AMERICAN EXPRESS SERVICES INDIA LTD.,NEW DELHI vs. DEPUTY COMMISSIONER OF INCOME-TAX, NEW DELHI

• To reject companies having turnover less than INR 5 Crores; • To reject companies having different accounting year than that of the Appellant; • To reject companies having peculiar economic circumstances which are not in line with the industry trend and companies which showed diminishing revenue trend; and • To reject companies having export revenue less than 75 percent of the operating revenue.

3 Assessment Year: 2010-11

6. That on facts and in law, the TPO/AO/DRP have grossly erred in applying the turnover filter on segmental revenue instead of the total revenue of the company as a whole in case of company namely CG- Vak Software & Exports Limited without appreciating the segmental revenue of the Appellant which is far less than the INR 5 crore threshold of the turnover filter.

7. That on facts of the case and in law, the TPO/AO/DRP have erred in selecting companies in the final set of alleged comparables which are functionally different as compared to the Appellant for the impugned transaction.

9. That on facts of the case and in law, the TPO/AO/DRP have erred in rejecting certain companies and adding certain companies to the final set of alleged comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparable companies for benchmarking the impugned transaction.

10. That on facts of the case and in law, the TPO/AO/DRP without appreciating the functional analysis undertaken by the Appellant in its Transfer Pricing study, have erred by identifying companies which are engaged in providing Knowledge Process Outsourcing services by stating that the Appellant is engaged in providing high end services whereas the Appellant is only engaged in rendering provision of back office support services.

11. That on facts of the case and in law, the DRP without appreciating the risk profile of the Appellant, have erred in stating that the Appellant bears the significant risks and accordingly failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-a-vis the alleged comparables for impugned transaction

14. That on facts of the case and in law, the DRP has grossly erred in giving a direction to rectify the arithmetical errors in the computation 4 Assessment Year: 2010-11 of the operating margins of alleged comparable companies in compliance with the Income Tax Act ("the Act") without appreciating that Indian regulations do not enumerate the methodology for computing operating margins which may apply to the Appellant. The DRP has erred in directing the TPO to rectify the margins of alleged comparables using safe harbour rules without understanding that: a. Appellant has not applied for being assessed under safe harbor provisions b. Safe harbour provisions do not reflect arm's length nature of margins c. Safe harbour rules cannot be applied retrospectively and are only applicable for assessment year ("AY") 2013-14 and AY 2014-15 on specific application by a taxpayer

15. That on facts of the case and in law, the TPO/AO/DRP have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act.

16. That on facts and in law, the TPO/AO/DRP have grossly erred by charging interest on credit period granted by the company under normal trade practices.

14 . That on facts of the case and in law, the DRP/AO has erred in confirming that AO/TPO has discharged his statutory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm’s length price determined by the Appellant and proceeding to determine the arm’s length price.

Part II - Corporate tax grounds of appeal Disregard of acquisition cost of business database 4.1 That on the facts and circumstances of the case and in law, the Hon’ble DRP has erred in confirming and accordingly, the Learned AO has erred in restricting the cost of acquired database to Rs 30,000,000 instead of Rs 120,000,000 as confirmed by the Learned TPO for AY 2002-03. 4.2 That on facts and circumstances of the case and in law, the Hon’ble DRP and the Learned AO has erred in not following the decision of Hon’ble Income Tax Appellate Tribunal (“Hon’ble ITAT”), Mumbai in appellant’s own case for AY 2002-03 which is binding on them.

5 Assessment Year: 2010-11 Disallowance of depreciation on such database 5.1 That on facts and circumstances of the case and in law, the Hon’ble DRP has erred in confirming and accordingly, the Learned AO has erred in disallowing the claim of the appellant for Rs. 1,238,745, being the amount of depreciation on the acquired business database under section 32 of the Act.

5.2 . That on facts and circumstances of the case and in law, the Hon’ble DRP has erred in confirming and accordingly, the Learned AO has erred in following the assessment orders passed by his predecessor for assessment years 2002-03 to 2009-10 that the acquired business database could not be regarded as plant and machinery.

5.3 That on facts and circumstances of the case and in law, the Hon’ble DRP has erred in confirming and accordingly the Learned AO has erred in not appreciating that the database falls under the head of “intangible asset" and accordingly, depreciation of Rs. 3,003,387 should be allowed on the same.

