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Appellant by : Shri Anand Mohan (CIT-DR) with Sh. A. Umap (DR) Respondent by : Shree Niraj Sheth (AR) Date of Hearing : 06/11/2019 Date of Pronouncement: 08/11/2019 Order under section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by revenue and cross objections by assessee are directed against the order of ld. Commissioner of Income Tax (Appeals)-55, IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd. [CIT(A)], Mumbai dated 31.01.2017 for Assessment Year 2011-12.
The revenue has raised the following grounds of appeal:
1. Whether in the facts and circumstances of the case the CIT(A) was right to delete Acropetal Technologies Ltd as a comparable to the assessee by holding that Acropetal is engaged in providing Engineering Design Services and is therefore a KPO without realizing that the assessee company has also been held to be a KPO by the TPO.
2. Whether in the facts and circumstances of the case the CIT(A) was right to delete Acropetal Technologies Ltd as a comparable to the assessee on the basis of assessee's contention that Acropetal has during F.Y. 2010-11 acquired Line Beyond Inc USA and Optic Consulting Inc USA and the occurrence of this extraordinary event has effected the margin of this comparable, when infact this contention is not factually correct as the annual report of Acropetal on Page 13 clearly mentioned that the said acquisitions were effective from 01.04.2011 and hence are not part of financial statements as on 31.03.2011. 3. Whether the CIT(A) was right in the facts and circumstances of the case to include ICRA Management Consulting Services Ltd as a comparable to the assessee in contradiction to his rejection of all companies sought to be included by the assessee as being functionally dissimilar, as held by him in Para (h) on page 53 of his order. 4. Whether the CIT(A) was right in the facts and circumstances of the case to include ICRA Management Consulting Services Ltd as a comparable to the assessee even though ICRA Management Consulting Services Ltd owns considerable intangibles and the CIT(A) has rejected two comparable of the TPO on the ground that the comparables own intangibles. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal
at any time before or at the time of hearing of appeal.
5. The appellant prays that the order of CIT(A) on the above ground be set- aside and that of the assessing officer be restored.
IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd.
The assessee in its cross objection has raised the following grounds of appeal:
1. The Commissioner of Income-tax Appeals - 55, Mumbai ['CIT (A)'] erred in upholding selection of Infosys BPO as a comparable to the Respondent.
2. The CIT(A) erred in confirming the rejection by the TPO and the AO of the following comparables selected by the Respondent: - Coalition Development Systems (India) Private Limited - Cyber Media Research Limited - Datamatics Global Services Limited - Pipal Research Analytics & Information Services India Private Limited - SKP Securities Limited 3. The CIT(A) ought to have allowed benefit of adjustment upto + / - 5 percent as per the proviso to Section 92C(2) of the Income-tax Act, 1961 ('the Act').
Brief facts of the case are that the assessee-company is engaged in the provision of stock broking services to foreign institutional investor, mutual funds, domestic financial bank and act as a merchant banker for merger and advisory activities, initial public offerings (IPOs) etc. The assessee-company filed its return of income for Assessment Year 2011-12 on 29.11.2011 declaring loss of Rs. 20,96,81,783/-. Along with the return of income, the assessee furnished report under Form 3CEB reporting international transaction with its associated enterprises (AE). The case was selected for scrutiny. During the scrutiny IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd. assessment the assessing officer noted that the assessee in the report under Form 3CEB reported the following international transactions:
Name of international transaction Amount in Rs. 1 Provision for the stock broking services 1277069 2 Provision for advisory services 2680000 3 Allocation of IT cost (spider system) 840183 4 Allocation of advertisement expenses 1124820 5 Sharing of executive cost 1380360 6 Reimbursement of employee cost 33112663 7 Reimbursement of other expenses 2761990 8 Reimbursement of business promotion expenses 2125583 9 Reimbursement of leased line expenses 2765113 10 Recovery of research expenses 209411837 11 Recovery of employees cost, travelling and other 1618114 expenses 4. The Assessing Officer made a reference to Transfer Pricing officer (TPO) vide reference dated 26.08.2013 under section 92CA for computation of Arms Length Price (ALP). The TPO identified recovery of research cost of Rs. 20,94,11,837/- as erroneous and examined its ALP.
The assessee bench marked its ALP under Transaction Net Margin Method (TNMM),the assessee selected 9 companies as comparable in the following manner:
Sr no. Companies name FY 2010-11- NCP% 1 Coalition Development system India private limited -- 9.45 2 Cyber media Research Limited -- 10.33 IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd.
