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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”, HYDERABAD
Before: SHRI RAMA KANTA PANDA & SHRI K.NARASIMHA CHARY
आदेश / ORDER PER K. NARASIMHA CHARY, JM: Aggrieved by the order dated 27/09/2019, passed by the Learned Dy. Commissioner of Income Tax, Circle-3(1), Hyderabad (“Ld. AO”) in the case of M/s. SNL Financial (India) P.Ltd., (now merged with S&P Capital IQ
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(India) P. Ltd) (“the assessee”) for the AY.2009-10, under section 143(3) r.w.s. 144C(13) r.w.s. 254 of the Income Tax Act, 1961 (for short “the Act”), consequent to the directions of Hon'ble Dispute Resolution Panel, Bengaluru (“DRP”), assessee filed this appeal.
Brief facts of the case are that SNL India, a wholly owned subsidiary of SNL financial LC is engaged in providing information technology enabled services (ITeS) to SNL US, and is primarily engaged in the provision of data entry and analysis services to its Associated Enterprises (“AEs”) through its office situated in India. Activities of the assessee include collating, standardising, storing all relevant corporate, financial, market and M&A data, news and analysis for various industries such as banking, financial services, insurance, real estate, energy and media/communications and this information is transmitted in return, electronic or any other medium through data bases, web applications and analytical models, and for this reason the operations of the assessee are classified as provision of low end ITeS like data entry, data analysis and similar support services to the AE.
For the assessment year 2009-10 the assessee filed the return of income on 02/09/2009 declaring a total income of Rs. 26, 252/-. In view of the international transactions entered into by the assessee with its AE’s, determination of arm’s-length price of such services was referred to the Learned Transfer Pricing Officer (TPO). Pursuant to the order dated 28/01/2013, passed by the Ld. TPO, draft assessment order under section 143(3) read with section 144C of the Income Tax Act, 1961 (for short “the Act”) was passed on 04/03/2013 making an adjustment of Rs. 3,36,21,812/-. Assessee filed objections before the Ld. DRP and the Ld. DRP by order dated 12/12/2013 gave certain relief to the assessee and
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pursuant to the directions of the Ld. DRP a final assessment order under section 143(3) read with section 144C (13) of the Act was passed on 17/02/2014 making an addition of Rs. 3,05,39,702/- as per the adjustment suggested by the Ld. TPO by order dated 03/02/2014.
When the assessee carried the matter in appeal to the Tribunal, the Ahmedabad Bench of the Tribunal noticed that there is a conflict in the stand taken by the Revenue in respect of the same agreement, in two different assessment years. Inasmuch as by order dated 18/5/2016 in ITA No. 770/Ahd/2014 the Tribunal set aside the final assessment order and restored the issue relating to the nature of services rendered by the assessee, to the file of the learned Assessing Officer/Ld. TPO taking into account the order of the Ld. TPO passed on 26/02/2014. Observations of the Tribunal on this point are relevant and read thus,-
As observed earlier, agreement with the AE for providing service was executed on 1.10.2004. It was valid upto 30.12.2012. In the year for which an order under section 10TE(6) was passed by the TPO, this agreement was relevant for the period 1.4.2012 to 30.12.2012 i.e. nine months. If an agreement for a period of nine months indicates that the assessee's services were of low-end services, and those services can be categorized as BPO, then, how for the earlier period, the nature of services would be different ? In other words, same agreement cannot be give rise two types of services, merely on the basis of providing at different times. The TPO in the ITA No.770 and 1082/Ahd/2014 proceedings for the purpose of Safe Harbour Rules paid a visit in the office of the assessee, and himself collected information regarding nature of services. Thus, there is a conflict in the stand of the Revenue in different assessment years on one agreement. Considering this aspect, we are of the view that impugned orders are not sustainable on this issue, therefore, we set aside the assessment order including that of DRP and restore this issue to the file of the AO for fresh adjudication. The ld.AO shall take into account, the TPO's order passed in subsequent period i.e. dated 26.2.2014 though passed for the subsequent period but deals with same agreement. If the assessee is being accepted as a BPO, then,
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all the comparable selected by the TPO would not be relevant, and a fresh inquiry has to be conducted. Considering all these aspects, we allow the appeal of the assessee for statistical purpose. The observation made by us will neither impair the case of the AO nor will cause any prejudice to the defence/explanation of the assessee. 5. Subsequently SNL Financial (India) Private Limited was merged with S&P Capital IQ (India) Private Limited on 11/4/2018. Pursuant to the directions of the Tribunal, Ld. TPO at Hyderabad issued notice to the assessee and considering the submissions of the assessee selected a fresh set of comparables consisting of 11 Companies. And determined the arm’s- length price adjustment at Rs. 15,01,17,925/- and suggested the upward adjustment to the tune of Rs. 1,92,12,650/-. In this respect, grievance of the assessee is that the Ld. TPO considered the foreign exchange gain as non-operating in nature while calculating the margin of the assessee resulting in decrease in the operating margin from 11.50% to 9.15% on cost.
