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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
This appeal is filed by First Credit ITES Pvt. Limited (the appellant/ assessee) for Assessment Year 2016-17 against the assessment order passed under section 143(3) read with section 144C(3) read with section 144B of the income-tax Act, 1961 (the Act) passed by National e- Assessment Centre (the learned Assessing Officer) dated 21st April, 2021 determining the total income of the assessee at ₹2,64,40,219/- against the return of income filed at ₹43,16,570/- on 30th September, 2016, whereby the adjustment proposed by the learned Transfer Pricing Officer by his order dated 30th October, 2019 under
2. The assessee has raised the following grounds of appeal:-
“The Appellant objects to the assessment order dated 21st April 2021 passed under section 143(3) r.w.s. 144C (13) & 144B of the Income-tax Act, by the Assessing Officer (AO) and raises the following grounds, which are mutually exclusive, independent of, and without prejudice to one another.
1. Transfer Pricing addition of INR 2,21,23,649/- on account of services rendered to the Associated Enterprise:
1.1. On the facts and in the circumstances of the case and in law, the DRP/ AO/ Transfer Pricing Officer (TPO') have erred in making an addition of INR 2,21,23,649/- to the value of international transactions in respect of the provision of services to its associated enterprise ('AE'). The Appellant humbly submits that no transfer pricing adjustment is warranted in its case.
1.2. On the facts and circumstances of the case, the DRP/AO/TPO have erred in law by considering the Transactional Net Margin Method (TNMM') as the most appropriate method for benchmarking the 1.3. On the facts and circumstances of the case and in law, the DRP/TPO have erred in not considering the 'Other Method' prescribed under Rule 10AB of the Income-tax Act as the most appropriate method for benchmarking the services rendered by the Appellant to its AE.
The DRP/TPO have erred in ignoring the additional evidence in the form of comparable quotes obtained from third-party service providers in support of an hourly rate of USD 10 charged by the Appellant to its Associated Enterprises.
The DRP/TPO have also erred in ignoring the hourly rates payable for similar low-value services available in the public domain submitted by the Appellant during the DRP proceedings.
1.4. The DRP/TPO have erred in considering the following companies as comparable to the Appellant under TNMM though the same are not functionally comparable to the Appellant.
• HCL Global Processing Services Ltd. • Inteq BPO Services Pvt. Ltd. • Manipal Digital Systems Pvt. Ltd. • One Touch Solutions (India) Pvt. Ltd. • E-Zest Solutions Ltd.
• Ignored the factual position of the AE earning only 6.93% margin on its costs at an entity level from the services rendered by it to the third parties.
• Ignored the submissions made by the Appellant that if this addition is sustained the AE would incur a loss of 3. 26% from its transactions with the third parties for the Gyms Phase 2 segment.
1.6. The DRP/TPO have erred in rejecting additional evidence submitted by the Appellant during the DRP proceedings on the grounds that 'sufficient opportunity was given during original TP proceedings and the additional evidence and contention raised is merely an after-thought.
1.7. The DRP/TPO have erred in ignoring the additional evidence in the form of AE's segmental profit & loss account in respect of the margins earned from the 'Gyms Phase 2' segment as the Appellant renders services to the AE relating to only the 'Gyms Phase 2 segment.
1.8. The DRP/TPO have erred in ignoring Paddle Point BPO Services Pvt. Ltd as comparable without providing any cogent reasons.
Erroneous computation of tax demand by the AO:
Penalty proceedings:
The AO has erred in law in initiating penalty proceedings under section 274 r.w.s. 271AA of the Income tax Act.
The Appellant craves leave to add to, alter, amend, or withdraw all or any of the foregoing grounds of appeal at any time before or at the time of hearing of the appeal, to enable the Hon'ble Members to decide this appeal according to law.”
