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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: HON’BLE SHRI PAWAN SINGH, JM & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member) 1.1 Aforesaid appeal by assessee for Assessment Year [in short referred to as ‘AY’] 2012-13 contest the final assessment order dated 27/01/2017 passed by Ld. Income Tax Officer-15(1)(4), Mumbai [AO] u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act pursuant to the GTS e-Services Private Limited Assessment Year :2012-13 directions of Dispute Resolution Panel-I, Mumbai, [in short referred to as DRP] u/s 144C(5) dated 24/11/2016. 1.2 The Ld. Authorised Representative [AR] for the assessee, Shri Nilesh Patel, at the outset submitted that Ground No.1 is not being pressed whereas Ground Nos. 2.1, 5 & 6 are general grounds which would not require any adjudication. The remaining grounds as agitated before us, read as under: - 2. Transfer Pricing Adjustment on ITeS services rendered to the AE 2.1. General Ground Computation of Arm's Length Price under TNMM 2.2. The Learned AO/TPO based on the directions of DRP erred in adopting an inappropriate set of comparables for applying TNMM. 2.3. The Learned AO/TPO based on the directions of DRP erred in including four companies - Accentia Technologies Ltd, Universal Print Systems Ltd, BNR Udyog Ltd, and Excel Infoways Ltd. - as comparables for application of TNMM. 2.4. The Learned AO/TPO/DRP erred in not granting Working Capital Adjustment.
3. Plus/Minus 5% Tolerance Limit 3.1. The Learned AO/TPO erred in not allowing adjustment for the Plus/Minus 5 % Tolerance Limit.
Adding Transfer Pricing Adjustment to the Book Profit u/s 115JB 4.1. In computing the Total Income, the Learned AO has erred in adding Transfer Pricing Adjustment to the Book Profit u/s 115JB for purposes of MAT (This Ground is without prejudice to the grounds raised above.).” 2.1 The relevant facts are that the assessee being resident corporate assessee is stated to be engaged in the business of providing IT enabled services (ITeS) to Griffin Group entities in finance/accounts related services such as invoicing, refunds processing and other services such as ticketing, reservations etc. 2.2 The International Transactions as carried out by the assessee with its Associated Enterprises (AE) and as reported in Form No.3CEB were referred u/s.92CA (1) for determination of Arm’s Length Price [ALP] to Ld. Transfer Pricing Officer-2(2)(1), Mumbai [TPO].
GTS e-Services Private Limited Assessment Year :2012-13 2.3 It transpired that the assessee provided back office support services in the nature of IT enabled services and operated in single segment i.e. travel support services. These services were rendered to several constituents of Griffin Group which were mainly engaged in travel / travel related business worldwide over a large geographical spread. The assessee earned revenue of Rs.16.95 Crores by rendering these services. In its TP study report, the assessee classified itself as back office support provider and benchmarked the transaction using transactional net margin method [TNMM] as the most appropriate method. The Profit Level Indicator [PLI] was taken as Operating Profit / Operating Cost. The assessee computed its own PLI at 13.78% as against mean margin of 9.39% reflected by 7 comparable entities and the same being within tolerance range of +5%, no Transfer Pricing [TP] adjustment was proposed by the assessee. 2.4 However, the assessee’s methodology was not termed as reliable and correct in view of the fact that the assessee used 3 year’s data and did not apply any export filter. Therefore, applying various filters, the Ld. TPO undertook a fresh search, as a result of which 5 comparables out of 7 comparables as selected by the assessee got rejected whereas 6 new comparable were identified. The mean PLI of these 8 entities worked out to be 22.63%. Applying the same to assessee’s financial data, ALP of the stated transactions was worked out to be Rs.18.27 Crores as against Rs.16.95 Crores reflected by the assessee. Accordingly, TP adjustment of Rs.1.31 Crores was proposed by Ld. TPO in its order u/s 92CA (3) dated 29/01/2016. Incorporating the said adjustment, draft assessment
