Loading judgment…
No AI summary yet for this case.
Before: Shri Bhavnesh Saini & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order of the AO/TPO passed u/s. 143(3)/92CA/144C of the IT Act dated 16.10.2017 passed in pursuance to the direction of the DRP dated 25.08.2017 on the following grounds of appeal :
1. That the assessing officer (‘AO’) erred on facts and in law in completing assessment under section 144C read with section 143(3) of the Income-tax Act, 1961 (‘the Act’) at an income of Rs. 4,72,94,133 as against returned income of Rs. 2,61,11,546.
2. That the AO erred on facts and in law in making adjustment of Rs 2,11,82,587 to the arm’s length price of the ‘international transactions of BPO/Data Processing Services rendered to the associated enterprise on the basis of order passed by the Transfer Pricing Officer (‘TPO’) under section 92CA(3) of the Act.
ITA No. 6980/Del./2017 2
3. That the AO/TPO erred on facts and in law in computing the operating profit margin of the appellant at 6.99% as against the correct operating profit margin of 7.98%, allegedly holding that: i. The values reported in the Transfer Pricing Documentation for computation of operating profit margin of the appellant do not reconcile with the values reported in the audited financial statement for the financial year 2012-13. ii. The foreign exchange gain/loss is to be considered as non- operating for computing operating profit margin of the appellant and the comparable companies.
4. That the AO/TPO, erred on facts and in law in considering exchange fluctuation income of Rs. 29,03,948 as non-operating item of income for computing the operating profit margin of the appellant disregarding the directions of the Dispute Resolution Panel (‘DRP’). 4.1 That the AO/TPO erred on facts and in law in not appreciating that in terms of Rule 10B(1)(e) of the Income Tax Rules, 1963, while applying TNM method, net profit earned by the appellant from transaction undertaken with associated enterprise is required to be benchmarked. 5. That the AO/TPO erred on facts and in law in rejecting comparable companies on the basis of additional filter of export sales less than 75% of the total income, without appreciating that selection of comparable companies on the basis of such quantitative filters alone, defies the purpose of the benchmarking analysis. 6. That the TPO erred on facts and in law in considering the following companies in the final set of comparable companies not appreciating that there were not functionally comparable to the appellant for the purpose of undertaking benchmarking analysis applying TNMM i. Igate Solutions Ltd. ii. Capgemini Business Services (India) Pvt. Ltd. iii. e4e Healthcare 7. That the AO/TPO erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the ITA No. 6980/Del./2017 3 appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent ITES service provider 8. That on the facts and in the circumstances of the case and in law the AO/TPO erred in rejecting the contention of the appellant regarding risk adjustment, allegedly holding that the appellant failed to provide any evidence to demonstrate that whether any risk was actually undertaken by the comparable companies and such risks affected their operating profit margin.
9. That the AO/TPO erred on facts and in law in not allowing comparability adjustment on account of working capital employed by the appellant vis-a-vis comparable companies.
10. That the Assessing Officer erred on facts and in law in levying interest under section 234B and section 234C of the Act.”
The brief facts of the case are that the assessee filed return of income on 26.11.2013 declaring income of Rs.2,61,11,546/-. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee is in the business of BPO/Data processing to its associate enterises. It is a company incorporated on 19.03.2004, during the year was wholly owned 100% subsidiary of M/s. Omniglobe International LLC, USA (Associate Enterprises/AE). The assessee also provided information technology enabled services (ITeS) relating to phone activation and local number portability to various clients for and on behalf of its parent company. The assessee company was covered under the transfer pricing audit and the case was referred to Transfer pricing Officer (TPO) on 05.08.2015 for determining the Arm’s Length Price (ALP) u/s. 92CA(3) in respect of international transactions entered by the assessee with its AE. The ld. TPO included companies which were rejected by the assessee in the transfer pricing documentation either on account of functional dissimilarity or insufficient financial information and ITA No. 6980/Del./2017 4 arrived at a set of the 13 comparable companies. Accordingly, he passed the order on 13.10.2016 and determined the ALP for the provision of ITeS after considering 13 companies and calculated average mean by OP/OC at 14.50% as under :
Sr.No. Company Name OP/OC (%) 1. Accentia Technologies Ltd. 13.92 2. Informed Technologies India Ltd. 3.28 3. Microgenetics Systems Ltd. 16.25% 4. Jindal Intelecom Ltd. (-) 2.99% 5. Acropetal Technologies 14.98% 6. E4e Healthcare 17.11% 7. Capgemini Business Services (India) Pvt. 26.30% Ltd.
New VC Servces Pvt. Ltd. 20.07% 9. Datamatics Global Services Ltd. 17.11% 10. Caliber Point business solutions 2.19% 11. R Systems International 15.34% 12. Igate Solutions 23.61% 13. Tech Mahindra 21.33% Average 14.50% After calculating the above Arm’s length margin average at 14.50%, the ld. AO/TPO made upward adjustment in relation to international transactions related to ITeS as under : Particulars Amount in Rs. Operating Cost 305,345,595 Arm’s Length Margin (%) 14.50% Arm’s Length Margin (Rs.) 44,275,111 Arm’s Length Price 349,620,706 Price charged by the assessee 326,693,412 International Transaction 626,638,206 3% of Price charged in international transaction 9,799,146 Difference between ALP and Price charged by 22,927,294 assessee Percentage of services provided to AEs to total 99.98 revenue Proportionate Difference for which adjustment is 22,923,420 required to be made
ITA No. 6980/Del./2017 5 Accordingly, the ld. AO/TPO made upward adjustment of Rs.2,29,23,420/- being the ALP of international transactions for ITeS provided to its AE. Further, the AO also observed that the assessee has credited in his profit and loss account foreign exchange fluctuation gain of Rs.29,03,948/- which was not considered as operating income by the AO while passing the draft assessment order. During the course of determination of ALP by the TPO, it was noticed that the assessee had entered into the international transaction of provision of ITeS amounting to Rs.32,66,38,206/- with its AE. In the TP documentation for the purpose of benchmarking, the assessee had applied transactional net margin method as the most appropriate method considering itself as the tested party and operating profit to operating cost ratio as the most appropriate profit level indicator (PLI).
