Loading judgment…
No AI summary yet for this case.
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI N. K. BILLAIYA & MS SUCHITRA KAMBLE
This appeal is filed against the order dated 29/10/2015 passed by DCIT, TPO-2(2), New Delhi u/s 143(3) read with Section 144C (3) of the Income Tax Act, 1961, for Assessment Year 2011-12.
The grounds of appeal
are as under:- “Appeal against the appellate order under Section 143 (3) read with section 144C of the Income 'ax Act, 1961 (the Act) dated October 29, 2015 for assessment year 2011-12 passed by the Deputy Commissioner of Income Tax, Circle 16(1) New Delhi (hereinafter referred to as ‘Ld. AO").
1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer (“AO”) is bad in law.
2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the assessment order based on which he reached the conclusion that it was “expedient and necessary” to refer the matter to the Ld. Transfer Pricing Officer (“TPO”) for computation of the arm’s length price, as is required under section 92 CA (1) of the Act.
3. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Ld. Dispute Resolution Panel (“DRP”) erred in making an adjustment to the arm’s length price (“ALP”) of the Appellant’s international transactions, relating to provision of back office and research related services, with Associated Enterprises (“AEs”) amounting to INR 12,283,545 by: 3.1 modifying the comparability analysis conducted in the transfer pricing documentation of the Appellant on inappropriate and inadequate grounds; 3.2 rejecting the applicability of functional filter applied in the search process by the Appellant; 3.3 rejecting Omega Healthcare Management Services Private Limited and Zavata India Private Limited which were comparable to the Appellant, on ground of unavailability of reliable financial information; 3.4 selecting Eclerx Services Limited, which was not comparable to the Appellant on various grounds; 3.5 confirming the selection of current year (i.e. financial year 2010-11) data for comparability; 3.6 erred in computing the margins of comparable companies selected; 3.7 erred in not allowing the benefit of working capital adjustment.
4. That on the facts and circumstances of the case and in law the Ld. AO/ Ld. TPO erred in not examining the validity of initiation of penalty proceedings u/s 271 (1) (c) of the Act.
5. That on the facts and circumstances of the case and in law, the Ld. AO erred in charging and computing interest under section 234B, 234C and 234D of the Act. That the appellant craves leave to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal as they may be advised. That, the above grounds are independent and without prejudice to each other.”
The assessee Company is incorporated under the Companies Act, 1956 in March 2009 and is a wholly-owned subsidiary of Markit NV, the Netherlands. The assessee Company is engaged in the business of financial data processing and analysis including assimilation to the overseas client. Return of income declaring Rs. 4,09,11,339/- was e-filed by the assessee Company on 19/11/2011. The case was processed u/s 143(1) of the Income Tax Act, 1961. Subsequently, notice u/s 143(2) of the Act dated 11/9/2012 was issued to the assessee Company and duly certified. Thereafter, detailed questionnaire u/s 142(1) calling for furnishing details/information on 22/4/2013. Again notice u/s 143(2) and 142(1) was issued on 17/11/2014 and duly served upon the assessee. In compliance to the aforesaid notices, the Chartered Accountant and Authorized Representative of the assessee Company appeared from time to time for representing the case of the assessee and furnished the details/information requested from the assessee which was examined and place on record by the Assessing Officer. A reference u/s 92CA of the Income Tax Act was made to the Transfer Pricing Office (TPO). The TPO vide order dated 16/1/2015 made the following adjustments:- Operational Cost 17750568 ALP at a margin of 31.74% 233845835 Price received 212722513 105% of the Price received 223358639 Adjustment u/s 92CA 21123322 The above revised shortfall of Rs.2,11,23,322/- was proposed as adjustment to the price shown by the taxpayer in its books of accounts by the TPO.
Thus, the TPO directed the Assessing Officer to make an adjustment of Rs.2,11,23,322/- on account of international transactions. Thereafter, the draft Assessment Order computing the taxable income of the assessee Company at RS.6,20,47,261/- u/s 144C dated 23/2/2015 was forwarded to the assessee. The assessee filed its objection before the Dispute Resolution Panel (DRP). The DRP vide direction dated 8/9/2015 held that the Assessing Officer /TPO shall verify the margins in case of comparables’ details and carry out required corrections. The TPO vide office letter dated 15/9/2015 and reminder letter dated 9/10/2015 was requested to pass an order giving effect to the directions of the DRR. The order of the TPO dated 13/10/2015 giving effect to the direction of DRP was sent to the office of the Assessing Officer on 14/10/2015 wherein the following observations was made:- “On the basis of the DRP directions, the arm’s length price is recomputed as follows: Operational Cost 17,505,568 ALP at a margin of 26.76% 225,006,057 Price received 212,722,513 105% of the price received 223,358,639 Adjustment u/s 92CA 1,22,83,545
On the basis of the above, the original adjustment amount INR 21,123,322 made vide order dated January, 16, 2015 stands revised to Rs.1,22,83,545.”
Thus, the Assessing Officer made an addition of Rs.1,22,83,545/- vide order dated 29/10/2015 towards Transfer Pricing issues.
Being aggrieved by the assessment order dated 29/10/2015, the assessee filed appeal before us.
