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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ B ’
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
Per Shri Vijay Pal Rao, J.M. : These cross appeals are directed against the order dt.29.09.2011 of Commissioner of Income Tax (Appeals)-IV, Bangalore for the Assessment Year 2004-05.
2 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd 2. The assessee is a subsidiary of Siemens Shared Services LLC USA. The assessee rendered back office service to its overseas Siemens Group Company and accordingly reported international transactions as reproduced by the Transfer Pricing Officer (TPO) in para 1.4 as under :
1.4 The following are the international transactions the tax payer has entered into with its associated enterprises during the year 2003-04 : i) Back Office Processing Rs.11,93,09,364 ii) Revenue Cycle Management Service Rs.1,46,08,788 iii) Reimbursement received towards travel and Rs.1,71,07,476 other expenses and cost of IPLC charges.
The turnover of the assessee for the year under consideration was Rs.13,57,25,409. To bench mark its international transactions, the assessee selected 10 comparables in its transfer pricing study having average PLI of 9.63% in comparison to the assessee's PLI of 11.85%.
Accordingly, the assessee claimed its international transactions at arm’s length. The TPO rejected the TP Study of the assessee and carried out a fresh search and selected 9 companies in the set of comparables as under :-
3 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd The assessee challenged the action of the Assessing Officer before the CIT (Appeals). The CIT (Appeals) applied a filter of 0% RPT as well as rejected some companies on other criteria. Accordingly, the CIT (Appeals) rejected five companies out of 9 companies selected by the TPO. Thus the CIT (Appeals) has retained 4 companies as under : (i) Nucleus Netsoft & GIS India Limited
(ii) Tricom India Limited (iii) Fortune Infotech Limited
(iv) Vishal Information Technology Limited Thus both the revenue as well as assessee are aggrieved by the impugned order of CIT (Appeals) and filed cross appeals raising the following grounds :
4 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd Assessee's Grounds of Appeal 1 Assessment and reference to Transfer Pricing Officer (‘TPO’) are bad in law a) The assessment order passed by the DCIT under section 143(3) of the Income-tax Act, 1961 (‘the Act’) and the order passed by the Commissioner of Income-tax (Appeals)-IV, (‘the CIT(A)’) under section 250 of the Act, are bad in law and on facts. b) The CIT(A) erred in determining the arithmetical mean of arm’s length net cost plus margin at 35.895% and a transfer pricing adjustment of Rs. 2,08,50,103. c) The CIT(A) erred in law in not appreciating the meaning of the erstwhile phrase ‘having regard to’ in sections 92 and 92CA(4) of the Act. d) The CIT(A) erred in law in confirming that the amendment made to section 92CA(4) vide the Finance Act, 2007 was to set right the lacuna in the said section. 2 Determination of arm’s length price a) The CIT(A) erred in determining a transfer pricing adjustment of Rs 2,08,50,103 towards Information Technology (‘IT’) Enabled services by substituting the arm’s length price as determined by the Appellant. b) The CIT(A) erred in rejecting the value of international transaction as recorded in the books of account, as the arm’s length price. 3 The fresh comparable search undertaken by the TPO is bad in law a) The CIT(A) erred in law in holding that the fresh comparability analysis using non contemporaneous data conducted by the TPO and further substituting the Appellant’s analysis with fresh benchmarking analysis by the TPO on his own conjectures and surmises. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the TPO is liable to be quashed. b) The TPO erred in not sharing the fresh comparability analysis conducted by him at the time of assessment. c) On the facts and in the circumstances of the case and in law, the TPO erred and the CIT(A) further erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transaction which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. 4 Determination of arm’s length price by the TPO a) The AO/TPO grossly erred on facts and the CIT(A) further erred in confirming the benchmarking of IT enabled services transactions of the Appellant with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-à-vis comparable companies. b) The CIT(A) erred in facts in confirming the comparability analysis conducted by the TPO, without analysing the functional and risk profile of Appellant vis-à-vis comparables selected in the Transfer Pricing Order.
5 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd c) The AO/TPO erred on facts in rejecting most of the comparable companies arrived at in the Transfer Pricing Study. 5 Erroneous data used by the AO/TPO a) The AO/TPO has erred in law and the CIT(A) further erred in confirming the use of data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law and the CIT(A) further erred in not applying multiple- year data while computing the margin of alleged comparable companies. 6 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts and the CIT(A) further erred in not allowing appropriate adjustments under Rule 10B to account for differences in risk profile between the Appellant and the comparable companies. 7 Interest levied under section 234B of the Act The CIT(A) erred in confirming the action of the AO in levying interest under section 234B of the Act. 8 Interest under section 234D The CIT(A) erred in confirming the action of the AO in levying interest under section 234D of the Act. 9 Initiation of Penalty Proceedings The CIT(A) erred in not reaching a conclusion that the initiation of penalty proceedings by the AO under section 271(1)(c) was not justified in the case of the Appellant 10 Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. c) Further, the Appellant prays that the adjustment in relation to Transfer Pricing matters made by the AO/TPO and upheld by the CIT(A) is bad in law and is liable to be deleted.