3 Datamatics Global services Ltd -- 5.32 4 e4e healthcare business services private limited -- 9.69 5 ICRA Management Consulting Services Ltd -- 15.79 6 Informed technologies India Ltd -- 9.65 7 Jindal Intellicom private limited -- 11.15 8 People research analytical and information services India private limited -- (0.62) 9 SKP securities Ltd -- 9.93 Arthematic mean -- 8.97
The margin on comparable based on average was 8.97% and the assessee claimed it within 5% range of mark up charged by assessee in the International Transaction from its AE. During the proceedings before TOP, the TPO rejected some of the comparable of the assessee comparable and accepted remaining comparable. The TPO included Infosys BPO, Acropetal Technology Ltd. and TCS Eservices Ltd. On the basis of final set of 7 comparable, the TPO made the benchmarking in the following manner:
Sr No. Name of Company Updated Margin AY 2011-12 % 1 Accentia Technology Ltd. 29.18 2 Acropetal Technology Limited. 23.95 3 e4e Healthcare Business Services Private Limited 9.69 4 Informed Technology 9.65 5 Infosys BPO 17.86 6 Jindal Intellicom Pvt Ltd 13.7 7 TCS - Eservices 69.31 Weighted average margin 24.76 IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd.
The TPO on the basis of above 7 comparable worked out Arithmetic mean of Profit Level Indicator (PLI) 5% of the assessee and arrived at margin of 24.76% against PLI of 5.76% of the assessee and worked out difference between ALP of sales and value of international transaction and made adjustment of Rs. 3,94,09,313/- in the following manner:
1 Operating AE revenue 209,411,837 A 2 Operating AE Cost 199,439,845 B 3 Operating Profit 9,971,992 C= A-B 4 ALP Margin 24.76% D 5 ALP Profit 49,381,306 E=B*D 6 ALP operating revenue 248,821,150 F=E+B 7 95% of the Transfer Price 198,941,245 K= A*95% 8 105% of the Transfer Price 219,882,429 L=A*105%
On receipt of report of TPO, the Assessing Officer made upward adjustment/addition of Rs. 3,94,09,313/- to the total income of assessee vide assessment order dated 27.05.2015 passed under section 143(3) r.w.s. 144C(3). The assessee instead of filing objections before Dispute Resolution penal (DRP), exercised its option to file appeal before the ld. CIT(A). The ld. CIT(A) after considering the material placed before him and considering the submissions of assessee directed to exclude Acropetal Technology Ltd. from set of comparable.
Thus, aggrieved by the order of ld. CIT(A), the revenue has filed appeal challenging the action of ld. CIT(A) for directing to exclude Acropetal Technology Ltd. from the set of comparable. On service of IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd. notice of appeal, the assessee has filed its cross objection for excluding Infosys BPO as a comparable from final set of comparable. We have noted that ICRA Management Consulting Services was not considered by TPO in final set of comparable.
We have heard the submission of ld. AR of the assessee and ld. DR for the revenue and perused the order of lower authorities. The ld. DR for the revenue supported the order of TPO in selecting the Acropetal Technology Ltd. in the final set of comparable. The ld. DR submits that Acropetal Technology Ltd. is functionally comparable with the assessee company. This company satisfied quantitative filter adopted by TPO. No extra event was reported by this comparable company during this year. Merely reason that foreign expenditure of this comparable is high cannot be a ground for excluding this comparable. 11. On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A) in excluding this comparable. The ld. AR further submits that this company is engaged in providing engineering design services, information technology services and healthcare services. This company acquired line beyond Inc. USA and Optech Consulting USA in F.Y.
2010-11. The occurrence of this extraordinary event during this year affects the margin of this comparable. The ld. AR of the assessee submits that the assessee is engaged captive service provider to its IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd. AEs, therefore, this comparable company is not comparable with the assessee and was rightly excluded by ld. CIT(A).
12. On the exclusion of ICRA Management Consulting Ltd., the ld. DR for the revenue conceded that it was included by TPO at the stage of Transfer Pricing Adjustment. On appeal, the ld. CIT(A) not excluded this comparable from final set of comparable. On the other hand, the ld. AR of the assessee submits that ICRA Management Consulting Ltd. was not excluded by ld. CIT(A) in his order from the final set of comparable by TPO, therefore, the grounds of appeal
raised by revenue is not emanating from the order of lower authorities.
