INTERNATIONAL SPECIALITY PRODUCTS (INDIA) P LTD,NAVI MUMBAI vs. ASST CIT 15(2)(1), MUMBAI

Per Manoj Kumar Aggarwal (Accountant Member):- 1. Aforesaid appeal by assessee for Assessment Year [AY] 2012-13 contest final assessment order dated 23/12/2016 passed by Ld. Assistant Commissioner of Income Tax-15(2)(1), Mumbai [AO] u/s 143(3) read with Section 144C(13) pursuant to the directions of Ld. Dispute Resolution Panel-1, Bengaluru [DRP] u/s 144C(5) dated 10/11/2016. The assessee has raised 12 grounds. Ground Nos.1 & 12 are general in nature whereas ground nos. 2 & 7 have not been passed before us during hearing. The remaining effective grounds read as under: - Corporate / Back Office Support Services 3. The Ld. AO / Ld. DRP are not justified in law in considering wrong comparable and consequently arriving at a high arithmetic mean of 22.90% (after working capital adjustment of 2.06%) as a ratio of OP/OC as against the margin of 11.85% of the appellant.

5. The Ld. AO / Ld. DRP ought to have rejected the following companies which were objected by assessee on the grounds of functional dissimilarity and which are also rejected by Ld. DRP during AY 2011-12 i.e., S.No. Name of Comparable Company 1. Accentia Technologies Ltd.

As evident from grounds of appeal, the assessee is agitating exclusion / inclusion of certain comparable entities under the two segments viz.

Corporate / Back Office Support Services [referred to as ITeS Services] and R&D Services. 2.1 Briefly stated, the assessee being resident corporate entity was stated to be engaged in trading activities, R&D & providing corporate support services during impugned AY. In trading division, it was engaged in distribution of specialty chemicals. The assessee filed its return of income for the impugned AY on 28/09/2012 at Rs.291.15 Lacs. Since the assessee entered into certain international transactions with its Associated Enterprises [AE] during impugned AY, a reference was made u/s 92CA(1) to Ld. DCIT (Transfer Pricing Officer)-2, Hyderabad [TPO] for determination of Arm’s Length Price [ALP] of these transactions. The subject matter of present appeal before us is issue of comparable in 2 segments viz. (i) Corporate / Back Office Support Services classified as Information Technology enabled Services [ITeS]; (ii) R & D Services. 2.2 The assessee has provided these services to its various AEs during impugned AY and earned revenue of Rs.941.93 Lacs from ITeS services and revenue of Rs.758.64 Lacs from provision of R & D Services. The revenue in trading segments amounted to Rs.3473.99 Lacs. The Ld. TPO had proposed aggregate TP adjustment of Rs.193.26 Lacs which comprised-off of TP adjustment of Rs.120.93 Lacs under ITeS Segment and TP adjustment of Rs.72.32 Lacs under Contract R&D. However, the directions of Ld. DRP reduced the proposed adjustment to Rs.143.59 Lacs. Aggrieved, the assessee is in further appeal before us.

2.3 We have heard the submissions made by respective representative, in this regard. After careful consideration of the same and material on record, we proceed to adjudicate the issues as argued before us. I. ITeS Services 3.1 The ITeS services were benchmarked by the assessee using Transactional Net Margin Method [TNMM] as most appropriate method [MAM] using Cost-plus mark- up method [OP/OC] as Profit Level Indicator [PLI]. The assessee’s margin were reflected as 12% as against mean margin of 12.91% reflected by 9 comparable using Prowess and Capitaline data bases. Since the margins were within the range of +5%, no transfer pricing adjustment was proposed by the assessee in its Transfer Pricing Study. 3.2 However, invoking provisions of Section 92C(3), the assessee’s methodology was rejected by Ld. TPO and fresh benchmarking analysis was done after applying new filters which were as follows:- -Companies whose data was not available for FY 2011-12 were excluded -Companies whose ITeS income was less than INR 1 Crore were excluded -Companies having ITeS income less than 75% of the total operating revenue were excluded -Companies whose export sales were less than 25% of the sales were excluded -Companies having more than 25% of related party transactions were excluded -Persistent loss-making companies were excluded -Companies having different financial year were excluded -Companies which were functionally different were excluded -Companies having peculiar economic circumstances were excluded.

