infosys BPO Ltd from final set of comparables.
Marsh McLennan Global Services Pvt. Ltd. 14. Thus, in view of the findings given above, the TPO/AO is accordingly directed to re-work the arm’s length margin of the finally selected comparables and benchmark against the assessee’s margin and/or international transactions. Needless to say that, the assessee would be allowed reasonable opportunity of hearing in such proceedings. 15. In the result, the appeal of the assessee is allowed for statistical purposes.