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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI N.K. BILLAIYA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER
The Appellant, Addl. Commissioner of Income-tax, Special Range 1, New Delhi (hereinafter referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned order dated 30.08.2015 passed by the Commissioner of Income-tax (Appeals)-44, New Delhi in an appeal challenging the orders passed by the ld. TPO/AO qua the assessment year 2011-12 on the grounds inter alia that :-
“1. Ld. CIT(A) erred in law and on facts in directing Transfer Pricing Officer to include R. System International Ltd. In comparable, since the data of M/s R System International Ltd. is not available for finical year 2010-11 and audited recasting of data may distort the profitability.
Ld. CIT(A) erred in law and on facts in directions the AO/TPO to apply nil rate as arm's length interest rate on outstanding receivables from AE as in identical facts in assessee's own case for A.Y. 2010-11. The DRP has upheld such adjustments.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Axis Risk Consulting Services Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) was incorporated as a private limited company in India and is a wholly owned subsidiary of Genpact India Holding (Mauritius), which in turn ultimately held by Genpact Ltd., Bermuda. The taxpayer operates as an information technology enabled consultancy solutions provider rendering integrated risk and technology solutions.
During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprise (AE) as reported in Form 3CEB asunder :-
Description of the transactions Amount (Rs.) Provision of consultancy services 283,665,015 Cost recharge 9,602,346 Reimbursement of Expenses 48,642,007
The taxpayer in its TP analysis applied Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI) as Most Appropriate Method (MAM) for benchmarking the international transactions qua provision of consultancy services. Ld. TPO, during its TP analysis, noticed that the taxpayer has reimbursed expenses to the tune of Rs.4,86,42,007/- without any mark-up nor the same has been routed through profit & loss account of the taxpayer.
Consequently, TPO treated the reimbursement expenses as part of the total cost base and proceeded to compute the operating profit margin of the taxpayer at 23.39% by making computation as under:-
Particulars Amount Income from consultancy services 401,960,248 Reimbursement received 48,642,007 Operating Income 450,602,255 Personal expenses 227,535,858 Operating and administrative expenses 80,923,087 Less Foreign exchange loss (net) (498,709) Bank charges (21,888) Depreciation and amortization 8,612,748 Reimbursement received 48,642,007 Total cost (TC) 365,193,103 Operating Profit (OP) 85,409,152 OP/TC 23.39% Add Other income 771,957 Less Foreign exchange loss (net) 498,709 Bank charges 21,888 Finance charges 14,580,770
Profit Before Tax as per profit and loss 71,079,742 account
TPO, after applying various filters, rejected two comparables out of 11 comparables selected by the taxpayer, introduced 6 new comparables to benchmark the international transactions qua provision of consultancy services. Final list of comparables selected by the TPO with computation of average PLI is as under:-
S.No. Company Name OP/TC (%) 1 Jindal Intellicom Ltd. 13.70 2 Accentia Technology Ltd. 29.18 3 Acropetal Tech Ltd. (seg.) 14.36 4 E4e Healthcare Business Services Pvt. 9.77 Ltd. 5 Eclerx Services Ltd. 56.82 6 ICRA Techno Analytics Ltd. 25.24 7 Infosys BPO Ltd. 17.86 8 TCS E-Serve Ltd. 69/31 AVG 29.53%
Consequently, AO proposed the adjustment qua provision of ITES and receivables as under :-
“15. The cumulative adjustment made in this case is tabulated below :- S. Nature of ALP ALP Adjustment No. international determined determined u/s 92CA transaction by the TPO (INR) (INR) 1. Provision of IT 450602255 473034626 22432371 enabled services 2 Receivables Nil 33,73,224 33,73,224 Total 2,58,05,595
The Assessing Officer will accordingly enhance the income of the taxpayer by Rs.2,58,05,595/-. This shall be treated as the cumulative adjustment u/s 92CA.”
The taxpayer carried the matter before the ld. CIT (A) by way of filing appeal, who has deleted the addition made by the TPO/AO on account of TP adjustment by partly allowing the same.
Feeling aggrieved, the Revenue has 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.
GROUND NO.1
Undisputedly, the TPO as well as ld. CIT (A) have accepted TNMM with OP/TC as PLI as MAM applied by the taxpayer to benchmark the international transactions qua provision of consultancy service. Now, the Revenue has challenged the order passed by the ld. CIT (A) only to the extent that the ld. CIT (A) has erred in law and facts directing the TPO to include M/s. R System International Ltd. as a comparable to benchmark the international transactions on the ground that the data of this company is not available for FY 2010-11 and audited recasting of data may distort the profitability.
When we examine the order passed by the TPO he has applied different year ending filter as under :-
“Hence, wherever a company’s accounting period is not ended with 31.03.2011 and the data is not available/submitted for 12 month period from 01.04.2010 to 31.03.2011, the company is not considered as comparable as the international transactions of the taxpayer have been entered into during the FY 2010-11 covering the period from 01.04.2010 to 31.03.2011.”