GTS e-Services Private Limited Assessment Year :2012-13 order was passed on 29/02/2016 which was subjected to objections before Ld. DRP. 2.5 The final list of comparable entities as selected by Ld. TPO was as follows: - No. Name of Entity PLI (%) 1. Accentia Technologies Ltd. 11.75 2. Universal Print System (Segment)(BPO) 52.46 3. Informed Technologies India Ltd. 6.08 4. Jindal Intellicom Ltd. -0.05 5. Microgenetic Systems Ltd 19.61 6. BNR Udyog Ltd. (Seg.)(Medical Transcription) 41.58 7. Excel Infoways Ltd. (Seg) (IT/BPO) 29.79 8. E4e Healthcare Services Pvt. Ltd. 19.85 Average PLI 22.63%
Although the assessee, inter-alia, contested the selection of comparable as made by Ld. TPO, the same could not find favor with Ld. DRP except the plea of the assessee to include an entity namely Acropetal Technologies Ltd. in the final list of comparable. The inclusion of this entity reduced the mean PLI to 21.33% which reduced the TP additions to Rs.1.12 Crores in the final assessment order dated 27/01/2017. The income of the assessee was finally computed as Rs.131.69 Lacs as against returned income of Rs.19.17 Lacs filed by the assessee on 29/11/2012. The aforesaid TP adjustment was also added back while computing book profit u/s. 115JB. Aggrieved as aforesaid, the assessee is in further appeal before us. 4.1 The Ld. Authorized Representative for Assessee (AR), Shri Nilesh Patel, drew our attention to the functional profile of the assessee and submitted that the assessee was captive support service provider and bears minimal risk, do not deploy any intangible assets and employs GTS e-Services Private Limited Assessment Year :2012-13 ordinary non-professional graduates. The nature of services being provided by the assessee were of a supportive nature only and are not part of the core business of the Griffin Group. Merely because the functional profile of the comparable entity falls under the category of ITeS services, the same would not make these entities comparable to assessee as held by Mumbai Tribunal (Special Bench) in Maersk Global Centers (India) Pvt. Ltd. V/s ACIT [2014 43 Taxmann.com 100], Hon’ble Bombay High Court in CIT V/s Aptara Technology Pvt. Ltd. [2018 92 Taxmann.com 240] & Hon’ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. V/s CIT [2015 60 Taxmann.com 355]. 4.2 In the above background, Ld. AR argued for exclusion of 4 entities namely (i) Accentia Technologies Ltd. (ii) Universal Print Systems Ltd. (iii) BNR Udyog Ltd. (iv) Excel Infoways Ltd. by submitting that these entities were functionally not comparable to low-end ITeS services being provided by the assessee. To support the same, reliance has been placed on various judicial pronouncements for same assessment years, the copies of which has been placed on record. The Ld. DR submitted that final set of comparable entities would not require any interference.
We have carefully considered the rival submissions and perused relevant material on record including judicial pronouncements as cited before us. Since the arguments have been raised only with respect to selection of comparable, henceforth, we shall be straightway dealing with the same. Our adjudication in respect of these comparable entities would be as follows: - (i) Accentia Technologies Ltd.
