M/S. OMNIGLOBE INFORMATION TECHNOLOGIES (INDIA) PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

आदेश / ORDER आदेश आदेश आदेश

PER SUSHMA CHOWLA, JM:

2. The assessee has raised following grounds of appeal:-

1. “That the assessing officer erred on facts and in law in completing assessment under section 143(3)/ 144C read with section 254 of the Income-tax Act (the Act) at an income of Rs. 1,15,57,890 as against the returned income of Rs. 3,417.

2. That the assessing officer / TPO erred on facts and in law in making an addition of Rs. 1,15,57,886 allegedly on account of difference in the arm’s length price of the ‘international transactions' of provision of BPO / ITES services to the associated enterprise on the basis of the order passed under section 92CA(3) of the Act by the TPO. 2.1 That the DRP/TPO erred on facts and in law in adopting additional filter of export sales less than 75% of total income without appreciating that selection of comparable company shall be on FAR analysis and application of such quantitative filters selectively defies the purpose of the benchmarking analysis. 2.2 That the DRP/TPO erred on facts and in law in rejecting the following companies on the basis of export filter and not appreciating that they were functionally comparable to the appellant: a) Surevin internet Services Ltd. b) E-Nxt Financial Ltd. c) Cosmic Global Ltd.

d) AOK In-House BPO Services Ltd. e) Cameo Corporate Services Ltd.

2.3 That the DRP/TPO erred on facts and in law in rejecting Eureka Outsourcing Solutions Pvt. Ltd. on the ground that it was a persistent loss making company and not appreciating that the company is functionally comparable to the appellant. 2.4 That the DRP/TPO erred on facts and in law in not appreciating that the company has earned a profit margin of 0.25% over operating cost in the relevant year and accordingly is not a persistent loss making company.

3. That on facts and circumstances of the case and in law, the AO/TPO erred in not holding that since the associated enterprise (“the AE”) has incurred a loss, in relation to ITES services rendered by the appellant to the AE, which, in turn, were rendered by the AE to ultimate third party customer(s), no Transfer Pricing adjustment was warranted. 3.1 That on facts and circumstances of the case and in law, the AO/TPO erred in not holding that the Transfer Pricing adjustment, at best, could not exceed the total profit earned by the group, as the same would result in taxation of notional income. 3.2 That the AO/TPO erred on facts and in law in not appreciating that the appellant is engaged in the business of rendering low end data processing services resulting in low combined profitability and, therefore, there could not be an allegation as to transfer pricing.

4. That the assessing officer erred on facts and in law in not undertaking comparability adjustment to account for difference in working capital employed by the appellant vis-a-vis comparable companies considered in the order passed under section 92CA(3)/144C of the Act.

5. That the assessing officer erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service Page | 3 provider as opposed to the comparable companies who were independent ITES service provider, even while holding that “the assessee cannot be compared to a risk free entity”.

6. Without prejudice that the assessing officer erred on facts and in law in not appreciating that the income of the appellant being exempt under section 10A of the Income-tax Act, 1961 ("the Act”), there could be no motive to divert any part of its profit to the foreign enterprise 7. That the assessing officer erred on facts and in law in levying interest under Section 234B of the Act.

8. That the assessing officer erred on facts and in law in initiating penalty proceedings under Section 271(1)(c) of the Act. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing.”

