DEPUTY COMMISSIONER OF INCOME TAX -14(1)(2), MUMBAI vs. CITICORP SERVICES INDIA LIMITED , MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): These cross appeals in ITA No.4609/Mum/2017 & 7336/Mum/2019 for A.Y.2010-11 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-56, Mumbai in appeal No.CIT(A)-56/TP/DCIT-10(1)/2015- 16/179-C dated 15/03/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 19/06/2014 by the ld. Dy. Commissioner of Income Tax-10(1), Mumbai (hereinafter referred to as ld. AO).

ITA No.7336/Mum/2019 (A.Y.2010-11)

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assessee had not preferred the appeal in time, for the reasons stated hereinabove, we are not inclined to condone the delay in filing of appeal by the assessee. Accordingly, the appeal of the assessee is hereby dismissed as unadmitted.

ITA No.4609/Mum/2017 (A.Y.2010-11)

“1) Whether on the facts of the case and in law, the Ld CIT (A) erred in rejecting the economic analysis of the TPO to arrive at the suitable quantitative and qualitative filters to be applied for selecting the comparables for bench the transaction. 2) Whether on the facts of the case and in law, the Ld CIT (A) erred in rejecting the quantitative and qualitative filters applied by the TPO for selecting the comparables for the purpose of determining the ALP of the transaction. 2A) Whether on the facts of the case and in law, the Ld CIT (A) erred in rejecting the quantitative and qualitative filter of export sales more than 75% applied by the TPO for selecting the comparables for the purpose of determining the ALP of the transaction which has been held to be valid by the ITAT Delhi in the case M/s Motorola Solutions India P Ltd Vs ACIT (ITA No ITA No. 5637/Del/2011) and has been further upheld by the ITAT Bangalore in the case of 24/7 Customer.Com Pvt Ltd Vs DCIT (140 ITD 0344), the ITAT Mumbai in the case of DCIT VS Indo American Jewellery Ltd (41 SOT 1) and the ITAT Hyderabad in the case of M/s Deloitte Consulting India P Ltd Vs DCIT (12 taxmann.com 500). 2B) Whether on the facts of the case and in law, the Ld CIT (A) erred in rejecting the quantitative and qualitative filter of related party transactions less than 25% applied by the TPO for selecting the comparables for the purpose of determining the ALP of the transaction which has been held to be valid by the ITAT Delhi in the case of Actis Advisers P Ltd Vs DCIT (TS-688-ITAT-2012(Del)-TP), which has been further upheld by the ITAT Delhi in the case of Global Logic India P Ltd Vs DCIT 12 taxmann.com 295, the ITAT Hyderabad in the case of M/s ADP Pvt Ltd Vs DCIT 45 SOT 172, the ITAT Mumbai in the case of CAIT VS M/s Hapag Lloyd Global Services P Ltd (TS-47-ITAT-2013(Mum)-TP) and the ITAT Delhi in the case of M/s Nokia India (P.) Ltd Vs DCIT Circle -13(1), New Delhi (52 taxmann.com 492 (Delhi - Trib.) 2C) Whether on the facts of the case and in law, the Ld CIT (A) erred in rejecting the quantitative and qualitative filter of rejection of consistent loss making companies applied by the TPO for selecting the comparables for the

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purpose of determining the ALP of the transaction which has been held to be valid by the ITAT Delhi in the case of M/s Sony India (P) Ltd VS DCIT (110 TTD 448) which has been further upheld by the decision of ITAT Mumbai in the case of Syscom Corporation Ltd Vs ACIT (TS-195-ITAT-2013 (Mum). 3. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal. 4. The appellant prays that the order of CIT(A) set-aside and that of the assessing officer be restored.

4.1. We find that assessee has rendered support service to various affiliates. The key activities undertaken by the assessee under the instruction of its AEs are as under:-

• Oversight over Operations & Technology suppliers and Business Process Outsourcing suppliers which support Citi businesses around the globe;

• Quarterly assistance for monitoring key compliance requirements of outsource service provider relationships;

• Oversight and governance over IT suppliers performing IT development work for various business units and affiliates;

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• Oversight over Operations suppliers performing work for consumer business; • Performing entitlement reviews semi-annually on behalf of Citi Business Managers for contractors from third party organizations.