Out of such eleven comparables, assessee disputed the inclusion of the entities Accentia Technologies Limited, Acropetal Technologies Limited, Cosmic Global Limited, Crossdomain solutions private limited, Infosys BPO limited and M/s Genesys international Corporation limited. Ld. DRP deleted M/s Genesis International Corporation limited, but retained other entities. The assessee is therefore, in appeal before us seeking exclusion of five comparables, namely, Accentia technologies limited, Acropetal Technologies Limited, cosmic global limited, Crossdomain solutions private Ltd and Infosys BPO limited besides challenging the action of the Ld. TPO in treating the foreign exchange gain as non- operating in nature for calculating the margin of the assessee, which
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according to the assessee resulted in decrease in the operating margin from 11.50% to 9.15% on cost.
Insofar as the grievance relating to the foreign exchange gain is concerned, the submission of the Ld. AR is that the Ld. TPO failed to consider the findings of the Tribunal in ITA.No.770/Ahd/2014 in the 1st round of litigation. On a perusal of the order dated 18/05/2016, we find that vide paragraph No. 15, the Tribunal observed that,-
A perusal of the above finding would indicate that ld.DRP has recorded a finding that foreign exchange fluctuation gain was directly linked with the export business carried out by the assessee, hence, it is to be treated as income derived by an undertaking. The ld.DR was unable to point out any significant error in the proposition canvassed by the ld.DRP for granting the deduction under section 10A of the Income Tax Act. 8. It is, therefore, clear that the Tribunal endorsed the view taken by the Ld. DRP in respect of the foreign exchange fluctuation gain to the effect that it is directly linked with the export business carried out by the assessee and therefore it has to be treated as income derived by an undertaking. Further we are in agreement with the submission of the Ld. AR that in the case of SAP LABS India (P) Ltd vs. ACIT (2011) 44 SOT 156 the Bangalore Bench of the Tribunal held that the foreign exchange gain is operating in nature. We therefore, while accepting the contention of the assessee, direct the learned Assessing Officer/Ld. TPO to consider the foreign exchange gain as operating in nature for calculating the margin of the assessee.
Coming to the grievance of the assessee in respect of comparables, at the time of arguments, the challenge is confined to four entities only,
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namely, Accentia technologies limited, Acropetal Technologies Limited, cosmic global limited and Infosys BPO limited. Assessee contends that all these entities are functionally dissimilar to the functions performed by the assessee and all these entities were excluded in assessee’s own case for the assessment year 2007-08 and 2009-10 before merger.
Assessee is challenging the inclusion of Accentia technologies limited on the grounds of functional dissimilarity, because Accentia technologies limited is into the HRCM services also. Further submission of the Ld. AR is that during the year this company acquired Oak Technologies Inc, USA and has rapidly increased its customer base from New Jersey and neighbourhood areas. It is further submitted that the segmental information is insufficient to make this company a good comparable apart from this company earning super normal profits at the rate of 49.40%. Apart from this, this company is excluded in the case of the assessee before merger for this assessment year.
