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Income Tax Appellate Tribunal, BANGALORE BENCH ‘C’
Before: SHRI N.V VASUDEVAN, VICE- & SHRI B.R.BASKARAN
PER SHRI N.V VASUDEVAN, VICE-PRESIDENT:
IT(TP)A No.193/Bang/2016 is an appeal by the Revenue while IT(TP)A No.48/Bang/2016 is an appeal by the assessee. Both these appeals are directed against the final order of assessment dated 18-12-2016 passed by the ITO, Ward -2(1)(3), Bangalore u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (Act) relating to assessment year 2011-12.
IT(TP) A Nos. 193, 48/Bang/2016 Page 2 of 10 2. The Assessee is a wholly owned subsidiary of Softitler Net, Inc. USA. The Assessee is engaged in providing information technology enabled services ("ITES") to its holding company and therefore has to be regarded as an Associated Enterprises ("AEs"). Consequently the transaction of rendering of ITeS by the Assessee to it’s AE has to be regarded as an international transaction and the price received by the Assessee has to pass the Arm’s Length test as laid down in Sec.92 of the Act.
Details of International Transactions in dispute : Particulars Amount in Rs. Provision of ITeS 18,24,94,476/- Net margin on cost earned by the Assessee as computed by the TPO in the TP Order:
Operating Income Rs. 18,24,94,476/- Operating Cost Rs.16,05,39,322/- Rs.2,19,55,154/- Operating Profit (Op. Income —Op. Cost) Operating/Net margin (OP/OC) 13.68% There is no dispute that the Transaction Net Margin Method (TNMM) was the most appropriate method (MAM) for determination of Arm’s Length Price (ALP) and the Profit Level Indicator (PLI) chosen for the comparison of Assessee’s profit margin with that of the comparable companies was Operating Profit on Operating Cost (OP/OC). In its Transfer Pricing (TP) study, the Assessee had chosen 6 Comparable companies and the average arithmetic mean profit margin of those companies was comparable with that of the assessee. The Assessee claimed that the price received in the international transaction should be accepted as at Arm’s Length.
IT(TP) A Nos. 193, 48/Bang/2016 Page 3 of 10 4. The Transfer Pricing Officer (TPO) to whom the question of determination was referred to by the AO u/s.92CA of the Act, accepted only 2 viz., Jindal Intellicom Ltd., and E4E Health Care Business Services (P) Ltd., out of the 6 comparable companies chosen by the Assessee and rejected the other 4. The TPO selected his own set of 8 comparable companies and arrived at a total set of 10 comparable companies. The Comparables selected by TPO and the arithmetic mean profit margin of those comparable companies was as follows: SI. Mark-up on Mark-up on No. Total Costs Total Costs (WC—unadj) (WC — adj) Name of the Company (in %) (in %) 1 Accentia Technologies Ltd. 28.89 28.07 2 Acropetal Technologies 26.86 23.57 3 Cosmic Global Ltd. . 9.81 11.20 4 e4e Healthcare 12.38 14/63 5 ICRA Online Ltd. (seg.) 34.21 33.77 6 Jeevan Scientific Technology Ltd. 70.66 72.12 7 Infosys BPO Ltd. 17.89 16.69 8 Jindal Intellicom .11.13 12.36 9 Mindtree Ltd. (seg.) 10.76 9.56 10 iGate Global Solutions Ltd. 25.07 25.23 AVERAGE MARGIN 24.77 24.72
The TPO Computed arm's length price and addition to the total income consequent to the determination of ALP as follows:
Arm's Length Mean Margin 24.77% Less: Working Capital Adjustment 0.05% Adjusted mean margin of the comparables 24.72% Operating Cost (`OC') Rs. 16,05,39,322/- Arm's Length Price (ALP') = 123.62% of OC Rs. 20,02,24,642/- Price Received Rs. 18, 42,94,476/- Short fall being adjustment u/S. 92CA Rs. 1,77,30,166/-
IT(TP) A Nos. 193, 48/Bang/2016 Page 4 of 10 6. Aggrieved by the draft order of the Assessment in which the addition suggested by the TPO was incorporated by the AO, the Assessee preferred objections before the Disputes Resolution Panel (DRP). On objections by the Assessee, the DRP accepted the contention of the Assessee that following companies were not functionally comparable to the Assessee and directed their exclusion: a. Acropetal Technologies, b. Jeevan Scientific Technology Ltd. c. Mindtree Ltd. (seg.) d. iGate Global Solutions Ltd. e. Cosmic Global Ltd. f. Infosys BPO Ltd. g. e4e Health Care Business Services Pvt. Ltd.