4.2. In addition to the above, the assessee also rendered other shared support services such as providing assistance in employee administration, assistance in the employee database administration, employee helpdesk support, etc. to few of the Citi affiliates operating in India. The assessee does not face significant risks such as market risk and credit risk while rendering the aforesaid support services to its AEs. It is pertinent to note that the aforesaid services are in the nature of oversight and shared support services. Such services were rendered on a cost-plus basis.

4.3. For the year under appeal, the assessee had e-filed its return of income on 8.10.2010 for the relevant previous year ended 31.3.2010, declaring a total income of Rs.210,95,946/- under the normal provisions of the Act.

4.4. In its TP documentation, the assessee had adopted the Transactional Net Margin Method ('TNMM') as the Most Appropriate Method (MAM) to determine the Arm's Length Price (ALP) for its International transaction pertaining to provision of support services. Being in the nature of back office support services, these services were benchmarked using companies engaged in Information Technology Enabled services (ITES). Based on the search process adopted in the TP Study, the assessee arrived at a set of fifteen functionally comparable companies having an average arithmetic mean of 14.27%.

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4.5 Before the TPO, without prejudice to use of multiple year data, based on the request made by the learned TPO, the assessee updated the margins of TP Study comparables using single year data for FY 2009-10, on a without prejudice basis for its arguments on contemporaneous documentation, the assessee arrived at the following set of twelve comparables having a mean margin of 10.87% (excluding three comparables on account of unavailability of data).

Sr. Name of Company FY 2009-10. No OP / TC (%) 1 A O K In-House B P O Services Limited 0.11 2 Aditya Birla Minacs Worldwide Limited 7.92 3 B N R Udyog Limited 23.77 4 Cameo Corporate Services Limited 7.84 5 Cosmic Global Limited 14.97 6 Delta Services (I) Pvt. Limited 5.17 7 In House Productions Limited 17.30 8 Informed Technologies India Limited 26.15 9 Infosys B P O Limited 31.20 10 Optimus Global Services Limited -12.25 11 Sparsh B P O Services Limited 2.57 12 Tirnex Group India Limited 5.70 Arithmetic Mean 10.87

4.6. Based on the financial results of the assessee, the operating profit / total cost ('OP/TC') margin came to 9.52%. Such OP/TC margin of 9.52% was compared to the average arithmetic mean of 10.87% (single year

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update) earned by the comparables. Accordingly, on applying the proviso to section 92C(2) of the Income Tax Act, 1961, it was concluded by the assessee that the international transactions were compliant with the arm's length standard.

4.7. The ld. TPO accepted the selection of tested party and the Most Appropriate Method (MAM) adopted by the assessee. The following filters were applied by the ld. TPO for the purpose of benchmarking of international transactions in respect of provision of support services of the assessee:-

(a) Companies having turnover less than Rs.5 Crores were rejected. (b) Companies with income from IT enabled services more than 75% of the operating revenues were selected. (c) Companies with less than 75% earning from exports were rejected. (d) Companies with persistent losses / diminishing Revenues were rejected. (e) Companies with related party transactions less than 25% of the Revenues were selected. (f) Companies with peculiar economic circumstances were rejected.

Based on the aforesaid application of filters, the ld. TPO finally arrived at the following set of comparables and worked out the arithmetic mean margin of the comparables of 28.85% as under:-

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Sr. No. Name of the Company NCR % FY 2009-10 1 Accentia Technologies Ltd 43.06 2 Cosmic Global Limited 14.97 3 Infosys B P O 31.21 4 Informed Technologies India Ltd. 26.15 Arithmetic Mean 28.85

4.8. We find that the ld. TPO arrived at the arm’s length operating income at Rs.20,67,96,724/- as against income returned by the assessee at Rs.17,57,74,166/- in respect of provision of back office support services and proposed the adjustment of Rs.3,10,22,558/- to the said international transaction by applying (a) TNMM as MAM ; (b) OP/OC as PLI ; (c) by applying single year data pertaining to A.Y.2010-11 as per Rule10B(4) of the Rules.