5.4 That on facts and circumstances of the case and in law, the Hon’ble DRP and Learned AO has erred in not following the decision of Hon’ble ITAT, Mumbai in appellant’s own case for AY 2002-03 which is binding on them.

Disregard of cost of goodwill

6. That on facts and circumstances of the case and in law, the Hon’ble DRP has erred in confirming and accordingly the Learned AO has erred in restricting the cost of goodwill to Rs NIL instead of Rs 80,000,000 on the basis that no goodwill exists in the business acquired.

Allowability of depreciation on goodwill

7. That on facts and circumstances of the case and in law, the Hon’ble DRP has erred in confirming and accordingly the Learned AO has erred in not appreciating the fact that goodwill purchased for the purpose of business should be considered as “intangible assets” and accordingly, depreciation of Rs. 2,002,258 should be allowed as per section 32 of the Act.

Part III- General grounds of appeal

8. That on facts and circumstances of the case and in law, the Learned AO has erred in withdrawing interest u/s 244A of the Act of 6 Assessment Year: 2010-11 Rs 82,335 and also erred in charging interest of Rs 310,278 under section 234D of the Act.

9. That on facts and circumstances of the case and in law, the Learned have grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act.

5. The assessee was compensated by AE for services rendered on cost plus 15% markup basis. The cost comprised of staff salaries, all administrative costs indirectly incurred in respect of the services rendered after undertaking the functions performed and the risk assumed. The TPO proposed certain revised filters to benchmark the international transactions undertaken by the assessee. The assessee had selected 10 comparables for benchmarking the international transactions but only 4 out of 10 comparables were finally selected by the TPO. The TPO also proposed another six comparables for transfer pricing analysis and thus in all 10 companies were selected as comparables. The mean margin of the comparables worked out to 34.73% and the assessee was show caused as to why adjustment of Rs.15,44,931/- should not be made in its hands in ITeS Segment. In respect of other segment i.e. provision of marketing service, the TPO finally selected 8 companies as comparables whose mean margins worked out to 24.76% and adjustment of Rs.3.51 Crores was proposed in the said segment. The TPO after considering 8 Assessment Year: 2010-11 the objections of the assessee to the selection of the comparables under the segment provision of marketing support services proposed adjustment of Rs.2.86 crores. Similarly, in the segment of provision of IT Enabled Services, the TPO selected 10 comparables and finally worked out the mean margin of the comparables at 35.77% and proposed adjustment of Rs.15,44,931/-. The Assessing Officer issued draft assessment order against which the assessee filed objections before the DRP, in-turn the DRP issued directions to the Assessing Officer/TPO. Consequent to the said directions, the Assessing Officer/TPO passed consequent order, wherein, under the segment of provision of marketing support services, no adjustment was made. However, under the segment of provision of IT Enabled Services, adjustment of Rs.14,12,058/- was made in the hands of the assessee. Further, adjustment was made on account of interest due on receivables which was not received within the due period and applying rate of interest @14.88%, an adjustment of Rs.10,75,876/- was made. The assessee is in appeal against both these adjustments. In addition, it has also raised the issue against the corporate tax additions made in the hands of the assessee.

• Accentia Technologies Ltd. • Infosys BPO Limited • eClerx Services Limited • TCS E-serve Limited • TCS E-Serve International Ltd.

8. The Ld. DR for the Revenue strongly placed reliance on the orders of the authorities below.

S. Name of the Company No. 1 Accentia Technologies Ltd. 2 Cosmic Global Ltd. 3 e4e Healthcare Business Private Limited 4 Fotune Infotech Limited 5 Igate Global Solutions Limited 6 Infosys BPO Limited 7 Jindal Intellicom Private Limited 8 TCS e Serve Limited 9 TCS e Serve International Limited 10 eClerx Services Limited 11 Omega Healthcare Management Services Pvt. Ltd.

10. An initial adjustment of Rs.15,44,931/- was proposed in the said segment; however, after the directions of the DRP, the same was reduced to Rs.14,12,058/-. As pointed out in the paras above, the assessee was engaged in the marketing and distribution of credit cards and personal loans. It was also engaged in buying and selling foreign currency and travelers cheque and is 11 Assessment Year: 2010-11 an authorized full fledged money changer. As part of services, it was providing support services to its AE.