Using the same databases, 10 comparable were identified having mean margin of 24.96% against which concession for working capital adjustment to the extent of 2.06% was provided. The net margins so derived worked out to 22.90% as against assessee’s margin of 12%. The method used was the same i.e. TNMM with Profit Level Indicator [PLI] as operating profit / operating cost or expenses. Non-operating incomes as well as expenses were excluded while working out the margins. In the process of new benchmarking analysis, only one comparable namely Jindal Intellicom Ltd. as initially selected by the assessee got selected. The services rendered by assessee were classified as ITeS and search was made from databases for companies engaged in rendering those services. 3.3 Although, the assessee objected to working of Ld. TPO including the filters applied and comparable selected by Ld. TPO. However, the same could not find favor with Ld. TPO. Finally, applying mean margin of 22.90% to assessee’s operating cost, the Arm’s Length Price of transactions was worked out to be Rs.10.62 Crores as against Rs.9.41 Crores reflected by the assessee. Accordingly, upward TP revision of Rs.1.20 Crores was proposed in the order. The stand of Ld. TPO, upon confirmation by Ld. DRP, is under challenge before us. 3.4 Before Ld. DRP, the assessee, inter-alia, raised objections as to proper allocation of foreign losses. After due consideration, Ld. DRP directed Ld. AO to adopt the proper allocation of forex losses. However, the other objections raised by the assessee could not find favor with Ld. DRP. The directions of Ld. DRP reduced the net TP adjustment to Rs.143.59 in the final assessment order dated 23/12/2016, against which the assessee is in further appeal before us.

3.5 Before us, the Ld. AR, on the strength of various judicial pronouncements and citing functional dissimilarities, raised arguments for the exclusion of following comparable: - i) Accentia Technologies Ltd. ii) Eclerx Services Ltd. iii) Infosys BPO Ltd. iv) TCS E-serve Ltd. v) Cross Domain Solutions Pvt. Ltd. The Ld. DR supported the comparable selected by the lower authority while conducting benchmarking analysis. The Ld. DR also submitted that the assessee functional profile was mainly Knowledge Process Outsourcing [KPO] as rightly held by Ld. DRP. 3.6 We have carefully perused the rival contentions, material on record and deliberated on judicial pronouncements as cited before us. The basic facts as enumerated by us in preceding paragraphs are not under dispute. The only dispute raised before us by Ld. AR is regarding exclusion of the 5 comparable as stated above. Therefore, we restrict our finding to the issue of selection of these 5 comparable. Our adjudication with respect to these comparable is given in succeeding paragraphs. 3.6.1 Accentia Technologies Ltd. The Ld. TPO had found this entity as comparable since the activity of this entity, in the opinion of Ld. TPO, fall under ITeS services only. The Ld. DRP confirmed the same by observing that the assessee was engaged in providing high end services to its AE which would be akin to KPO services and further the assessee accepted 2 other entities providing KPO services. Drawing our attention to extract from annual report, Ld. AR submitted that this entity was offering complete healthcare documentation as well as receivables management including installation and maintenance of all software, hardware and bandwidth infrastructure which could not be termed as akin to ITeS services as provided by the assessee and therefore, it was not functionally comparable. Further, this entity holds intangibles in the shape of goodwill, brands and IPRs and computer & software which are more than 59% of value of its fixed assets. The attention has also been drawn to the fact that this entity was found not comparable by Ld.DRP in immediately preceding AY2011-12 on account of functional dissimilarity by placing reliance on the decision of Tribunal rendered in Vodafone India Ser.Pvt. Ltd. [ITA No.7140/M/12]. A copy of the order of Ld.DRP has been placed on record. The Ld. DR could not controvert the said factual matrix. Upon perusal of assessee’s TP study, as placed on record, we find that the assessee was engaged in providing application support, analytical support, R&D support to its AE. The assessee was responsible for identification of resources, recruitment of manpower, training, project management and execution. These services were characterized as routine support services with less than normal business risk. These services, in our considered opinion, could not be equated with the functions performed by Accentia. This is further evidenced by the fact that in immediately AY 2011-12, Ld. DRP excluded this entity on functional dissimilarity. Keeping in view the fact that nothing on record suggest that there was any change in functional profile of the assessee or the said entity, we direct for exclusion of this entity. Nothing has been brought on record to suggest that the revenue contested the aforesaid stand of Ld. DRP, in any manner.