For application of TNMM, the assessee considered the following two comparable companies in the transfer pricing documentation with an average operating profit margin of (-) 8.48% as under :
S.No. Company Name OP/OC (%) 1. Allsec Technologies Limited (-)4.19 2. Nucleus GIS & Ites Limited (-)12.77 Average (-)8.48% While calculating operating profit margin by the ld. TPO, he applied the following quantitative and qualitative filters for selection/rejection of comparable companies : (i). Use of current year data (ii). Companies having sales less than 1 Cr. were rejected (iii). Companies having service income to total income ratio more than 75% were selected.
ITA No. 6980/Del./2017 6
(iv). Companies having income from export sales at least 75% of the total income were selected. (v). Companies having employee cost to total cost less than 25% were rejected. (vi). Companies having RPT more than 25% of total income were rejected. (vii). Companies that are affected by some peculiar economic circumstances. (viii). Companies undertaking significantly different functions compared to assessee.
Based on the aforesaid filters, the TPO in impugned order rejected all the comparable companies considered by the assessee in the transfer pricing documentation, for the reason submitted as under :
S.No. Company Name Remarks of TPO 1. Allsec Technologies Limited This company fails Export income more than 75%. Hence, not a suitable comparables. 2. Nucleus GIS & Ites Limited This company fails Export income more than 75%. Hence, not a suitable comparables.
On the basis of the TPO order, the AO passed the draft assessment order. Against the draft assessment order, the assessee raised objection before the ld. DRP. The ld. DRP after considering the submissions and explanations of the assessee gave direction regarding the foreign exchange fluctuation as under : “As far as foreign exchange fluctuation is concerned, as per the TP study filed by the assessee, the assessee bears the foreign exchange risk since its functional currency is rupees and it gets payments in US$. The AE of the assessee does not bear foreign exchange risk. In view of this, the TPO is directed to treat foreign exchange fluctuation as operating in nature if it is linked to the operations of the assessee. Similar treatment (treating FE fluctuation as operating) should be given in the case of comparables also.”
Further, the turnover filter was also rejected by the DRP and risk adjustment was also rejected by the DRP. Further, the assessee objected to ITA No. 6980/Del./2017 7 five comparable companies out of 13 companies taken by the TPO. The ld. DRP after making detailed discussion issued directions to the TPO vide order dated 25.08.2017. In pursuance to the directions of the ld. DRP, the AO worked out the average margin at 13.93% and finally made adjustment of Rs.2,11,82,587/- to the income of the assessee. Feeling aggrieved from the final order of the Assessing Officer, the assessee is in appeal before the Income-tax Appellate Tribunal.
6. Ground No. 1 & 2 are general in nature and do not require any specific adjudication.
In respect of ground No. 3, 4 and 4.1, the AR of the assessee submitted that the foreign exchange gain earned by the assessee is generated from the services rendered to AE. It is an operating income. He further submitted that the assessee has followed the TNMM as most appropriate method for calculating the operating profit margin which has not been considered by the AO/TPO. He also relied on many judgments placed on the paper book. Even though the ld. DRP’s specific directions were to consider the foreign exchange gain as operating income, the AO has not considered the same in the final assessment order. Therefore, the foreign exchange gain should be considered for calculation of operating profit margin. The TPO has calculated operating profit margin at 6.99% whereas it should be 7.98%.
8. On the other hand, the ld. DR relied on the order of the lower authority.
After hearing both the sides and perusing the entire material available on record and case laws cited by the assessee, we find that the AO was not ITA No. 6980/Del./2017 8 justified in not following the directions given by the ld. DRP. We, therefore, remit this matter back to the AO/TPO to consider the foreign exchange gain as operating income of the assessee while working out the operating profit margin of the assessee, as directed by the ld. DRP. We further direct that the AO/TPO should calculate operating profit margin as per Rule 10B(1)(e) of the Income Tax Rules, 1963, if the assessee satisfies the conditions as per rules. Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, these grounds are allowed for statistical purposes.
10. Ground No. 5 challenges the rejection of comparable companies on the basis of additional filter of export sales less than 75% of the total income. In this context, we do not find any justification to discard the conclusion reached by the authorities below while considering this filter as appropriate filter for comparability analysis in the facts of the present case. The ld. AR of the assessee failed to rebut the finding of the ld. DRP that more than 86% of the operating revenue is earned by assessee out of export sales. Therefore, considering the quantum of export gross revenue of the assessee, the authorities below have rightly applied this filter as an appropriate filter for comparability analysis. Accordingly, this ground of assessee has no merit and is liable to fail.
Ground No.6 relates to selection of certain comparables, which according to the assessee are not comparable companies, although the assessee has challenged the selection of comparables, namely, Igate Solutions Ltd., Capgemini Business Services (India) Pvt. Ltd. and e4e Healthcare Business Services Ltd.
ITA No. 6980/Del./2017 9
iGATE Solutions Ltd. : The ld. AR of the assessee objected to the inclusion of this company in the list of comparables contending as under : a) the company is not passing RPT filter It is submitted that the company is not passing on the filter of related party transaction in excess of 25%, applied by the TPO.
The related party transaction works out to 36.09% of sales (refer page 338 of the paper book), as under Particulars Amount ( in million) Revenue from operations I get technologies I NC. 9,551 I hate technologies I NC., Kannada 1,236 I get computer systems (UK) Ltd 1,320 Others 235 Total 12,342 Sales revenue 34,195 RPT as % sales 36.09%
The company, it is submitted, ought to be rejected from the final set of comparable companies, for this reason alone. a) Mergers/Accusations during the year During the year under consideration, IgateComputer Systems Ltd (formerly known as patni computer Systems Ltd.) merged with Igate Solutions Ltd. wide order dated 10.05.2013 w.e.f. 01.04.2012.