6 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd Revenue’s Grounds of Appeal.
As regards the filter applied by the CIT (Appeals) of 0% RPT, we find that this Tribunal has taken a consistent view that 0% RPT is an impossible and impractical situation as it is difficult to find the comparable companies having no RPT. Therefore the Tribunal in due course have considered that in the normal circumstances, the tolerance range of related party should be 15% and in any case it cannot be more than 25%. Accordingly, by applying the criteria of 15% RPT we decide this issue partly in favour of revenue. Since the assessee has raised the objection against the companies which are rejected by the CIT (Appeals) on different criteria therefore we have to consider the functional comparability of the companies which are objected by the assessee one
7 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd by one. We will deal with the functional comparability of the companies sought to be excluded by the assessee as under :
(i) Tricon India Limited (ii) Fortune Infoteh Limited (iii) Wipro BPO Solution Ltd. (iv) Vishal Information Technology Limited
The learned Authorised Representative of the assessee has submitted that in the case of Tricon India Limited, the CIT (Appeals) has accepted the objection of the assessee regarding low employee cost.
Further this company renders specialized services like plant maintenance and electric data discovery. He has referred to the Annual Report of this company in support of his contention. He has further pointed out that this company is also having in-house R&D process for upgrading software and training its professional to develop its own software to cater the need of the clients. This company also engaged in software product development and functionally not comparable.
As regards the Fortune Infotech Limited, the learned Authorised Representative has submitted that this company own intangibles being proprietary software like ‘Fine Tran’ and ‘Image Index’. Therefore this company is not comparable with the assessee.
8 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd 6. As regards Wipro BPO Solution Ltd., the learned Authorised Representative has submitted that the turnover of this company is Rs.430.31 Crores which breaches the turnover tolerance range of 10 times of the assessee. Further this company owns significant intangibles and also having advantage of its brand value and name. Therefore this company cannot be considered as functionally comparable to the assessee. He has further submitted that the functional comparability of all these companies have been considered by the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. Vs. DCIT 28 taxmann.com 258 for the same assessment year.
As regards Vishal Information Technology Ltd., the learned Authorised Representative has submitted that this company is functionally not comparable as it is engaged in providing specialized service to print production industry. This company is also outsourcing its significant portion of work which is different from operating model of the assessee. Thus this company fails employee cost filter as it is only 1.38% of total cost in comparison to the assessee's employee cost filter of 32.18%. This company has also shown the inventory in the books therefore, this company cannot be considered as a good comparable of the assessee.
9 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd 8. On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and submitted that when the predominant functions of these companies are ITES in nature then the insignificant dissimilarities are not relevant and further the margins of the comparable companies are not impacted in the case where TNMM is adopted as MAM and average PLI is considered as comparable price.
We have considered the rival submissions as well as the relevant material on record. We find that the objections raised by the learned Authorised Representative are based on the facts recorded in the Annual Reports of these companies and have been considered by the co- ordinate bench of this Tribunal in the case of 24/7 Customer.Com Vs. DCIT (supra) in paras 14.3 to 15.3.4 and para 17.4 as under :
“ 14.3 We have heard both parties, carefully considered the submissions made, judicial decision relied on and the material on record. The Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra ) held that only companies within the turnover range of Rs. 1 Crore to Rs. 200 Crores should be taken into consideration for the T.P. Study. We are of the considered view that the cited case squarely applies to the assessee's case as the turnover of the assessee being approximately Rs. 66 Crores falls within the range of Rs. 1 Crore to Rs. 200 Crores. Therefore, respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra), we direct the Assessing Officer/TPO that only those companies having a turnover of Rs. 1 Crore to Rs. 200 Crores be taken as comparable companies and to consequently exclude Wipro BPO Ltd. which has a turnover of Rs. 322 Crores in the relevant period.