GTS e-Services Private Limited Assessment Year :2012-13 The Ld. AR has objected to inclusion of this entity on the ground that this entity was functionally not comparable to the assessee since it was engaged in providing medical transcription services, medical coding, medical billing etc. which were more in the nature of Knowledge Process outsourcing [KPO] services as against assessee’s low-end support services which were in the nature of Business Process outsourcing [BPO] services. We find that Ld. DRP has upheld the inclusion of this entity on the ground that for benchmarking under TNMM, only broad functional comparability was required. However, the undisputed position that emerges is that the assessee is a low risk captive service provider and mainly engaged in providing low-end support services. These services, in our opinion, could not be compared with services which are in the nature of medical transcription services, medical coding, medical billing etc. since these are services of specialized kind. This is further fortified by the fact that the assessee had engaged ordinary non- professional graduates. The Tribunal in the decision of Maersk Global Centers (India) Pvt. Ltd. V/s ACIT [ITA No. 1082/Mum/2015 order dated 29/07/2016] directed for exclusion of this entity for AY 2010-11 in case of assessee engaged in providing similar kind of ITeS services primarily on the ground that Ld. DRP for AY 2011-12 and Ld. TPO for AY 2012-13 rejected this entity on functional dissimilarity. Keeping in view the above factors, we direct for exclusion of this entity. (ii) Universal Print Solutions Ltd. The Ld. AR disputed the inclusion of this entity on similar ground of functional dissimilarity by drawing our attention to the fact that this entity was an integrated print solution provider and operates in the segment of GTS e-Services Private Limited Assessment Year :2012-13 Repro, Label Printing, Offset Printing and Pre-Press BPO. The Ld. TPO picked up the pre-press BPO segment for the purpose of comparison. In this segment, the entity provides services in the nature of scanning, layouts, trapping, hand-outlined clipping path and image masking & magazine / catalogue publishing. Another point to which our attention is drawn is the fact that this entity has unallocated expenses of Rs.89.67 Lacs which would distort the segmental profits and therefore, the segmental results would not be reliable. Upon perusal, we find that Bangalore Tribunal in the case of XLHealth Corporation India (P.) Ltd. vs. ACIT [2018 91 taxmann.com 310] for very same AY 2012-13 directed for exclusion of this entity in case of assessee having similar functional profile on the ground that an entity which is engaged in the business of printing could be, by no structure of imagination, be considered as comparable entity. Secondly, as rightly pointed out by Ld. AR, the segmental results of the said entity would not be reliable in view of the fact that it has unallocated expenditure of Rs.89.67 Lacs which would surely distort the segmental results. Keeping in view the said factors, we direct for exclusion of this entity. (iii) BNR Udyog Ltd. Similar arguments of functional dissimilarity have been raised for this entity by drawing our attention to the fact that this entity was engaged in medical transcription, medical coding and medical billing etc. As observed by us in the case of Accentia Technologies Ltd., the low-end support services, in our opinion, could not be compared with services in the nature of medical transcription services, medical coding, medical billing etc. which are services of specialized kind. This is further fortified
GTS e-Services Private Limited Assessment Year :2012-13 by the fact this Tribunal in Maersk Global Centers (India) Pvt. Ltd. V/s ACIT [ITA No. 1082/Mum/2015 order dated 29/07/2016] has observed that this entity has been excluded by Ld. DRP on functional dissimilarity. Further, Delhi Tribunal in BT e-Serv (India) (P) Ltd. vs. ITO [2019 101 taxmann.com 275 AY 2012-13] in case of assessee having similar functional profile directed for exclusion for aforesaid entity on the ground that medical transcription would not be, at all, functionally similar to BPO service provider. Keeping in view the said factors, we direct for exclusion of this entity. (iv) Excel Infoways Ltd. The Ld. AR has submitted that this entity is engaged in rendering of voice-based services, customer services which include outbound sales, marketing, voice and email response, real time chat, knowledge management and other value-added services which could not be compared with assessee’s low-end BPO support services. Another differentiating fact is that the ratio of employee cost of this entity is only 12.97% as against assessee’s 59.20%. Further, the segmental results of the said entity would not be reliable as found in various decisions of the Tribunal. Upon careful consideration, we find that Delhi Tribunal in the case of Baxter India Pvt. Ltd. vs. ACIT [ITA No.6158/Del./2016 AY 2012-13 24/08/2017] has held that segmental results of this entity are not reliable and therefore, this entity is not suitable for comparison. Following the said decision, similar view has been expressed in BT e- Serv (India) (P) Ltd. vs. ITO [2019 101 taxmann.com 275 19/06/2018]. Respectfully following the same, we direct for exclusion of this entity. In the result, Ground No.2.2 & 2.3 stands allowed.