It is pertinent to note that the financial results of the company for the financial year 2012 – 13 are affected on account of the merger undertaken during the year under consideration. The figures reported in the audited financial statements ofIgateSolutions Ltd for the year ending March, 2013 includes assets, liabilities, income, expenditure, profits and losses of IgateComputer Systems Ltd. for the period beginning from 01.04. 2012 to 31/03/2013. The fact that the financial results of the company for the financial year 2012 – 13 are affected due to the merger undertaken during the year are reproduced at page 20 – 21 of the annual report (page 321 – 322 of the paper book).
It shall further be noted that the merging entity, i.e.IgateComputer Systems (formerly known as patni computer systems), is engaged in the business of providing IT and IT enabled services. The services rendered by the company under the IT segment includes, application development, application maintenance and support, verification and validation, enterprise application solutions, business
ITA No. 6980/Del./2017 10 intelligence and data warehousing (refer page 8 of the annual report of patni computer systems). (annual report enclosed at pages 536 – 605 of the paper book). Accordingly, even if it is assumed that the company, iGATESolutions Ltd is engaged in providing IT enabled services, which is akin to the services rendered by the appellant, pursuant to the merger of Igate computer Systems Ltd (formerly known as patni computer systems), iGateSolutions Ltd ought not be considered as comparable to the appellant, as the merging entity is also engaged in providing IT services, which includes application development etc. b) Functionally not comparable and segmental daughter not available The company is engaged in the business of providing information technology and IT Enabled services to the customers. At page 21 of the annual report, it is mentioned that the company is specialised IT and ITES is provider (page 321 of the paper book). From notes to Accounts: Segment Reporting, it is evident that the company is engaged in two business segments, namely, Information Technology and IT Enabled services. It is submitted that since the operating results of the IT enabled services segment is not available in the audited financial statement, therefore, the company cannot be considered as comparable to the appellant. Decisions relied upon Reliance is placed on the following decisions, wherein the Hon’ble Benches of the Tribunal have consistently taken a view to exclude companies having extra-ordinary event during the year under consideration: • Capital IQ Information Syatems (India) Pvt. Ltd. (ITA No. 1961/Hyd/2011) approved by Hon’ble High Court in of 2014 – CL 481-508(ITAT)/ 697-698 (HC) • Xchanging Technology Services India Pvt. Ltd. Vs. DCIT (ITA No. 1897/Del/2014) – Approved Hon’ble High Court in ITA No. 813/2015- CL 699- 700 (HC) /701-711 (ITAT) • Ameriprise India Pvt. Ltd. Vs. DCIT (ITA No. 7014/Del/2011) – Approved by Hon’ble High Court in ITA No. 461/2016- 759-786 (ITAT) • Toluna India Pvt. Ltd. Vs ACIT (ITA No. 5645/Del/2011) • Lear Automotive India P. Ltd. Vs ACIT (ITA No. 5612/Del/2011) and • Global Logic India Pvt. Ltd. Vs ACIT (ITA No. 5809/Del/2011) • Agilent Technologies ( International )Pvt. Ltd. Vs. ITO (ITA No. 1620/Del/2015, 477 & 6420/DEL/2016 • Transcend MT services Pvt. Ltd. Vs ACIT ( ITA No. 4048/Del/2013) • Vertex Customer Services India P.Ltd. vs. DCIT (ITA No. 1508/ Del/2015) • Exevo India Pvt. Ltd. vs DCIT (ITA No. 20/Del/2017) • Alcatel – Lucent India Ltd. vs Addl. CIT (ITA No. 1112 /Del/2017) • Ciena India Pvt. Ltd. vs DCIT (ITA No. 3324/Del/2013) • Equant Solutions India Pvt. Ltd. vs DCIT in ITANo.1202/Del/2015 • NCS Pearson India Private Limited v ACIT (ITA No. 2556/Del/2014)
ITA No. 6980/Del./2017 11 Reliance is also placed on the decision of Delhi Bench of Tribunal in the case of following decisions, wherein, the Hon’ble Tribunal directed to exclude a company on account of non- availability of segmental data: i. Vodaphone India Services vs. DCIt( & 7097 / Mum/2012 ) ii. Macquire Global Services (P.) Ltd. (ITA 6803/ Delhi/2013) – CL 509-533 Hon’ble Tribunal in the case of appellant for the assessment year 2011 – 12[ITA No. 1003/Del/2016] excluded Accentia Technologies Ltd from the final set of comparable companies, interalia, on account of extraordinary event of a merger/acquisitions and nonavailability of segmental accounts. – CL 615 – 627.
Further, Igate global Solutions Ltd itself has been rejected as comparable, on account of merger/acquisition and absence of segmental accounts, in the falling decisions; Vertex customer services vs DCIT, Circle 28 (1), India Private Limited vs DCIT (ITA number 1508/Del/2015) – CL 712 – 740 Evalueserve SEZ ( Gurgaon ) P. Ltd. Vs ACIT (ITA No. 1467/Del/2017) Ameriprise India Pvt. Ltd. vs DCIT (ITA No. 7014/Del/2014) – CL 759 – 786
The assessee has further relied on the following decisions : (i). PCIT vs. Ameriprise India Pvt. Ltd. dated 19.10.2016 (Delhi H.C.) (ii). ITA No. 124/2018 PCIT vs. M/s. Oracle (OFSS)BPO Services Pvt. Ltd. (Delhi H.C.)
13. On the other hand, the ld. DR relied on the order of lower authorities and submitted that it is a good comparable company because it is engaged in providing ITeS. It was also submitted that the amalgamation will not affect the business of the company.