TPO by applying the aforesaid filter rejected M/s. R System International Ltd. as comparable on the ground that this company is having different financial year ending i.e. December. Ld. CIT (A) dealt with this issue as to rejection of M/s. R System International Ltd. by the TPO by recasting the period of 01.04.2014 to 31.03.2011 by adding quarter ending 31.03.2011 and deleting the quarter ending on 31.03.2010 on the basis of audited quarterly results and audited financial results and ordered to include M/s. R System International Ltd. in the final set of comparables and directed the AO/TPO to recompute the average PLI by returning following findings :-
“7 Ld AR gas filed audited financials and quarterly results which shows that the financial data of R Systems Pvt. Ltd. has available in public domain. I rely on the judgment of Hon'ble Delhi Tribunal in the case of Mercer Consulting (India) Put. Ltd. Vs. DCIT (ITA No. 966/Del/2014) to include R Systems International Ltd. for IT Segment. Respectfully, following the decision of Hon'ble Tribunal in the case that Mercer Consulting cited supra, I direct the AO /TPO to include R Systems International Ltd. (ITS Segment), in the final list of comparables. As the Ld AR has argued that even only this comparable namely R systems Ltd. International Ltd. is included in the final list, operating margin earned by the appellant will fall within the arms length, there is no need to adjudicate all other comparables. Ld AO /TPO as directed to recompute average PLI of the comparables after including R System International Ltd. (ITS segment)”
When financial results are available in the public domain and result of M/s. R. Systems International Ltd. has been recasted on the basis of audited quarterly result and audited financial results, we are of the considered view that no error has been committed by the ld. CIT (A). So, we find no ground to interfere into the findings returned by the ld. CIT (A) on this issue, hence ground no.1 is determined against the Revenue.
GROUND NO.2
TPO, after rejecting the contentions raised by the taxpayer in its reply dated 13.11.2014 that benchmarking of receivables on the ground that receivables were not separate international transactions, recharacterisation was not permitted, non-application of SBI base rate for benchmarking etc. and has given invoice details of receivables along with their duration, proceeded to apply the interest @ 11.69% to bring the transactions qua receivables at arm’s length by deeming the receivables outstanding beyond the period stipulated in the service agreement/invoice as deemed loan advanced.
Undisputedly, during the year under assessment, the taxpayer has entered into transactions with AE as well as non-AE.
Ld. CIT (A) deleted the addition made on account of adjustment on the interest of receivables by relying upon decision rendered by the Tribunal in case of Indo American Jewellery Ltd. vs. DCIT (ITA No.5872/Mum/2009), which has been upheld by Hon’ble High Court in of 2012. However, ld. AR for the taxpayer contended that this issue is entirely covered by taxpayer’s own case in ITA No.3693/Del/2014 for AY 2009-10 order dated 22.02.2018 thereby identical addition made on account of delay of receivables for the same period has been deleted.
We have perused the order passed by the coordinate Bench of the Tribunal in taxpayer’s own case for AY 2009-10 (supra) which has considered the period of outstanding receivables ranging from 38 days to 1718 days and in most of the invoices, average delay is more than 300 days and proceeded to hold that no interest can be imputed on receivables with AE. Operative findings of the Tribunal in taxpayer’s own case for ready perusal are as under :-
“8. After considering the rival submissions and on perusal of the relevant findings and material placed on record, the only dispute before us is with regard to the adjustment by way of imputing interest @ 17.22% by the TPO on account of receivables from the AE. Here in this case, it is an undisputed fact that the assessee has also rendered similar services to non AEs/unrelated parties and on receivables from the non AEs also, there have been delays on receivables on which no interest has been charged by the assessee. Before us, invoice wise details have been furnished highlighting the details of amount of the invoice date; date of receipt and the number of outstanding days for the payment has been given. From such details, it is seen that in the case of unrelated party transaction, there are huge delays and in some cases it has gone up more than 1700 days. The period of outstanding receivables is ranging between 38 days to 1718 days and in most of the invoices, average delay is more that 300 days. If there are similar nature of transaction with comparable uncontrolled transactions and also with related parties, then there is an internal CUP to bench mark the controlled transaction with comparable uncontrolled transaction. Under CUP price charged or paid for the services provided in a comparable uncontrolled transaction is taken into consideration and it is the adjusted price paid for availing services which constitutes the benchmark for comparison with the price paid for availing of any services in an international transaction. If there are similar transactions of services with related parties as well as unrelated parties and the price charged or paid are comparable, then it is taken to be at arm’s length price. Thus, if under both the scenarios, no interest has been charged on similar nature of receivables, then it has to be reckoned that the transaction with the related party meets the arm’s length requirement vis-à-vis, the transactions with the unrelated third parties. Accordingly, we hold that no interest can be imputed on receivables with the AE and accordingly, the addition made by the TPO is directed to be deleted.”
Following the order passed by the Tribunal in taxpayer’s own case for AY 2009-10 (supra), we are of the considered view that in the instant case, the period of outstanding receivables is ranging between 25 days to 365 days and facts and circumstances are identical, so no interest can be charged on the receivables with AEs, hence ld. CIT (A) has rightly ordered to delete the addition.
Consequently, ground no.2 is determined against the Revenue.
Resultantly, the appeal filed by the Revenue is dismissed. Order pronounced in open court on this 10th day of December, 2019.