3.6.2 Eclerx Services Ltd. The Ld. AR has submitted that this entity’s operating income was approx. 51 times than that of the assessee and therefore, the same could not be termed as proper comparable. Reliance has been placed on the decision of Hon’ble Bombay High Court in CIT V/s Pentair Water India (P.) Ltd. [2016 69 taxmann.com 180] as followed by Mumbai Tribunal in Integreon Managed Solutions India Pvt. Ltd. Vs ACIT [2019 101 Taxmann.com 289]. Another point raised is the fact that there was an extraordinary event in the case of this company since it acquired another US entity namely Agilyst Inc. and therefore, the same could not be a suitable comparable in terms of decision of Delhi Tribunal rendered in Exevo India P. Ltd. V/s DCIT [ 2018 89 Taxmann.com 48]. We find that Ld. TPO had found this entity comparable. The Ld. DRP observed that huge profit or huge turnover, ipso facto, does not lead to its exclusion. We find that the fact that this entity had operating income of more than 51 times than that of assessee, has not been disputed by the revenue before us. This being so, the ratio of decision of Hon’ble Bombay High Court in in CIT V/s Pentair Water India (P.) Ltd. [supra] would become applicable wherein it has been observed as under: - 5. On perusal of the impugned Order passed by the Tribunal dated 23.05.2014, we find that the Tribunal has recorded the reasons for not accepting the said three companies are comparable by stating as follows : (i) HCL Comnet Systems & Services Ltd :- We find force in the submission of the ld. AR that this company cannot be a comparable as the turnover of this company is 260.18 crores while in the case of the Assessee, the turnover is around Rs. 11 crores only. While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of Rs. 11 crores cannot be compared with a company which is having turnover of Rs. 260 crores which is more than 23 times the turnover of the Assessee. This company cannot be regarded to be in equal size to the Assessee. We, accordingly, direct the AO to exclude this company out of the comparables. (ii) Infosys BPO Ltd.:- In this case also we noted the turnover in respect of this Company is Rs. 649.56 crores while the turnover of the Assessee company is around Rs. 11 crores which is much more than 65 times of the Assessee's turnover. We, therefore, do not find any illegality or infirmity in the order of CIT (A) in excluding this Company out of the comparables. Accordingly, we confirm the order of the CIT (A). (iii) Wipro Ltd. :- After hearing the rival submissions, we noted that the CIT (A) applying the turnover filter has excluded this company out of the comparables. The turnover reported in the case of Wipro Ltd. Is Rs. 939.78 crores while in the case of the Assessee the turnover is around Rs. 11 crores. Therefore, on the basis of the turnover filter itself this company cannot be regarded to be comparable to the Assessee company and accordingly, we do not find any infirmity in the finding of CIT (A) while he excluded this company on the turnover criteria following the decision of this tribunal in : Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) E-Gain Communication (P.) Ltd. v. ITO [2008] 23 SOT 385 (Pune) Deloittee Consulting India (P.) Ltd. v. Dy. CIT [2013] 144 ITD 451/36 taxmann.com 68 (Hyd.) Genisys Integrating System (India) (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 (Bang.) 6. The said findings of the Tribunal in respect of the said three Companies are on the basis of appreciation of evidence on record. We find no infirmity in the said findings of the Tribunal on that count. In fact, the Tribunal has endorsed the views of the CIT Appeals whilst coming to such conclusions. The concurrent findings of facts arrived at by the Authorities below, cannot be re- appreciated by this Court in the present Appeal.

II. Contract Research & Development Services 4.1 These services were benchmarked using the same methodology. In assessee’s TP study, mean margin of 9 entities was shown as 12.91% as against 12% reflected by the assessee. The Ld. TPO, rejected assessee’s methodology on similar lines and identified 5 fresh comparable with mean margin of 19.30% and suggested TP adjustment of Rs.72.32 Lacs against the same. The stand of Ld. TPO, upon confirmation by Ld. DRP, is under challenge before us. 4.2 Before us, the Ld. AR has canvassed for exclusion of 2 comparable viz. Oxygen Bio Research Pvt. Ltd. & Syngene International Ltd. The perusal of assessee’s TP study reveal that the assessee’s AE was to provide basic designing for undertaking R & D activity and AE would place work order with the assessee specifying the scope of R&D to be carried out by the assessee. Our adjudication with respect to two comparable is given in succeeding paragraphs. 4.3.1 Oxygen Bio Research The Ld. AR has submitted that complete set of Annual Report for this year was not available in public domain and therefore, comparison would not be feasible. Another argument is that the said entity has been acquired by another entity during the impugned AY. Lastly, there was change in method of depreciation policy during FY 2010-11 which has affected its profitability and therefore, the same would not be a comparable entity. Reliance has been placed on the decision of Hyderabad Tribunal rendered in Capital IQ Information Systems India Pvt. Ltd. V/s DCIT [2013 32 Taxmann.com 21]. However, upon perusal, we find that all these arguments have already been dealt with by Ld. DRP which remained uncontroverted before us. Therefore, the stand of Ld. DRP, in this regard, would not require any interference on our part. Regarding issue of change in depreciation policy, Ld. DRP has already directed the Ld.AO to compare the margins of the tested party and the comparable before charging depreciation. The Ld. AR has placed on record the working of the same. Therefore, endorsing the same, we direct Ld. TPO / Ld. AO to consider Profit Before Depreciation for the purpose of benchmarking analysis. 4.3.2 Syngene International Ltd This company was originally selected by the assessee in its benchmarking analysis but the same was rejected by Ld. TPO on the ground of functional dissimilarity and the same was stated to be wrongly included. However, Ld. DRP did not agree with assessee’s submissions. The Ld. AR, reiterating the same, submitted that this company was found functionally non-comparable and wrongly included in the final list of comparable. It has been submitted that RPT of this entity is greater than 25% and therefore, the same would not be a good comparable. It has further been submitted that operating income of this entity is more than 52 times than that of the assessee. Upon perusal, we find that the assessee’s submissions would require verification and therefore, we deem it fit to restore the matter of this comparable to the file of Ld. TPO / Ld. AO for re-adjudication in the light of submissions made by Ld. AR. The assessee, in turn, is directed to substantiate the same.

4.4 Ground Nos.8,9 & 11 stand allowed for statistical purposes whereas ground no. 10 stand dismissed.