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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI N.K. SAINI & SHRI KULDIP SINGH
(PAN : AAACE9836D) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Ashwani Taneja, Advocate and Shri Shantanu Jain, Advocate REVENUE BY : Shri H.K. Choudhary, CIT DR Date of Hearing : 11.10.2017 Date of Order : 22.11.2017
O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : The Appellant, M/s. Element K India Pvt. Limited (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 17.10.2012, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2008-09 on the grounds inter alia that :-
“Ground No.1 The assessment order passed by the learned Assessing Officer (hereinafter referred to as "AO") pursuant to the directions of the Hon'ble Dispute Resolution Panel (hereinafter referred to as "DRP") is bad in law and void ab-initio.
Ground No.2:
The learned AO/Transfer Pricing Officer (hereinafter referred to as "TPO") erred in computation of Arm's Length Price (hereinafter referred to as "ALP") which has resulted in a proposed addition of Rs. 1,07,20,111/- and the Hon'ble DRP in confirming the same. In doing so, they have grossly erred: a) by not appreciating the fact that none of the conditions set out in Section 92((3) of the Income Tax Act, 1961 (hereinafter referred to as "Act") are satisfied; b) by making a reference without recording any reasons based on which he reached the conclusion that it was 'expedient and necessary' to refer the matter to the learned TPO for computation of the arm's length price, as required under section 92CA(1) of the Act; c) by ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; d) by undertaking the fresh search for comparability analysis as on November 25, 2010, which is beyond the date of compliance resulting in 'Impossibility of performance' and against the premise of maintenance of 'contemporaneous documentation’. The same also violates the law, Rule 106(4) read with Rule 10D(4) of the Income Tax Rules, 1962 (hereinafter referred to as "Rules"); e) by disregarding the ALP, as determined by the Appellant, by either rejecting or modifying the filters applied by the Appellant for selection of comparable companies; f) by disregarding the use of multiple year data adopted by Appellant; g) by benchmarking the Appellant with companies having an entirely different functional profile; h) by exercising his powers under section 133(6) of the Act to obtain selective information, which was not available in the public domain; i) by applying additional arbitrary filters; j) by not applying an upper limit to the 'turnover filter'; k) by implicitly accepting the companies having abnormal/super profits as comparable companies and on the other hand, rejecting companies incurring huge losses; l) by cherry-picking some companies as comparable companies even though these companies were not a part of the current year's initial selection set extracted by the learned TPO himself out of the database; m) by committing errors in computation of operating profit margins of comparable companies; n) by not appreciating the risk free nature of the Appellant and by not granting an adjustment on account of differential risk borne by the comparable companies; o) by not granting the Appellant an option to choose a price that falls within + / - 5% range of the arithmetic mean of the comparable companies, as contemplated under the proviso to section 92C(2) as it stood at the time of preparing the TP documentation. Accordingly, this has resulted in hardship for Appellant, having regard to the principle of natural justice.
Ground No.3:
The learned AO erred on facts and in law in charging interest under section 2346 of the Act.
Ground No.4:
On the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act mechanically and without recording any adequate reasons for such initiation.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Element K India Pvt. Ltd., the taxpayer is an IT Service provider to EK USA and claimed to have been providing design and development support services for online courseware to its parent company. The taxpayer provided services at an agreed cost plus mark up. During the year under assessment, the taxpayer entered into international transactions as under :-
Provision of courseware development 15,44,23,557 services Cost recharges 12,11,863
The taxpayer in its TP study adopted Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM), Operating Profit / Total Cost (OP/TC) as the Profit Level Indicator (PLI) and computed its OP/TC at 12.36% by using current year data and found its international transactions qua provision of contract content / online courseware development services at arm’s length. Ld. TPO selected 21 comparables for benchmarking the international transactions out of which the ld. DRP has rejected two comparables and computed the OP/OC at 22.16% and made transfer pricing adjustment at Rs.1,07,20,111/-. In compliance to the order passed by TPO/directions issued by ld. DRP, AO computed the assessment.
The taxpayer carried the matter by way of filing objections before the ld. DRP, which have been rejected. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUND NO.1
8. Ground No.1 is general in nature and does not require any adjudication.
GROUND NO.2
At the very outset, the ld. AR for the taxpayer challenging the impugned order passed by TPO/DRP/AO to cut short his argument sought exclusion of four comparables viz. (i) Infosys Technologies Ltd.; (ii) KALS Information Systems; (iii) Tata Elexi Ltd. (seg); and (iv) Wipro Limited out of final set of 19 comparables selected by the TPO to benchmark the international transactions.