In respect of Acropetal Technologies Limited, the objections raised by the assessee is in relation to the functional dissimilarity, namely, engineering design services performed by the Acropetal Technologies Limited are similar to knowledge processing organisation services, which were held to be so in assessee’s own case before merger for this assessment year as well as for the assessment year 2007-08.
Assessee’s objection in respect of Cosmic Global Limited is also on the functional dissimilarity in as much as Cosmic Global Limited is involved in to the outsourcing activities and its majority Revenue is derived from translation charges to the extent of 94.8%, this entity earns super normal
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profit at 48.20% and it was excluded by the Tribunal in assessee’s own case, for the assessment year 2007-08 and 2009-10 before merger.
Infosys BPO is objected again by the assessee on the ground of functional dissimilarity stating that Infosys BPO limited is rendering wide array of services with significantly large scale operations and it is an industrial giant. Revenue of Infosys is Rs. 1081 crores which is 82 times larger than the assessee at 13.08 crores, apart from the Infosys BPO limited enjoying the high brand value and huge asset base.
A perusal of the order dated 31/07/2014 in ITA No. 124 /Hyd/ 2014 in the case of M/s. Capital IQ Information Systems (India) Private Limited, before the merger, clearly shows that the above four entities are excluded from the list of comparables. The relevant observations of the Tribunal are to the effect that,-
Infosys BPO Ltd. : 16. It was the contention of assessee that this BPO is a giant in its area and has brand value of Infosys Technologies limited. Assessee's main contention was that it is not functionally similar and its turnover is much more when compared to that of assessee. It was also contended that the Infosys BPO has done brand building exercise by incurring large amounts of brand building and advertisement expenditure and undertaking brand campaigning outside India. Further, it also has huge asset base and therefore, this company is not functionally comparable to assessee. Assessee relied on the M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad decision of the Hon'ble Delhi High Court in the case of CIT V/s. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Del), wherein it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee. 16.1 Even though we are not in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs.129.8 crores,
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which as against turnover of Rs.1016 crores of the Infosys, ( which is only about 5 times) we are of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, just because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company. … … … Cosmic Global Ltd. 19.The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- "13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at Rs.7.37 crore divided into three segments, namely, Medical transcription and consultancy services at Rs.9.90 lacs, Translation charges at Rs.6.99 crore and Accounts BPO at Rs.27.76 lac. The ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which
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we are not agreeable with the ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs.3.00 crore, which is strictly inthe realm of the Translation segment, revenues from which are to the tune of Rs.6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment. 13.3. However, we find this case to incomparable on the alternative argument advanced by the ld. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs.27.76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs.86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs.27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables." In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. Acropetal Technologies Ltd. (Seg.) 20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are
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extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper. 20.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company. (6) Accentia Technologies Limited. 21. This company was objected to by assessee on the reason of super profits as well as extra-ordinary events. It was submitted that acquisition of Oak Technologies & Trans Services has impact on the profits of the company and has taken inorganic growth as strategy to increase the profits because of the peculiar economic circumstances and brand value. The same in these circumstances cannot be selected. It was submitted that assessee was in medical transcription services. 21.1. The Departmental Representative however, objected to the pleas of assessee stating that the extraordinary events occurred in earlier year and therefore, the same cannot be considered as having any impact in the year under consideration. 21.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at
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the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected. 15. Having regard to the above observations of a coordinate Bench of this Tribunal for the assessment year 2009-10 which are very much applicable to the facts of the present case, and following the same we hold that the above four entities cannot be good comparables to the assessee and they are to be excluded. We accordingly direct the learned Assessing Officer/Ld. TPO to exclude the same from the final list of comparables and recomputed the margins for determining the arm’s-length price.
In the result, the appeal of assessee is treated as allowed for statistical purposes.
Order pronounced in the open court on this the 11th day of August, 2022
Sd/- Sd/- (RAMA KANTA PANDA) (K. NARASIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 11/08/2022
TNMM
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