DCIT, NEW DELHI vs. M/S. VERTEX CUSTOMER SERVICES INDIA (P) LIMITED, NEW DELHI

ORDER PER O.P. KANT, A.M.: This appeal has been filed by the Revenue against the order dated 21/07/2014 of the Commissioner of Income-tax (Appeals)-XXIX, New Delhi [in short ‘the CIT-(A)’] for assessment year 2005-06 raising following grounds: 1. On the facts and in the circumstances of the case, Ld. CIT(A) erred in directing the TPO to delete Ultramine and Pigments Ltd. from the final set of comparables whereas whether the margin is high or low is not the indicator of comparability and the comparable was selected by the taxpayer itself after function, Assets and Risk (FAR) analysis and agreed by the TPO"

3. The appellant craves, leave or reserving the right to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal. 2. At the outset, we would like to mention that the assessee was issued notice for hearing on 17/10/2017 and which was served through Departmental Representative, however, on the date of hearing neither the assessee appeared nor any Authorized Representative of the assessee attended. No written submission was either filed by the assessee. We also note from the record that on earlier occasions notice for hearing was sent through registered ports as well as served through Departmental Representative but no compliance was made on behalf of the assessee. It is evident that the assessee is not interested in prosecuting the appeal. We are of the opinion that sending again one more notice to the assessee would not serve any purpose, and accordingly the appeal was heard ex parte qua the assessee. 3. Facts in brief of the case are that the assessee company was incorporated under Indian Companies Act, 1956 as a wholly-owned subsidiary of ‘Vertex India Ltd UK’, which in turn was held jointly by ‘Vertex Data Science Limited, UK’ and ‘GE Equity Investment Ltd’, Cayman Islands. The assessee was engaged in providing services in the field of customer relationship management, managing call Centre and Information Technology (IT) enabled services to its Associated Enterprises (AEs). The assessee has provided the services from its undertaking registered with Software Technology Parks of India (STPI). The assessee filed return of income for the year under consideration on 29/10/2005 declaring total income of Rs.93,21,290/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short ‘the Act’) was issued and complied with. During assessment proceeding, the assessee filed a revised computation of income, declaring total income of Rs.1,02,56,880/-. In the revised computation, the assessee declared income under the head “Profit and Gains of Business or Profession” at nil after claiming deduction of Rs.13,76,14,091/- under section 10A of the Act. Income under the head “Income from other sources” was declared at Rs.1,03,88,880/- and after claiming deduction under section 80G of the Act, amounting to Rs.1,32,000/- total taxable income was arrived at Rs.1,02,56,880/-. In assessment proceeding, the Assessing Officer noticed following international transactions with its AEs:

S. No. Description of the transactions Amount (Rs.) 1. Provision of IT Enabled back services to the AEs 946,818,348 2. Receipt of Call Centre Support Services 102,575,273 3. Receipt of Technical Counseltancy Services 18,815,642 4. Cost Recharges 21,084,439 3.1 The Assessing Officer made a reference to the Ld. Transfer Pricing Officer (TPO) for determination of arm’s length price of the international transactions. 3.2 In its transfer pricing report, the assessee characterized itself as IT enabled back-office service provider. For computing arm’s length price of the international transactions, the assessee selected Transactional Net Margin Method (“TNMM”) and aggregated all transactions and applied TNMM at entity level. Further, it applied applying the operating profit/total cost (“OP/TC”) as the Profit Level Indicator (“PLI”). The assessee selected set of 22 comparables companies and based on average of three years data i.e. financial years 2002-03, 2003-04 and 2004-05 of these 22 selected comparable companies, the average OP/TC margin 11.60%. Further, in view of the claim of capacity utilization adjustment, the assessee computed its OP/TC at 13.80%. Further, the assessee mentioned that it re-negotiated its commercial arrangement with its AE, who agreed for an increase in the service fee for the services rendered by the company in the year under consideration and, therefore, as a result of negotiation, the assessee in financial year 2006-07 received an additional amount of Rs.10,26,67,942/- for the services rendered corresponding to financial year 2004-05 i.e. the year under consideration. The assessee recomputed OP/TC ratio at 26.2% after taking into consideration additional remuneration fee received pertaining to the period under consideration and also after making adjustment for excess capacity. It was mentioned by the assessee that this profit margin being more than arm’s length margin of 11.06% earned by the comparables, the international transactions with its AEs were at arm’s length. 3.3 The ld. TPO rejected the claim of adjustment for not utilization of excess capacity and claim of working capital adjustment. The ld. TPO also excluded the additional service fee amount of Rs.10,26,67,942/- received by the assessee in financial year 2006-07 for the services rendered in financial year 2004-05. The ld. TPO used the data of current year only as against multiple year data used by the assessee. The TPO recomputed the arm’s length price after selecting comparable from the set of comparables used in transfer pricing study by the assessee for immediately preceding years as well as from the set of comparable selected by the assessee in transfer pricing study for the year under consideration. Using this methodology, the learned TPO arrived at an average OP/TC margin at 14.77% for the revised set of comparables and proceeded to make TP adjustment amounting to Rs.5,60,42,063/-.

3.4 After following the procedure laid down in the Act, the Assessing Officer passed the final assessment order on 19/12/2008 assessing the total income at Rs.6,62,98,943/-. 3.5 Aggrieved, the assessee filed appeal before the Ld. CIT-(A), who partly allowed the appeal of the assessee. Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above.

5. Before us, the ld. Sr. DR submitted that Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors India (P) Ltd. Vs. Deputy Commissioner of Income Tax in ITA 417/2014, in decision pronounced on 27/04/2015, held that merely on the ground that an entity makes highly/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables. He further submitted that the learned CIT-(A) was not correct in holding that the said comparable was not functionally similar to the assessee.

“44. In light of the above findings, this Court concludes as follows: a. The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. b. While determining the comparability of transactions, multiple year data can only be included in the manner provided in Rule ITA 417/2014 Page 52 10B(4). As a general rule, it is not open to the assessee to rely upon previous year‟s data. c. As regards Khandwala Securities and Brescon, the matter is remitted to the DRP to carry out the analysis under Rule 10B(3) and determine whether the material differences arising out of their exceptionally high profits can be eliminated. If not, the said entities cannot be included as comparables. For Keynote, firstly, enquiry is to be carried out by the DRP, preceding the analysis under Rule 10B(3), as to its functional similarity with the assessee; thereafter, the exercise of determining if there are material differences on account of exceptionally high profits which are capable of elimination has to be carried out. d. The deduction claimed by the assessee under Section 36(1)(ii) of the Act, in respect of the bonuses paid to its shareholder- employees is allowed.