3. The brief facts of the case shows that the assessee is a company engaged in the business process outsourcing . It has entered into an agreement of provision of call center and BPO services amounting to ₹15,68,06,068/-, which was referred by the learned Assessing Officer to the learned Transfer Pricing Officer for determination of arms length price. The assessee has adopted Transactional Net Margin Method [ TNMM] as the most appropriate method. The assessee states in its transfer pricing study report that its associated enterprises has outsourced certain call center services to the assessee and except exchange risk,
The learned Transfer Pricing Officer examined the transaction and found that assessee did not take into account comparability study despite stating that Transactional Net Margin Method is the most appropriate method. The Transfer Pricing Officer further noted that the assessee has merely stated that login hour rate charged to its Associated Enterprises of 10 USD can be said to be arm’s length price of the transaction. The learned Transfer Pricing Officer stated that rule 10(1)(e) of the Act requires comparability analysis. Therefore, the learned Transfer Pricing Officer carried out fresh search, selected seven comparable companies whose arms length margin was computed at 19.81%. Consequently, Arms Length Price of the international transaction of ₹15,68,06,068/- was determined at ₹ 17,89,29,717/- and thus, adjustment of ₹2,21,23,649/- was made by order under section 92CA(3) passed on 30th October 2019.
Consequently, a draft assessment order was passed and assessee filed objection before the learned Dispute Resolution Panel. The learned Dispute Resolution Panel after considering the objection of the assessee upheld the comparability study made by the learned Transfer Pricing
Based on the above direction, the learned Assessing Officer passed the final order on 21st April, 2021 making an adjustment of ₹2,21,23,649/- to the total income on account of Arm’s Length Price of international transaction. Assessee is aggrieved with that and has preferred this appeal.
The learned Authorized Representative firstly referred to the Transfer Pricing study report paced at page no. 336 of the Paper Book to show that assessee has exported international calls center services and earned revenue of ₹15,68,06,068/-from its Associated Enterprises namely; First Credit Services Incorporation USA. He also referred to the various functions performed by the assessee. He also referred to the agreement placed at page 360 of the Paper Book. He submitted that as per clause no. 2 of the agreement, assessee is required to provide several services namely; customers, debtor records, call center services, training, operations management, reporting, data management and back up and quality assurance. He also referred that minimum 70 fully trained customer services associates (CSA) are required to be employed by the assessee. He referred to clause 2.2 to show that assessee shall receive the services charged of USD 10 per productive hour for fully trained customer service associates. He therefore submitted that assessee receives call center services fees at the rate of 10 USD per login
He further referred to Rule 10AB, where ‘other method’ is also stated to be acceptable method of transfer pricing analysis. He submitted that the quotations of the work could also be considered as the acceptable comparable prices. He first referred to the decision of co-ordinate Bench in 51 taxmann.com 942 (Del) in case of Toll Global forwarding India Pvt. Ltd., wherein it has been held that ‘other method’ can be applied retrospectively. He also referred to Para no. 20 of that decision to support that the change of method requested is not for diverting the adjustment made but for better determination. He further referred to the decision of co-ordinate bench in case of Gulf Energy Maritime Services Pvt. Ltd. (TS-74-ITAT-2016
He also referred to the comparability analysis conducted by the learned Transfer Pricing Officer and submitted that the comparables selected by the learned Transfer Pricing Officer suffers from severe infirmities. However, he submitted that if the assessee succeeds on ground no. 1.3 , ground no. 1.4 onwards becomes redundant and merely academic in nature.
The learned Departmental Representative vehemently submitted that assessee has already selected the
The learned Departmental Representative on comparability analysis supported the orders of the lower authorities.