In our opinion, It is clear from the annual report of this company that related party transaction filter is more than 25% . The TPO has rejected has the RPT filter more than 25 % itself (supra). It is further seen from the directors’ report which is on paper book page No. 307 that the company has merged with Igate Computer Systems Ltd. The Directors’ report is as under :
ITA No. 6980/Del./2017 12
“iGATE computer systems Ltd. (iCSL) (formerly known as Patni Computer Systems Ltd) was merged with the company, pursuant to the approval of the scheme of arrangement by the shareholders of both companies and order dated May 10, 2013 of the Hon’ble High Court having judicature at Bombay, which became effective from May 27, 2013. The appointed date fixed under the scheme of arrangement was April 01, 2012. Accordingly, iCSL stands merged with the company as on the appointed date.”
Due to extraordinary events occurred during the year, the financial result is affected. Further, no segmental information is available on the annual report. Moreover, iGATE has undergone restructuring by way of amalgamation, as discussed above. iGATE is also having huge turnover of Rs.34,195 . In view of both the counts as narrated above and after considering the case laws cited by the assessee , we directed to the AO/TPO to exclude this company not being a suitable comparable.
Capgemini Business Services (India) Pvt. Ltd.: The learned AR of the assessee relied on the written submissions for exclusion of this company from the list of comparables, stating as under : a) Functionally not comparable it is submitted that as per the business information provided under head notes to accounts of the annual report (refer page 135 of the paper book), the company is a provider of financial shard services and governance., Risk and compliance services. Further under the head Revenue Recognition, the company states that it derives its revenue primarily from business process management services and assurance and compliance services. The company is also engaged in the business of providing supply chain, procurement, Technical Publication services in the financial year 2012 – 13. The company also provides operational control assessments, IT risk assessment, SAS 70, Assurance andRisk management services to many around the globe. It is submitted that the aforesaid services are in the nature of KPO services and cannot be considered comparable to the captive services rendered by appellant being in the phone activation.
ITA No. 6980/Del./2017 13
Reference in this regard is also made to Rule 10 TA of the income tax rules, which, the safe Harbour Rules, provides following services to be considered in the nature of KPO services: (g) “ Knowledge process outsourcing services”means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:- (i) geographic Information System; (ii) human resource services; (iii) engineering and design services; (iv) animation or content development and management: (v) business analytics; (vi) financial analytics; or (vii) market research, but does not include any research and allotment services whether or not in the nature of contract research and development services; it is submitted that the nature of services provided by the company, viz, financial shared services and governance, risk and compliance services, involve advance analytical and technological skills, and are in the nature of KPO services.
Therefore, the company ought not be considered as comparable to the appellant on account of functional dissimilarity.
It shall also be noted that as per the website of the company, the company is providing services in the following areas: Transformation and innovation Digital Services Cloud Services Technology solutions Business Operations Cybersecurity & Risk all our services Complete details of services provided under each head as shown above is enclosed at pages 609 to 614 of the paper book.
In fact, on the website of the company under head featured jobs, the company has sought application of candidates having most advanced technology experiences, reproduced as under : Portfolio Management – 14-16 years- Bangalore; Salesforce – 6 to 9 years Bangalore Mulesolf developer – 6 to 9 years – Chennai Salesforce developer – Hyderabad Magento Developer – 6 to 9 years – Bangalore & Mumbai Senior consultants
ITA No. 6980/Del./2017 14 From the aforesaid, it shall be noted that the company is not only engaged in providing outsourcing services, but is also engaged in software development and related services and provision of KPO services.
Needless to mention that in the absence of segmental results with regard to BPO/outsourcing segment, the company cannot be considered as comparable to the appellant with regard to its entity wide operation. b) Nonavailability of complete financial information It is further submitted that thecompany is a whollyowned subsidiary of Capgemini S.A. France and the entire group operates through its subsidiary across 40 countries. However, the related party transition detail is not available in the annual report being available in the public domain and therefore, the basis filters applied by the TPO cannot be verified. In view of the aforesaid, it is submitted that the company cannot be considered as an appropriate comparable for the purpose of applying TNMM.” Hon’ble Tribunal in the case of appellant for the assessment year 2012 – 13 in excluded Informed Technologies India Ltd from the final set of comparable companies, being engaged in provision of KPO services such as financial research services, data management services to the financial content industry. – CL 628 – 648.
A company engaged in provision of KPO services cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transition of provision of BPO services[Rampgreen Solutions Pvt. Ltd vs. CIT (377 ITR 533)]. – CL 670 – 696
Reliance, in this regard, is praised on the following decisions, wherein, the Hon’ble Tribunal directed to exclude a company on account of non-availability of segmental data: iii. Vodaphone India Services vs. DCIT( & 7097 / Mum/2012 ) iv. Macquarie Global Services (P.) Ltd. (ITA 6803/ Delhi/2013) – CL 509-535
The ld. DR, on the other hand, relied on the orders of authorities below.
In our opinion, it is clear from the business profile of this company that the company is engaged in providing BPO services in the nature of business process management services and assurance and compliance services. The company is also providing business process outsourcing services in finance
ITA No. 6980/Del./2017 15 and accounting in India. The company also offers financial share services and sharbanes Oxley compliance services to the industries in the domain of customer products, retail and distribution, financial services, life science and healthcare, manufacturing, media and entertainment and utilities. The arguments of the ld. DR has no force in view of the fact that the AO /TPO himself has admitted in his order that the assessee was in the business of BPO/data processing and in ITeS relating to phone activation and local number portability to various clients for and on behalf of its parent company. Nowhere in these orders, the authorities have observed that assessee was providing high-end knowledge based services requiring high skill. In our considered opinion, the above comparable company is engaged in BPO/KPO. The KPO is nothing but extended version of BPO. The contention of the assessee is also that the assessee is engaged in BPO/KPO services, but no segmental information is available, which is necessary to treat this company as appropriate comparable. We, therefore, direct the AO/TPO to analyse the comparability test of this company on the basis of segmental information, if he possesses the same.
