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Facts
The assessee, M/s. Dell International Services India Pvt. Ltd., engaged in marketing and technical support services, faced a Transfer Pricing (TP) adjustment of Rs. 2,39,71,904/- for Assessment Year 2014-15. The TPO made this adjustment using the Transaction Net Margin Method (TNMM), disagreeing with the assessee's selected comparables and choosing new ones, leading to an appeal that was dismissed by the CIT(A).
Held
The Tribunal held that Quest Global Engineering Pvt. Ltd. was not functionally comparable to the assessee and directed its exclusion from the list of comparables. For DCM Ltd. and Telecommunication Consultancy India Ltd., the Tribunal remanded the matter, directing the AO/TPO to provide a fresh opportunity to the assessee to substantiate their inclusion, considering the applied filters.
Key Issues
The key legal issue was the correctness of the Transfer Pricing adjustment, specifically concerning the selection and exclusion of comparable companies for determining the arm's length price of international transactions under the Transactional Net Margin Method (TNMM).
Sections Cited
92CA, 144C(13)
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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI. LAXMI PRASAD SAHU & SHRI. SOUNDARARAJAN K
Per Laxmi Prasad Sahu, Accountant Member :
This appeal filed by the assessee is against the Order passed by the CIT(A), vide DIN and Order No.ITBA/APL/S/143(3)/2024-25/1065557642(1) dated 11.06.2024, for the Assessment Year 2041-15.
2. At the outset of hearing, the learned Counsel submitted that ground Nos.1 and 2 are general in nature and ground Nos.4 and 5 were not pressed. Therefore, these above grounds are dismissed as not pressed.
IT(TP)A No.1488/Bang/2024 Page 2 of 14 3. Briefly stated, the facts of the case are that the assessee company is engaged in the business of marketing of EMC products, consultancy and solutions. The assessee filed return of income for the Assessment Year 2014- 15 on 28.11.2014 declaring income of Rs.26,78,74,040/-. The case was selected for scrutiny and statutory notices were issued and served upon the assessee. Subsequently, the case was referred to the TPO after obtaining necessary approvals. As per Form 3CEB and TP study report, following are the international transactions and financial statements:
IT(TP)A No.1488/Bang/2024 Page 3 of 14 4. Further, financials of the tax payer as reconciled by the TPO are as under:
The tax payer has reported international transaction in respect of provision of marketing support services and technical support services. The ALP of the international transactions for the services provided to the AEs has been determined by applying Transaction Net Margin Method (TNMM) stating
IT(TP)A No.1488/Bang/2024 Page 4 of 14 to be at arm’s length. The OP/OC was considered as the PLI. The data base was used was Prowess and Capitaline. The 5 companies selected as comparable companies and arithmetic mean were calculated at 11.75after applied certain filters as set out in the T.P. study and its written synopsis. However, the learned TPO did not accept the TP study filed by the assessee and he started fresh search applying the data base under Prowess and Capitaline and applied certain filters as per TP order u/s 92CA of the Act. and the same is extracted in the written submissions of the assessee. He selected 6 companies and calculated average margin at 27.83% and TPO calculated PLI as OP/OC under TNMM and he made adjustment of Rs.2,39,71,904/-. Accordingly, show cause notice was issued to the assessee. The assessee replied to the show cause notice. During the TP proceedings, the assessee objected for exclusion of Quest Global Engineering Pvt. Ltd., and he sought for inclusion of two companies named DCM Ltd., (IT business) and Telecommunication Consultancy India Ltd. The ld. TPO rejected the prayer of the assessee and he passed Order under section 92CA of the Act on 27.10.2017 suggesting for the adjustments as stated above. Accordingly, the AO passed draft Assessment Order under section 144C(13) of the Act on 29.01.2018.
Aggrieved from the above Order, assessee filed appeal before the learned CIT(A) and he dismissed appeal of the assessee.
