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Income Tax Appellate Tribunal, BANGALORE BENCHES “ A ” BENCH: BANGALORE
Before: SHRI A.K. GARODIA & SHRI GEORGE GEORGE K
O R D E R
PER SHRI GEORGE GEORGE K, JM :
This appeal at the instance of Revenue is directed against the assessment order dt.27.01.2016, passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 ('the Act'), in pursuance to the directions of Dispute Resolution Panel (‘DRP’). The relevant Assessment Year is 2011-12.
2 IT(TP)A No.487/Bang/2016 2. The learned Authorised Representative at the time of hearing had argued only Ground Nos.7, 8 & 12. The Ground Nos.7, 8 & 12 read as follows :
“ 7. a) The authorities below erred in treating Accentia Technologies Ltd. as a comparable company though it is functionally different from the appellant on the facts of the case. b) The authorities below erred in treating Acropetal Technologies Ltd. as a comparable company though it is functionally different from the appellant on the facts of the case. c) The authorities below erred in treating ICRA Online Ltd. as a comparable company though it is functionally different from the appellant on the facts of the case. d) The authorities below erred in treating Jeevan Scientific Technology Ltd. as a comparable company on the facts of the case. e) The authorities below further erred in not giving effect to the directions of the DRP with regard to the discrepancies that existed in the figures adopted for computing the margin of the comparable M/s. Jeevan Scientific Technologies Ltd. and thus the comparable needs to been rejected even on this ground. f) The learned DRP erred in not considering the submissions made by the appellant with regard to functionality of the comparables which is sine qua non for passing the order and thus the order passed needs to be set aside on the facts and circumstances of the case.
8. a) The TPO, DRP and the Assessing Officer erred in not reducing the working capital adjustment of 1.47% from the final ALP margin though the TPO had specifically provided for the same as per TP order. b) Without prejudice, the Working Capital Adjustment that ought to have been provided at 1.47% is very low and needs to be substantially enhanced on the facts of the case.
12. The assessing officer erred in not following the directions of the DRP to exclude such comparables which do not fall within the turnover filter of 1-200 crores which amounts to judicial indiscipline and therefore the order of assessment passed needs to be set aside on the facts of the case.”
3. The assessee has also filed additional grounds which read as follows :
3 IT(TP)A No.487/Bang/2016 “ 1. The comparable M/s. Mindtree Ltd. originally selected by the appellant needs to be excluded as it fails the turnover filter of 1-200 Crores as well as 10 times multiple under the facts and circumstances of the case.
The comparable M/s. Acropetal Technologies Ltd. originally selected by the appellant needs to be excluded as the company is functionally different from the appellant and segmental information is not available under the facts of the case.
The comparable M/s. Accentia Technologies Ltd. originally selected by the appellant needs to be excluded as the company is functionally indifferent on the facts of the case.
4. The appellant craves leave to add, alter, delete or substitute any of the grounds urged above.
In view of the above and other grounds that may be urged at the time of the hearing, the appellant prays that the objections be considered in the interest of equity and justice.” 3.1 The learned Counsel for the assessee submitted that the above additional grounds raised
are not urged specifically in the original grounds of appeal at the institution of the appeal. However, these grounds do not involve any new investigation of facts otherwise on record. Therefore, it is prayed that the additional ground may be admitted for advancement of substantial cause and justice. In this context, the learned Counsel for the assessee relied on the judgment of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. Vs. CIT reported in 229 ITR 383 (SC) and decision of Hon'ble Mysore High Court in the case of Gundathur Thimmappa & Sons Vs. CIT reported in 70. ITR
70. (Mysore).
4 IT(TP)A No.487/Bang/2016 3.2. The additional grounds raised does not require investigation of any new facts. All the facts for adjudication of the additional grounds are on record. Therefore for advancement of substantial cause and justice in the light of the judgment of the Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. (supra), the additional grounds are admitted for adjudication.
The brief facts are as follows :
The assessee is an Indian company engaged in the business of rendering back office and related services including invoicing, collection, administration, support services includes customer services, ticketing, contract loading etc. to its Associated Enterprises (AEs) i.e. ;TRX Inc, USA, TRX Europe Limited and TRX Germany GmbH, Germany (herein referred to as AEs). The services rendered by the assessee to its AEs is predominantly related to travel and tourism industry. The assessee is also engaged in providing software maintenance support to TRX portfolio of software products and solutions which is essential an ITES. For the Assessment Year 2011-12, the Return of Income was filed on 30.09.2011, declaring total income of Rs.28,81,107, after claiming deduction under Section 10A of the Income Tax Act, 1961 ('the Act') amounting to Rs.2,94,52,337. As per the 92CE Report, the assessee has entered into international transactions with its 5 IT(TP)A No.487/Bang/2016 AEs amounting to Rs.20,71,82,109 (both software support services and business support services). The net margin of the assessee company was calculated in the TP Study at 16.08% (Operating Margin) whereas the net margin of the comparable companies selected by the assessee in its TP Study was calculated at 9.59%. Therefore it was submitted that the margin of the international transactions of the assessee with its AEs be accepted as Arm’s Length in the facts and circumstances of the case.
