ITO 10(3)(2), MUMBAI vs. JARDINE LLOYED THOMPSON P.LTD, MUMBAI

In grounds no.1, 2 and 3, the Revenue has challenged the exclusion of the following comparables:–

Brief facts relating to this issue are, the assessee, an Indian Company, is engaged in the business of providing back office support services which can be classified as Information Technology Enabled Services (ITeS). During the year under consideration, the assessee had entered into various international transactions with its overseas Associated Enterprises (AE). Insofar as the provision of back office support service (BPO) is concerned, the assessee has earned revenue of ` 16,45,35,639, from its AE. In the transfer pricing analysis, assessee benchmarked the aforesaid transaction by selecting Transactional Net Margin Method (TNMM) as the most appropriate method with operating profit to total cost ratio as the profit level indicator (PLI). In the course of proceedings before him, the Transfer Pricing Officer called upon the assessee to show cause why the comparables selected by him in the assessment year 2008–09, cannot be selected for the current year by applying the same filters. In response, the assessee objected to the application of filters and comparables of assessment year 2008–09. After considering the submissions of the assessee, the Transfer Pricing Officer ultimately rejected the transfer pricing analysis of the assessee by pointing out various defects / deficiencies. Having done so, the Transfer Pricing

After considering the submissions of the assessee, learned DRP directed the Assessing Officer to include CG–VAK Software and Exports Ltd. as a comparable and exclude Genesis International Corporation Ltd. and Cosmic Global Ltd. from the list of comparables. Hereinafter we will deal with each of the comparable disputed before us by the Revenue.

This is one of the comparables selected by the assessee in its transfer pricing analysis. The Transfer Pricing Officer has rejected this company on the ground that it has incurred loss in the preceding two years.

Learned DRP while considering the objections of the assessee noted that as per assessee’s contention, segmental financials of the company with reference to ITeS segment is available and as per the segmental details available, the company had an operating margin of 3.84% for the year under consideration. Therefore, he directed the Assessing Officer to verify the financials of the company and if the segmental operating margin can be reliably computed, the company should be accepted as a comparable.

The learned Departmental Representative has submitted before us that the company is a consistent loss making company, hence, cannot be selected as a comparable. Further, he submitted, while selecting / rejecting comparables, the Transfer Pricing Officer has applied less than ` 1 crore ITeS revenue filter and has excluded all the companies whose revenue from ITeS segment was below ` 1 crore. He submitted, since, the Revenue from ITeS segment of the company is less than ` 1 crore, it cannot be selected as a comparable.

The learned Authorised Representative submitted, the assessee had never applied less than ` 1 crore ITeS revenue filter. He submitted, nor has the Transfer Pricing Officer applied the aforesaid filter. Therefore, he submitted, the Department cannot introduce a fresh argument which was neither the case of the Transfer Pricing Officer nor learned DRP. He submitted, the DRP has simply directed the Assessing Officer to verify the margin of the comparable and on verifying the margin of the comparable, the Assessing Officer having found that it has a profit margin of 3.84% included it as a comparable in the final assessment order.

We have considered rival submissions and perused the material on record. The only ground on which the Transfer Pricing Officer has rejected this company as a comparable is, it has made loss in the preceding two assessment years. However, before learned DRP, it was argued by the assessee that in the current year, the company has a margin of 3.4%. Considering the aforesaid submission of the assessee, learned DRP had directed the Assessing Officer / Transfer Pricing Officer to verify the claim of the assessee and, in case it was found to be correct, to include the company as a comparable. Notably, while implementing the aforesaid direction of learned DRP, the Transfer Pricing Officer has examined the financials of the aforesaid company and has found that it had a margin of 3.4% from ITeS segment.

This company was selected by the Transfer Pricing Officer despite objections of the assessee.

Before learned DRP, it was submitted by the assessee that the company is engaged in various business activities including Geophysical Information Services (GIS), therefore, it is not functionally comparable to the assessee.

After considering the submissions of the assessee, learned DRP having found that this company is functionally different from the assessee, directed the Assessing Officer to exclude it from the list of comparables.