We have carefully considered the rival contentions and perused the orders of the lower authorities. We find that assessee is providing services to its enterprises in terms of agreement dated 1st April 2015. Assessee owns and operates call center having trained customer service associates. It provides the services to its Associated Enterprises on terms and conditions mentioned at Paragraph 2 of that agreement which is as under:-
2. TERMS AND CONDITIONS OF ENGAGEMENT 2.1 FCS hereby retains FCITES to provide Services in the manner set forth below and FCITES hereby accepts such engagement. b) Debtor Records - Debtor Records or access there to shall be provided to FCITES by FCS in a manner agreed upon by the Parties. c) Call Centre service - FCITES will utilize the Call Centre located at an Authorized Service Location for delivery of Services The Call Center will be equipped with telephone systems, computer systems, and various FCITES support and call monitoring tools, such as documentation and knowledge bases, to be used in the delivery of the Services FCITES shall bear all expenses of operating the Call Center, including insurance all expenses for equipment and systems necessary to connect to any telecommunications circuits or facilities utilized by FCS to bring calls to the Call Center. FCS shall provide FCITES with a list of the required minimum capabilities that FCITES shall maintain with respect to the Call Centre FCS will facilitate FCTIES with various services as like front office service, client service, sales and marketing, lease line, letter service and legal services without additionally charging to it d) Training - FCITES will not charge to FCS for the time spend on training of CSAs. e) Training by FCITES- The trainers appointed by FCITES shall train CSA's how to perform Services Training shall be subject to FCS's review. g) Reporting Requirements - FCITES shall provide FCS with those reports, and in accordance with the time frames, as FCS may proscribe from time to time. h) Data Management and Backup the data shall be managed in the manner described by FCS from time to time. A back-up of all data shall be located at site other than the Call Center, the location of which shall be reasonably satisfactory to FCS. i) Service Commitments FCITES shall render the Services in accordance with the service level commitments set forth by FCS from time to time. In addition, FCITES shall comply with and follow the FCS Code of Business Principles (the Code") as set forth by FCS from time to time. Any amendments to the Code shall be provided in writing to FCITES whereupon such amendments shall become of equal effect on FCITES as of the date of the receipt of such notice. FCITES shall make all best efforts to comply with such amendments as soon as practicable and in any event no later than fifteen (15) days from the date of receipt of the notice described in the preceding sentence. k) Headcount - The minimum number of CSA's required is 75. FCS shall provide reasonable notice to increase the number of CSA FCS can have the number of CSA rendering Third Party Services, reduced by providing four (4) weeks prior notice, provided that the reduction in CSA may not exceed more than 15 CSA in any thirty (30) day period. The 15 CSA limitation does not apply to nonperforming CSA Notwithstanding the foregoing, if FCS loses a material customer, then FCS can immediately reduce the number of CSA rendering Third Party Services by thirty (30) CSA per month. l) Billable Login Hours - FCITES can bill maximum 160 hours for per FTE's (Full) Time Employee). FTE's count should be more than 60 for every month. This includes CSA's who are moved to floor during the month. FCITES cannot bill for break time, team discussion, absenteeism, preparation for start and finish shift time FCS has agreed that FCITES can recruit more CSAS to cover up floor performance FTE's count may go down beyond 60 with reference to section 21.k 2.2 FCS shall receive all of the revenue generated from the provision of Third Party Services to Customers and shall pay FCITES for Services performed in India the rate of $10.00 per Productive 2.3 For FCITES employees performing quality assurance at FCS's request, FCS shall not pay FCITES separately. FCS shall not be responsible for any costs or expenses, such as supervisory-related expenses, that FCITES may incur to monitor and manage the quality of the Third Party Services that it is rendering under this Agreement.
2.4 For FCITES employees performing skip tracing at FCS's request FCS shall not pay FCITES separately for it.
2.5 FCS can grant special incentives to FCITES on extra ordinary performance during slack periods.
2.6 Taxes:
(a) The hourly rates described in Sections 2.2, 2.3, 2.4 and 25 inclusive of all taxes.
(b) FCS shall be entitled to withhold income tax, if applicable on all payments due to FCITES under this Agreement, as required under the applicable laws and 2.7 Every Month, FCITES shall submit to FCS an invoice detailing the Productive Hours FCS shall remit payment to FCITES within Sixty (60) days of its receipt of an invoice. Notwithstanding anything in this Agreement to the contrary, FCS shall have the right to offset any payments due to FCITES under this Agreement against amounts due to FCS from FCITES under any other agreement.
2.8 If a customer requires FCITES and FCS to sign an agreement (a "Tri Party Agreement") in order to render Services to said customer, then the Parties shall use their best efforts to negotiate a separate agreement with respect thereto.