E4e Healthcare: The ld. AR for exclusion of this company from the list of comparables has stated as under : a) Functionally not comparable and segmental data not available As per page 54 (227 of the paper book), besides providing IT enabled services, the company is also engaged in the business of rendering software development services. However, segmental data with respect to IT enabled services segment is not available in the audited financial statement of the company. Further, as per page 56 (page 229 of the paper book), the company derives its revenue primarily from Revenue Cycle management of U.S. Based the Healthcare client. Revenue is derived from billing, coding and claim process services.
ITA No. 6980/Del./2017 16
A further scrutiny of the nature of services provided by the company from the website of the company revealed that the company is providing host of services and end – to - end solutions to the healthcare industry. A few snapshot of the website of company is as under;
Healthcare Business Solutions Enhance your margins Our 23 - year experience has taught us that there is no magic potion are silver bullet for improving financial performance. It can only be achieved by leveraging best practices, tested process, and innovative technology. Our approach historically addresses Revenue Cycle Management – from the moment a patient enters the system to the final dollar being collected or paid – all this, while delivering better outcomes in quality, turnaround times, and productivity.
The various services and solutions provided by the company, as demonstrated on the website is reproduced hereunder Provider solutions Medical Billing Companies Integrated Practice and RCM Coding and Compliance Hospital Services Hospital Coding Payer Solutions Claims Management and Admin Cost Avoidance and Audit Medical Record Audit Contact Centre Solutions Technology Solutions Payer Platforms Computer – Assisted Coding Workflow Tools Value – Added Services Case Studies Healthcare & Life Science Analytics
Detailed services as extracted from the website of the company is enclosed at pages 606 to 609 of the paper book.
From the aforesaid, it shall be noted that for the revenue cycle management services provided to its health clients, the company is not only providing just billing, coding and claim processing services, but also providing audit services as well as technology solutions such as payer platform, workflow tools etc. It is submitted that the diverse services provided by the company is in the nature of IT services and KPO services apart from IT enabled services.
ITA No. 6980/Del./2017 17
Hon’ble Tribunal in the case of appellant for the assessment year 2011 – 12[ITA No. 1003/Del/2016] excluded Accetia Technologies Ltd. form the final set of comparable companies, inter alia, on the basis that the company provides services in healthcare division and also engaged in the business of providing KPO services. The company was also excluded on account of non-availability of segmental accounts. Following the decision for assessment year 2011 – 12 the Hon’blelTirunal in the appeal for assessment year 2012 – 13 in 2016, excluded Acropetal Technologies Ltd and BNR Udyog Ltd from the final set of comparable companies, being engaged in provision of KPO services in healthcare segment A company engaged in provision of KPO services cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transition of provision of BPO services[Rampgreen Solutions Pvt. Ltd vs. CIT (377 ITR 533)]. The company has itself been rejected as comparable is to a ITES enabled services provider in the following cases: HOV Services Ltd. Vs. JCIT (2016) 73 Taxmann.com 311 – CL 787 – 818 Schlumberger India Technology Centre Pvt. Ltd. Vs. DCIT (ITA No. 640/Pn/2014) – CL 741– 758
On the other hand, the ld. DR relied on the orders of the lower authorities and submitted that the assessee has produced the print out of business profile of this company on 20.01.2018, which at PB-606 to 608, which is not reliable and may differ from actual business activities of the company. The case of assessee is related to A.Y. 2013-14.
In our opinion, the ld. DRP has given direction that if this company passes the employee cost filter, it can be retained as comparable. We further observe from the paper book of assessee that in assessee’s own case for A.Y. 2011-12, this company was selected as comparable on which no objection was raised by the assessee upto the stage of Tribunal. Similarly, in the case of assessee for A.Y. 2012-13, the DRP had mentioned that assessee has no objection on inclusion of this company. However, keeping in view the ITA No. 6980/Del./2017 18 objection of assessee in the submissions made before the Tribunal, the ITAT remitted this matter back to the file of DRP for re-deciding the same after affording reasonable opportunity of hearing to the assessee. No further information pursuant to the remand proceedings, is furnished by the assessee before us. It is notable that before the ld. DRP, the assessee raised objection on this company only on account of non-comparability of employees cost and no objection was raised either on functional test. The objection regarding non- availability of annual report was not raised by the assessee before the TPO. The ld. DRP was also of the view that when the assessee challenged the employees cost filter having not been passed, it leads to say that the assessee was having annual accounts of the said company. Keeping in view these facts, the ld. DRP remitted it to the AO to compare this company on the basis of employees cost filter. In pursuance to this, the AO/TPO after going through the annual report of this company found that this company passes the employees cost filter and therefore, in our considered opinion, has rightly included this company as an appropriate comparable. In presence of above facts, the objections of the assessee on functional dissimilarity or non- availability of segmental data are not found acceptable at all. We, therefore, conclude that the ld. Authorities below have rightly included this company as an appropriate comparable in the instant case.
In respect of ground No. 7 & 8, the assessee has raised grounds relating 21. to risk adjustment not granted by the AO/TPO. The AR of the assessee reiterated the submissions made before the lower authorities and submitted that the assessee should be allowed risk adjustment because the assessee is dealing only with its holding company. On the other hand, the ld. DR relied on ITA No. 6980/Del./2017 19 the order of the lower authorities and he submitted that the authorities below have discussed this issue in detail.
