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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
(PAN : AABCN7923R) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Vishal Kalra, Advocate and Ms. Khyati Oadhwal, Advocate REVENUE BY : Shri H.K. Choudhary, CIT DR and Shri Sanjay Tripathi, Senior Dr Date of Hearing : 07.09.2017 Date of Order : 25.10.2017 O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. NCS Pearson India Private Limited (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 30.01.2014, 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 2009-10 on the grounds inter alia that :-
“1. The Assessment Order dated January 30,2014, passed by the learned Assistant Commissioner of Income-tax, Circle 13(1), New Delhi ("the AO") under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ("the Act") is not in accordance with the law and is contrary to the facts and circumstances of the present case.
Transfer Pricing Adjustment
The Honourable Dispute Resolution Panel ("DRP") has erred in law and on facts in upholding the adjustment to the arm's length price made by the learned AO to the income of the assessee, based on the order, purportedly under section 92CA of the Act, passed by Additional Director of Income-tax, Transfer Pricing Officer - II (1) ("TPO").
3. Rejection of the transfer pricing documentation of the Appellant
3.1 The Honourable DRP and the learned TPO has erred in law and on facts in rejecting the Transfer Pricing ('TP") documentation which has been prepared by the Appellant in the manner as contemplated under the relevant provisions of the Act and the Income-tax Rules,1962 ("the Rules").
3.2 The Honourable DRP and learned TPO has erred in law and on facts in determining an adjustment of Rs.848,162 to the income of NCS India, without first establishing that any of the conditions specified in clauses (a) to (d) to section 92C(3) of the Act were attracted.
3.3 The Honourable DRP has erred in law and on facts in upholding the TPO's/AO's finding that there are defects in the appellant's determination of arm's length price and in holding that the transfer pricing study undertaken by the appellant is "unreliable or incorrect", under section 92C(3) of the Act. 3.4 The Honourable DRP and the learned TPO have erred in law and on facts in undertaking a new search and selecting fresh com parables.
4. Use of multiple year data
4.1 Honourable DRP and learned AO/TPO have erred in law and on facts in rejecting the use of multiple year data, without considering that the past year data had an influence on the determination of arm's length price and that the appellant had considered contemporaneous data available at the time when it carried out the benchmarking study having regard to the statutory requirement to maintain the Transfer Pricing documentation by the specified date.
5. Filters and quantitative criteria applied by the assessee
5.1. A) The Honourable DRP and the learned AO / TPO erred in law in adopting/modifying the additional filters for conducting TP analysis, without appreciating the TP documentation prepared by the assessee.
B) The Honourable DRP and the learned TPO has erred, in law and on facts, by rejecting the filter adopted by NCS India i.e. to reject companies having no sales and instead considered a filter of excluding companies having sales less than 5 crores. The learned TPO has failed to appreciate that NCS India has a low turnover when compared to the comparables selected by the TPO.
5.2 Honorable DRP and the learned TPO, has erred in law and on facts, in upholding the inclusion of the following 4 additional comparable companies by the Learned TPO without considering the detailed submissions of the appellant:
- Accentia Technologies Limited - Cosmic Global Limited - Genesys International Limited - Crossdomain Solution Private Limited - Infosys BPO Limited 5.3 The Honorable DRP and the learned TPO have erred in law and on facts, in including Eclerx Services Ltd as a comparable company without considering the detailed submissions of the appellant as well as request of the appellant that the same has been erroneously included in its transfer pricing documentation. 5.4. The learned TPO, has erred in law and on facts, in not including the following 5 comparable companies proposed to the learned TPO without considering the detailed submission of the appellant: - Allsec Technologies Limited - CG VAK Software and Exports Limited - Informed Technologies Limited - Microgenetics Systems Limited 5.5 The learned AO has erred in law and on facts by upholding the adjustment to the income of NCS India proposed by the TP officer consequent to incorrectly computing the ALP in respect of the international transactions undertaken by NCS India with its associated enterprises.
6. Risk Adjustment and working capital adjustment 6.1. The Honourable DRP and the learned AO/ TPO have erred in not appreciating that the appellant, being a captive service provider operated at lower risk levels as compared to comparable companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments to the margins of the comparables.
6.2. The Honourable DRP has erred in upholding the TPO's/AO's conclusion that there exists a single customer and political risk and that such a risk nullifies any risk adjustment that could be provided.
Other corporate tax matters
7. The Honourable Dispute Resolution Panel ("DRP") has erred, in law and on facts, in making an observation that the Appellant is a permanent establishment of NCS USA and that the Appellant was required to withhold taxes on the remittance of fees to NCS USA.