GTS e-Services Private Limited Assessment Year :2012-13 6. By way of Ground No. 2.4, the assessee seek working capital adjustment from PLI of comparable entity in terms of Rule 10B(3). The Ld. DRP has denied the same by observing that no working capital adjustment was made by the assessee in its TP study report and secondly, it was observed that fees for services is not impacted in the same manner by credit period offered or received as is the case with sale of goods. Although Ld. AR has pleaded for this adjustment on the strength of certain judicial pronouncements, however, no convincing case has been made out before us so as to justify the grant of aforesaid adjustment. Therefore, we are not inclined to interfere in the order of lower authorities, in this regard. This ground stands dismissed.
In Ground No. 3.1, the assessee is seeking benefit of tolerance range of +5%. In this regard, it would suffice to direct Ld. TPO / Ld. AO to grant the applicable benefits / concessions as per law. This ground stands allowed for statistical purposes. 8.1 In Ground No. 4.1, the assessee is aggrieved by the fact that impugned TP adjustment has also been added back while computing Book Profits u/s 115JB. We find that this ground was not raised by the assessee before Ld. DRP. The assessee seeks adjudication of the same by relying upon the decision of Hon’ble Supreme Court in NTPC V/s CIT [229 ITR 383] in view of the fact that this is purely a legal ground. It has been submitted that this issue stood covered in assessee’s favor by the decision of this Tribunal rendered in Owens Corning (India) Pvt. Ltd. V/s DCIT [ITA No. 8522/Mum/2011] & Cash Edge (India) Pvt. Ltd. V/s ITO [ITA No.64/Del/2015] coupled with the decisions of Hon’ble Supreme Court rendered in Apollo Tyres 255 ITR 273, Malayalam
GTS e-Services Private Limited Assessment Year :2012-13 Manorama 300 ITR 152 & HCL Comnet Systems and Services Ltd. 305 ITR 409. 8.2 After careful perusal of cited judicial decisions, we concur with the submissions made by Ld. AR. The relevant observations of co-oridnate bench of Mumbai Tribunal in Owens Corning (India) Pvt. Ltd. V/s DCIT [supra], for ease of reference, could be extracted in the following manner: - 4.1. The additional ground being purely legal and not requiring any investigation of fresh facts, the same was admitted in view of the judgment of Hon’ble Supreme Court in the case of NTPC 229 ITR 383. It is noted that section 115JB is self- contained code. Only those adjustments are permissible to the book profit as have been prescribed u/s 115JB. The adjustment/additions made under the transfer pricing regulations are governed by altogether different sets of provision as contained in Chapter X of the Act. There is no such provision under the law that permits the AO to make adjustment on account of transfer pricing addition to the amount of profit shown by the assessee in its profit and loss account, for the purpose of computing book profit u/s 115JB. The law in this regard is clear. Reference is made to the judgment of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs CIT 255 ITR 273. It is noted from the perusal of the assessment order that the AO has simply made addition by an amount of Rs.1,30,72,762/- to the amount of net profit as per profit and loss account for the purpose of computation of income u/s 115JB without even mentioning that under what provisions this addition was being made. Such an approach is highly unfair and brings undue and avoidable hardship to the tax payers and we recommend that such a casual approach should be avoided by the revenue officers, as it may tarnish image of the income tax department, which may in turn discourage voluntarily compliance by the taxpayers. Thus, we delete the addition made by the AO. As a result, additional ground filed by the assessee is allowed.
Similar is the decision of co-ordinate bench of Delhi Tribunal in Cash Edge (India) Pvt. Ltd. V/s ITO [supra], wherein the issue has been concluded in the following manner: - ADDITION OF TRANSFER PRICING ADJUSTMENT TO MAT 33. The final issue for consideration is challenge raised by the assessee to the action of the AO in adding back transfer pricing adjustment of Rs.1,18,93,468/- to income assessed under Section 115JB (MAT).