After going through the orders of the authorities below and submissions of the assessee, we observe that there is no infirmity in the orders of the lower authorities. The findings reached by the authorities below are as under :
RISK ADJUSTMENT The assessee has argued that it is working in a risk mitigated environment and does not take market risk, credit risk, pricing risk, etc. On single customer risk it is claimed that it is getting continuous business from the AE and there is no such risk. As regards political and country risk, it is stated that the same are applicable to ail and is not peculiar to assessee alone. The assessee has not provided any quantification of the different kinds of tasks assumed by the comparables and claimed not available in the case of assessee, Thus, the computation of risk adjustment by the assessee is vague and without any basis as the assessee has not furnished any factual input correlating its functioning, die functioning of the service sector and the functioning of die comparable companies. From the above, it is observed that the assessee has not been able to assign any evident and acceptable value to the adjustment claimed on account of Zero risk born by the assessee. The assessee has also not furnished the risk profiles of the comparables, even-while the assessee has objected the action of this office for not allowing any adjustment for difference in risk profile of the assessee and that of comparables. The primary' argument of the assessee is that it was remunerated on cost plus basis, i.e, the entire cost incurred by the assessee is reimbursed by its AE along with a certain markup and, accordingly, is was working in a risk free environment. 1'he assessee further contended that the profits are directly linked with the risk profile , t e., more is the risk more should be the profit and, therefore, since the assessee was not carrying any risk, it should have been allowed adjustment for assuming lower risk as compared to the compare' vs. This Panel has carefully considered the arguments of the assessee. The adjustment for function - : differences, if any. can be made only if those differences can be ascertained accurately and then impact on the margins can be assessed with reasonable accuracy. In this case, no information is available about the risk profile of the comparables, i.e. how much was the risk assumed in respect of functions carried out by them, what was their business model, i.e., either cost plus or full time equivalent (FIE) or lump-sum. consideration. In the absence of reliable information about the risk profile of the comparables, it is impossible to quantify the adjustment for difference in the risk profile. Moreover, the assessee also bears single customer risk which is a significant risk. In stock market also, companies with diversified customer base commands better valuations as compared to the companies having single customer or narrower customer base.
After careful consideration of the matter this office is of the view that risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparable.- had actually
ITA No. 6980/Del./2017 20 undertaken such risk and how the same materially affected their margins. The revised OECD guidelines of 2010 has also stated in Para 3.54 as under: "Ensuring the needed level of transparency of comparability adjustments nun depend upon the availability of an explanation of any adjustment performed, the reasons for the adjustments being considered appropriate how they were calculated, how they changed the results for each comparable and how the adjustment improves comparability. Issues regarding documentation of comparability adjustments tire discussed in Chapter V ."
8.2. Prom the above guidelines, it can be seen that unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the assessee. In the present case except pointing out various risks the assessee has not shown with evidence as to whether each of the risk was actually undertaken by the comparables or not and if so how these risks affected each of them and whether such adjustment would improve the comparability. It may also be mentioned that: it is incorrect to say that the assessee is working virtually in a risk free environment. The assessee too bears several risks like technology risk, foreign exchange risk, manpower risk, single customer risks, etc. The various risks to which assessee is exposed are being discussed below:-
No. Risk to The discussion on various risks as per the matrix as assessee disclosed in transfer pricing report and also remarks of this office on the same 1. Market risk Disclosed in transfer pricing report, The assessee’s claim that it does not bear market risk as it renders services- exclusively to its AE is not acceptable. In fact, the assessee bears a much bigger market risk viz. single customer risk, j As the assessee is wholly dependent on its AE, its entire existence is dependent on it. If the AE runs out of business or if AC - business gets reduced substantially, the assessees business will also get adversely affected The assessee being a captive service provider cannot even look, for other 1 customers. Thu?, in fact the assesses runs a greater risk than an average independent entity that can always look for other customers or other markets 2. Service liability Disclosed in transfer pricing report. The assesses argues that independent i comparables bear lull responsibility for delivery of final services to clients and hence exposed to service failures risk whereas the assessee is not exposed to this risk as it dries not have any contractual liability for losses or damages' for service failures and the cost of rework (if any) would be recoverable from AE on a cost plus basis. It is naive to argue that the assesses is not responsible for quality of service and ITA No. 6980/Del./2017 21 thus does not bear risk for delivery1 of services. Further, it is the duty of the independent enterprise to rectify such error at an additional cost, which in fact, reduces the profitability as it cannot get more than the prevailing rate in the market for the services rendered. The reworks unless exceptional are a part of running business and are factored in stated profits. 3 Price Risk Not disclosed In transfer pricing report but actually borne by assesses. : 4, Capacity Disclosed in transfer pricing, report. The assessee states that as utilization risk it is compensated even on' the idle capacity, it does not bear this risk. However, most independent companies are charging almost similar man-hour rates. Further, it is not the case of assessee that independent companies are charging at a premium rate to account for under utilization of capacity. Further, as the operating margin is computed after considering the complete employee cost which includes the salary for the period of under utilization of employees, the effect of this risk is already taken care of while computing the operating margin. It has also not been shown that margins change because of under utilization.
5. Foreign Disclosed in transfer pricing report. However, it has been exchange risk considered a nonoperating item both for assesses and comparable companies. Besides, hedging costs incurred by comparable companies are already part of their P&L and have already reduced their profits.
Credit & Disclosed in transfer pricing report. It is not shown that the AE collection risk pays the money in advance. If not so. assessee also has credit risk as there is no guarantee that the AE shall always be in a position to pay the assesses. In any. case, the risk on account of collection is very minimal and it gets nullified at net level due to the fact that the margin of the comparable companies is computed only after deducting the bad debts/ provision for bad debts as operating expenses. & 7. Government Not disclosed in transfer pricing report but actually borne by institutional assesses.
8. Operational risk Not disclosed in transfer pricing report but actually borne by assesses.
9. Infrastructure Not disclosed in transfer pricing report but actually borne by failure risk assessee.
Manpower risk Disclosed in transfer pricing report but actually borne by assesses, It is argued that the high attrition rate resulting in higher training costs, idle time etc will have an impact on the pricing of comparables. However, it is an ongoing phenomenon in any running company and the costs on account of the same
ITA No. 6980/Del./2017 22 are already factored in the P&L of comparables. As regards loss of valuable personnel and related human intangible, even the assesses is exposed to this risk.
11. Security risk Not disclosed m transfer pricing report but actually home by assesses.
12. Environmental Not disclosed in transfer pricing report but actually borne by risk assessee.
Technology Risk Comparable companies as well .as the assesses tire exposed to similar type of technological obsolescence or risk, further, technological changes are an ongoing phenomenon and place an additional cost burden which pull down the profitability of the comparable companies as well. It may be more relevant for companies which have substantial assets and run the risk of their products getting obsolete This risk is not very relevant for service industry.
