FNF BUSINESS PROCESS OUTSOURCING SERVICES INDIA PVT. LTD.,,BANGALORE vs. ASST.C.I.T., BANGALORE

As far as the provision of ITES are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/TC of the Assessee was arrived at 15.50% by the Assessee in its TP study. The IT(TP)A No. 195/Bang/2016 & 459/Bang/2017 Page 3 of 20 operating income was Rs.34,58,02,453/- and the Operating Cost was Rs.30,73,91,430/-. The Operating profit (Operating income – Operating cost was Rs.3,84,11,023/-. Thus, the OP/TC was arrived at 12.49%. The Assessee chose companies who are engaged in providing similar services such as the Assessee from the Prowess and Capitaline Plus Data Base. The Assessee identified 8 companies whose average arithmetic mean of profit margin was 14.38% which was less than the Operating margin of the Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm’s Length.

5. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. The TPO selected a set of 10 comparable companies (2 out of the 10 so chosen were comparable companies which the Assessee had chosen in its Transfer Pricing Study viz., Cosmic global Ltd., and Jindal Intellicom Ltd.) and worked out the average arithmetic mean of their profit margins and adjustment to ALP as follows:-

As far as exclusion of the company ICRA Online Ltd. is concerned, this Tribunal in the case of M/s. Zyme solutions Pvt.Ltd. Vs. ACIT IT(TP) A.No.85/Bang/2016 for AY 2011-12 order dated 28.4.2017 in paragraph-26 of its order was pleased to remand to TPO/AO for fresh consideration, the comparability of this company with the Assessee. Following the said decision, we set aside the order of the AO in this regard and remand to the TPO/AO for fresh consideration the comparability of this company with the Assessee on the lines indicated in the order in the case of M/s. Zyme solutions Pvt.Ltd. (supra).

As far as inclusion of comparable company M/S. R Systems Ltd., is concerned, the DRP excluded this company from the list of comparable companies for two reasons viz., (i) the financial year ending of this company was different and (ii) that the segmental information relating to ITES segment is not available. As far as the first objection is concerned, this tribunal in Assessee’s own case considered the exclusion of this company on ground No. (i) viz., that the financial year ending of this company was different from that of the Assessee company, in IT (TP) No.221/Bang/2015 for AY 2010-11 order dated 31.1.2019. The tribunal held that if the financial results of the comparable company, even though it has a different year ending than the company with which its margins are IT(TP)A No. 195/Bang/2016 & 459/Bang/2017 Page 6 of 20 sought to be compared, can be culled out from the financial data available financial in public domain for the financial year of the company with which it is sought to be compared, than a company cannot be regarded as not comparable. The following are the relevant observations of the Tribunal:-

The assessee has selected in the transfer pricing documentation R Systems International Ltd. as a comparable company since it is functionally comparable and passing all the filters applied by the assessee in the TP documentation. However the lower authorities rejected that company on the basis that it has different year ending. Against this assessee is in appeal before us. The ld. AR submitted that R Systems International Ltd. accounting period is January to December and assessee’s accounting period is April to March, therefore that the assessee and R Systems International Ltd. were operating for a period of 12 months accounting cycle. Since they were facing similar business cycles, market and economic conditions, it is not possible to say that because of different accounting period it had any impact on its financials and resulted into distortion of comparability. Since use of different accounting period have no effect on the comparability parameters as mentioned in Rule 10B(2) of the IT Rules 1962, therefore it would be inappropriate to reject R Systems International Ltd. which is functionally comparable company only on the reason that it has different accounting period. He relied on the judgement of Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Mercer Consulting (India) Pvt. Ltd. in ITA No.

On the other hand, the ld. DR submitted that the accounting period of assessee and R Systems International Ltd. are different and hence the lower authorities have not considered R Systems International Ltd. as comparable. The same to be upheld. For this purpose she relied on the decision of Pune Bench of the Tribunal in the case of Schlumberger India Technology Centre (P.) Ltd. Vs. DDIT in (PUN.) of 2014 dated 10.01.2018 wherein held in para 21 as follows:- “21. Now, coming to the concern Jindal Intellicom Pvt. Ltd. The case of assessee before us is that the said concern has different financial year than the one of assessee. The Assessing Officer had applied the current year data as contemporaneous data to be used for benchmarking the arm's length price of international transactions of assessee. The assessee had prepared its financial statements for the financial year starting from 1st April, 2009 to 31st March, 2010. The case of assessee before us is that Jindal Intellicom Pvt. Ltd. has prepared its IT(TP)A No. 195/Bang/2016 & 459/Bang/2017 Page 8 of 20 financial statements for period of 15 months and the same is not to be selected in the final set of comparables.