The relief given by the DRP was incorporated in the final order of Assessment by the AO. Aggrieved by the final order of assessment, to the extent of relief allowed by the DRP, the revenue has preferred appeal before the Tribunal. The grounds of appeal in the Revenue's appeal are as follows:
1. In the facts and circumstances of the case, DRP has erred in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies.
The order of the tribunal in rejecting comparable cases by insistence on strict comparability under TNMM defeats the very purpose of the law relating to determination of ALP under income tax act.
3. The DRP has erred while seeking the exact comparability in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin.
DRP has erred in fact and law in disregarding the position of law that there could be differences between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises?
IT(TP) A Nos. 193, 48/Bang/2016 Page 5 of 10 5. DRP has erred in fact and law in concluding that the companies selected by the TPO are not comparable to the assessee overlooking the fact that reasonably accurate adjustments could be made to eliminate the material effects of the differences between them.
The grounds of appeal
of the Revenue are general and vague and does not specify which of the comparable companies that were excluded by DRP suffer from the defeats pointed out in the grounds of appeal. We therefore proceed to adjudicate on the comparability of all the 7 companies that were excluded by the DRP.
9. As far as exclusion of Acropetal Technologies Ltd. (`Acropetal-) by the DRP is concerned, the learned DR reiterated the stand of the revenue as reflected in the order of the TPO which is to the effect that there cannot be any difference between Knowledge Process Outsourcing (KPO) and Business Process Outsourcing (BPO). The learned counsel for the Assessee placed reliance on the decision of this Hon'ble Tribunal in Swiss Re Shared services (India) Pvt. Ltd. v. ACTT (order dated 08.07.2016 in IT(TP)A No. 380/Bang/2016) and e4e Business Solutions India P. Ltd v. DCIT [Order dated 13.01.2017 in IT(TP)A No.1397/Bang/2016] wherein, in the case of assessees similar to the assessee herein for the same assessment year, the company was directed to be excluded from the list of comparables.
10. We have considered the rival submissions. We find that as per the Annual Report of the company for the year ending 31st March 2010, the company is engaged in provision of a variety of IT enabled services comprising of Enterprise solutions, IT Infrastructure Management Services, Cloud Services, Greenhouse Gas Management, unlike the Assessee who is a provider of routine IT enabled services. Further, the company is engaged in provision of engineering design services which are in the nature of high end IT enabled services which are in the nature of Knowledge Process Outsourcing ("KPO"), which is not comparable to the Assessee's ITES. In the decision rendered in the case of Swiss Reshared services (I) Pvt.Ltd. (supra) vide paragraph 23 & 24 of the order, the Tribunal held that Acropetal Technologies Ltd., was IT(TP) A Nos. 193, 48/Bang/2016 Page 6 of 10 rendering high end services in the engineering design services which cannot be compared to the low end BPO services rendered by Acropetal Technologies Ltd., and therefore this company was not comparable to the Assessee and the DRP's findings on exclusion of Acropetal is therefore upheld.
11. As far as exclusion of the comparable company Jeevan Scientific Technologies Ltd. ("Jeevan") is concerned, we find that this company was excluded by the DRP for the reasons that (a) the ERP segment of the company is not comparable to the assessee, (b) the BPO segment of the company, although is comparable to the assessee functionally, fails the filter of service income being greater than 75% of total revenue, and (c) the company suffers from huge fluctuations which indicate that certain peculiar circumstances influencing the profit margin of the company exist, for which appropriate adjustments cannot be made to balance the effect. The Revenue is in appeal before this Tribunal only insofar as (b) above is concerned, which is the rejection of the company on failure to satisfy the service income filter, and therefore, the other grounds on which the DRP excluded the company have attained finality. We further find that the total revenue of this company from 5 different segments of the Assessee was Rs.246.75 lakhs and the segmental revenue from BPO segment was less than Rs.1 crore. The TPO considered the ERP service as also BPO service which is incorrect since ERP implementation services are not in the nature of IT enabled services which were notified by CBDT vide Notification No. SO 890(E) dated 26.09.2000. If the service income from the BPO segment alone is considered, the component of service income to the total revenue of this company is less than 75% of total operating revenue. In any event if the turnover of BPO segment is considered it is less than Rs.1 Crore and this company fails to satisfy the TPO's own filter of service revenue from the relevant segment having to be in excess of Rs. 1 crore as the revenue from the BP0 segment of the said company is Rs. 79 lakhs only. The company is therefore not comparable to the Assessee and the DRP's findings on exclusion of Jeevan are right in law and ought not to be interfered with. In this regard we find that this Hon'ble Tribunal
IT(TP) A Nos. 193, 48/Bang/2016 Page 7 of 10 in Swiss Re Shared services (India) Pvt. Ltd. v. ACIT (order dated 08.07.2016 in IT(TP)A No. 380/Bang/2016) directed the TPO to verify as to whether the TPO's filter of Sales > 1 Crore is satisfied by this company. In the present case, the DRP has examined the same and has given a finding that the filter of sales > Rs. 1 crore is not satisfied. Therefore the exclusion of this company as a comparable company by the DRP does not require any interference.