8. The Ld AO has erred, in law and on facts, in levying interest under section 234B of the Act.
The Ld AO has erred, in law and on facts, in initiating penalty proceedings under section 271 (1)(c) of the Act.” 2. By moving a separate application, the taxpayer sought to raise additional grounds on the ground that the same go to the root of the case which are as under :-
“That on the facts and circumstances of the case and in law, the Assessing Officer has erred in incorrectly considering the transfer pricing adjustment of the Appellant at INR 82,20,908 as against INR 8,48,162 determined by the Transfer Pricing Officer vide its order dated January 21, 2014, passed in pursuance to the directions of Dispute Resolution Panel.”
Keeping in view the fact that the additional ground sought to be raised by the taxpayer, though not raised before the ld. DRP, is necessary for complete adjudication of the controversy at hand, the application for additional ground is hereby allowed.
Briefly stated the facts necessary for adjudication of the controversy at hand are : the taxpayer is into the business of providing electronics test delivery services to certain international entities that have established levels of education, training and/or testing experience. These international entities issue specified certification or other form of recognized position, title or status based on their online test conducted through NC Inc. The taxpayer entered into international transaction with Associated Enterprises (AE) during assessment year under consideration as under :-
No. Nature of transaction Method Value of 1 Provision of collection, co-ordination TNMM 121,172,163 and technical support 2 Collection on the behalf of AE CUP 134,681,883 3 Reimbursement of amount received on CUP 20,400 sales of assets by NCS India on behalf of NCS Inc. USA 4 Reimbursement of cost incurred by NCS CUP 1,598,051 India on behalf of NCS Inc. USA 5 Reimbursement of cost incurred by NCS CUP 929,172 India on behalf of Edexcel
The taxpayer in its TP study report shown to have engaged in providing collection, coordination and technical support to its AE earning a margin of 15% on cost. The taxpayer in order to benchmark this transaction chosen 15 comparables having margin of 11.72% by using multiple year data and have found its international transactions at arm’s length. Pursuant to the show- cause notice issued by ld. TPO, the taxpayer filed various submissions, from which TPO proceeded to conclude that the assessee has not given any bifurcation of cost of various services as it was providing ITES business support and technical support services to its AE. TPO also noticed that the taxpayer has only selected ITES and software companies to benchmark its international transactions.
After applying various filters and during the TP proceedings, a fresh search was conducted on the basis of filters applied by TPO and the taxpayer has selected 8 comparables. The ld. TPO after discussing all the objections raised by the taxpayer selected 9 companies as comparables for benchmarking the international transactions qua ITES segment having average margin of 37.72%.
Similar set of comparables have been taken by the ld. TPO for benchmarking the international transaction qua business support services segment having average margin of 22.35%. Accordingly, TPO proceeded to compute the Arm’s Length Price (ALP) of support services for ITES segment and ALP of business support services at Rs.11,49,090/- and Rs.73,72,746/- respectively as the short fall being adjustment u/s 92CA.
The taxpayer carried the matter by way of filing objections before the ld. DRP who has partly allowed the objections. 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.
GROUNDS NO.1 & 2 9. Grounds No.1 & 2 are general in nature and do not require any adjudication.
GROUNDS NO.3, 3.1, 3.2, 3.3 & 3.4, 10. Grounds No.3, 3.1, 3.2, 3.3 & 3.4 are academic in nature and do not need any adjudication.
GROUNDS NO.4, 4.1, 5, 5.1, 5.3, 5.4 & 5.5
Grounds No.4, 4.1, 5, 5.1, 5.3, 5.4 & 5.5 are not pressed, hence dismissed as not pressed.
GROUNDS NO.5.2 & 5.3
Undisputedly, for ITES support services, the taxpayer charged cost + 15% and for business support services, the taxpayer charged cost + 5% from its AE. TNMM as most appropriate method used by the taxpayer for benchmarking international transactions has been accepted by the ld. TPO. It is also not in dispute that the ld. DRP upheld the comparables chosen by the ld. TPO but allowed worked capital adjustment. It is also not in dispute that adjustment made by the TPO/AO qua business support services is not now sustainable in view of the order passed u/s 154 of the Act.
In the backdrop of the aforesaid facts and circumstances of the case, the ld. AR for the taxpayer to cut short its arguments by contending that the taxpayer only sought exclusion of 3 comparables viz. (i) Accentia Technologies Limited, (ii) Cosmic Global Limited and (iii) Eclerx Services Limited from the final set of comparables chosen by the ld. TPO to benchmark international transactions qua ITES segment. We will examine aforesaid comparables one by one so as to determine their suitability to benchmark the international transactions.