5) The assessment was taken up for scrutiny and in the course of assessment proceedings the matter was referred to the Transfer Pricing Officer (TPO). The TPO rejected some of the comparables selected by the assessee, included some new comparables and arrived at Arm’s Length Price (‘ALP’) margin of 24.77% for the year under consideration. The TPO after providing for Working Capital Adjustment of 0.13%, proposed ALP adjustment of Rs.1,83,99,556. The final set of 10 comparables considered by the TPO and its operating profit to operating cost are as follows :
Sl. Name of the case Operating Operating cost OP/OC No. Income 1 Accentia Technologies 1,069,026,524 82,93,91,898 28.89% Ltd.
6 IT(TP)A No.487/Bang/2016 2 Acropetal 494,399,332 389,706,574 26,86% Technologies 3 Cosmic Global Ltd. 62,499,615 5,69,15,360 9.81% 4 E4e Healthcare 613,160,587 54,56,25,872 12.38% (capitaline) 5 I C R A Online Ltd. 156,691,000 11,67,49,267 34.21% (Seg.) 6 JeevanScientific 1,721,400,000 1,00,86,52,592 70.66% Technology Ltd. 7 Infosys BPO Ltd. 11,291,147,909 9,57,73,24,546 17.89% 8 Jindal Intellicom 390,358,799 35,12,69,641 11.13% (capitaline) 9 Mindtree Ltd. (Seg.) 65,653,000,000 5,10,39,05,999 10.76% 10 iGate Global Solutions 11,845,540,000 9,47,11,65,000 25.07% Ltd. Average Margin 24.77%
The assessee filed objections to the assessment order before the DRP. The DRP directed the TPO to exclude the comparables which do not pass the turnover filter of Rs.1 to 200 Crores. The DRP also directed the AO / TPO to check discrepancies in the figure of comparables. However the final assessment order
7 IT(TP)A No.487/Bang/2016 under Section 143(3) r.w.s. 144C of the Act was passed on 27.01.2016, adopting the ALP adjustment proposed by the TPO at Rs.1,83,99,556.
Aggrieved by the assessment order dt.27.01.2016, the assessee has filed this appeal before the Tribunal. The assessee has filed a Paper Book comprising of 372 pages, inter alia enclosing therein the Return of Income, computation statement, audited financial statements, copies of service agreements entered into by the assessee with its AEs, annual report of comparable companies, etc. The learned Authorised Representative submitted that though M/s. Acropetal Technologies Limited (Seg.), M/s. Accentia Technologies Limited and M/s. Mindtree Limited (Seg.) were selected by the assessee in its TP Study, the same needs to be excluded from the list of comparables. It was stated that M/s. Mindtree Limited needs to be excluded as it fails the turnover filter of Rs.1 to 200 Crores as well as 10 times multiple ratio. As regards M/s. Acropetal Technologies Limited (Seg.) and M/s. Accentia Technologies Limited, it was submitted that the above companies are functionally different. It was further contented that in the case of Acropetal Technologies Limited, segmental information is not available. As far as Infosys BPO Limited, Mindtree Limited and Jeevan Scientific Technology Limited are concerned, it was submitted that the Assessing Officer in its final assessment order had not complied with the directions of the DRP and has included the above
8 IT(TP)A No.487/Bang/2016 companies in list of comparables. Further the learned Authorised Representative relied on the order of Bangalore Bench of Tribunal in the case of Aspect Technology Centre (India) Pvt. Ltd. Vs. ITO (ITA No.187/Bang/2016 order dt.30.07.2020) for the proposition that Accential Technologies Limited, Acropetal Technologies Limited, Jeevan Scientific Technology Limited and ICRA Online Ltd. (Seg.) need to be excluded from the list of comparables.
The learned Departmental Representative has relied on the order of the Delhi Bench of Tribunal in the case of E-Valueserve SEZ (Gurugaon) P. Ltd. Vs. ACIT (ITA No.5147/Del/2017 Dt.28.03.2018) for the proposition that comparables selected by the assessee in its TP Study cannot be disregarded by the assessee when there is no functional dissimilarity.