(a) In the event any performance of the Services will be, or contemplated to be undertaken whether directly by FCITES or subcontracted to any third party, at any location other than an Authorized (b) If FCITES provides the Services to FCS in breach of Section 2.9(a), then FCS at its sole discretion may (a) immediately terminate this Agreement and recover any damages to which it is entitled; (b) require continuation of the Services entirely within an Authorized Service Location and/or (c) execute a modification to this Agreement to incorporate the newly agreed Authorized Service Location.
2.10 Audit Rights (a) FCS, and/or its authorized representatives ("Auditor"), shall have the right at any time, with notice of at least five (5) business days, to perform an audit with respect to FCITES's rendering of the Services and its performance hereunder. Subject to and without compromise to FCITES's obligations of confidentiality to its other clients, FCITES shall grant the Auditor full and complete access, during normal business hours and upon reasonable advance notice in writing as aforementioned, to any and all relevant portions of FCITES's books, records and any other information as they relate to this Agreement and the Services. FCITES shall provide the Auditor, such information and assistance as reasonably requested including without limitation, the provision of copies of any of FCITES's books, records and information in connection with its performance of the Services and (b) In order for the Auditor to perform such audits, FCITES shall for the term of this Agreement and for at least two (2) years after the expiry or termination of this Agreement, preserve its books, records and accounts in respect of the exercise of the Services under this Agreement. Such books, records and accounts shall be treated as confidential and the Auditor shall maintain such confidentiality and shall not divulge any information in respect thereof other than for the purposes of conducting the Audit.
(c) For each audit, the Auditor shall prepare and submit to FCS a written report of the results of such audit ("Audit Report") and thereafter, within fifteen (15) days, FCS shall deliver a copy of the Audit Report to FCITES.
(d) If the Audit Report indicates that the performance of FCITES is not materially unsatisfactory but could nonetheless be improved in specific ways, the Parties shall mutually agree to and implement such recommendations as soon as commercially feasible without costs to FCS (e) If the Audit Report indicates that the performance of FCITES is materially unsatisfactory in any respect the Parties shall, within ten (10) days of receipt of the Audit Report by FCITES, mutually agree to a plan to improve FCITES's performance to the level deemed acceptable to such audit and implement such plan (f) If the Audit Report indicates that FCITES is failing to materially comply with the terms and conditions of this Agreement, FCITES shall reimburse FCS for all the costs and expenses incurred in conducting the Audit (g) During the term of this Agreement, FCITES shall also conduct its own internal or external audit ("FCITES's Audit") to test adequacy of FCITES's internal control environment at least annually and at FCS's request submit a copy of such audit report to FCS.”
According to the terms of agreement, the assessee is remunerated at the rate of US$ 10 per productive hour of customer services associates. On looking at the transfer pricing study report, we find that the assessee did not benchmark this international transactions with any comparability study, but merely stated that as assessee does not provide similar services to third parties and no other service transactions reveals the nature of terms and conditions of services provided, Arm’s Length Price data
We also find that assessee has submitted additional evidence in the form of comparables quotations from third party service provider in support of r rates charged by the assessee. We find that these evidences are at page no. 463 to 475 of the Paper Book. At page no. 463 of the Paper Book is the rate quoted by Enser Communication Pvt. Ltd to the Associated Enterprises on 6th January 2020, of $ 10 per login hour. Similarly, at page no. 475 Rhombus on 14th September 2012 has quoted man hour rate of $ 8.5. Further at page no. 475 Synergies outsourcing Pvt. Ltd. vide quotation dated 28th January 2020 has also given the rate of $ 10 per man-hour. As these quotes are
Ground no. 1.1 is general in nature and ground no. 1.2 is challenging the Transactional Net Margin Method, ground no. 1.4 to 1.8 deals with comparability analysis as per TNMM method, in view of our decision in ground no. 1.3 those ground have become infructuous, hence, dismissed.
Ground no.3 is against initiation of penalty proceedings which is premature and therefore, dismissed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 18.05.2022.