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Income Tax Appellate Tribunal, DELHI BENCHES : I-1 : NEW DELHI
Before: SHRI R.S. SYAL & SHRI K. NARASIMHA CHARY
ORDER PER R.S. SYAL, VP: This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer u/s 143(3) read with 144C of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2009-10.
The only issue raised in this appeal is against the addition on account of transfer pricing adjustment amounting to Rs.2,43,97,712/-.
Briefly stated, the facts of the case are that the assessee, an Indian company, is a wholly owned subsidiary of Grail Research Ltd., Cyprus.
The assessee is a risk insulated captive service provider and during the year under consideration was engaged in providing outsourcing back office support services to its associated enterprise (AE), Grail Research LLC, USA (‘Grail US’). The assessee filed Audit Report in Form No. 3CEB declaring an international transaction of ‘Provision of outsourcing back office support services to Grail US.’ The Assessing Officer (A.O.) referred the matter of determination of the arm’s length price (ALP) of such transaction to the Transfer Pricing Officer (TPO). The assessee showed a revenue of Rs.23,79,25,303/- from the international transaction. It employed the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit level indicator (PLI) of Operating
Profit/Total Cost (OP/TC) for benchmarking the international transaction.
24 companies were chosen as comparable with their weighted average margin of 10.77% on the basis of multiple year data. The assessee declared its own PLI of 15.11% in the revised Form No.3CEB. That is how, it was claimed that the international transaction was at ALP. The TPO did not dispute the application of TNMM as the most appropriate method nor the PLI of OP/TC. After certain exclusions/inclusions made from/in the list of comparables drawn by the assessee, the TPO shortlisted five companies as comparable with their mean margin at 24.30%. On this basis, transfer pricing adjustment of Rs.2,66,74,000/- was proposed, which was incorporated by the Assessing Officer in the draft order. The assessee challenged such adjustment before the Dispute Resolution Panel (DRP).
Some of the assessee’s contentions were accepted. On giving effect to the direction of the DRP, the Assessing Officer finally computed addition on account of transfer pricing adjustment at Rs.2,43,97,712/-, against which the assessee has come up in appeal before the Tribunal.
We have heard both the sides and perused the relevant material on record. There is no dispute on the application of the most appropriate 3
PLI. The entire controversy rotates around the selection of comparables. In fact, the ld. AR requested only for the exclusion of Cosmic Global Ltd. from the list of comparables. But for that, no other aspect of determination of ALP is in assail before us.
Before analyzing the comparability or otherwise of this company, it is sine qua non to comprehend the functional profile of the assessee under the international transaction. The assessee has only one international transaction, which has been described as ‘Provision of outsourcing back office support services to Grail US.’ The TPO has recorded in para 3.1 of his order that the services rendered by the assessee: ‘are in the nature of outsourcing back office support services to assist AE to perform its core activities.’ Thus, it is evident that there is no dispute on the functional profile of the assessee, being, rendering of back office support services.
With the above understanding of the functional profile of the assessee, we now proceed to examine if Cosmic Global Ltd. is comparable.
The assessee objected to the inclusion of this company on the basis of failing of employee cost filter, applied by the TPO. The TPO has set out
ALP of the international transaction. One of them, given on page 6 of his order, is exclusion of companies whose employee cost is less than 25% of the revenues. The TPO, on page 27 of his order did not concur with the assessee’s objection of failing of employee cost filter by opining that no such filter on account of employee cost was to be applied. We have gone through the assessee’s Profit & Loss Account, a copy of which is available on page 7 of the paper book. It is evident from the Profit & Loss Account that the assessee earned income of Rs.23.04 crore. Under the head ‘Expenditure’, there are two items, namely, ‘Personnel expenses’ amounting to Rs.12.73 crore and ‘Administrative and other expenses’ at Rs.7.95 crore. Break-up of `Personnel expenses’ is available in Schedule 5, which divulges that it consists of only `Salaries’ and `Allowances’. This reveals that the assessee is rendering services exclusively in-house and there is no outsourcing. Further, the ratio of its Personnel cost to Sales is 55% and odd, which does not pass the filter adopted by the TPO as discussed above.
A copy of the Annual report of Cosmic Global Ltd. is also available in the paper book. Page No.117 carries Profit & Loss Account of this company, which shows ‘Revenues from operations’ at Rs.7.37 crore.
Under the head ‘Expenditure’, there is an item of ‘Salaries, wages & amenities’ at Rs.1.57 crore and another item is ‘Translation charges paid’ at Rs.3.00 crore. In this way, the ratio of Personnel cost to sales of this company is 21% and odd. This company is substantially outsourcing its services to outsiders, which gets reflected from the ratio of `Translation charges’ to `Sales’, which is at 40% and odd. It, therefore, becomes graphically clear that Cosmic Global Ltd., though functionally similar, is carrying out its work by relying more on outsourcing than through its own personnel. As against this, the assessee is doing entire work through its own employees. This illustrates that there is a difference in the business model adopted by the assessee vis-à-vis Cosmic Global Ltd.
The Delhi Bench of the Tribunal in Xchanging Technology Services India (P) Ltd. vs. DCIT (2015) 57 taxmann.com 437 (Del)-(TRIB.), has directed the exclusion of Cosmic Global Ltd. on account of adopting a different business model vis-à-vis the assessee in that case, which, like the 6
assessee in the instant appeal, was providing in-house services. The Hon'ble Delhi High Court in Pr. CIT vs. Xchanging Technology Services India (P) Ltd., vide its judgment dated 20.10.2015, has upheld the Tribunal order on this score. The facts and circumstances of the instant case are mutatis mutandis similar to those of Xchanging Technology Services India (P) Ltd.( supra), inasmuch as the assessee in question is also rendering in- house services without outsourcing them, which is a business model quite different from that of Cosmic Global Ltd. Following the above precedent, we direct the exclusion of this company from the list of comparables.
To sum up, we set aside the impugned order on the issue of transfer pricing addition in the above referred international transaction of ‘Provision of outsourcing back office support services’ and remit the matter to the file of AO/TPO for a fresh determination of the ALP in consonance with our above view. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
In the result, the appeal of the assessee is allowed for statistical purposes.
The order pronounced in the open court on 14.09.2018.