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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER
The Appellant, M/s. Copal Research India Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 31.08.2016 passed by the Assessing Officer (AO) in consonance with the orders passed by the ld. DRP/TPO under section 254/143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2007-08 on the grounds inter alia that :-
“That on the facts and circumstances of the case, and in law:- 1. The Ld. AO following the directions of the Ld. TPO/ Hon'ble ORP erred on facts and in law in making an upward adjustment to the income of the appellant by INR 2,93,93,847 holding that the international transactions of the appellant pertaining to provision of Information Technology Enabled Services ('ITeS') does not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in: 1.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 1.2. ignoring the functions, risks and asset profile of the appellant provided in the Transfer Pricing CTP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'); 1.3. disregarding the Arm's Length Price ('ALP') as determined by the appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules and modifying/ rejecting the filters applied by the appellant; 2. The Ld. AO following the directions of the Ld. TPO/ Hon'ble ORP erred on facts and in law in including Vishal Information Technologies Ltd. and Eclerx Services Ltd. as a comparable in the final set of comparables which has been held to be not comparable to the appellant in its own case for AY 2009-10 by the Hon'ble Income-tax Appellate Tribunal; 3. The Ld. AO following the directions of the Ld. TPO Hon'ble DRP erred on facts and in law in including certain other companies as comparable without appreciating that they are not comparable to the appellant keeping in view their functional, asset and risk profile; and 4. The Ld. AO following the directions of the Ld. TPO Hon'ble ORP erred on fact and in law by committing a number of computational error in the operating profit mark-up of the selected comparables.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Copal Research India Pvt. Ltd., the taxpayer is a subsidiary of Copal Research Ltd., Mauritius, which is engaged into providing IT Enabled Services (ITES) (Back Office Support Services in the nature of providing research support services) in the nature of Business Information/data gathering, Data mining/entry to its Associated Enterprises (AE). During the year under assessment, the taxpayer entered into international transactions as per Form 3CEB with its AE as under :-
Nature of transaction Value of international transaction Provision of IT Enabled Services 329,980,600
In the first round of litigation, Transfer Pricing Officer (TPO) rejected the TP study undertaken by the taxpayer and by applying quantitative and qualitative filters, proposed TP adjustment of Rs.36,13,36,377/- on account of provisions of ITES by the taxpayer. Then, taxpayer approached Disputes Resolution Panel (DRP) by filing objections which have been disposed off with certain directions. Feeling aggrieved, the taxpayer approached the Tribunal which has disposed off the appeal vide order dated 08.05.2015 by remanding the matter back to ld. DRP to pass a speaking order after dealing with all the contentions raised by the taxpayer.
In the second round of litigation/proceedings before the ld. DRP, correction of margins of certain comparables were ordered but taxpayer’s contention of inclusion/exclusion of certain comparables was declined.
Post-DRP directions, 27 comparable companies were selected to benchmark the international transactions with mean margin of 28.54% minus working capital adjustment of 2.17% and as such the mean margin comes to 26.39%. Accordingly, AO passed final assessment order making adjustment on account of Arm’s Length Price (ALP) at Rs.2,93,93,847/-.
Feeling aggrieved, the taxpayer has again come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Undisputedly, TP adjustment has been made by the AO at Rs.2,93,93,847/- post directions issued by the ld. DRP on the basis of 27 comparables with margin of 26.39% (mean margin of 28.54% minus working capital adjustment of 2.17% = 26.39%) as against mean margin of the taxpayer at 16.06%. Final set of comparables post-DRP directions are extracted as under for ready perusal :-
S.No. Name of the company Margins 1 Accentia Technologies Ltd. (Segmental 30.61% 2 Aditya Birla Minacs Worldwide Ltd. 11.98% 3 Allsec Technologies Ltd. 27.31% 4 Apex Knowledge Solutions Pvt. Ltd. 12.83% 5 Apollo Healthstreet Ltd. 14.04% 6 Asit C. Mehta Financial Services Ltd. 24.21% 7 Bodhtree Consulting Ltd (Segmental) 29.58% 8 Caliber Point Business Solutions Ltd 21.26% 9 Cosmic Global Ltd. 12.40% 10 Datamatics Financial Services Ltd 5.07% (Segmental) 11 Eclerx Services Ltd. 89.33% 12 Flextronics Software Systems Ltd 8.62% (Segmental) 13 Genesys International Corporation Ltd 13.35% 14 H C L Comnet Systems & Services Ltd 44.99% (Segmental) 15 I C R A Techno Analytics Ltd (Segmental) 12.24% 16 Informed Technologies India Ltd 35.56% 17 Infosys B P O Ltd 28.78% 18 I Services India Pvt Ltd 49.47% 19 Maple Esolutions Ltd. 34.05% 20 Mold-Tek Technologies Ltd (Segmental) 113.49% 21 R Systems International Ltd (Segmental) 20.18% 22 Spanco Ltd. (Segmental) 25.81% 23 Triton Corp Ltd. 34.93% 24 Vishal Information Technologies Ltd 51.19% (Coral Hub Limited) 25 Wipro Ltd. (Segmental) 29.70% 26 Nittany Outsourcing Services Ltd. 11.50% 27 Cameo Corporate Services Ltd. 6.28% Arithmetic Mean 28.54% Work Cap Adjustment 2.17% 26.39%
12. The Ld. Assessing Officer (AO) accordingly passed final assessment order enhancing the returned income of the Appellant by Rs.2,93,93,847.”
It is not in dispute that Transactional Net Margin Method with OP/TC as PLI used by the taxpayer as Most Appropriate Method (MAM) to benchmark the international transactions has been accepted by the ld. DRP. It is also not in dispute that working capital adjustment has already been granted by the ld. DRP to the taxpayer. It is also not in dispute that the taxpayer is providing routine ITES to its AE on cost plus mark up basis.
In the backdrop of the aforesaid facts and circumstances of the case, ld. AR for the taxpayer contended that the taxpayer only challenges inclusion of six comparables by the TPO/DRP and in case, all the six comparables, namely, Asit C. Mehta Financial Services Ltd., Eclerx Services Ltd., Maple Esolutions Ltd., Mold- Tek Technologies Ltd (Segmental), Triton Corp Ltd. & Vishal Information Technologies Ltd (Coral Hub Limited), are excluded, the taxpayer would be at arm’s length. We would examine the suitability of the aforesaid comparables vis-à-vis the taxpayer for benchmarking the international transactions as under.
VISHAL INFORMATION TECHNOLOGIES LTD. (VISHAL) 11. This is TPO’s comparable, which the taxpayer has challenged on ground of functional dissimilarity having distinct business model and relied upon the decisions in Copal Research India Pvt. Ltd. vs. ITO in PCIT vs. Copal Research India Pvt. Ltd. in ITA 894/2015, UT Starcom Inc.
((India Branch) vs. DDCT in UT Starcom Inc. (India Branch) in ITA 767/2017 and ICC India Pvt. Ltd. vs. DCIT in ITA No.25/Del/2012).
Perusal of the annual report of Vishal, available at pages 23 to 39 of the paper book, shows that Vishal is functionally dissimilar vis-à-vis the taxpayer as it has been providing agency services by way of outsourcing the services to third party vendors and has not been acting as intermediately between final customer and vendor which fact is proved from vendor payment charges as a percentage of sales. Vendor’s payment as a percentage of sale for Vishal is 54.41%, 44.81%, 42.88%, 67.37% & 66.00% for AY 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 respectively as against Vishal’s personnel cost as a percentage of sale is 0.95%, 1.25%, 2.3%, 2.93% & 2.00% for AY 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 respectively.
Similarly, annual report further shows that Vishal is incurring substantial outsourcing expenses which is 42.88% of the sales with meager employee cost of 2.30% whereas employees cost of taxpayer is 51.85% approximately of the operating cost.
Ld. DR for the Revenue relied upon the order passed by the ld. DRP and contended that all the contentions raised by the ld. AR for the taxpayer has been extensively dealt with by the ld. DRP.
Vishal has been ordered to be excluded as a comparable vis-à-vis the taxpayer’s own case passed by the coordinate Bench of the Tribunal in for AY 2009-10 order dated 08.05.2015, available at pages 1 to 18 of the paper book, which has been upheld by the Hon’ble High Court of Delhi in ITA 894/2015 order dated 23.11.2015. Moreover, suitability of Vishal as a comparable vis-à-vis routine ITES provider has been examined by the Hon’ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. vs. CIT (2015) 60 txmann.com 355 (Delhi) and ordered to be excluded by returning following findings :-
“20. In order for the benchmarking studies to be reliable for the purposes of determining the ALP, it would be essential that the entities selected as comparables are functionally similar and are subject to the similar business environment and risks as the tested party. In order to impute an ALP to a controlled transaction, it would be essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in all material aspects that have any bearing on the value or the profitability, as the case may be, of the transaction. Any factor, which has an influence on the PLI, would be material and it would be necessary to ensure that the comparables are also equally subjected to the influence of such factors as the tested party. This would, obviously, include business environment; the nature and functions performed by the tested party and the comparable entities; the value addition in respect of products and services provided by parties; the business model; and the assets and resources employed. It cannot be disputed that the functions performed by an entity would have a material bearing on the value and profitability of the entity. It is, therefore, obvious that the comparables selected and the tested party must be functionally similar for ascertaining a reliable ALP by TNMM. Rule 10B(2) of the Income Tax Rules, 1962 also clearly indicates that the comparability of controlled transactions would be judged with reference to the factors as indicated therein. Clause (a) and (b) of Rule 10B(2) expressly indicate that the specific characteristics of the services provided and the functions performed would be factors for considering the comparability of uncontrolled transactions with controlled transactions.