In the rejoinder, the learned Authorised Representative relied on the latest order of the Bangalore Bench of Tribunal in the case of Nvidia Graphics (P) Ltd. Vs. CIT (2020) 116 taxmann.com 909 (Bang – Trib). It was submitted that the Bangalore Bench of Tribunal order has followed the Special Bench order of the Tribunal in the case of DCIT Vs. Quark Systems Pvt. Ltd. (2010) 38 SOT 307 (Chandigarh) (SB) wherein it was held that comparable companies chosen by the 9 IT(TP)A No.487/Bang/2016 assessee in the TP Study can be sought to be excluded before the Tribunal on account of functional dissimilarity or other valid point.
We have heard both the parties and perused the material on record. In the TP Study, the assessee has selected 3 comparables i.e. M/s. Acropetal Technologies Limited (Seg.), M/s. Accentia Technologies Limited and M/s. Mindtree Limited (Seg.). In appeal before us, assessee contents (through additional grounds) that the above comparables are to be excluded, because these comparables were included on inappropriate appreciation of facts during the TP Study. The co-ordinate Bench of Bangalore Tribunal in case of Aspect Technology Centre (India) Pvt. Ltd. (supra) and in the case of M/s. Swiss Re Shared Services India Pvt. Ltd. Vs. ACIT reported in 76 taxmann.com 22 had directed to exclude M/s. Acropetal Technologies Ltd. and Accentia Technologies Limited from the list of comparables as these companies were functionally different from ITES segment. Further, in light of jurisdictional Tribunal order in case of ITO Vs. Maxim India Integrated Circuits Design Pvt. Ltd. in dt.13.03.2016, M/s. Mindtree Limited does not pass the turnover filter of Rs.1 to 200 Crores as well as 10 times multiple. The assessee did not have the benefit of these decisions at the time of TP Study. Therefore in the light of the order of Special Bench of Tribunal in the case of DCIT Vs. Quark Systems Pvt.
10 IT(TP)A No.487/Bang/2016 Ltd. (supra), we are of the view that the assessee can retract from its TP Study and contend that comparables selected by it are to be excluded on account of functional dissimilarity or other valid reason. A similar view was held by the Bangalore Bench of the Tribunal in the case of Nvidia Graphics (P) Ltd. Vs. CIT (supra), the relevant finding of the Tribunal reads as follows :
“ 10. All the aforesaid companies were chosen by the assessee in its TP analysis as a comparable company. Even before the CIT(A), the assessee had not chosen to challenge the aforesaid companies being considered as a comparable company. However the Special Bench, ITAT, Chandigarh, in the case of DCIT Vs. Quarks Systems Pvt. Ltd., 42 DTR 414 (Chandigarh-SB) has held that there cannot be estoppel against law and that non-comparable companies even if selected by the assessee in TP study can be sought to be excluded by the assessee based on functional comparability or other valid reasons. In view of the aforesaid decision of the special Bench, we admit the additional ground for adjudication.”
The order of the Delhi Bench of the Tribunal relied on by the ld.DR in the case of E-Valueserve SEZ (Gurgaon) P. Ltd. Vs. ACIT (supra) is distinguishable on facts. In the case considered by the Delhi Bench of Tribunal, the assessee in that case could not give any valid reason why it want to exclude certain comparables which itself has selected in its TP Study. In other words, the assessee in the case considered by the Delhi Bench of Tribunal could not demonstrate how the comparable chosen in its TP Study was functionally dissimilar. Whereas in the instant case, the jurisdictional Tribunal on similar set of facts and for the same assessment year has held that comparables sought to be excluded now by the 11 IT(TP)A No.487/Bang/2016 assessee are functionally dissimilar and in the case of Mindtree Limited, it does not satisfy the turnover filter. Therefore, we hold that the assessee is justified on the facts and circumstances of the case to retract from its TP Study and content that M/s. Acropetal Technologies Limited (Seg.), M/s. Accentia Technologies Limited and M/s. Mindtree Limited (Seg.) are to be excluded from the list of comparables.