Aggrieved from the above Order, assessee filed appeal before the Tribunal. The learned Counsel reiterated the submissions made before the lower authorities and she has filed written synopsis for inclusion and exclusion of comparable companies as under :
“The only issue which arises for consideration in the above appeal pertains to the Transfer pricing adjustment (“TP adjustment”) of Rs. 2,39,71,904/- made by the Transfer Pricing Officer (“the TPO”) towards IT(TP)A No.1488/Bang/2024 Page 5 of 14 the international transactions for provision of Technical Support Services (“TSS”) to its Associated Enterprises (“AEs”). BRIEF FACTS 1. The Appellant is engaged in provision of marketing support services and technical support services to the EMC Group companies. The Appellant provides post sales technical support services for the products of EMC.
During the previous year relevant to the assessment year 2014-15, one of the international transactions that took place between the Appellant and its AEs was provision of technical support services at a price of 6,93,13,1194/- for which a TP adjustment of Rs.2,39,71,904/- was made.
3. On a reference made by the Assessing Officer to the TPO, the TPO passed an order dated 27.10.2017 determining a TP adjustment of Rs. 2,39,71,904/-. Subsequently, the Assessing Officer passed a final assessment order dated 29.01.2018 incorporating the said TP adjustment.
Aggrieved by the final assessment order, the Appellant filed an appeal before the Commissioner of Income Tax (Appeals) (“CIT(A)”) on 01.03.2018. The CIT(A) vide order dated 11.06.2024 dismissed the appeal preferred by the Appellant in toto.
5. Aggrieved by the order passed by the CIT(A), the Appellant has filed the present appeal before this Hon’ble Tribunal.
APPELLANT’S SUBMISSIONS: A.1. Details of the Appellant’s international transactions: Particulars Amount in Outcome of rectified Rs. TP Order Provision of marketing 160,37,75,6 Accepted to be at support services 86/- arm’s length Provision of technical 69,31,31,91 Adjustment of Rs. support services 4/- 2,39,71,904/- Purchase of fixed assets 8,10,112/- Reimbursement of 9,55,56,688 expenses paid /- Reimbursement of 1,16,38,500 expenses received /-
IT(TP)A No.1488/Bang/2024 Page 6 of 14 Reimbursement received 2,24,79,418 Accepted to be at towards ESOP and /- arm’s length Restricted Stock Unit Remittance on behalf of 1,31,84,267 employees towards /- Employee Stock Purchase Plan
A.2. Net mark-up on cost earned by the Appellant as computed in the TP Order: Operating Income Rs. 162,17,00,000/- Operating Cost Rs.143,41,30,000/- Operating Profit (Op. Income – Op. Cost) Rs.18,75,70,000/- Operating/Net mark-up (OP/OC) 13.08%
A.3. Comparison of the TP studies done by the Appellant and TPO: Appellant TPO Methodology TNMM TNMM adopted Profit Level OP/TC OP/OC Indicator (PLI) Database used PROWESS PROWESS &CAPITALINE &CAPITALI PLUS NE PLUS Comparables 05 06 selected Period for which FYs 2011-12, 2012- FY 2013-14 data used 13 and 2013-14 IT(TP)A No.1488/Bang/2024 Page 7 of 14 A.4. Filters applied by the Appellant in its TP study: Step Description 1. Companies which had positive sales and ratio of operating income to sales greater than 50% – selected 2. Companies with ratio of R&D expenses to sales < 3% – selected 3. Companies with ratio of net fixed assets to sales < 200% – selected 4. Companies with average sales < Rs. 1 crore – rejected 5. Companies with net worth less than zero – rejected 6. Companies reporting forex earning/net sales > 25% - selected 7. Companies with ratio of sum of advertising, marketing and distribution expenses to sales < 3% – selected.