13. We have considered the submission of both the parties and gone through the order of lower authorities. A short controversy in dispute before us is only about the exclusion/inclusion of Acropetal Technology Ltd. The ld. TPO included this comparable in final set of comparable. Though, the assessee objected on the ground that this comparable is engaged in providing engineering design services, information technology services and healthcare services. Further, there was extraordinary event for acquisition of Line Beyond Inc. USA and Optech Consulting USA. The assessee also stated that this comparable is engaged in collecting industry data to prepare research report and accordingly not comparable. The TPO included this comparable in IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd. final set of comparable. However, the ld. CIT(A) directed to exclude this comparable on the ground that this comparable perform engineering design services and substantially on site services and operates on different model vis a vis assessee. The ld. CIT(A) referred several decisions of Tribunal. Before us, the ld. AR of the assessee relied on the decision of Bangalore Tribunal in DCIT vs. Goldman Sachs Services Pvt. Ltd. (supra) wherein Acropetal Technology Ltd. was directed to be excluded as a comparable with a captive service provider by passing the following order:
“11. We have heard both the parties and perused the material available on record and gone through the orders of the IT(TP)A No. 581/Bang/16 C.O 21/B/2017 Goldman Sachs Services Pvt Ltd., Bangalore authorities below. The Revenue has challenged exclusion of Acropetal Technologies Ltd, L&T Infotech Ltd., and E-infochips Ltd, on the ground that the DRP has suo-moto excluded above three companies by applying fresh filter in respect of onsite revenue filter, without applying such filter to all comparable selected by the TPO. We find that although the DRP has taken one of the reasons for excluding these companies on the basis onsite revenue filter but given other reasons to exclude these companies by holding that these companies are functionally not comparable to the profile of the assessee company. Let us examine each company and reasons given by the DRP to direct A.O to exclude from the list of comparables.
Acropetal Technologies Ltd. The DRP has directed the TPO to exclude Acropetal Technologies Ltd on the ground that on examination of annual report of the company the following facts are noticed. (i) Acropetal Technologies Ltd.
IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd.
Having considered the submissions, we examined the Annual Report from which the following facts are noticed:-
The foreign currency expenses are Rs. 64.94 crore (55%) of the total expenses of Rs. 118.68 crore debited in profit and loss account which makes it clear that the company is pre- dominantly engaged in on site activities which is further evident from the fact that Rs. 55.57 crore have been debited on account of on-site development expenses- technical sub contracts. No break-up of export sales of Rs. 140.55 crore is available in respect to different segments as per the profit and loss account. According to Schedule-IX, Rs. 13.51 crore includes salary and consultancy charges, there is no separate information is available in regard to the employees cost relates to the software development and therefore, it cannot be ascertained as to whether the employees cost is more than 25% in respect of software development segments and passes the employees cost filter applied by the TPO.
The DRP further observed that the company is not provided segmental information containing the breakup of employees cost, export sales, therefore it is not possible to come to correct conclusion as to whether the com company passes the employee cost filter and export earning filter. The DRP further observed that assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayers. Since, the entire operations of taxpayers is taking place offshore i.e. in India it is but natural to compare with companies having offshore operations,, due to the reason that the economic and profitability of onsite operations are different from offshore business model. In absence of the clear segmental information of the employees cost, the company cannot be retained as comparables. We find that the ITAT, Bangalore, in the case of DCIT Vs. CGI Information Systems and Management Consultation Pvt Ltd., has considered Acropetal Technologies Ltd., and held that this company is not comparable to the profile of the company which are IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd.