ACCENTIA TECHNOLOGIES LTD. (ACCENTIA)
The ld. AR for the taxpayer challenged the suitability of Accentia as comparable to the taxpayer on two grounds : (i) it is functionally different; and (ii) that it has undergone extra ordinary events during the relevant year and drew our attention towards pages 33, 36 & 32 of the paper book containing its annual report.
As far as functional dissimilarity of Accentia vis-à-vis the taxpayer is concerned, perusal of the annual report at page 33 categorically supports the contention of the ld. AR for the taxpayer that it is functionally dissimilar because Accentia services and solutions are focused in two main area : (i) Healthcare Receivables Cycle Management (HRCM) and (ii) software products for Business Processing Outsourcing (BPO).
So far as question of extra ordinary events during the year under consideration is concerned, it is apparent from page 32 of the financials of Accentia that Accentia acquires 10% stakes in Trans Services Inc., USA leading to abnormal growth in sale (57%) due to restructuring activities. Furthermore the ld. AR for the taxpayer contended that complete segmental data is not available and drew our attention to page 61 of the annual report i.e. schedules forming part of profit & loss account.
Ld. DR for the Revenue to repel the arguments addressed by ld. AR for the taxpayer on functional dissimilarity contended that coding is basically a software development and that income from coding is treated as income from software and drew our attention to page 61 of the annual report. No doubt income from coding is treated as income from software but in the absence of insufficient segmental data, this contention cannot be accepted.
Moreover, Accentia has been excluded by the coordinate Bench of the Tribunal as comparable to the company rendering ITES services during AY 2009-10 in the cases cited as Cummins Turbo Technologies Ltd. vs. DCIT – (2016) 68 taxmann.com 273 (Pune – Trib.), Maximize Learning (P) Ltd. vs. ACIT – (2015) 58 taxmann.com 169 (Pune – Trib.) and BNY Mellon International Operations (India) (P.) Ltd. vs. DCIT – (2015) 41 ITR (T) 407 (Pune). In Cummins Turbo Technologies Ltd. (supra), Accentia has 19. been ordered to be excluded by following Maximize Learning (P) Ltd. (supra). In Maximize Learning (P) Ltd. (supra), suitability of Accentia with companies rendering ITES has been examined and found to be not a suitable comparable on ground of extra ordinary circumstances i.e. amalgamation as well as functional dissimilarity.
Similarly, in BNY Mellon International Operations (India)
(P.) Ltd. (supra), Accentia has been ordered to be excluded as a comparable vis-à-vis company rendering ITES services on the ground that it is engaged in developing its own software product and is rendering medical transcription services. In case of Macquarie Global Services (P.) Ltd. vs. DCIT – 21. (2015) 39 ITR (T) 390 (Delhi-Trib.), Accentia has been ordered to be excluded for benchmarking the functional transactions for purpose of comparability with company rendering ITES services on the ground that Accentia apart from being engaged in ITES is also dealing with software products and its segmental figures are not available and the TPO has merely taken its entity level figures.
So, in view of what has been discussed above, we are of the considered view that the Accentia is not a suitable comparable vis- à-vis the taxpayer which is a captive service provider for benchmarking the international transactions. Hence, we order to exclude Accentia from the final set of comparables.
COSMIC GLOBAL LIMITED (COSMIS) 23. This is taxpayer’s own comparable. However, the taxpayer cannot be estopped to sought its exclusion before any of the judicial or quasi-judicial authority. Assessee sought its exclusion from the final set of comparables on ground of functional dissimilarity, different business model; earning super-normal profit, abnormal growth in sales and insufficient segmental data.
Ld. AR for the taxpayer relied on the decision of Macquarie Global Services (P.) Ltd. vs. DCIT (supra).
Ld. DR contended that transcription and translation services are basically ITES and does not make Cosmic functionally different. However, this contention is not tenable because Cosmic outsourced its activities and outsourcing expenses constitute 57% of the total expenses and this company cannot be chosen as a comparable on entity level.
Perusal of the annual report of Cosmic, available at page 104 of the paper book, in Schedule 13 i.e. Notes Forming part of Financial Accounts ending March 31, 2009 contains the revenue recognition as under :-
“1.2 Revenue recognition:
In respect of Medical Transcription Services. and Translation Services the Company follows the practice of raising monthly invoices job-wise on the clients based on the number of lines and number of words respectively, etc., as accepted by them and in respect of Accounts BPO services the invoices are raised after acceptance by the clients on mutually agreed basis.