Companies which are rendering similar services and are functionally comparable – selected A.5. Comparables selected by Appellant and their arithmetic mean: Sl. No. Name of the company Average mark-up (in %) 1. D C M Ltd. 3.56 2. Ajel Ltd. 9.90 3. Telecommunication Consultants India Ltd. (Consultancy and Service Contracts) 13.41 4. Tera Software Ltd. (Technical) 13.91 5. Mindtree Ltd. (IT Services) 17.98 Arithmetical Mean 11.75 A.6. Filters applied by the TPO: Step Description 1. Companies for which financial data was available for FY 2013-14 – selected. Companies having different financial year ending (i.e., not 31st 2. March 2014) or data of the company which does not fall within 12 month period i.e., 01.04.2013 to 31.03.2014.
Companies whose income was less than Rs. 1 crore – rejected 4. Companies whose Technical Support Services is less than 75% of the total operating revenue – excluded IT(TP)A No.1488/Bang/2024 Page 8 of 14 5. Companies whose income from non-financial services to sales is more than 75% - selected 6. Companies who have more than 25% related party transactions of the sales – excluded 7. Companies having positive net worth – selected.
8. Companies reporting loss for any 2 years of the last 3 years – rejected.
9. Companies whose export revenues are more than 50% of revenue – selected.
10. Companies failing the FAR analysis – rejected. Comparables selected by TPO and their arithmetic mean: Sl. OP/O No. Name of the Company C (in %) 1 Acropetal Technologies Ltd. (segmental) 15.63 2 Quest Global Engineering Pvt. Ltd. 18.35 AVERAGE MARK-UP 16.99 A.7. Computation of arm’s length price by the TPO and adjustment made: Arm’s Length Mean Mark-up on cost 16.99% Operating Cost 61,29,60,000/- Arm’s Length Price @ 116.99% of operating 71,71,01,904/- cost Price Received 69,31,30,000/- Variation in price 2,39,71,904/- 3% of price received 2,07,93,900/- Shortfall being adjustment u/s. 92CA Rs. 2,39,71,904/- B. ORDER OF THE CIT(A) The CIT(A) rejected the contentions raised by the Appellant in toto and dismissed the appeal. C. List of comparables pursuant to order passed by the CIT(A) are as follows:
IT(TP)A No.1488/Bang/2024 Page 9 of 14
SI. No. Name of the Company 1. Acropetal Technologies Ltd. (segmental) 2. Quest Global Engineering Pvt. Ltd.
D. APPELLANT’S SUBMISSIONS: GROUND NO. 3.3: Exclusion of Quest Global Engineering Pvt. Ltd. (“Quest Global”) At an outset, it is submitted that the finding of the TPO that the Appellant has accepted for the inclusion of Quest Global is wholly erroneous and contrary to the material on record. It is submitted that the Appellant has not accepted for the inclusion of Quest Global as a comparable company and the same is evident from the submissions dated 10.02.2020 and 06.10.2017 made by the Appellant before the TPO and the CIT(A) available at pages 48-49 and 66 of the paperbook. Further, the TPO in the remand report has observed that the Appellant has failed to provide any specific evidence in support of its contention. In this regard, it is submitted that the Appellant has demonstrated that Quest Global is functionally not comparable to the Appellant. It is submitted that Quest Global is engaged in rendering engineering design and analysis services. The principal activities of the Company include rendering engineering consulting services in design, modeling, simulation, in the areas of gas turbine, steam turbine, power generation, aircraft engines and automotive technologies which is not functionally comparable to the Appellant which provides post-sales technical support services. The Company has only one business segment, which is providing engineering consulting services for advanced technology products which is not comparable to the Appellant which provides technical support services for EMC products. Further, it is submitted that Quest Global ought not to be considered as a comparable on account of its large scale of operations. It is submitted that the difference in the scale of operations have a direct impact on the profitability. Detailed submissions are placed at pages 92-94 of the paperbook. Therefore, it is submitted that Quest Global ought to be excluded from the final list of comparables.