The assessee is contending to exclude from the list of comparables M/s. Acropetal Technologies Limited (Seg.), M/s. Accentia Technologies Limited, ICRA Online Ltd. and Jeevan Scientific Technology Limited. In similar circumstances and for the same assessment year, the jurisdictional Tribunal in the case of Aspect Technology Centre (India) Pvt. Ltd. Vs. ITO (supra) has held that the above companies are functionally dissimilar and cannot be taken as a comparable. The relevant finding of the Tribunal in the case of Aspect Technology Centre (India) Pvt. Ltd. Vs. ;ITO (supra) reads as follows :
“ 41. We have heard the rival submissions of the parties. As far as Gr.No.14 of the revenue’s appeal is concerned, the Revenue is seeking the inclusion of Acropetal Technologies Ltd., Jeevan Scientific Technology Ltd., Accentia Technologies Ltd., iGate Global Solutions Ltd. and ICRA Online Ltd. We find that the above companies were rightly rejected by the DRP and the same requires no interference from this Hon’ble Tribunal. We find that Acropetal Technologies Ltd., is engaged in the business of software development and services, contract centre service and IT enabled services and the same are reported together as one segment. In the absence of segmental details made available, the company could not be treated as a comparable. The TPO, while choosing the company as a comparable, has selected its Engineering Design Segment (‘EDS’ for short) which is in the nature of high end IT enabled services which are in the nature of Knowledge Process
12 IT(TP)A No.487/Bang/2016 outsourcing (“KPO”). The high end services provided by the company cannot be compared with the routine services provided by the Assessee. This Is a settled position and reliance can be placed on the decision of this Hon’ble Tribunal’s in the case of Symphony Marketing Solutions India Pvt. Ltd.(ITA No. 1316/Bang/2012) where it was held that Acropetal cannot be considered as a comparable to assessees performing routine low end IT enabled services function. As far as exclusion of company Jeevan Scientific Technology Ltd., we find that this company was rejected by the DRP for the reason that it was engaged in diverse functions and the same were reported under one segment without segmental details regarding the same being made available. The DRP is right in excluding the company as without segmental details, the comparability of the company cannot be determined. In any event, the ERP segment of the company is not comparable to the assessee, the BPO segment of the company fails the filter of service income being greater than 75% of total revenue, and 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. It is submitted that the 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 BPO segment is considered, the 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 BPO segment of the said company is Rs. 79 lakhs only. The company is therefore not comparable to the Assessee. This Tribunal in the case of 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, as can be seen from the annual report of the company the sale of the company in respect of the BPO segment amounts to only 79 lakhs, and therefore it fails the TPO’s filter. 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 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 and was rightly rejected as a comparable. As far as iGate Global Solutions Ltd., is concerned, DRP rejected this company as comparable 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. It is seen that iGate is engaged in provision of varied services and no segmental breakup of the same is available
13 IT(TP)A No.487/Bang/2016 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, the company has 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. For the reasons above, the company is not comparable to the Assessee and the DRP’s findings on exclusion of iGate is right in law. 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.”
Since the profile of the assessee and that of the Aspect Technology Centre (India) Pvt. Ltd. Vs. ITO (supra) being similar and the assessment year being the same (i.e. A.Y. 2011-12), we follow the co-ordinate Bench of the Tribunal in the case of Aspect Technology Centre (India) Pvt. LTd. Vs. ITO (supra) and direct the AO / TPO to exclude M/s. Acropetal Technologies Limited (Seg.), M/s. Accentia Technologies Limited, ICRA Online Ltd. and Jeevan Scientific Technology Limited from the list of comparables.
The DRP in its direction dt.28.12.2015 has held that the companies with turnover of lower than Rs.1 Crore and higher than Rs.200 Crores should be 14 IT(TP)A No.487/Bang/2016 excluded from the comparability analysis (refer page 4 of DRP direction). However, the directions of the DRP was not followed by the AO / TPO and ALP adjustment proposed by the TPO was included in the final assessment order. In the absence of the appeal by the revenue, the directions of the DRP has become final. The assessee's turnover is Rs.23.76 Crores. Therefore, the AO / TPO is directed to examine whether Infosys BPO Ltd., Mindtree Limited and I-Gate Global Solutions Ltd. are to be excluded on account of DRP direction on turnover filter. In the light of above, the Ground No.7 is allowed and Ground No.12 is restored to AO / TPO.
In ground No.8, the learned Authorised Representative contended that AO / TPO erred in not reducing the Working Capital Adjustment of 1.47% from the final list of ALP margin. It was stated that the TPO has specifically provided for 1.47 % as per the TPO order (Page 20 of TPO’s order) however while computing the ALP, the TPO adopted Working Capital Adjustment of only 0.13%. We are of the view that this issue ought to have been raised in a Rectification Application. Moreover, the assessee has not contended before the DRP that the Working Capital Adjustment ought to be 1.47% instead of 0.13% granted by the TPO while
15 IT(TP)A No.487/Bang/2016 computing the ALP. Therefore Ground No.8 raised is rejected. It is ordered accordingly.
In the result, the appeal of the assessee is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.