Undisputedly, the TNMM as the most appropriate method having OP/TC as the PLI used by the taxpayer for benchmarking the international transactions has been accepted by the ld. TPO. It is also not in dispute that only one segment i.e. transaction qua provision of contract content / online courseware development services has been disputed by the ld. TPO. Pursuant to the directions issued by ld. DRP, TPO has finally chosen 19 comparables having arithmetic mean PLI at 22.16% which are as under :-
S.No. Company Name Adjusted PHIT/Cost (%) 1. Mindtree Consulting Ltd. 18.03 2. Persistent Systems Ltd. 22.62 3. Bodhtree Consulting Ltd. 23.59 4. Lanco Global System Ltd. 29.02 5. Avani Cincom Technologies 30.49 6. e-Zest Solutions Ltd. 31.85 7. Flextronics (Aricent) 8.48
iGate Global Solutions Ltd. 13.7 9. Infosys Technologies Ltd. 40.81 10. Kals Information Systems 26.53 11. Quintegra Solutions Ltd. 20.65 12. R Systems Intl. (Seg.) 15.73 13. R S Software (India) Ltd. 8.97 14. Sasken Communication Technologies (Seg.) 9.19 15. Tata Elxsi 20.82 16. Thirdware Solutions 18.63 17. Wipro Ltd. 31.45 18. Softsol India Ltd. 25.57 19. Sonata Software Ltd. 24.84 Average 22.16
Consequently, TPO proceeded to compute the transfer pricing adjustment as under :-
Arithmetic mean PLI : 26.16% Less : Working capital adjustment (Annexure-C) : (1.05%) Adj. Arithmetic mean PLI : 27.21%
Operating Cost Rs.135,186,369 Arms Length Margin 27.21% of the operating cost Arms Length Price Rs.171,970,580
22.6 Price received vis-à-vis the Arm’s Length Price : The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under :-
Arms Length Price @ 127.21% of operating cost Rs.171,970,580 Price charged in the international transaction Rs.154,423,557 Shortfall being adjustment u/s 92CA Rs.17,547,023
The above shortfall of Rs.17,547,023 is treated as transfer pricing adjustment u/s 92CA.”
Now, we would examine the suitability of comparables viz.
Infosys Technologies Limited, Kals Information Systems, Tata Elexi Ltd. and Wipro Limited for benchmarking the international transactions qua provision of contract content/online courseware development services one by one.
Ld. AR for the taxpayer contended that all the four comparables now sought to be excluded for benchmarking the international transactions were ordered to be excluded by the coordinate Bench of the Tribunal in taxpayer’s own case for AY 2007-08 order dated 14.11.2014 by following the order passed by Toluna India Pvt. Ltd. in dated 26.08.2014. However, the ld. DR relied upon the order of the TPO.
Undisputedly, the taxpayer is a low risk captive IT service provider in the field of software services development to its parent company.
INFOSYS TECHNOLOGIES LIMITED (INFOSYS)
When we examine the profile of the taxpayer vis-à-vis Infosys, it is undisputed that Infosys is a giant company in terms of risk profile, nature of services, number of employees, ownership of its branded products and brand related profits, having huge turnover of Rs.15648 crores for FY 2007-08 as against taxpayer’s turnover of Rs.150 crores which is 1043 times of the turnover of the taxpayer. Moreover, intangible assets of Infosys are at Rs.31863 crores as on March 2008 as per balance sheet available at page 301 of the paper book and Infosys is also into software product and incurring huge amount of its R&D; and as such cannot be a suitable comparable for benchmarking the international transactions. The coordinate Bench of the Tribunal in taxpayer’s own case for AY 2007-08 ordered to exclude Infosys from the final list of comparables to benchmark the international transactions by following CIT vs. Agnity India Technologies Pvt. Ltd. – (2013)
219 Taxman 26 (Del.).
Hon’ble jurisdictional High Court in Agnity India Technologies Pvt. Ltd. (supra) has held Infosys as not a valid comparable keeping in view its giant size, in terms of risk profile, nature of services and huge turnover. Moreover, the taxpayer is a captive low risk IT Services provider in the field of software development to its parent company. So, we hereby ordered to exclude this comparable from the final set of comparables chosen by the TPO for benchmarking the international transaction.
KALS INFORMATION SYSTEMS (KALS) 17. The taxpayer raised objection to take KALS as comparable on ground of functional dissimilarity as it is a product company.
The coordinate Bench of the Tribunal in taxpayer’s own case for AY 2007-08 has ordered to exclude this company on the ground that since the taxpayer is not engaged in imparting any training on commercial basis or selling its software products, it cannot be taken as a comparable to the taxpayer.