The learned Authorised Representative submitted, this company is in no way comparable to the assessee due to divergent activities carried on by it. He submitted, in a number of decisions, the Co– ordinate Benches as well as different High Courts have held that this company cannot be a comparable to a BPO service provider due to functional difference. He submitted, in assessee’s own case for the assessment year 2008–09, the Tribunal has rejected this company as a comparable. In support of his contention, the learned Authorised Representative relied upon the following decisions:–

We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. On a perusal of the annual report of the company placed in the paper

The learned Departmental Representative submitted that this company was selected as a comparable by the assessee in its transfer pricing analysis and was accepted by the Transfer Pricing Officer. He submitted, the DRP has rejected it by accepting the submissions of the assessee that 90% of the revenue of the company is from translation charges which is functionally incomparable to the assessee. The learned Departmental Representative submitted, in the preceding year also, assessee had selected it as a comparable, which was accepted by 9 Jordine Lloyed Thompson Pvt. Ltd. the Transfer Pricing Officer. The learned Departmental Representative submitted, when the company was included as functionally comparable in the preceding year, in the absence of any change in functional comparability, it cannot be rejected in the impugned assessment year. For such proposition, he relied upon the following decisions:–

The learned Authorised Representative submitted, the company is not at all comparable to the assessee as 95% of its revenue is earned from translation services which are not comparable to BPO service. Thus, he submitted, that the company was rightly rejected as comparable. In support of his contention, learned Authorised Representative relied upon the following decisions:–

We have considered rival submissions and perused the material on record. No doubt, from the facts on record it is evident that the aforesaid company was selected as a comparable by the assessee and retained by the Transfer Pricing Officer. However, before learned DRP the assessee had pleaded that 95% of the Revenue earned by the company is from translation service, hence, it is not comparable to the assessee. From the annual report of the company placed in the paper book, it appears that the company is predominantly into the business of providing translation service. The revenue earned from the BPO segment is miniscule. Considering the aforesaid aspect, the Tribunal in the decisions cited before us by the learned Authorised Representative, which are for the very same assessment year, has excluded this company from the list of comparables. Though, it may be a fact that the company found a place as a comparable in the preceding assessment year as well as in the transfer pricing analysis of the assessee for the impugned assessment year, however, if subsequently, the assessee brings contemporaneous data on record to prove that the company is functionally different, assessee’s claim cannot be rejected merely because it was selected by it as a comparable in the transfer pricing analysis. For the aforesaid reason, we uphold the decision of learned DRP on the issue. In view of the aforesaid, grounds no.1, 2 and 3, are dismissed.

Brief facts are, in the course of proceeding before him, the Transfer Pricing Officer noticed that the assessee has paid an amount of ` 38,68,832, to the AEs towards corporate cost allocation. From the Transfer Pricing Officer analysis of the assessee, he observed that the assessee has stated that its AE in UK has provided certain office accommodation, staff and other ancillary services to the assessee. It was stated by the assessee that allocation of cost is based on time spent by employee in UK on India related activities. After perusing the transfer pricing study report, the Transfer Pricing Officer called upon the assessee to justify the cost allocation. In response, it was submitted by the assessee that one of the employees of the AE was rendering services for the assessee and the cost allocation charges represents the salary charge of the concerned employee without any mark–up. In this context, the assessee also furnished the agreement with the AE. The Transfer Pricing Officer, however, did not accept the claim of the assessee. He observed, the assessee could not prove the purpose and benefit of cost allocation charged by the AE. Accordingly, he determined the arm's length price of the cost allocation at ` nil, thereby, treating the entire payment of ` 38,68,832, towards cost

While considering assessee’s objections against the aforesaid addition, learned DRP observed that the payment made towards cost allocation without any mark–up forms part of the cost base of the assessee and has been recharged to the AE with a mark–up of 15%. Learned DRP observed, since the business model of the assessee is structured on a cost plus basis of invoicing for the service provided to the AE and the assessee being a captive service provider, there cannot be any scope for transfer of profit to the country of residence of the AE. Accordingly, learned DRP directed the Assessing Officer to delete the addition.