We have heard both the parties and perused the material on record. As rightly pointed out by the ld. AR, Rule 10(B)(4) does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R.Systems International Limited is available. We are, therefore, entirely in agreement with the decision relied by ld. AR that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B and the same is the view taken by Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Mercer Consulting (India) Pvt. Ltd. (supra). Being so, in our opinion data relating to the assessee financial year to be interpolated and thereafter if required, it should be considered as a IT(TP)A No. 195/Bang/2016 & 459/Bang/2017 Page 9 of 20 comparable to the assessee’s case. With this observation we remit this issue to the file of TPO for his fresh consideration.”

The learned counsel for the Assessee has filed before us the details of the financial results available for the period for which this companies profit margins are sought to be compared with that of the Assessee company. We are therefore of the view that the TPO should consider the financial results of this company for the period relatable to the Assessee’s financial year and for this purpose the issue is remanded to the TPO.

The learned DR prayed that this company has been consistently making losses and if on the basis of consistent loss making company which is abnormal is applied and if this company has to be excluded on this basis, then the TPO should be directed to examine this issue also in the set aside proceedings. The prayer of the learned DR was not objected to by the learned counsel for the Assessee. Therefore the TPO is directed to examine the comparability of this company, applying this filter also.

As far as the other reason given for excluding this company that segment details relating to the ITES segment are not available, is concerned, we find that this is not the reason assigned by the TPO for disregarding this company as comparable company. Secondly, the Assessee was not put on notice on this aspect by the DRP. Thirdly, the learned counsel brought to our notice page-97 of the Annual report of this company that the segmental results of the ITES segment is available. Therefore we deem it fit and proper to direct the TPO to consider the comparability of this company afresh.

As far as comparability of the company Informed Technologies Ltd., is concerned, it is undisputed that the Assessee in Annexure 1.16 of its objections to the draft assessment order of the AO, objected to the exclusion of this company from the list of comparable companies, but this objection was not considered by the DRP at all. We are of the view that in the light of the objections by the Assessee before the DRP against exclusion of this company by the TPO, the TPO should be reconsider his decision of excluding this company from the list of comparable companies and for this purpose, we remand this issue also for fresh consideration by the TPO.

In Gr.No.11 the Assessee has contended that the TPO and the DRP erred in adding to the average arithmetic profit margin of the comparable companies chosen by the TPO, negative working capital adjustment. On the above ground, it is undisputed that the Hyderabad Bench of the ITAT in ITA.No. 206/Hyd/2014 for Assessment Year 2009-2010 in the case of Adaptec (India) P. Ltd. Vs. The ACIT, Circle 1(1), order dated 25.3.2015 held that no such addition can be made for the following reasons:-

In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment.

It is undisputed that the Assessee is also a captive service provider such as the Assessee in the case decided by the ITAT Hyderabad Bench and therefore making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks, was not correct. Following the aforesaid decision, we allow Gr.No.11 raised by the Assessee. All other grounds relating to Transfer Pricing were not pressed. The grounds with regard to Charging of interest u/s.234A and 234 B of the Act has been challenged on the ground of improper computation. The AO is directed to verify the correctness of the claim of the Assessee and if found correct compute correct liability of interest u/s.234A and 234 B of the Act.

In the result, IT(TP)A.No. 195/Bang/2016 for AY 2011-12 is partly allowed.

The dispute in AY 2012-13 also relates to determination of Arm’s Length Price (ALP) in respect of the international transaction of providing ITES to AE. As far as the provision of ITES are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/TC of the Assessee was arrived at 15% by the Assessee in its TP study. The operating income was Rs. 45,56,86,624 and the Operating Cost was Rs.39,62,49,237. The Operating profit (Operating income – Operating cost was Rs.5,94,37,387. Thus the OP/TC was arrived at 15%. The Assessee chose companies who are engaged in providing similar services such as the Assessee from the Prowess and Capitaline Plus Data Base. The Assessee in its TP study on the basis of comparable companies chosen by it, claimed that the price it charged in the international transaction should be considered as at Arm’s Length.