4.9. We find that the ld. CIT(A) had rejected the following three filters adopted by the ld. TPO:-

(a) Companies having export sales less than 75% of its total Revenue (b) Companies where related party transactions are more than 25% of operating revenues (c) Companies which are persistently loss making

4.10. We find that the ld. CIT(A) had however, addressed the inclusion and exclusion of various comparables as under:-

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(a) Accentia Technologies Ltd., - EXCLUDED (b) Infosys BPO Ltd., - EXCLUDED (c) AOK In-House BPO Services Ltd – INCLUDED (d) Cameo Corporate Services Ltd., - INCLUDED (e) Delta Services India Pvt. Ltd., - INCLUDED (f) In House Provisions Ltd., (Vans Information) – Healthcare Segment – INCLUDED (g) Optimus Global Services Ltd., - INCLUDED (h) Sparsh BPO Services Ltd., - INCLUDED (i) Timex Group India Ltd., - INCLUDED

4.11. Aggrieved by the aforesaid order of ld. CIT(A), the Revenue has preferred the appeal before us only challenging the rejection of three filters by the ld. CIT(A) which was used by the ld. TPO for benchmarking the international transaction of the assessee. The comparables which were directed to be included / excluded are not subject matter of appeal before us by the Revenue. Hence, it would be relevant for us to address only the specific aspect of rejection of certain filters by the ld. CIT(A).

We find that the assessee had contended before the ld. CIT(A) that for the purpose of comparability, it would be essential to consider the activity / functions performed by the respective comparable company rather than its geographical customer location. According to the assessee once a comparable company is functionally comparable with the functions performed by the assessee, then the same would have to be included as

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a comparable company irrespective of the fact whether its foreign exchange earnings emanating out of export sales is less than or more than 75% of total sales. The ld. AR further pleaded that Rule 10A(a) of the Income Tax Rules defines the term “uncontrolled transactions” as below:-

“Uncontrolled transactions means the transaction between enterprises other than associated enterprises, whether resident or non-resident”.

5.1. From the above definition it was argued by the ld. AR that from the plain reading of the above, it could be concluded that the controlled transaction can be compared with a comparable uncontrolled transaction which takes place between two unrelated parties. It was argued that Rule 10A(a) nowhere provided that uncontrolled transaction had to be between the resident and non-resident or between non-residents (as is the case with the definition of associated enterprises) and the comparable transaction needs to necessarily involve the cross border element. The ld. AR vehemently argued that since the most appropriate method adopted by the assessee is TNMM, which is also accepted by the ld. TPO, the net margins i.e. return of assets, operating income to sales etc are less affected by transactional differences. Accordingly, it was argued that the enterprises catering to domestic market or to overseas market would still be comparable under this method and the absence of foreign exchange transactions or lack of overseas clients does not affect the comparability.

5.2. We find that assessee is mainly into operations being a low risk captive service provider providing back office support services in the nature and operations of technology, oversight services and other share services to its associated enterprises. It is not in dispute that assessee’s ITES segment is mainly catering to export market. Hence, there is

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absolutely no harm in ld. TPO applying the filter by rejecting the companies having export sales less than 75% of its total sales. The arguments of the ld. AR that the comparable companies having more domestic sales than the export sales could also be considered as comparable as per Rule 10A(a) of the Rules could be appreciated in the event, where the percentage of export sales and domestic sales are equal or the differences between them are not huge. As stated earlier in the instant case, there is no dispute that assessee in its ITES segment had been catering predominantly in export market to its AEs. Hence, it would be just and fair to have comparable companies which are also having more than 75% of its sales derived from export market. Hence, we hold that the filter adopted by the ld. TPO in this regard would be a valid filter. We find that none of the observations considered by the ld. TPO were even addressed by the ld. CIT(A) in his order, as rightly pointed out by the ld. DR before us. Accordingly, the ground No.2A raised by the revenue is allowed.