Learned Departmental Representative submitted, before the Transfer Pricing Officer assessee failed to furnish adequate documentary evidence to justify that the payment made towards cost allocation is at arm's length. He submitted, neither the Transfer Pricing Officer nor the assessee had made proper benchmarking to ascertain whether the payment made towards cost allocation is at arm's length. He submitted, the DRP has also not examined the basis of allocation of cost. Therefore, he submitted, the issue may be restored back either to learned DRP or the Assessing Officer for determining the arm's

The learned Authorised Representative submitted, one of the employees of the overseas AE was seconded to the assessee who exclusively worked for the assessee. He submitted, this arrangement between the assessee and the AE was made by way of a written agreement executed in the assessment year 2008–09. He submitted, the same agreement continued in the impugned assessment year as well. He submitted, the AE charged the salary cost of the concerned employee without any mark–up. Whereas, the salary cost paid by the assessee forms the cost base which are invoiced to the AE along with mark–up of 15%. Thus, he submitted, no benefit has been transferred to the AE on account of cost allocation. Rather, he submitted, the assessee has benefitted not only from the services rendered by the AE but by again recharging the cost to the AE with a mark–up of 15%. He submitted, while deciding identical issue in assessment year 2008–09, the Tribunal has accepted the payment made towards cost allocation to be at arm's length. He submitted, in the subsequent assessment years, similar payment made towards cost allocation have been accepted by the Transfer Pricing Officer. Thus, he submitted, there is no reason to interfere with the decision of the DRP.

We have considered rival submissions and perused the material on record. From the factual matrix, it is evident, the assessee and its AE in UK have entered into an agreement under which the AE provided certain office accommodation, staff and other ancillary services to the assessee’s UK based Branch. Expenditure incurred in relation to such services was allocated at cost without any mark–up. This arrangement between the assessee and the AE continued from the year 2008–09. In the year under consideration, the AE allocated salary GBP 50,000, equivalent to ` 38,68,832, without mark–up towards salary cost of one of its employees. It is also a fact that the assessee is a captive service provider to its AE and is remunerated at cost plus 15% mark–up. Thus, the salary cost of the employee allocated to the assessee also forms part of assessee’s cost base and in the invoice raised, the assessee recharged the aforesaid cost with mark–up of 15%. Therefore, if the payment made towards cost allocation is to be disallowed then similar adjustment has to be made to assessee’s income, which may not be favourable to the Revenue.

As regards the contention of learned Departmental Representative that neither the assessee nor the Transfer Pricing Officer have properly benchmarked the cost allocation due to lack of evidence, we must observe, the Transfer Pricing Officer himself in his order has specifically mentioned that the assessee had furnished not only the copies of agreement and debit notes raised by the AE as well 15 Jordine Lloyed Thompson Pvt. Ltd. as the assessee, but, it has also furnished detailed working of cost allocation. The allegation made by the Transfer Pricing Officer is to the effect that the assessee did not furnish any primary evidence to show that the payment made is only to the extent of benefit received by it. In our view, the aforesaid observation made by the Transfer Pricing Officer is vague and ambiguous and contrary to his own finding. When the assessee had furnished all the details including the working of cost of allocation, we are unable to understand what does the Transfer Pricing Officer means by mentioning “primary evidence”.

In any case of the matter, the Transfer Pricing Officer has not followed any one of the prescribed methods to benchmark the transaction and has determined it at nil on a presumptive basis. This, in our view, is not permissible under the statutory provisions. Moreover, while deciding identical issue in assessee’s own case for the assessment year 2008–09, vide ITA no.779/Mum./2013, the Tribunal has not only disapprove similar approach adopted by the Transfer Pricing Officer in determining the arm's length price of cost allocation at nil but held that no transfer pricing adjustment should have been made by the Transfer Pricing Officer. In view of the aforesaid, we do not find any reason to interfere with the decision of learned DRP on the issue. Ground no.4, is dismissed.

In the result, appeal is dismissed. Order pronounced in the open Court on 12.06.2019