In this regard, the learned counsel for the assessee submitted that the AO has added the transfer pricing adjustment of Rs.1,18,93,468/- to the book profits of the GTS e-Services Private Limited Assessment Year :2012-13 Assessee under Section 115JB of the Act without appreciating that book profits of the company cannot be adjusted except as provided in Explanation 1 Section 115JB(2) of the Act and that transfer pricing adjustment is not one of the adjustments contemplated under that Explanation. He placed reliance upon the following decisions to contend that except for adjustments provided in Explanation 1 Section 115JB(2) of the Act, no other adjustment can be made to book profits under Section 115JB of the Act :- i. Apollo Tyres: 255 ITR 273(SC) ii. Malayalam Manorma: 300 ITR 251(SC), iii. HCL Comnet Systems and Services Ltd., 305 ITR 409 (SC) and iv. DCIT v. Bisleri Sales Ltd.: 151 TTJ 285 (Mum)(ITAT) 35. The Ld. Sr. DR on the other hand supported the order of the AO on the strength of the decision of the Special Bench of the Tribunal in the case of Rain Commodities v. DCIT: (2010) 40 SOT 265.
We have considered the rival submissions and perused the material on record. It is settled law that except for adjustments provided in Explanation 1 Section 115JB(2) of the Act, no other adjustment can be made to book profits under Section 115JB of the Act. We find that that transfer pricing adjustment is not one of the adjustments contemplated under Explanation 1 Section 115JB(2) of the Act and, therefore, could not have been added back to the book profits under Section 115JB.
The case-law relied upon by the Ld. Sr. DR i.e. decision of the Special Bench in the case of the Tribunal in Rain Commodities (supra) does not also advance the case of the Revenue. In that case the Special Bench was considering whether the AO can alter the net profits declared by an assessee. The Special Bench has, following the decision the apex Court in Apollo Tyres and HCL Comnet (supra), inter alia, held that the AO cannot travel beyond the net profits declared by the assessee unless (a) it is discovered that profit and loss account is not drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or (b) the incorrect accounting policies, accounting standards have been adopted for preparing such accounts and the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account.
In the present case there is no allegation is the assessment order much less any finding that either that profit and loss account has not been drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or that any incorrect accounting policies, accounting standards has been adopted for preparing such accounts or that the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account.
In view of aforesaid, we hold that the AO erred in adding back the transfer pricing adjustment of the book profits under Section 115JB of the Act. Accordingly, this ground of the appeal raised by the assessee is allowed and the AO is directed to exclude the transfer pricing adjustment, if such adjustment survives, from the book profits computed under Section 115JB of the Act.
GTS e-Services Private Limited Assessment Year :2012-13 Respectfully following the same, we direct lower authorities to exclude Transfer Pricing adjustment, if any, while computing Book Profits u/s 115JB. Accordingly, this ground stands allowed.
Resultantly, the appeal stands partly allowed. Order pronounced in the open court on 03rd July, 2019. Sd/- Sd/- (Pawan Singh) (Manoj Kumar Aggarwal) �ाियक सद� / Judicial Member लेखा सद� / Accountant Member मुंबई Mumbai; िदनांक Dated : 03/07/2019 Sr.PS, Jaisy Varghese आदेशकी�ितिलिपअ�ेिषत/Copy of the Order forwarded to : अपीलाथ�/ The Appellant 1. ��थ�/ The Respondent 2. आयकरआयु�(अपील) / The CIT(A) 3. आयकरआयु�/ CIT– concerned 4. िवभागीय�ितिनिध, आयकरअपीलीयअिधकरण, मुंबई/ DR, ITAT, Mumbai 5. गाड�फाईल / Guard File 6.