engaged in captive service provider in respect of software development services. The relevant portion of order is extracted below:
Acropetal Technologies Limited - As far as exclusion of this company as a comparable company is concerned, it is seen from the Directions of the DRP at paragraph 2.7 at page-9, that this company was excluded on the grounds that: (i) IT(TP)A No.502/B/16 CO No.01/B/17 the segmental information containing the break-up of its export sales and employee costs, was not available and it was not possible to ascertain if it passed the export earnings and / or employee costs filters; and (ii) a substantial portion of its software development activities have been outsourced on sub-contract and it could, therefore, not be retained as a comparable. The DRP in directing exclusion of this company followed decision of Hyderbad Bench of ITAT in the case of Capital IQ Information Systems (India) Pvt. Ltd. (ITA No.1961/Hyd/2011). The DRP also observed that this company was predominantly doing on-site development of software and therefore cannot be compared with a company which develops software off-shore. One of the filters applied by the TPO was that companies where employee costs are less than 25% of turnover cannot be regarded as comparable. In the absence of segmental information, it was not possible to ascertain as to whether this company passes the test adopted by the TPO himself for comparison. The learned DR submitted that the required data can be culled out from the information available in the public domain or by resorting to a process of calling for information from this company u/s.133(6) of the Act. The learned counsel for the Assessee in this regard pointed out that the Hon'ble Delhi High Court rejected a similar argument by the Revenue in the case of Prl.CIT Vs. Saxo India Pvt. Ltd. ITA 682/16 order dated 28.9.2016. In the circumstances, this company was rightly held by the DRP to be not comparable. W e are of the view that once a company becomes not comparable for the reason that segmental information to apply filters, we need not consider any other aspect of comparability. The learned counsel for the Assessee made submissions before us that this company was rightly directed to be excluded by the DRP on the above basis and further contended that even otherwise; this company is not functionally comparable to the Assessee. As already stated, we do not wish to go into this aspect as this company goes out of comparability on other reasons. 14. In the present case, the assessee is a captive service provider to its AEs. This fact is not disputed by lower authorities. Considering the aforesaid factual and legal discussion and considering the decision of IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd. co-ordinate bench in Goldman Sachs Services Pvt. Ltd. (supra), we affirm the order of ld. CIT(A) in excluding Acropetal Technology Ltd. In the result, the ground of appeal raised by revenue is dismissed.
C.O. No. 51/Mum/2018 by assessee 15. The ld. AR of the assessee submits that assessee in his cross objection is objecting for upholding of Infosys BPO as a comparable by ld. CIT(A). The ld. AR of the assessee further submits that Infosys BPO is not comparable with the assessee-company. Infosys BPO is not comparable on account of significant intangible on brand value and due to high turnover comparative to the assessee company. The turnover of Infosys BPO is in thousands of crore, which is 53 times that of assessee’s turnover. In support of his submission, the ld. AR of the assessee relied upon the decision of Delhi Tribunal in Omniglobe Information Technologies (India) (P.) Ltd. [2017] 88 taxmann.com 315 (Delhi-Trib.) and decision of Hon’ble Bombay High Court in CIT vs. M/s. Pentair Water India Pvt. Ltd. (Tax Appeal No. 18 of 2015).
On the other hand, the ld. DR for the revenue supported the order of lower authorities. The ld. DR further submits that Infosys BPO is performing almost similar function, though on large scale and are functionally similar. This comparable company is also providing ITeS services.
IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd.
We have considered the submission of both the parties and perused the orders of lower authorities. We have noted that the assessee objected the inclusion of this company before TPO as well as before the ld. CIT(A). Before the ld. CIT(A), the assessee specifically contended that Infosys BPO is having brand value of its holding company, which influence pricing policy, thereby directly impacting the margin earned by that comparable. Further, the turnover this comparable is 53 times.
The ld. CIT(A) affirmed the action of TPO by holding that the contention of assessee is not acceptable as Infosys BPO is performing almost similar function but on large scale. We have noted that the Hon’ble jurisdictional in CIT vs. M/s. Pentair Water India Pvt. Ltd. (supra) while considering the exclusion of Infosys BPO on the ground of turnover filter of the assessee company whose turnover was Rs. 11 crore and the Infosys BPO of Rs. 649.56 crore, being more than 65 times of that assessee and upheld the exclusion of Infosys BPO.
Further, co-ordinate bench of Delhi Tribunal in Omniglobe Information Technologies (India) (P.) Ltd. (supra) while considering the brand value and significant intangible of Infosys BPO excluded from comparables. Therefore, respectfully following the decision of Delhi Tribunal and Hon’ble Bombay High Court, we direct the IT (TP) 4227 M 17 & C.O. 51 M 18-M/s Daiwa Capital Markets India Pvt. Ltd. Assessing Officer/TPO to exclude Infosys BPO from final set of comparable.
Ground No.2 relates to rejected of certain comparable. The ld. AR submits that he is not pressing this ground of appeal
. Considering the submission of ld. AR of the assessee, this ground of appeal is dismissed as not pressed. Ground No.3 relates for allowing benefit of +/- 5%, this ground of appeal is consequential and needs no adjudication.
19. Considering the facts that we have affirmed the exclusion of Acropetal Technology Ltd. in the grounds of appeal raised by revenue and further directed to exclude the Infosys BPO from the final set of comparable.
Therefore, the Assessing Officer/TPO is directed the re-compute the ALP in respect of International Transaction identified by TPO for benchmarking of ALP. 20. In the result, appeal of the revenue is dismissed and the cross objection of assessee is partly allowed.