IT(TP)A No.1488/Bang/2024 Page 10 of 14 GROUND NO. 3.2.1: Inclusion of DCM Limited (“DCM”): It is submitted DCM is engaged in rendering IT services and is therefore functionally comparable to Appellant. It is submitted that though the Company is engaged in other business, segmental details of the same are available and therefore, the IT services segment of the Company is comparable to the Appellant. Detailed submissions are placed at pages 97-98 of the paperbook. Therefore, it is submitted that DCM ought to be included in the final list of comparables. GROUND NO. 3.2.2: Inclusion of Telecommunication Consultants India Limited (“TCIL”): It is submitted that company was excluded by the TPO for the reason that the annual reports of the company was not available for the assessment years 2013-14 and 2014-15. The TPO excluded this company relying on the annual report for the assessment year 2012-13. In this regard, it is submitted that the annual report of the Company for assessment year 2014-15 is available in the public domain. The copy of the annual report was furnished by the Appellant before the TPO and therefore, the finding of TPO that the annual report for the assessment year 2014-15 was not available is wholly erroneous and contrary to the material on record. Further, it is submitted that the TPO has considered the entity level details regarding the functionality of TCIL while the Appellant has provided details specifically relating to the consultancy and service contract segment. It is submitted that the consultancy and service contracts segment of TCIL is engaged in rendering consultancy services, including IT consultancy and is therefore functionally comparable to the Appellant. Detailed submissions in this regard are placed at pages 98-99 of the paperbook. Therefore, it is submitted that TCIL ought to be included in the final list of comparables. Wherefore, it most humbly prayed that this Hon’ble Tribunal be pleased to allow the above appeal filed by the Appellant, in the interests of justice and equity.”
8. The learned Counsel further submitted that the TPO has wrongly mentioned in the TP Order that Quest Global Engineering Pvt. Ltd., has been IT(TP)A No.1488/Bang/2024 Page 11 of 14 accepted by the assessee. However, after show cause notice, objection was raised which is available in the Paper Book.
The learned DR relied on the Order of the lower authorities and she submitted that the lower authorities have rightly dealt with the objections raised by the assessee regarding inclusion of comparable company and exclusion of 2 other comparable companies.
Considering the rival submissions and on perusal of the entire material available on record and Orders of the authorities below, we noted that here the dispute raised by the assessee as per the written synopsis is quoted supra. The assessee wants to exclude Quest Global Engineering Pvt. Ltd., submitting that this company is functionally not a comparable company. We noted from the TP study placed at Paper Book Page No.154 and onwards, the functional profile of the assessee company is as under:
IT(TP)A No.1488/Bang/2024 Page 12 of 14
We also have gone through the financial statement of the Quest Global Engineering Pvt. Ltd. As per Textual Information (33) placed at Paper Book Page No.57, the overview of the company is placed as under:
The functional profile of the comparable company selected by the TPO are not matching with the assessee company. Which are clear from the above profile of both the companies., Accordingly the comparable company selected
IT(TP)A No.1488/Bang/2024 Page 13 of 14 by the AO is functionally different. Therefore, it cannot be said it is a comparable company in the case of the assessee. Therefore, the AO is directed to exclude this company from the list of comparable companies selected by the TPO.
Further, the assessee has sought for inclusion of 2 comparable companies i.e., DCM Ltd., (IT business) and Telecommunication Consultancy India Ltd. Considering the submissions noted supra, and on going the Paper Books filed by the assessee in this regard, we are of the view that this issue is to be considered afresh in the light of the filters applied by the TPO which has not been disputed by the assessee during the course of hearing. Therefore, it requires fresh consideration and AO/TPO is directed to provide reasonable opportunity of being heard to the assessee and assessee is directed to file necessary documents to substantiate the claim for inclusion.
In the result, appeal filed by the assessee is partly allowed for statistical purposes.
Pronounced in the court on the date mentioned on the caption page.