The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. The TPO selected a set of 10 comparable companies and worked out the average arithmetic mean of their profit margins and adjustment to ALP as follows:-

Aggrieved by the aforesaid addition of Rs.6,30,43,252 to the total income of the Assessee, the Assessee filed objections before the Disputes Resolution Panel (DRP) u/s.144C of the Act. The DRP excluded 3 out of the 10 comparable companies chosen by the TPO. As a result, only 7 companies remained for consideration pursuant to the order of the DRP.

In this appeal, the Assessee seeks exclusion of Infosys BPO Ltd., BNR Udyog Ltd., TCS e serve Ltd., from the final list of comparable companies chosen by the TPO. On exclusion of the aforesaid three comparable companies, the learned counsel for the Assessee brought to our notice a decision of the ITAT Bangalore, rendered in the case of Mobily Infotech Ltd. [2018] 97 taxmann.com 2 (Bangalore - Trib.) wherein this Tribunal in the case of an Assessee rendering ITES such as the Assessee ruled on the comparability of the aforesaid companies as follows:-

The learned DR however submitted that the Assessee is a mix of both high end and a low-end ITES provider and this aspect should be taken note of by the TPO when deciding comparability of BNR Udyog Ltd., and TCS e serve Ltd.

We have considered the rival submissions and are of the view that following the aforesaid decision of the Tribunal, Infosys BPO Ltd. should be excluded from the list of comparable companies and the comparability of BNR Udyog Ltd., and TCS e serve Ltd., should be considered afresh by the TPO on the lines indicated in the decision referred to above and also keeping in mind the submission of the learned DR before us. We hold and order accordingly.

In ground No.13, the Assessee has prayed for inclusion of Crystal Voxx Ltd. as a comparable company. This company was not regarded as comparable company with the Assessee by the DRP for the reasons given in Para 2.15 of its order i.e., for the reason that in the financial results, the Auditors have mentioned that this company was predominantly a Business Process Outsourcing (BPO) company and therefore this company cannot be said to be an ITES company. The learned counsel for the Assessee brought to our notice that in the very same note, the auditors have also mentioned that the only reportable segment was BPO. Therefore this company was a BPO company and the results of the BPO which is the only segment ought to have weighed in the mind of the TPO to include this company as a comparable company.

We have considered the submission of the learned counsel for the Assessee and are of the view that the plea raised by the Assessee is correct and the TPO ought to have regarded this company as comparable

In ground No.14, the Assessee also seeks inclusion of a company by name Jindal Intellicom Ltd. as a comparable company. On inclusion of the aforesaid company as comparable companies, the learned counsel for the Assessee brought to our notice a decision of the ITAT Bangalore, rendered in the case of Mobily Infotech Ltd. [2018] 97 taxmann.com 2 (Bangalore - Trib.) wherein this Tribunal in the case of an Assessee rendering ITES such as the Assessee ruled on the comparability of the aforesaid company as follows:-

Respectfully following the aforesaid decision, we direct the TPO to examine comparability of the company Jindal Intellicom Ltd., afresh on the lines indicated in the decision referred to in the earlier paragraph after affording Assessee opportunity of being heard.

In ground No.15 the Assessee has contended that the TPO and the DRP erred in adding to the average arithmetic profit margin of the comparable companies chosen by the TPO, negative working capital adjustment. On the above ground, it is undisputed that the Hyderabad Bench of the ITAT in ITA.No. 206/Hyd/2014 for Assessment Year 2009- 2010 in the case of Adaptec (India) P. Ltd. Vs. The ACIT, Circle 1(1) order date 25.3.2015 held that no such addition can be made. This ground is similar to ground No. 11 raised by the Assessee in the appeal for AY 2011- 12, which we have discussed in the earlier part of this order. For the reasons given therein, we allow ground No.15 raised by the Assessee. All other grounds relating to Transfer Pricing were not pressed.

In the result, both the appeals by the Assessee are partly allowed.