11. The assessee is aggrieved by the inclusion of the Accentia Technologies Ltd. in the final set of comparables. The plea of the assessee before us is that the said concern is engaged in diversified services which includes HRCM (using SaaS model), also is KPO and not BPO. Further it owns significant intangible assets to the extent of 67%. Another aspect pointed out was that during the year, there was extra-ordinary activity of amalgamation. The assessee also pointed out that the TPO had included the said concern on the ground that the concern was engaged in HCRM consisting of various closely related activities, but no revenue was generated from SaaS. It was also pointed out that the amalgamation did not affect the profitability of the company. The DRP had held such concern to be engaged in rendering ITeS services and thus was similar to the profile of the assessee. The Ld. AR for the assessee pointed out that the issue stands covered by the order of the Tribunal in the case of sister concern i.e. American Express (I) P. Ltd. in relating to Assessment Year 2010-11, vide order dated 17/07/2019. In the entirety of the submissions made by the Ld. AR for the assessee and in view of the services provided by the assessee, which are back office services, the concern Accentia Technologies Ltd. cannot be held to be comparable to the assessee on the ground of it being not functionally comparable. The said proposition is laid down in the case of sister concern (supra) vide para 28 at page 19 of the order.

Another aspect to be kept in mind is the extraordinary event of amalgamation, which has occurred during the year and such concern with extraordinary event 12 Assessment Year: 2010-11 cannot be held to be comparable in the year of the amalgamation. Accordingly, we hold so. The AO/TPO is directed to exclude Accentia Technologies Ltd. from the final list of comparables.

12. Now coming to the concern Infosys BPO Limited, which is selected as functionally comparable concern to the assessee. In the first instance, it has large scale of operations totalling Rs.1126 Crores against the total turnover of the assessee as Rs.1.17 Crores. Further, the said concern is engaged in wide set of services and the margins of the said concern cannot be compared with the margins of the assessee. We find support from the ratio laid down by the Tribunal in the case of sister concern itself. Similar is the proposition for the TCS E-serve Ltd. and TCS E-serve International Ltd.

13. Similar issue of exclusion of TCS E-serve Limited and TCS E-serve International Ltd. has been adjudicated in the case of Integreon (India) Pvt. Ltd. vs DCIT in relating to Assessment Year 2012-13, vide

order dated 31.08.2020 and it was held as under:-

“9. We find that the issue of exclusion of TCS e-Serve Ltd. from the final list of comparables on the ground of the said concern having both brand value and high turnover was agitated before the Tribunal (supra) in assessee’s own case in Assessment Year 2011-12. The Tribunal in turn relied on the ratio laid down by the Delhi Bench of Tribunal in B.C. Management Services P.Ltd. 83 Taxmann.com 346. The relevant finding of the said case are reproduced by the Tribunal in para 14 and are being referred, but not being reproduced for the sake of brevity. It may further be pointed out that against the said order in B.C. Management Services P.Ltd.(supra), the Revenue filed an appeal before the Hon’ble High Court and the question of law raised was as under:-

13 Assessment Year: 2010-11

Accordingly, we direct the AO/TPO to exclude the said concern from the final set of comparables.

Caliber Point Business Solutions Limited in the final list of comparables. We direct the Assessing Officer to afford reasonable opportunity of hearing to the assessee in order to decide the same and accordingly re-compute the Arm’s length price of ITeS Segment.

19. Under part-I, the assessee has raised the issue of transfer pricing adjustment. We have already elaborated on the issue in paras above and the Assessing Officer is thus directed to re-compute the adjustment on account of transfer pricing in the hands of the assessee, if any, after affording reasonable opportunity of hearing to the assessee on the ground of inclusion of two concerns i.e. M/s. R Systems International Limited (segmental) and M/s.

Caliber Point Business Solutions Limited, as per our directions in the paras above. Other concerns as directed are to be excluded from final list of comparables. We hold so.

nso.7, 13 and 14 are against the application of Safe Harbor Rules. The Hon’ble Delhi High Court in Pr. CIT vs Fiserv India Pvt. Ltd.,

16. Assessment Year: 2010-11 in order dated 06.01.2016, vide para-10 has held that Safe Harbour Notification dated 18th September 2013 relied upon by the Revenue is prospective. Since, Safe Harbour Rules are not operative for the year under consideration; hence, the orders of authorities below are reversed on this ground.