The Ld. AR submitted that the assessee is challenging one comparable to be excluded and three comparables to be included. As regards exclusion of Eclerx Services Ltd., the Ld. AR submitted that this comparable is functionally dissimilar. The Ld. AR submitted that it provides services through two business units i.e. Financial Services and Sales and Marketing Services. Under the Financial Service Segment, Eclerx Services Ltd. provides professional services including consulting, business analysis and solution testing. It provides a broad suite of services that allow its clients to operate on a day-to- day basis including trade processing, reference data, accounting and finance, and expense management activities. Further, under Sales and Marketing Services, Eclerx Services Ltd. provides web content management and merchandising execution, web analytics, social media moderation and analytics, search engine analytics & support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price & catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting. The Ld. AR pointed out that these services are a mix of research, advice and operation management. Hence, in view of the same, the Ld. AR submitted that Eclerx requiring specialized knowledge and having engaged in high-end services cannot be compared to routine IT enabled services provided by the assessee whereby it assumes minimal business risk. The Ld. AR submitted that as per Annual Report, the Comp0any has acquired Igentica Travel Solutions Ltd.. The said acquisition has provided the company with 28 large customers thereby increasing the customers base and overall revenues of the Company. The said acquisition has also provided the company with an entry platform in a new vertical-travel and hospitality. Further, the Company has also acquired Eclerx Pvt. Ltd, Singapore. Therefore, Eclerx Services Ltd. has abnormal circumstances and abnormally high margin due to the extraordinary circumstances and cannot be compared to the assessee. Hence, the Ld. AR submitted that this comparable should have been excluded by the TPO. The Ld. AR further submits that there appears to be a discrepancy in the revenue as per standalone financial statements and consolidated financial statements depicting the financials of Eclerx Services Ltd. along with its subsidiaries. The Ld. AR relied upon the following case laws:-
� Actis Global Services Pvt. Ltd. (Delhi High Court - ITA 417/2016) � Actis Global Services Pvt. Ltd. (Delhi ITAT - � Copal Research India Pvt. Ltd. - Delhi High Court Decision (ITA 894/2015)
� Rampgreen Solutions Pvt. Ltd. (ITA 102/2015).
7. The Ld. DR relied upon the order of the TPO and submitted that the TPO has rightly included this comparable.
We have heard both the parties and perused all the relevant material available on record. From the Annual Reports, the Ld. AR rightly pointed out that Eclerx Services Ltd. is functionally dissimilar to that of the assessee company. It provides services through two business units i.e. Financial Services and Sales & Marketing Services. Under the Financial Service Segment, Eclerx Services Ltd. provides professional services including consulting, business analysis and solution testing. It provides a broad suite of services that allow its clients to operate on a day-to-day basis including trade processing, reference data, accounting and finance, and expense management activities. Further, under Sales & Marketing Services, Eclerx Services Ltd. provides web content management and merchandising execution, web analytics, social media moderation and analytics, search engine analytics & support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price & catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting. While the assessee company is engaged in the business of financial data processing and analysis including assimilation to the overseas client. In fact, the assessee company is providing services to this comparable company. Thus, this comparable company is functionally dissimilar to the assessee company and has to be excluded. Therefore, we direct the TPO/AO to exclude this comparable.
As regards inclusion of 3 comparables, the Ld. AR submitted as under:-
1) Omega Healthcare Management Services Pvt. Ltd.: The Ld. AR submitted that annual report of the company is not available in the public domain; however, the financial data of the company is available in the databases. The Ld. AR submitted that when, the TPO is relying financial data extracted from databases for applying filters and computation of margin of other comparable companies, then, there is no reason for rejection of this company if annual report is not available and data is available on database. Zavata India Pvt. Ltd. - The annual report of the company is not 2) available in the public domain; however, the financial data of the company is available in the databases. The TPO is relying on databases for search and computation of arm's length margin.
R Systems International Limited- The Ld. AR submitted that the TPO 3) has rejected this comparable on the ground of different financial year ending December. However, quarterly data is available. The TPO has not acknowledged the objections raised by the Assessee in rejecting the applicability of this filter. The TPO citing the provisions of Rule 10B (4) provided that the data to be used in analysing the comparability of an uncontrolled transaction with an international transaction be the data relating to the FY in which the international transaction has been entered. A different accounting year of a comparable company means that the transactions taking place in a different period are being compared.
In this regard, the Ld. AR relied upon the following case laws: CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd. (ITA 217/2014) • CIT vs. Mercer Consulting (India) Pvt. Ltd. (ITA No. 101 of 2015) •
8. The Ld. DR submitted that these comparable have to be verified by the TPO/AO as the database is available.
We have heard both the parties and perused all the relevant material available on record. All the three comparables which the Ld. AR submitted to be included as comparables requires a proper verification as the very basis of rejecting the comparables on the ground that the financials were not available seems to be not proper as there is database available in public domain. In fact, quarterly database of the comparable R system is available. Thus, it will be appropriate to remand back this issue for verifying these three comparbles to be included in the final list of comparables to the file of the TPO/AO. Therefore, the issue is remanded back to the file of the TPO/AO and we direct the TPO that after verifying the database available and after applying the relevant filters, if these three comparables are suitable then the same may be included in the final list of the comparables. Needless to say, the assessee be given the opportunity of the hearing by following principles of natural justice.
As regards ground relating to working capital adjustment, the Ld. AR relied on the decision of Demag Cranes & Components [2013] 30 Taxmann.com 364 (Pune-Trib.)
The Ld. DR relied upon the assessment order as well as the order of the Tribunal.
We have heard both the parties and perused the material available on record. As regards the issue of working capital adjustment the same needs to be verified properly by the TPO/AO. The appropriate transfer pricing adjustment can only to be made in consonance with the international transaction undertaken by the assessee company during the year under assessment on the basis of its comparability vis-à-vis comparable companies, by providing working capital adjustment to the assessee in view of the provisions contained under Rule 10B(1)(e) also. So, we are of the considered view that the matter is required to be restored to the TPO to provide the assessee company the benefit of working capital adjustment for transfer pricing adjustment. Therefore, we remand back this issue to the file of the TPO/AO for proper adjudication. Needless to say, the assessee be given the opportunity of the hearing by following principles of natural justice.
In result, the appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on 29th October, 2018.