This year the company has raised the bill on all the jobs accepted and hence the application of proportionate completion method according to AS-9 has not arisen.
Export/Consultancy Services are billed at mutually discussed rates wherever the terms have not been reduced to writing.
Revenue from Operations includes Revenue earned through Translation Services Rs.6,99,35,756.45, through Medical Transcription Rs.9,90,737 and through Accounts BPO services Rs.27,76,090.”
Aforesaid revenue recognition shows that Cosmic has three segments viz. medical transcription Rs.0.09 crore, translation services Rs.6.99 crores and Accounts BPO segment Rs.0.27 crores.
However, complete segmental data is not available. Furthermore Cosmic is having abnormal growth of sales i.e. 106% as is evident form profit & loss account, available at page 98 of the annual report.
Comparability of Cosmic has been examined by the coordinate Bench of the Tribunal in Macquarie Global Services (P.) Ltd. vs. DCIT (supra) for AY 2009-10 vis-à-vis company rendering ITES services as in the case of the taxpayer and ordered to be excluded on the ground that this company has outsourced its activities and the outsourcing expenses constitute 57% of the total expenses and that the entire outsourcing is confined to translation charges paid of Rs.3 crores. So, in view of its outsourced activities and in view of the fact that it is having a different business model and that it is having abnormal growth in sales i.e. 106%, we are of the considered view that it is not a suitable comparable vis-à-vis the taxpayer for benchmarking international transaction qua ITES services, hence ordered to be excluded.
ECLERX SERVICES LTD. (ECLERX)
The taxpayer sought exclusion of Eclerx on the grounds inter alia that Eclerx is a KPO providing data analytics process solution to global enterprise clients; that it is functionally dissimilar; that it is earning supernormal profit; that it is having significant intangibles; that it has incurred Rs.26.65 crores towards contract for service which amounts to outsourcing its services and that it is having different set of skilled employees.
Despite the fact that it is taxpayer’s comparable but it cannot be debarred form seeking exclusion of this comparable if wrongly chosen in its TP study as has been held in Quark Systems (P) Ltd. vs. DCIT – (2010) 38 sot 307 (CHD)(SB).
Undisputedly, the taxpayer is a low end BPO rendering services as a captive service provider. Comparability of Eclerx has been examined by the coordinate Bench of the Tribunal in Macquarie Global Services (P.) Ltd. vs. DCIT (supra) for AY 2009-10- wherein it was ordered to be excluded as a comparable to the companies providing BPO / low end services / ITES having supernormal profit. Coordinate Bench of the Tribunal in Macquarie Global Services (P.) Ltd. vs. DCIT (supra) ordered to exclude Eclerx by returning following findings :-
“24. We have perused the Annual report of this company, a copy of which s available on pages 494 onward of the paper book, It can be seen that it is a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to global clients. This company provides end to end support through trade lifecycle including trade confirmation, settlements, etc. It also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability services. From the above narration of the nature of business done by Eclerx Services Pvt. Ltd., it is overt that it, being a KPO company, is providing data process solutions to its clients, which activity is way different from that of the assessee company, which is basically of providing accounts payable services and general accounting services to its AEs alone. Not only that, this company has significant intangibles which its uses for the purposes of rendering KPO services. As the assessee is a captive unit rendering services to its AEs without any intangibles, there can be no comparison between the assessee and Eclerx Services Pvt. Ltd. We, therefore, order for the exclusion of this company from the final set of comparables.”
So, when the taxpayer is a routine ITES i.e. low end service provider, it cannot be a suitable comparable with Eclerx which is a KPO providing data analytics and data process solutions to global enterprise clients and it is having significant intangibles to the tune of 7.24%. So, high end KPO cannot be compared with low end routine ITES service provider. Eclerx also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability service which makes it functionally dissimilar with the taxpayer.
So, in view of the matter, we order to exclude Eclerx from the final set of comparables.
GROUNDS NO.6, 6.1 & 6.2
Grounds No.6, 6.1 & 6.2 are not pressed, hence dismissed as not pressed.
GROUNDS NO.7 & 8 33. Keeping in view our findings returned on the TP issues decided in the preceding paras, grounds no. 7 & 8 are academic and do not need any adjudication at this stage.
GROUND NO.9 34. Ground No.9 is premature and does not require any adjudication.
Additional ground raised
by the taxpayer needs no adjudication as it has since become infructuous in view of the order passed by AO u/s 154 of the Act.