The assessee filed objections before the DRP which rejected the same and confirmed the proposed addition. The assessment was completed under section 143(3)/ 144C (13) of the Act at Rs. 3.26 Crores. The assessee filed an appeal against the final assessment order before the Tribunal, which in vide order dated 18.02.2011 restored the issue of transfer pricing adjustment to the file of DRP observing that it had not passed speaking order on the issue. The DRP issued directions under section 144(C) (5) to the TPO to recalculate arm’s length price of international transaction. Consequent thereto vide report dated 23.12.2011, the TPO determined the transfer pricing adjustment at Rs. 2.66 Crores. Thereafter the AO passed order under section 254 / 143(3) of the Act on 30.12.2011 determining the assessed income at Rs. 2.66 Crores. The assessee preferred an appeal before the Tribunal and vide order dated 29.08.2012 in ITA No. 699/Del/2012, the Tribunal held that the DRP had not considered the additional evidences produced by the assessee; hence the matter was again restored to the file of DRP with the direction to consider the additional evidences. The DRP again issued directions under section 144C(5) of the Act to the TPO. In the order passed under section 254 read with section 143(3) of the Act, dated 29.5.2014, the AO notes that the assessee had entered into international transactions totalling Rs. 20.92 Crores which were in the form of software development and data processing. The assessee had applied TNMM method as the most appropriate method and OP over TC as the profit level indicator. By using multiple year data, the assessee had selected 14 comparables, whose arithmetical mean margins were 10.01%. The margin of the assessee was 9.9% hence the claim of the international transactions being at arm’s length price. The TPO however used current years data and out of 14 comparables selected by the assessee, he rejected 3 comparables on the ground of persistent losses and 02 comparables on the ground of high turnover and 02 on the ground of substantial related party transactions i.e. RPT filter. Where the current year data was not available, the said concerns were also rejected as being comparable.

Thus out of 14 comparables, only 4 companies were selected as comparable and the arithmetic mean of the said comparables worked out to 26.99%. The TPO determined the arm’s length price of the international transaction at Rs. 23.94 Crores as against 20.71 Crores shown by the assessee and proposed an adjustment of Rs. 3.22 Crores. Before the DRP vide letter dated 16.11.2011, the assessee had filed an application for admission of additional evidence. Consequent to the directions of the Tribunal , the DRP applies revised filter of the export turnover to the extent of 75% and rejected the concerns which did not fulfill the said filter and gave directions to the AO in this regard. The AO in the final assessment order in turn relying on the directions of the DRP made the following observations. The AO notes vide para 6 at page 4 of the assessment order that the assessee had conducted fresh search for comparables as the said comparables did not figure in accept / reject matrix. The AO also notes that the search for comparables had taken place after the TPO had passed the order and only during the set aside proceedings before the DRP, the assessee had filed fresh set of comparables. The AO observed that the data was not contemporaneous data as envisaged under section 92F (iv) of the Act. Further Rule 10D(4) mandated that the data used for benchmarking the arm’s length price should be contemporaneous and should exist latest by specified data referred to in Clause 4 of section 92F of the Act. The AO was of the view that the data was not contemporaneous but since the Tribunal had given directions and hence they were examined on merits. The total number of companies finally selected in the said additional evidence were 09 and the average PLI was 12.18%, as against the margin of the assessee at 9.90%. Out of this list of 09, one Allsec Technologies Ltd. was accepted. The AO further observed that where the assessee was engaged in export of 100% of its software / data processing; therefore, the comparables should have its income out of export activity, if not full, then at least to the extent of 75%. This was the proposition of DRP and he applied filter of 75% and as a result, 05 concerns were rejected, as not fulfilling the said filter.

5. The assessee is in appeal against the order of the AO / DRP.

The learned AR for the assessee pointed out that the assessee was providing ITES Services to its AE. It was handling telecom services i.e. providing services of mobile portability and availability of mobile numbers. The assessee had selected TNMM method as the most appropriate method and applied PLI of OP over TC and its margins worked out to 9.90%. The assessee had initially selected 14 comparables concerns as functionally comparable whose weighted mean margins worked out to 10.01%. The TPO updated the margins and by applying different filters had selected set of comparables.

The TPO had applied filter of the persistent loss making concerns being not comparable and also high turnover concerns being not comparable. Further RPT filter of 25% was also applied and finally selected 04 concerns as comparable, whose mean margin was 24.02% and adjustment of Rs. 2.66 Crores was made in the hands of the assessee. He pointed out that the Tribunal in the second round had directed the DRP to consider the application filed by the assessee for admission of additional evidence, which in turn was filed in the first round itself. The learned AR for the assessee referred to the list of comparables which were finally selected by assessee adopting the same filters as applied by the TPO. However, the DRP in the third round applied new filter, wherein the filter of the concerns having less than 75% turnover were excluded. In this regard 05 concerns were rejected as not being comparable. The learned AR for the assessee also pointed out that the TPO held Eureka Outsourcing Solutions Pvt. Ltd., to be persistent loss making concern and did not apply the margin of the said concern.