8.3. Judicial decisions: In various judicial pronouncements the risk adjustment has not been allowed by the ITATs. Some of these decisions are discussed below: (a) Vedaris technology (2010-TII-10-ITAT-DEL-TP: No risk adjustment to be allowed even on ad hoc basis
(b) M/s Marubeni India Private Ltd. t20n-TII-36riTAT~DF.L-TP) in which it was held that as the assessee failed to bring any evidence on record to show that-there was any difference in risk profiles of comparable companies and since the assesses failed id file the details exhibiting risk borne by comparables, no risk adjustment can be given, even on ad hoc basis.
M/S ADP Private Ltd. (2011-TII-44-ITAT-HYD-TP wherein the IT AT held that there is no thumb rule for allowance of risk adjustment (d) M/s Symantec Software Solutions Private Ltd, (2011-TII-60-ITAT-MUM-TP): The ITAT held that;- i. Until and unless it is shown that the difference in function and risk results in deflation or inflation of financial results of the comparables, it is not a general rule to grant it as a standard adjustment. ii. The assessee could not show how such difference in risk and functions affected the results of the- comparables.
(e). M/S ST Micro Electronics (2011-TII-63-ITAT-DEL-TP): The assessee's claim that is was a risk tree captive service provider and hence cannot be compared with comparables who were lull entrepreneurs was not accepted by the ITAT.
(f). M/s. Exxon Mobile Company India Pvt. Ltd. (201 l-TII 68-ITAT-MUM-TP): The ITAT held that since working capital adjustment has been given and the assessee has not worked out the risk adjustment, no adjustment can be granted on this account
ITA No. 6980/Del./2017 23
(g). M/s Deloitte Consulting India P Ltd: ITAT Hyderabad dated 22.7.2011: In this decision the ITAT held as under;
''The next ground is with regard to the issue that the TPO/CIT (A) not allowing any adjustment towards valuable intangibles owned by and in respect of entrepreneurial risk borne by the comparables. We find that there are several factors such as market risks environmental risk, entrepreneurial risk and functional risk etc.. which affect this muter and which ultimately, affect the results of the company. All the aforesaid factors make it impracticable to any authority to find out exact duplicate company of the assessee as comparable. Some variation bound to exist. We find that the TPO had made efforts to identify the comparables whose functions are similar to the assessee company by applying filter quantitatively and qualitatively to eliminate, the differences between the assesses companies with that of comparable companies neutralize the aforesaid risk factors. The argument of the learned counsel for the assessee in the written submissions as well as submissions made before us were all in the background of showing the assessee company its low end performer. We do not find force in the contention of the-learned counsel for the assessee that the assessee is a risk free service provider and sufficient adjustment needs to be allowed to compare with the other comparable companies. The learned counsel for the assessee placed reliance on several decisions in support of his case that there should be some adjustment for risk to be given However, we find that the first appellate authority utter going through the agreement, entered by the assessee company with the AE. observed that the assessee company is an independent contracting entity and shall be solely responsible for determining the manner, means and methods by which ii performs its obligation under the said contract as per Articles, the assessee company has undertaken the warranty that all its work and documentation to be delivered to the associate enterprise shall be free of error In a nutshell, the assessee company was carrying several risks while undertaking various works services far as associate enterprise In view of this mater after considering the detailed reasoning given by the CIT (A) TPO in their orders, in our considered opinion, it cannot be said that the assessee company was operating in a risk free environment and accordingly the assessee company is not entitled to any adjustment towards risks borne by various comparable companies. Therefore, we confirm their orders on this issue. Hence, the ground raised by the assesses on this issue is rejected. "
(h). Reliance on the judgment of M/s Inteilinet Technologies India Pvt. Ltd Vs ITO (ITA No. 1237 (Bang)/2010) is not of much help as in that case ITAT has not accepted the assessee’s contention of risk adjustment of 5.5%, The ITAT has only set aside the matter to TPO to consider various contention of the assessee and decide the percentage of risk adjustment in accordance with law. However, if the methodology given by the-assessee in its contention does not lead to reasonably accurate adjustment, the law is not in favour of granting an adjustment. Hence, the judgment cannot said to be to laying down that a risk adjustment should be allowed even if it does not result in reasonable accurate adjustment.
ITA No. 6980/Del./2017 24
8.6. Hence, it can be seen from the analysis of various judgments that the issue of grant of risk adjustment is not yet settled. In some decisions, courts have not allowed any risk adjustment, in some decisions, courts have principally agreed that there are differences between risk profile of the assessee and comparables and so there should be risk adjustment. However, the courts have not yet ruled on the issue whether any particular method results in reasonably accurate adjustment or not. Further, whether the assessee has a significantly different risk profile from that of comparables, therefore warranting a risk adjustment is a question of fact and has to be decided on the facts of the case.
8.7. It is not sufficient to merely spell out risks. It has to be shown which risk was actually undertaken by the comparables and to what extent it affected the profitability. The assessee has not done so. Adjustment can be allowed only if it is demonstrated that is leading to better comparability and only when a credible methodology is adopted for calculating a reasonably accurate adjustment.
8.8. Since, the methodology is nor well established and-requires making several assumptions, the risk adjustment calculated as per the methodology will not lead to reasonably accurate adjustment as required as per the Income Tax Act and Rules. Therefore, it will not be possible to give risk adjustment under the Indian law.
8.9. The discussion on the risk adjustment is summarized as under: a. As discussed above, the assessee has also undertaken several risks. Therefore, it is not correct to say that it is a risk mitigated entity. b. The assessee is totally dependent on the AE tor business. Thus the assessee takes the risks associated with heavy dependence on a single customer. In common business parlance it is known as "single customer risk’. c. The compensation model with the AE does not guarantee volume of business nor tire period. The agreement can be terminated by any party at any time after giving a stipulated period notice. Thus the assessee is not free from the risk of losing business entirely or losing volume of business. d. The assessee is not compensated any amount for termination of agreement even if it is terminated without any cause. No independent enterprise would like to agree for a termination clause without compensation if it is terminated without any cause.