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would not be materially affected by the presence of controlled transactions if the controlled or related party transactions are only to the extent of 25% of the operating revenues. Thus the TPO applied 25% related party transactions filter wherein the companies which have related party transactions in excess of 25% of the operating revenues for the year were eliminated as comparables. It is also pertinent to mention here that related transactions on revenue and expenditure side were considered for applying this criterion.” 6.1. Based on the above filter, the ld. TPO had rejected the comparable companies having related party transactions more than 25% of operating revenues. The ld. AR submitted that the materiality of related party transactions had to be judged with reference to the PLI used by the assessee to determine the arm’s length price of international transaction which alone, in his opinion, would provide correct reflection to the extent to which related party transactions can commence PLI used for TP analysis. He argued that since PLI applied by the assessee is OP/OC, it would be pertinent to apply similar base i.e. operating profit to sales or cost to determine the threshold of related party transactions. He argued that companies having related party transactions less than 10% alone should be excluded. He reiterated his argument by stating that as long as the said comparable company is functionally comparable with the functions performed by the assessee company, the percentage of related party transactions in the said comparable company would have no major bearing on the PLI of the comparable companies.

6.2. We are unable to persuade to accede to these arguments of the ld. AR in view of the fact that any comparable company having more than 25% of related party transactions would be able to have advantage in prices negotiated between the controlled entities (that is related parties) and it becomes controlled transactions and that such negotiated advantageous pricing mechanism would certainly have a major bearing on the PLI of the said comparable company that is why the spirit of

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provisions of Chapter X of the Act mandate that a controlled transaction should be always comparable with uncontrolled transaction for the purpose of determination of arm’s length price. Hence, it would be just and fair to apply a filter by rejecting comparable companies having related party transactions more than 25% of the operating revenues. Hence, we hold that this filter applied by the ld. TPO for the purpose of determination of arm’s length price is to be considered as a valid filter. We find that none of the observations considered by the ld. TPO were even addressed by the ld. CIT(A) in his order, as rightly pointed out by the ld. DR before us. Accordingly, the ground No.2B raised by the revenue is allowed.

We find that the ld. TPO had excluded all the companies with persistent losses / diminishing revenues for the last three years including the year under consideration. The ld. TPO observed that IT enabled sector is growing at Compounded Annual Growth Rate (CAGR) of more than 25% during the last 10 years or atleast for the last three years relevant to the year under consideration. He observed that the diminishing revenues indicate that there may be no utilization of assets or human resources for which reasonably accurate adjustments cannot be made based on the data available in the public domain. Accordingly, he applied this filter to reject companies which are persistent loss making or companies having diminishing revenues in the last three years including the year under consideration.

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7.1. We find that A.Y.2010-11 is the first year of operation of the assessee company. We are in agreement with the argument advanced by the ld. AR that consistent loss making companies are to be construed as those companies which are incurring operational losses year after year or atleast in the last three years including the year under consideration. We are also in agreement with the argument advanced by the ld. AR that if a particular comparable had made profits in the earlier two years and had incurred losses during the year under consideration alone, then, the said company would not fall under the ambit of persistent loss making company. Since assessee is in the first year of operation where due to heavy investments made in the initial year and claim of depreciation thereon, among other factors, the assessee is bound to incur losses and therefore, assessee indeed is justified in comparing the companies which had incurred losses during the year under consideration. Hence, the loss making company per se cannot be eliminated for the purpose of comparability. It has to be seen depending upon the facts and circumstances of each and every case. We hold that this filter applied by the ld. TPO would not be a valid filter for the purpose of comparability of benchmarking analysis vis-à-vis assessee company. Hence, we hold that the ld. CIT(A) had rightly rejected this filter applied by the ld. TPO. Accordingly, the ground No.2C raised by the revenue is dismissed.

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Order pronounced on 20/07/2021 by way of proper mentioning in the notice board.

Sd/- Sd/- (SAKTIJIT DEY) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 20/07/2021 KARUNA, sr.ps

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai