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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’, NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
Date of hearing 08.08.2019 Date of pronouncement 16.09.2019 ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against final assessment order dated 26/09/2018 passed by the Deputy Commissioner of Income Tax, Circle 16(2), New Delhi (hereinafter will be referred as ‘the Assessing Officer’) for assessment year 2014-15, pursuant to the direction issued by the learned Dispute Resolution Panel (DRP). 2. The grounds raised by the assessee in the appeal are reproduced as under:
1. On the facts and in the circumstances of the case, the learned TPO / AO / DRP have erred in making an addition of INR 33,11,82,383 to Appellant in respect of provision of Research and Information (‘R&I’) services, provision of IT support services and notional interest on inter-company receivables arising from provision of R&I services and IT support services.
On the facts and in the circumstances of the case, the learned TPO /AO / Hon’ble DRP have erred in not accepting the economic analysis undertaken by the Appellant in accordance with provisions of the Act read with the Income-tax Rules, 1962 (‘the Rules5) and modifying the same for determination of arm’s length price (“ALP”) of the impugned transactions to hold that the same are not at arm’s length.
On the facts and in the circumstances of the case, the learned TPO /AO / Hon’ble DRP have erred in not accepting the use of multiple year data, as adopted by the Appellant in its transfer pricing documentation and determining the arm’s length margins / prices using data pertaining only to financial Year (‘FY’) 2013-14 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements.
On the facts and in the circumstances of the case, the learned TPO / AO have erred by wrongly rejecting certain companies from and adding certain companies to the final set of comparables for the impugned international transactions on an ad-hoc basis, thereby resorting to cherry picking of comparables for benchmarking the impugned international transactions.
5. On the facts and in the circumstances of the case, the learned TPO /AO have erred in excluding Inmacs Management Services Limited from the final set of comparables used for benchmarking the international transaction of provision of R&I services, which is against the directions passed by the Hon’ble DRP.
6. On the facts and in the circumstances of the case, the learned TPO / AO / Hon’ble DRP have erred in including Aditya Birla Capital Advisors Private Limited in the final set of comparables for benchmarking the international transaction of provision of R&I services, even though the said company is functionally not comparable and earns supernormal profits as compared to the Appellant.
7. On the facts and in the circumstances of the case, the learned TPO / AO have erred in including ICRA Online Limited in the final set of comparables for benchmarking the international transaction of provision of R&I services, even though The same has already been rejected by the learned TPO in the transfer pricing order on account of it being functionally not comparable and earns supernormal profits as compared to the Appellant.
8. On the facts and in the circumstances of the case, the learned TPO / AO have erred in not granting benefit of second proviso to Section 92C(2) of the Act while computing the arm’s length margin for benchmarking the international transaction of provision of IT support services, pursuant to which the transfer pricing adjustment made on account of this international transaction should be deleted.
On the facts and in the circumstances of the case, the learned TPO / AO / Hon’ble DRP have erred by not considering gains / losses arising out of foreign exchange fluctuations as operating in nature while computing the operating margins of the assessee as well as comparable companies while benchmarking the impugned international transactions. 10. On the facts and in the circumstances of the case, the learned TPO / AO have erred in passing orders which suffered from several computational errors in determination of ALP, and consequently, erred in computing the amount of adjustment to be made in respect of the impugned international transactions. 11. On the facts and in the circumstances of the case, the learned TPO / AO / Hon’ble DRP have erred by not making appropriate adjustments to account for differences in working capital employed by the assessee vis-a-vis the comparable companies while benchmarking the impugned internaTional transactions. 12. On the facts and in the circumstances of the case, the learned TPO / AO / Hon’ble DRP have erred by not making suitable adjustments to account for differences in the risk profile of the assessee vis-a-vis the comparable companies while benchmarking the impugned international transactions. 13. On the facts and in the circumstances of the case, the learned TPO / AO / Hon’ble DRP have erred in holding inter-company receivables arising from provision of R&I services and IT support services provided by the Appellant to constitute a separate international transaction under section 92B of the Act. 14. On the facts and in the circumstances of the case, the learned TPO / AO/ Hon’ble DRP have erred in not appreciating that the R&I services and IT support services (from which the intercompany receivables have arisen) were benchmarked by undertaking working capital adjustment which takes into account the difference in credit terms of the Appellant vis-a-vis the comparable companies. 15. Without prejudice to the above, on the facts and in the circumstances of the case, the learned TPO / AO / Hon’ble DRP have erred in not considering the weighted average period of recovery to determine whether or not an adjustment ought to Tie made in respect of R&I services and IT support services.
On the facts and in the circumstances of the case, the learned AO has erred in levying interest under Section 234A and Section 234B of the Act in the income tax computation as per the final assessment order.
The learned AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act: Each of the above grounds of appeal is without prejudice to and independent of one another. The Appellant craves leave to add, alter, amend or delete the above grounds of appeal at or before the time of hearing of the appeal, so as to enable the Hon’ble Income Tax Appellate Tribunal to decide this appeal according to law.
3. Briefly stated facts of the case are that the assessee (McKinsey India), is a subsidiary of ‘McKinsey Holding Inc.’, which in turn is a wholly-owned subsidiary of McKinsey and Company Inc. (McKinsey). The assessee is engaged in providing Research and Information (R & I) services to its Associated Enterprises (AEs). The assessee also provides Information Technology (IT) support services to its AEs which include IT infrastructure support, IT application support, maintenance of IT systems etc. For the year under consideration, the assessee filed return of income on 20/11/2014, declaring total income of Rs.59,99,58,860/-. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 (in short ‘the Act’) was issued and complied with. The Assessing Officer noticed international transactions carried out by the assessee and referred the matter for determination of arm’s length price of those transactions to the Ld. Transfer Pricing Officer (TPO). In order dated 10/10/2017, the learned TPO proposed transfer pricing adjustment as under: Sl. No. Adjustment made Amount (INR) 1. Provision of R&I Services 27,98,63,045/- 2. Provision of IT support services 44,23,952/- 3. Interest on inter-company receivables 3,78,236/- Total adjustment 28,46,65,233/- 3.1 In view of the transfer pricing adjustment proposed, the Ld. Assessing Officer issued draft assessment order on 25/12/2017 incorporating the transfer pricing adjustment. Aggrieved with the additions proposed, the assessee filed objection before the learned DRP. The learned DRP issued directions to the transfer pricing officer on 06/08/2018. In compliance to the direction of the learned DRP, the learned TPO revised the transfer pricing adjustment from Rs.28,46,65,233/- to Rs.33,11,82,383/-. Pursuant to the direction of the learned DRP, the Assessing Officer issued the final assessment order incorporating the transfer pricing addition of Rs.33,11,82,383/-.
4. Before us, the learned Senior counsel of the assessee submitted that out of the Ground No.1 to 12 in relation to the transfer pricing adjustment in respect of provision of research and information services, the Ground No. 6 challenging inclusion of Aditya Birla Capital Advisors Private Limited in the final set of the comparables, was only pressed and remaining grounds were not pressed. Accordingly, the relevant grounds are dismissed as not pressed. 4.1 The learned Senior Counsel filed a paper-book containing pages 1 to 157 and submitted that the ‘McKinsey India’ has 01/04/2010 with ‘McKinsey’ under which, the ‘Mckinsey India’ is responsible for providing research and information services to ‘McKinsey’. Under the provision of research and information services, the assessee provides services to ‘McKinsey’ for assistant in their projects. The information required to respond to queries/request placed by the consultant is mainly obtained by accessing various Internet- based database such as ‘Bloomberg’, ‘Reuters’, ‘One Source’, ‘Dow Jones’, ‘dialogue’ and ‘data stream’ etc. The learned counsel referred to the profile of the assessee reproduced by the learned TPO on Page 1 to 11 of his order. The assessee has characterized itself as a routine contract research and information IT enabled service provider, operating in a low-risk or risk mitigated environment. With regard to research and information services, the assessee benchmarked the transaction selecting Transaction Net Margin Method (TNMM) as most appropriate method with Profit Level Indicator (PLI) of operating profit/operating cost (OP/OC). The assessee computed its PLI at 15.39% for research and information services segment. Further, the PLI (OP/OC) was calculated at 14.55% excluding the foreign exchange gain/loss as non-operating item. The assessee selected 10 comparable companies and computed their average margin (OP/OC) at 12.03%. According to the assessee, the average margin of the comparable being lower than the margin of the assessee, the International transaction of provision of research and information was at arm’s length. The learned TPO finally selected following three comparables with average margin of 24.18% and accordingly proposed transfer pricing adjustment of Rs.27,98,63,045/-:
S. No. Company Name OP/OC (%) 1. Aditya Birla Capital Advisors Pvt. Ltd. 45.15% 2. Ajcon Global Services Ltd. 22.02% 3. ICRA Management Consulting 5.36% Services Ltd. Average 24.18 4.2 The Ld. DRP, rejected ‘Ajcon Global Services Ltd.’ as comparable and directed to exclude the said company but retained the ‘Aditya Birla Capital Advisors Private Limited’ as it was also retained by the DRP in assessment year 2013-14. 4.3 The learned senior counsel referred to page 9 to 28 of the paper-book and submitted that the company M/s Aditya Birla Capital Advisors Private Limited is functionally dis-similar to the assessee as it was engaged in providing investment management services. He referred to page 9 of the paper book containing Director’s report which reads that the company focused on managing generic growth, Private Equity assets, excluding real estate and infrastructure. The learned senior counsel referred to profit and loss account of the company available on page 22 and 28 of the paper book, where revenue from operations has been shown from management fees. The learned counsel also referred to clause 1 of Note No. 17, available on page 31 of the paper- book, which reads that the main object of the company was to provide financial advisory services in management services and to carry on business of advising and managing venture capital funds. 4.4 The learned senior counsel further submitted that company has been excluded by the Tribunal in assessment year 2011-12 2012-13 in the assessee’s own case, and further appeal filed by the Revenue against the order of the Tribunal has been dismissed by the Hon’ble Delhi High Court in both the assessment years. In view of the submission, the learned senior counsel requested to exclude the company from the final set of the comparables selected for benchmarking the transaction of provision of research and information services. 4.5 The learned DR relied on the order of the lower authorities and submitted that the company is mainly in the advisory and thus, it is functionally similar to the assessee, who is also advising to its Associated Enterprises on management issues. 4.6 We have heard the rival submissions and perused the relevant material on record. The facts in brief mentioned above have not been disputed. Only issue which has been disputed before us is in respect of adjustment on provision for Research and Information Transaction is exclusion of the company M/s Aditya Birla Capital Advisor P. Ltd from set of comparables. On perusal of the profit and loss account of the company available on page 22 and notes to the account available on page 28, it is undisputed that the company M/s Aditya Birla Capital Advisors Pvt. Ltd. has earned revenue from providing management services. Further, from the annual report of the company, it is also evident that the company has been engaged in advising and managing venture capital funds. The activity of advising investment management is quite distinct from the services provided by the assessee under the transaction of research and information services. Further, we find that the Tribunal in for assessment year 2011-12 in the case of the M/s Aditya Birla Capital Advisors Private Limited as under: “(i) Aditya Birla Capital Advisors Pvt. Ltd. 26.1 The TPO proposed this company as comparable which was objected by the assessee on the ground that it was a company rendering asset management services and, hence, functionally dissimilar. The TPO treated it as comparable, which was approved by the DRP. The assessee is aggrieved against such inclusion. 26.2 After considering the rival submissions and perusing the relevant material on record, we find that this company, as noted by the TPO himself on page 20 of his order : ‘offers Investment Management and advisory services as Aditya Birla Private Equity to domestic and global investors’. This company is ‘managing a series of private equity funds to invest in and harvest business growth opportunities’. When we view the Annual report of this company, a copy of which is placed on page 246 of the paper book, it turns out that: “The company’s focus continues on the alternative assets excluding Realty and Hard Infrastructure investments. At the current activity levels, the Company has raised and managements two sector-agnostic domestic funds, namely, Aditya Birla Private Equity Fund-I and Aditya Birla Private Equity – Sunrise Fund’, Break-up of “Revenue from Operations” given on page 253 of the paper book gives the description of the nature of its revenues, namely: “Management Fees.”Thus, it is apparent that the nature of business of this company, being raising of funds and deploying the same, is entirely different from what the assessee is doing in this segment, namely, rendering services in the nature of Knowledge on call, Practice research and Analytics. This company is, therefore, directed to be excluded from the list of comparables.” 4.7 Similar finding has been given by the Tribunal in assessment year 2012-13 in in the case of the assessee. The Hon’ble Delhi High Court in order dated 09/08/2018 while disposing of ITA No. 461/2017 and 526/2017 2011-12 and 2012-13 and also and ITA No. 82/2018 filed by the Revenue for assessment years 2011-12 and 2012-13, upheld the finding of the ITAT on the issue of exclusion of comparable M/s Aditya Birla Capital Advisors Private Limited. The relevant part of the decision is reproduced as under: “39. The revenue urged that a stringent application of the comparability test was unnecessary as was also provisioned in Chapter-6 of United Nations Practical Manual on Transfer Pricing, Edition 2013, and some flexibility in conducting this comparison was urged to be allowed. However, from the above analysis, in the present appeals, even if due consideration is given to a certain level of dissimilarity between the Assessee and the comparable companies, it can be observed that the nature of services provided by the abovementioned comparable companies do not demonstrate even a degree of similarity with the services rendered by the Assessee that would be sufficient to qualify under rule 10B(2) of the Income Tax Rules, since, as established above, the Assessee’s services under its R&I segment are in the nature of services provided by a KPO and they are functionally dissimilar from the comparable companies, in terms of their services as well as their risk profiles. Relevantly reading what was highlighted in Rampgree (supra) that while using TNMM, the search for comparables may be broadened by including comparables offering services/products which are not entirely similar to the controlled transaction/entity, however, this can be done only if, inter alia, the difference in services/products offered has no material bearing on the profitability, and do not have functional differences or any differences in their risk profiles. Thus, it can be concluded that the ITAT was correct in excluding the abovementioned comparable companies. 4.8 In view of the above discussion, we hold that the company is functionally dissimilar to the assessee and direct the learned AO/TPO to exclude the company from the final set of the comparables. The ground No. 6 of the appeal is accordingly allowed for statistical purposes.
In grounds No. 13 to 15, the assessee has challenged the transfer pricing adjustment on account of interest on outstanding International transactions of research and information and IT support services. 5.1 Before us, the learned senior counsel submitted that in assessment year 2011-12 in 2012-13, interest on outstanding receivables was held to be an International transaction by the Tribunal. He further submitted that the Hon’ble Delhi High Court in order dated 7/02/2018, while reserving the judgment in ITA 461/2017, ITA 526/2017; ITA 590/2017 and ITA 82/2018 remitted the matter to the ITAT for deciding in view of the decision of the Hon’ble Delhi High Court in the case of Pr. CIT Vs. Kusum Healthcare Private Limited (ITA No. 765/2016 vide order dated 25/04/2017). In the judgment dated 09/08/2018, the Hon’ble Delhi High Court in para- 32 to 33 upheld that finding of the Tribunal that interest on outstanding receivables is an International transaction. The assessee filed review petition against the order dated 09/08/2018 of the Hon’ble Delhi High Court. The Hon’ble Delhi High Court in order dated 16/04/2019, reviewed the order dated 09/08/2018 and recalled the order dated 09/08/2018 with the finding that Hon’ble High Court did not propose to disturb order dated 7/02/2018 and matter would be considered by the Tribunal on its own merits. 5.3 The learned senior counsel submitted that the learned TPO has followed the finding of the Tribunal for assessment year 2012-13 in which is no longer in operation in view of the order of the Hon’ble Delhi High Court dated 16/04/2019. 5.4 The Ld. senior counsel further referred to page 119 and 120 of the paper book, which contain details of money received corresponding to invoices raised on Associated Enterprises. He submitted that in most of the cases, payment has been received in advance. He submitted that when the period for which amount of advance enjoyed by the assessee is seen vis-à-vis the amount receivable beyond 60 days, the assessee has received more advance rather than outstanding receivable beyond 60 days. He referred to financial statements of the assessee available on page 128 to 157 of the paper book and submitted that assessee is a debt free company and not borrowed any funds for its business activity. The learned counsel in support of the contention that in case of a debt free company, notional interest on outstanding receivables is not required to bring to tax, relied on the decision of the Hyderabad bench of the Tribunal in the case of Pegasystems Worldwide India (P) Ltd Vs ACIT (2018) 64 taxmann.com 470 (Hyd). 5.5 The learned Sr. Counsel also relied on the decision of the Hon’ble Delhi High Court in the case of Kusum Healthcare Private Limited (supra), wherein it is held that effect of delayed receivables get subsumed in the working capital adjustment. 5.6 The learned DR, on the other hand, referred to Explanation (i)(c) of section 92B and submitted that transaction in dispute has been brought in ambit of International transaction by the Parliament of India w.e.f. 01.04.2002 and, thus, there is no dispute as far as the impugned transaction is an International transaction. He further submitted that though advance has been received on many occasions but in case of few transaction delay in receipt of outstanding receivables is more than 60 days and thus the lower authorities has correctly made at adjustment on account of interest on outstanding receivables.
5.7 We have heard the rival submission of the parties and perused the relevant material on record. The Tribunal in the case of Pegasystems Worldwide India (P) Ltd Vs ACIT (supra) has held as in case of a debt free company, there is no requirement for making transfer pricing adjustment on account of the interest on outstanding receivables. The relevant finding of the Tribunal is reproduced as under:
“17.2. Ld. Counsel submitted that the issue of charging of interest beyond the period was not adjudicated and DRP reduced the rate of interest from 12% LIBOR plus 2.5 points. It was submitted that Assessee was a debt free company, AE takes care of funding, no interest was charged and there is no liability of interest and therefore, notional interest income cannot be brought to tax. Assessee relied on the principles laid down by Co-ordinate Bench at Mumbai in the case of Lintas India Pvt. Ltd., in dt. 09-11-2012 and also Mastek Ltd., Vs. ACIT in ITA No. 3120/Ahd/2010 then referring to the provisions of the Act the explanation brought by amendment in 2012 Finance Act. It was submitted that even though retrospective, it does not cover Assessee's transaction as the word 'capital financing' used there particularly refers to loans or advances given for capital financing, whereas in Assessee's case, these are outstanding services rendered but not capital financing. The words are to be interpreted invoking the principles ejusdem generis and so the outstanding receivables cannot be equated to capital financing as amended by the provisions of the Act. It was further submitted that working capital adjustments are being made while analyzing the operational performance of the companies, therefore, outstanding amount gets adjusted in working capital adjustments and another separate addition is not required under the TP provisions. Thus, it was contended that the outstanding amounts are not to be considered for adjustment. 17.3. We have considered the issue and examined the rival contentions. In the case of Evonik Degussa India P. Ltd., in ITA No. 7653/Mum/2011, it was already held the TP adjustment cannot be made on hypothetical and notional basis, until and unless there is some material on record that there has been under charging of real income. Thus on the facts and circumstances of the case, we are of the opinion that addition on account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case. Even though DRP tried to distinguish the above decision on facts, as seen from the facts in Assessee's case. Assessee has outstanding service charges receivables and as seen from the order of TPO, the outstanding is only from 31-07-2009. There seems to be no such delay in earlier months. Assessee has no interest liability at all so notional interest cannot be brought to tax under the provisions of TP. As rightly pointed out by the Ld. Counsel, the outstanding receivables on account of services cannot be equated with capital financing as provided for in the Explanation by the amendment by Finance Act, 2012 retrospectively. Even otherwise, as rightly held by the Logix Micro Systems Ltd v. ACIT [42 SOT 525] (supra), TPO should have allowed some interest free period for receiving the outstanding service charges. While acknowledging the order of the ITAT, TPO did not even bother to exclude the reasonable period and levied interest not only from the date of invoice to the date of realization during the year but also for the period beyond 31-03- 2010 in later year. We were informed that no such addition was made in the later year on Assessee's receivables. We are of the opinion that both on the facts of the case and principles of law, there is no need for bringing to tax the notional interest on the outstanding receivables. Accordingly, we allow the grounds 7 & 8 of Assessee and direct AO/TPO to delete the said addition made.”
5.8 We have verified the balance sheet of the assessee available on page 134 of the paper book along with notes on page 143 of the paper book and we find that the assessee has not borrowed any fund for its business activity and, thus, it being a debt free company, the ratio of the decision of the Tribunal in the case of Pegasystems Worldwide India (P) Ltd Vs ACIT (supra) is squarely applicable on the facts of the case. Accordingly, we delete the transfer pricing adjustment made on account of interest on receivables. The grounds No. 13 to 15 of the appeal are accordingly allowed.
The ground No. 16 of the appeal being consequential in nature, we are not referred to adjudicate upon and dismissed as infructuous.
The ground No. 17 of the appeal being premature at this stage, it is dismissed as infructuous.
In the result, the appeal of the assessee is allowed for statistical purposes. Order is pronounced in the open court on 16th September, 2019.