21. Now, coming to the ground no.16 under part-I i.e. on account of interest chargeable on receivables. The case of the AO/TPO is that where the assessee had not received the amount due from AEs within specified period, then interest is chargeable on the aforesaid receivables. The Ld. AR for the assessee pointed out that this issue stands covered by the ratio laid down by the Hon’ble Delhi High Court in Pr. CIT vs Kusum Health Care Pvt. Ltd. in judgment dated 25.04.2017, as working capital adjustment has been allowed to the assessee.

“8. We find that it is not in dispute that the transaction between the assessee and American Express Bank, inter alia, including for purchase of Acquired Business Database were subjected to transfer pricing scrutiny and, the Transfer Pricing Officer vide order dated 15.2.2005 has accepted the transaction without making any adjustment to the arms length price. In this view of the matter and as held by Hon’ble Delhi High Court in the case of CIT vs. Oracle India Pvt Ltd (243 CTR 103), when the price fixed is acceptable as arms length price by Transfer Pricing Officer (TPO) under section 92 of the Act, it cannot be open to the Assessing Officer to disturb that price so paid as unreasonable. We have also noted that the Assessing Officer has doubted the appropriateness of the consideration of Rs.12 crores without any cogent material to come to the conclusion that this is excessive or unreasonable, but then the TPO whose duty is it to examine whether or not the price paid in intra associate enterprises transactions are at arms length price or not has accepted the transaction without 18 Assessment Year: 2010-11 making any arms length price adjustment. There is no material whatsoever to establish or even indicate that the price of Rs.12 crores paid for the Acquired Business Database is excessive or unreasonable and only the basis of Assessing Officer’s coming to the conclusion about his subjective judgment. When the valuation of Acquired Business Database has been examined by TPO while concluding that the database price adjustment for the said year and no adverse inferences have been recorded in respect of the same, there could be no good reason for the AO to deviate from the stand of the TPO and substitute his own opinion as to what should be the correct price at which Acquired Business Database should have been purchased. In this view of the matter and in the light of the judgment of Hon’ble Delhi High Court in the case of Oracle India P. Ltd (supra), we are of the considered view that the CIT(A) was indeed in error in restricting the value of Acquired Business Database at Rs.3 crores as against Rs.12 crores paid by the assessee. To this extent, we vacate the order of the CIT(A). We further find that so far as the question about admissibility of depreciation of Acquired Business Database is concerned, this issue is covered in favour of the assessee by the judgment of Hon’ble Delhi High Court in the case of CIT vs. Hindustan Coca Cola Beverages Pvt Ltd (331 ITR 192), wherein, Their Lordships, inter alia, have observed that “It is worth noting, the scope of section 32 has been widened by the Finance (No. 2) Act, 1998 whereby depreciation is now allowed on intangible assets acquired on or after 1st April, 1998. As per section 32(1)(ii), depreciation is allowable in respect of know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.” In view of these discussions as also bearing in mind the entirety of the case, we are of the considered opinion that the CIT(A) ought to have allowed the depreciation on the entire payment of Rs.12 crores towards Acquired Business Database. We, therefore, reject the appeal filed by the Assessing Officer against partial relief granted by the CIT(A) and uphold the grievance of the assessee in this regard.

9. As regards the question of claiming payment towards acquiring database as revenue expenditure, learned counsel for the assessee did not press the same. Accordingly, the grievance is dismissed as not pressed.”

“3. At the time of hearing before us, the AR pointed out that the issue was impugned in the assessment year and the issue of valuation of goodwill travelled upto the ITAT, Mumbai and the coordinate Bench in the original order held that the valuation of Goodwill was correct and held that entire payment of Rs.12crores was towards acquire business, thereby allowing a claim.

4. Respectfully following the order of the ITAT in assessee's own case, we hold that the assessee acquired the business along with goodwill and also that the valuation thereof was correct.

5. We now come to the issue of allowance of depreciation of goodwill, acquired by the assessee. The AO disallowed the claim of deprecation on goodwill, because, goodwill did not feature as a depreciable intangible asset in section 32.

6. The AR pointed out that the issue is now covered by the decision of CIT vs Smifs Securities Ltd., reported in 348 ITR 302, rendered by Hon'ble Supreme Court.” 7. We, therefore, allow grounds no.6 & 7.”

20 Assessment Year: 2010-11