However in the list wherein the names of the comparables were mentioned, the said concern was shown as not persistent loss making concern. In respect of exclusion of Maple Esolutions Ltd. and Informed Technologies Pvt. Ltd., by the AO / DRP / TPO, learned AR for the assessee says that it had no objections. The learned AR for the assessee further submitted that it was an established position of law, that DRP cannot apply new filter in set aside proceedings. In this regard, he placed reliance in the cases of MCorp Global (P.) Ltd. vs. CIT (309 ITR 434, Paper Products Limited vs. CIT [(2007) SCC 352 and S. P. Kochar vs. ITO (145 ITR 255). He stressed that the DRP in the second round cannot apply a new filter in the set aside proceedings. The learned AR for the assessee also fairly pointed out that the TPO may look into the functionality of the 05 concerns which were rejected by the DRP by modifying the turnover filter. The DRP in the second round had also rejected the assessee’s contentions of working capital adjustment.

7. The learned DR for the Revenue placing reliance on the orders of the authorities below, pointed that the DRP had correctly applied the filters.

The proceedings before us in the present case are in third round of litigation. As pointed out in paras above, the Tribunal in the first round had set aside the matter to the DRP to pass a speaking order on the issues. The DRP did pass an order and the transfer pricing adjustment was reduced in the hands of the assessee. However, the additional evidence which was filed by the assessee in the first round itself was not considered by the DRP. The Tribunal again remanded the issue back to the DRP to look into the application for admission of additional evidence which contain result of search of the finally applied filters of the TPO and the list of the comparables is selected by the assessee. The said evidence is placed at pages 214 to 240 of the paper book. The DRP in the third round of proceedings before us applied a new turnover filter i.e. since the assessee was a 100% exporter, it deemed it fit that only concerns having export activity atleast to the extent of 75% should be selected. Thus out of 09 concerns which were selected by assessee as a part of additional evidence, 05 concerns were held to be as not comparable.

The assessee applying the additional filters of the TPO i.e. not considering persistent loss making concerns and concerns having high turnover and applying RPT filter of 25%, selected 09 comparables as additional evidence. The list of 09 comparables reads as under:-

S. Company Name Finance Year Sales OP/ TC No.

3. Cosmic Global 200603 3.11 16.48% Ltd.

4. AOK in-House 200603 5.22 8.03% BPO Services Ltd.

6. Maple Esolutions 200603 7.43 35.15% Ltd.

8. Eureka 200603 9.00 0.25% Outsourcing Solutions Pvt. Ltd.

9. Informed 200603 2.12 6.64% Tehcnologies India Ltd. Average PLI 12.18% OP/TC% of Omniglobe India 9.90%

It may be pointed out that the TPO in the first order under section 92CA (3) of the Act had accepted the filter applied by the assessee of the persons engaged in export and no filter of the extent of export was applied. These proceedings started from the order of the TPO and travel to the Tribunal in two rounds and have been set aside by the Tribunal, with specific directions to consider the additional evidence filed by the assessee and if the same is based on the filters applied by the TPO, then the concerns selected by the assessee may be considered in the final list of comparables. The order of the AO / DRP suffers from infirmities in applying a revised filter in the set aside proceedings. We find no merit in the same. According we set aside the said directions of the AO / DRP. The concerns at Sr. Nos.

1 to 5 are to be included in the final list of comparables if they are found to be functionally comparable. This aspect has not been verified by the authorities below and the learned AR for the assessee has fairly admitted that the same may be verified. Accordingly, we direct the TPO to verify functionality of the said 5 concerns and if they are functionally comparable to the assessee, then the same may be included in the final list of comparable. Hence the ground of appeal raised by the assessee in this regard is allowed.

13. Now coming to the last stand of the assessee of working capital adjustment. No such objection was raised by the assessee before the DRP against the original order and since this is a set aside matter, then no working capital adjustment can be allowed at this juncture. Hence, plea of the assessee is rejected. Thus, grounds raised by the assessee in this appeal are partly allowed.

Order pronounced in the open court on 29th day of November, 2019.