ITA No. 6980/Del./2017 25 e. The independent entrepreneur has to incur expenditure on marketing, etc. which is debited to the profit and loss account. But, it is always not necessary that these risks reflected in the marketing, sales promotion expenses will automatically be compensated by increase in sales or higher margins For example, increased marketing efforts in some segments of market may not yield results for a company and thereby there may be a loss on this marketing effort which may bring down the overall profitability rather than increase the profitability. Thus if undertaking the market risk etc. helps in earning any extra margin, the benefit is more than set off by the corresponding expenditure. The same applies to credit risk, service- liability, technology risk etc. f. If is incomxt to say that higher the risk, the higher is the margin though it is true that one expects higher margin when one undertakes higher risk. Titus realization of risk is different from expected return based on risk undertaken. Finally selected comparables have almost similar risk' as all are independent entrepreneurs but their margins vary substantially. g. Different: comparables can have different risk profiles and different profit margins. The proviso to Sec. 92C{2) of the Act provides for adopting arithmetical mean of the different prices. This provision neutralizes the effect of difference in the risk profile, if any between the tax payer and the comparables as realized risk may pull down the profitability below the risk tree return. h. It is not sufficient to merely spell out .risks, .It has to be shown which risk was actually undertaken by the comparables and to what extent it affected the profitability. Adjustment can he allowed only if it is demonstrated that is leading to better comparability and only when a credible methodology is adopted for calculating a reasonably accurate adjustment. The methodology used by the assessee does not have any application in the area of transfer pricing. i. In the various decisions of the ITATs as referred to above no risk adjustment has been allowed in such cases in absence of any credible methodology to gram risk adjustment.
In view of the above discussion it is held that no risk adjustment is to be given to the assessee.
8.10. Further the assessee has quantified the risk adjustment based on the difference between bank rate and PLR. It is mentioned here that reference to PLR and bank rates in the context of transfer pricing is not pertinent. Though the honorable ITAT was persuaded in the case of Philips that bank rates and PLR are in some way connected with the under lying risk of lending; in fact it is not. so. Loosely speaking bank rate is the rate at which the central bank (RBI in India) advances credit to other banks. The bank rate also refers to the rate of interest charges on interbank short term borrowings (call money). However it is in no way connected with the perceived under lying risks. Before setting the base fate system, banks used another rate system called Prime Lending Rate (PLR) to set their lending rates. It was ITA No. 6980/Del./2017 26 noticed by the RBI that banks used to manipulate this PLR to lower level to offer discounted lending rates for the borrowers. It may cause the loss for the banks If they offer loan with much cheaper price. The real intention of the RBI is to make the banking system much stronger after the global financial crisis. The banks meet huge loss because of the default loans. The main reason is, when banks offer loans with cheaper price to lure the customers, most of the customers without adequate financial support to get the loans. Base rate system provides more transparency on selling the rates. Each bank uses same criteria to set their base rates. Base rate system is arrived at taking into the account, the cost of deposits and cost of keeping aside cash to meet CLR and SLR, It is convenient for the banks to adjust the lending rates after the changes on policy rates by the RBI. 8.11. In the following categories of loans PLR or base rate is not applicable: • Agricultural Loans • Loans given to own employees * Loans against deposit * Export Credit 8.12. As per RBI guidelines Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are: (i) cost of deposits; (ii) adjustment for the negative carry in respect of CRR and SLR; (Hi) unallowable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office, directors’ and auditors’ lees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance; and (iv) profit margin. It is generally known fact that the RBI uses interest rates as a measure of monetary policy to control liquidity in the market or as an anti inflationary measure. 8.13. The RBI policy announcement makes it very clear that PLR/Base Rate and bank rates are not the functions of risk adjustments but are measures used by the RBI as tools of monetary policy to control inflation; to regulate excess cash flow in the market and to release/suck out liquidity from the market. It is naive to postulate that the difference between the bank rate and the PLR/Base rate represent the underlying risk of lending,. The 29rystall's argument is therefore not acceptable. 8.14. Further, in the assessee own ease for AY 2012-13, the assessee has filed an appeal before DRP against the order u/s 92CA(3) passed by the TPO on this issue. However, the DRP vide its order dated 14.09.2016 has dismissed the assessee’s ground with the remarks “It is also worth adding that it is not sufficient to merely spell out risks, it has to be shown which risk was actually undertaken by the comparables and to what extent it affected the profitability……….. Since, the methodology is not well established and requires making several assumptions, the risk adjustment calculated as per the methodology will not lead to reasonably accurate adjustment as required as per the Income Tax Act and Rules. Therefore, it will not be possible to give risk adjustment under the India law.”
ITA No. 6980/Del./2017 27
“DRP Directions: Objections ix and x are related to risk analysis and risk adjustments hence are being adjudicated together. Risk adjustment as a general rule cannot be allowed unless it is demonstrated that the comparables had actually undertaken such risk and how the same materially affected their margins. Unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the taxpayer. In the present case, the taxpayer has not shown with evidence as to whether each of the risk was actually undertaken or not by the comparables and if so, how these risks affected each of them and whether such adjustment would improve the comparability. Probability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustment. All this requires robust and reliable data, both for the assessee and the comparables in the absence of which risk adjustment cannot be considered for enhancing comparability. Thus, the objection is dismissed.”
In the result, these grounds of appeal are rejected.
24. Ground No.9, challenges the working capital adjustment of assessee vis- a-vis comparable companies. After going through the order of the lower authorities, this issue has not been dealt and the assessee has also not raised this issue before the DRP, but raised before us. Therefore, this ground is not accepted.
25. Ground No. 10 regarding charging of interest 234B and 234C is consequential in nature. The AO is directed to give its consequential effect.