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Income Tax Appellate Tribunal, DELHI BENCHES : I-1 : NEW DELHI
Before: SHRI R.S. SYAL & SHRI SUDHANSHU SRIVASTAV
Date of Hearing : 21.09.2017 Date of Pronouncement : 25.09.2017 ORDER PER R.S. SYAL, VP: This appeal filed by the assessee is directed against the order passed by the CIT (A) on 31.07.2012 in relation to the assessment year 2007-08.
The only issue raised in this appeal is against the confirmation of transfer pricing addition to the extent of Rs.35,44,190/-.
Briefly stated, the facts of the case are that the assessee is a subsidiary of Ariba Inc., USA and is engaged in providing Spend Management Solutions in the Indian market; Provision of online auction; Bid evaluation services; and Captive IT enabled support services to its associated enterprises (AEs). Certain international transactions were reported by the assessee in Form No. 3CEB. The Assessing Officer (AO) made reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price (ALP) of the international transactions. The dispute in this appeal is in only respect of international transaction of ‘Provision of IT enabled services’ with transacted value of Rs.5,45,07,381/-. The assessee selected itself as the tested party and applied Transactional Net Margin Method (TNMM) as the most appropriate method. Its own Profit Level Indicator (PLI) of Operating Profit (OP) to Total Costs (TC) at 17% was shown to be favourable with the PLI of comparables. On this basis, it was claimed that the international transaction was at ALP. The TPO made certain variations in the comparables chosen by the assessee. Applying 2
28.11% of such comparables, the TPO worked out the ALP of the ‘Provision of IT enabled services’ at Rs.5,96,83,251/ as against the transacted value at Rs.5,45,07,381/-. The TPO, thus, proposed transfer pricing adjustment of Rs.51,75,870/-. The ld. CIT(A) reduced the transfer pricing addition to Rs.35,44,190/-, against which the assessee has come up in appeal before the tribunal.
We have heard the rival submissions and perused the relevant material on record. There is no dispute on the application of the TNMM as the most appropriate method or the assessee’s own computation of PLI.
In fact, the only issue raised by the ld. AR during the course of instant appellate proceedings is to plead for the exclusion of e-Clerx Services Ltd. from the final list of comparables drawn by the TPO. For making a proper evaluation of the comparability or otherwise of this company, let us have a look at the functional profile of the assessee of this international transaction. It can be seen from the assessee’s Transfer pricing study report that it provides, inter alia, captive IT enabled support services to its group companies. Various services provided by the assessee within this segment can be categorized into five broader categories, viz., Legal 3
Pricing analysis, Financial analysis, Global sourcing support and IT support. Under the Legal support services, the assessee provides assistance with the drafting and reviewing of the legal contracts entered into by various Ariba group companies. This includes the sales contracts as well as the purchase contracts with various vendors. In providing such services, the assessee uses the pre-existing templates for contracts. Under Pricing support services, the assessee renders pre-sale support and post-sale support services. The sale team of the assessee specifies various parameters like details of the solutions sold, level of support provided etc. based on which the final quote is arrived at. In the post-sale services, the pricing team reviews the sale contracts entered into with the customers to ensure that the final terms and conditions are same as agreed through the approval process. Under the third category of Financial analysis, the assessee provides accounting and data analysis services for the Asia Pacific region. Main functions performed under this category of services are Budget analysis, Sales Forecasting, Delivery matrix analysis, Invoicing & Accounts receivable analysis, Revenue analysis and overall AR Management. Under the fourth category of Global sourcing, the operations of the assessee involve provision of support services for online competitive bidding events. The assessee identifies the prospective suppliers in India; manages and trains suppliers in the Ariba offerings; and provides support to the suppliers during an event auction. The last category of IT support services includes Application support, Software documentation and Testing services etc. On going through the above nature of services rendered by the assessee under the overall international transaction of ‘Provision of IT enabled services’, it becomes clear that the assessee is mainly supporting the sales activity and also maintaining accounts etc. of its associated enterprises.
With the above background in mind of the functional profile of the assessee under this international transaction, let us examine the comparability or otherwise of e-Clerx Services Ltd. This company was chosen by the TPO as comparable. The assessee objected to the same by contending that e-Clerx is functionally different. The TPO collected some information from the company u/s 133(6) of the Act. He did not accept the assessee’s argument and finally included this company in the list of comparables. No relief was allowed in the first appeal. 5
Having heard both the sides and perused the relevant material on record, it can be seen from the Annual Report of this company, a copy of which has been placed in the paper book, that it paid Outsourcing charges to the tune of Rs.8 crore and odd in addition to payment of Salary and wages etc. to its staff, including director’s remuneration, to the tune of Rs.24.54 crore. This divulges that roughly 26% of the activity carried out by this company has been outsourced. As against this, the assessee is doing the entire business at its own without there being any expenditure on outsourcing. This reveals a significant difference in the business model adopted by the assessee and e-Clerx Services Ltd. The Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. vs. CIT (2015) 377 ITR 533 (Del) excluded Vishal Information Technology Ltd. from the list of comparables on accounts of its different business model, namely, more of outsourcing than in-house services. When we advert to the facts of the instant case, we find that e-Clerx Services Ltd. has also spent more than 26% of the total cost of the employees and job work charges simply on outsourcing. Since the business model of e-Clerx Services Pvt. Ltd. is significantly different from that of the assessee, which is not outsourcing
any of its work, the same, in our considered opinion, renders it non- comparable. We, therefore, direct to exclude this company from the final set of comparables.
To sum up, we set aside the impugned order on the issue of addition towards transfer pricing adjustment in the international transaction of ‘Provision of IT enabled services’ and remit the matter to the file of AO/TPO for fresh determination of its ALP in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings
In the result, the appeal is allowed for statistical purposes.
The order pronounced in the open court on 25.09.2017.