As far as exclusion of iGate Global Solutions Ltd. ("iGate") is concerned, the finding of the DRP is that i-Gate is engaged in provision of varied services and no segmental breakup of the same is available in its Annual Report. Further. the company's' software services segment is clubbed with its ITEs segment and there is no breakup between the revenues generated from the two segments. During the year under consideration, this company had acquired majority equity interest in Patni Computer Systems Ltd. rendering it incomparable due to it failing the TPO's own filter of having peculiar economic circumstances. In addition, the company owns significant intangibles in its name, which is evident from the balance sheet of the company for the Financial Year 2010-11. We are of the view that the above reasons given by the DRP for excluding this company as a comparable company is right and does not call for any interference.
As far as inclusion of Cosmic Global Ltd. in the final list of comparables is concerned, we find that this comparable company was selected by the Assessee in its TP Study and by the TPO and thus included by him in the list of comparables. In the proceedings before the DRP, the Assessee did not object to its inclusion in the list of comparables. Therefore this company is directed to be included in the list of comparable companies. For the very same reason the comparable company e4e Healtchcare Business Services Pvt.Ltd., is also directed to be included in the list of comparable companies.
IT(TP) A Nos. 193, 48/Bang/2016 Page 8 of 10 14. As far as exclusion of Infosys BPO Ltd., and Mindtree Ltd., is concerned, we find that the DRP was of the view that Infosys BPO Ltd., was a giant in the field and had huge brand value and diversified activities and therefore excluded it from the list of comparable companies. Similarly Mindtree Ltd., was excluded for the reason that this company was not functionally same as ITeS company and there were extraordinary events that took place during the relevant previous year which had effect on its margin. We find the reasoning of the DRP to be acceptable and find no grounds to take a different view.
Thus, the Revenue’s appeal is partly allowed.
As far as the Assessee’s appeal is concerned, the learned counsel for the Assessee prayed for exclusion of Accentia Technologies Ltd., and ICRA Online Ltd., from the list of comparable companies that were retained by the DRP.
As far as exclusion of Accentia Technologies Ltd., is concerned, we find that this company was excluded by the DRP for the reason that the details regarding its diverse functions were reported under one segment, without segmental details regarding the same being made available. In the absence of segmental details being made available, the comparability of the company with that of the assessee cannot be determined. In any event, Accentia is engaged in providing high end services in the nature of Knowledge Process Outsourcing ('KPO') which is evident from its annual report, whereas, the assessee is engaged in rendering routine low end information technology enabled services. Further, the said company not only does medical transcriptions, but has also ventured into healthcare receivables cycle management and high end consultancy to start-ups requiring field experts. As can be seen from the annual report, coding income is contributing 15% of the total income which activities are akin to software development activity while
IT(TP) A Nos. 193, 48/Bang/2016 Page 9 of 10 the assessee is a mere provider of IT enabled services. The company has invested huge sums in the development of EMR software. Segmental details of its various activities are unavailable. The company further owns significant intangibles. This Tribunal in the case of Swiss Re Shared India Pvt. Ltd. v. ACIT [TS-598-ITAT-2016(Bang)-TP at paras 9-20 on pages 7-21] where, in similar circumstances and for the same assessment year, this Hon'ble Tribunal directed the exclusion of this company from the list of comparables. Accentia Technologies Ltd. is, therefore, not comparable to the Assessee. We therefore direct exclusion of this company from the list of comparable companies.
As far as the company ICRA Online Ltd., is concerned, the DRP excluded this company for the reason that the details regarding its diverse functions are reported under one segment without segmental details regarding the same being made available. Therefore, the comparability of the company cannot be determined. In any event, this company is functionally dissimilar for the reason that the outsourced services segment of the company is engaged in the provision of high end consultancy services which cannot be compared to the assessee who is into provision of low end IT enabled services which are routine in nature. Further, the company fails the TPO's own filter of export turnover in excess of 75% of total sales as the export turnover of the company amount to only 61.88% of its sales. Therefore, the company cannot be held as a comparable to the assessee and the same is directed to be excluded from the list of comparable companies.
No other grounds were pressed for adjudication in Assessee’s appeal.
The TPO is directed to compute ALP in the SWD services segment, as per the directions contained in this order and after affording opportunity of being heard to the Assessee.
IT(TP) A Nos. 193, 48/Bang/2016 Page 10 of 10
In the result, the appeal of the assessee and Revenue are partly allowed.