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In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal’s expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one’s own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity.”
Moreover, when the taxpayer has not undergone any change in the business model then AY 2009-10 in which year Vishal has been found to be not a suitable comparable which order has been upheld by the Hon’ble Delhi High Court in taxpayer’s order case for AY 2009-10 (supra).
In view of the matter, we are of the considered view that Vishal is not a suitable comparable vis-à-vis taxpayer on ground of functional dissimilarity and distinct business model, hence we order to exclude it from the final set of comparables.
ECLERX SERVICES LTD. (ECLERX)
This is again TPO’s comparable which the taxpayer has sought to exclude on ground of functional dissimilarity and relied upon the decision rendered by the Tribunal in taxpayer’s own case for AY 2009-10 (supra), which has been confirmed by the Hon’ble Delhi High Court. The taxpayer also relied upon the decisions of Rampgreen Solutions Pvt. Ltd. vs. CIT (2015) 60 txmann.com 355 (Delhi) and ICC India Pvt. Ltd. vs. DCIT in ITA No.25/Del/2012).
Ld. DR for the Revenue relied upon the order passed by the ld. DRP and contended that all the contentions raised by the ld. AR for the taxpayer has been extensively examined by the ld. DRP.
When we examine annual report of Eclerx, available at pages 1 to 22 of the annual report compendium, it shows that Eclerx has been providing data analytics services, operations management services and audit & reconciliation services whereas the taxpayer is into routine ITES. Eclerx has been ordered to be excluded in taxpayer’s own case for AY 2009-10 by the Tribunal which has been upheld by the Hon’ble Delhi High Court vide order dated 23.11.2015 (supra) by returning following findings :-
“11. We have considered the submissions of both the parties and have perused the record of the case. We find that in the case of Maersk Global Centres (India) Pvt.
Ltd., which company was, inter alia, engaged in the business as shared service centre and rendering transaction processing, data entry, reconciliation of statements, audit of shipping documents and other similar support services; and also rendering I.T. services such as process support, process optimization and technical support services, the Tribunal in para 82 of its order observed as under: “In so far as M/s eClerx Services Limited is concerned, the relevant formation is available in the form of annual report for financial year 2007 - 08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. t is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals – financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns.” 11.1. We find that the assessee also cannot be said to have relatable degree of comparability because primarily assessee was engaged in providing primary data for various field of activities but not complete business solutions. Therefore, this company could not be treated as comparable for the purpose of determining ALP of the transactions between the assessee company with its AEs. We, accordingly, direct that this company be excluded from the list of comparables finally taken by the AO/ TPO as per the direction of the DRP.”
Suitability of Eclerx has also been examined and excluded by the Hon’ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. (supra) vis-à-vis routine ITES provider on ground of functional dissimilarity. In view of the matter, we are of the considered view that Eclerx is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded.
MOLD-TEK TECHNOLOGIES LTD. (SEGMENT) (MOLD-TEK)
The taxpayer challenged Mold-Tek before TPO as well as DRP on ground of functional dissimilarity and growth/extra ordinary circumstances/acquisition; that it has abnormally high margin having low employee cost/sales ratio and has already been rejected by the ld. DRP in taxpayer’s own case for AY 2008-09.
Ld. DR for the Revenue relied upon the order passed by the ld. DRP and contended that all the contentions raised by the ld. AR for the taxpayer has been extensively examined by the ld. DRP.
When we examine the functional profile of Mold-Tek, it is proved that it is into the business of rendering structural engineering KPO services in the nature of producing designs, drawings, detailed structural engineering drawings etc. whereas the taxpayer is a routine ITES (back office services in the nature of providing research support services) Furthermore, during the year under assessment, Mold-Tek has achieved super-normal growth of 250% qua the KPO Division and it has also AMP expenses of 5.13% of sales. Furthermore, Mold-Tek is having low employee cost/sales ratio which is 12.93% as compared to the wages/sales ratio of 51.85% of the taxpayer.
Mold-Tek has been rejected by the ld. DRP in taxpayer’s own case for AY 2008-09 vide order dated 21.08.2012, copy available at pages 253 of the paper book. When it is undisputed fact that there is no change in the business model of the taxpayer, so the rule of consistency has to be followed by the Revenue.
Mold-Tek has also acquired abnormal growth rate during the year under assessment which has apparently led to high margin of 250%. So, we are of the considered view that Mold-Tek cannot be a suitable comparable on ground of functional dissimilarity and it has gone into acquisition having abnormally high margin and low employee cost ratio/sales ratio as all these factors are direct indicator of enhancing the profit margin, hence we order to exclude the same.
ASIT C. MEHTA FINANCIAL SERVICES LTD. (SEGMENTAL) (ASIT C. MEHTA) 27. This is TPO’s comparable. The taxpayer challenged the inclusion of Asit C. Mehta on the grounds inter alia that it is functionally dissimilar; that segmental financials are not available; that it has significant advertisement expenditure and relied upon the decision of NTT Data Global Delivery Services Ltd. vs. ITO (2018) 96 taxmann.com 181 (Delhi-Trib.). However, the TPO retained this comparable on the ground that the company cannot be rejected on the basis that it is into KPO or BPO and moreover, the taxpayer has not gone into verticals of comparables.
Ld. DR for the Revenue relied upon the order passed by the ld. DRP and contended that all the contentions raised by the ld. AR for the taxpayer has been extensively dealt with by the ld. DRP.
Ld. DRP also retained this comparable by ratifying the findings given by the TPO. Annual report of Asit C. Mehta now known as Nucleus Netsoft and GIS India Ltd., available at pages 288 to 365 of the paper book, shows that Asit C. Mehta is engaged in advertising business as it has earned income from ITES and software services, portfolio management and investment activities, whereas its segmental are not available as is evident from profit & loss account, relevant page 312 of the paper book. Furthermore, during the year under assessment, Asit C. Mehta has undergone amalgamation with Nucleus Netsoft & GIS India Ltd. w.e.f. April 1, 2005 with its assets of Rs.39,541,385, liabilities of Rs.6,449,847, capital reserves Rs.16,287,405 and revenue reserve of Rs.1,686,933. Furthermore, it has also come on record that employee cost with Asit C. Mehta is merely 23 % of the total cost whereas in ITES employee cost is a significant factor which also makes it dissimilar vis-à-vis the taxpayer.
Suitability of Asit C. Mehta has been examined by the coordinate Bench of the Tribunal in the case of NTT Data Global Delivery Services Ltd. (supra), available at pages 58 to 67 of the case laws compendium, vis-à-vis ITES service provider and has been ordered to be excluded on ground of diversified activities like brokerage, commission, arbitrage, trading in securities, premium on equity index option, equity stock option etc. So, in view of the aforesaid facts and following the decision rendered by the coordinate Bench of the Tribunal in NTT Data Global Delivery Services Ltd. (supra), we find that Asit C. Mehta is not a suitable comparable vis-à-vis the taxpayer on ground of functional dissimilarity, non-availability of segmental and on ground of amalgamation, so we order to exclude Asit C. Mehta from the final set of comparables.
MAPLE ESOLUTIONS LTD. (MAPLE) And TRITON CORP LIMITED (TRITON) 31. The taxpayer challenged the inclusion of Maple on grounds inter alia that it has undergone extra-ordinary events with merger of Triton Corp with Maple on January 1, 2007; that its functional data is not reliable as its promoters were involved in a fraud; that the company has shown volatile margin and relied upon the decisions of UT Starcom Inc. and ICC India Pvt. Ltd. (supra).
Ld. DR for the Revenue relied upon the order passed by the ld. DRP and contended that all the contentions raised by the ld. AR for the taxpayer has been extensively examined by the ld. DRP.
Triton is also stated to be functionally dissimilar being engaged in sale of IT Peripherals and on the ground that its segmental is not available. Perusal of the annual report, available at page 130 of the paper book, shows that segmental is not available to show the income and expenditure in IT as well as ITES. Moreover, Triton has been excluded by the TPO himself in taxpayer’s own case for AY 2008-09 when undisputedly there is no change in the business model of the Triton. So, we order to exclude Triton from the final set of comparables.
Coordinate Bench of the Tribunal examined the suitability of Maple in UT Starcom Inc. for AY 2007-08 (supra) vis-à-vis routine ITES provider and has ordered to be excluded on the ground that its financials are not reliable being owned by Rastogi Group, which was under serious indictment for financial irregularities committed by the Directors. Hon’ble Delhi High Court has confirmed the findings returned by the Tribunal.
Moreover, coordinate Bench of the Tribunal examined the suitability of Maple in ICC India Pvt. Ltd. for AY 2007-08 (supra) vis-à-vis routine ITES provider and has ordered to exclude it on ground of merger and acquisition during the year under assessment as Triton has acquired 100% share of Maple and promoters were involved in fraud for earlier years and as such, its financials are unreliable. So, following the aforesaid decisions of the coordinate Bench of the Tribunal, we are of the view that Maple is not a suitable comparable vis-à-vis the taxpayer on account of merger and on the ground that its promoters have been indicted in fraud and distorted unreliable financials. So, we order to exclude Maple it from the final set of comparables.
35. Resultantly, the appeal filed by the taxpayer is allowed. Order pronounced in open court on this 30th day of October, 2019.