Comparables Companies Owning Intangiables 15.1 In Ground No. 1, the assessee has contended that the learned CIT (Appeals) erred in accepting comparable companies owning intangibles as proposed by the TPO. The learned counsel for the assessee submitted that the assessee is a captive service provider engaged in the business of providing call centre services and would fall under 10 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd the IT Enabled service sector. It is argued that while the assessee does not own brand intangibles some of the comparables chosen by the TPO have their own, software products and hence own intangibles. It is submitted that such companies, having the ability to deliver services, penetrate the market and provide faster delivery, ought not to have been taken as comparable companies as has been done in the case of Wipro BPO Ltd., Tricom India Ltd. and Fortune Infotech Ltd. It is urged that these companies ought to be excluded from the list of comparables. The learned counsel for the assessee argued that intangible assets, in the normal commercial sense, are those which have intrinsic productive value, even though they may not have any intangible form and substance such as Research & Development, Patents and Software. He quoted from the synthesis report of the OECD, which forms part of the paper books, to stress that intangible assets play an important role in value creation and enabling productivity and efficiency to reap economic gains. It was contended that in the service industry, service providers who have better brand or other intangible assets get better premium for their services, as in the case of some of the comparable companies selected by the TPO. Whereas, it is submitted that, the assessee is only rendering call centre services and does not possess any intangibles nor does it derive any benefit from intangibles in providing these services. 15.2 The learned Departmental Representative on his part supported the orders of the learned CIT (Appeals) which he contended was well explained. It was submitted by the learned Departmental Representative that the assessee had not pointed out any provisions in the Act or Rules or OECD guidelines which imposes any prohibition in taking comparables with intangibles so long as there is functional similarity of comparables vis-à-vis the tested party. The learned Departmental Representative argued that Brands can give business but not profits. The learned Departmental Representative pointed out the assessee itself does not have any consistent stand in the matter as in its own T.P. Study the assessee has taken companies like Tata Share Registry and Max Health - which had their own intangibles. The learned Departmental Representative submitted that the arguments put forth by the assessee shifted to suite its own purpose. In these circumstances, the learned Departmental Representative contended that the findings of the learned CIT (Appeals) be upheld. 15.3.1 We have heard both parties and have carefully perused and considered the submissions made, details filed and material on record. It is a well accepted principle that only those companies which are on similar standards need to be considered for comparability. In this context, a co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra ) has reiterated that all the comparables have to be compared on similar standards. Therefore, companies which possess their own unique software intangibles cannot be compared with the assessee, as the former would derive significant advantage from unique software compared with the assessee, which is performing call centre services for it's A.E. in the USA. 15.3.2 In the case of M/s. Wipro BPO Ltd., this comparable is under consideration for exclusion as a comparable, in this case for this Assessment Year 2004-05, on account of the application of the turnover filter of Rs. 1 Crore to Rs. 200 Crores. (refer para 14.3 supra) 15.3.3 In respect of M/s. Tricom India Ltd., the learned counsel for the assessee contended that it has registered an abnormal growth of 33% increase in PAT in the 11 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd relevant period due to the fact that it has developed its unique software to provide BPO services to its customers. The learned counsel for the assessee referred to the Annual Report of this comparable, wherein it is mentioned that it does specialized services such as Title Plant maintenance and Electronic Data discovery which gives it an edge over other Indian Company competition thereby enabling it to generate higher revenues and margins. It was also submitted by the learned counsel for the assessee that it has a process of continuous in house R & D process for upgradation of software and training its professionals to develop its own software to cater to the needs of its clients. On appraisal of the submissions and the material on record, it would certainly stand to reason that a company having unique software developed in house which also renders specialized services in its area of specialization gets that sort of competitive edge that gives it an advantage. Applying the principle that companies which are on similar standards only should be taken as comparables, we hold that this company which has unique intangibles cannot be taken as a comparable for the assessee and accordingly direct the Assessing Officer / TPO to exclude it from the list of comparables in this case. M/s. Fortune Infotech Ltd. 15.3.4 The learned counsel for the assessee contended that this company was using web based software, unique technology and technical know how imported from its business partner for providing BPO services and submitted letter dt.11.9.2012, enclosing web site extracts detailing the intangibles developed by this company. On perusal of the details furnished and submissions made, it is seen that this company has developed its own software called "Finetran" and "image index" for performing specialized services in medical transcription and patient record management. On appraisal of the same, we are of the opinion that this comparable company has developed unique software from which it would derive substantial benefits/advantages when compared with the assessee which is undertaking pure call centre services. Applying the principle that companies which are on similar standards only should be taken as comparables, we hold that this company which has unique intangibles cannot be taken as a comparable for the assessee and accordingly direct the Assessing Officer/TPO to exclude it from the list of comparables in this case. 16…… 17…..
Wipro BPO Ltd. 17.4 As per the details on record, the turnover/Revenue of Wipro BPO Ltd. in the period relevant to Assessment Year 2004-05 is Rs. 322 Crores. Further, this company having the influence of "Wipro" brand may be seen as having its unique intangibles. Following the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra), we have already held that companies whose turnover is outside the range of Rs. 1 Crore to Rs. 200 Crores are to be excluded from the set of comparables and accordingly direct the Assessing
12 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd Officer/TPO to exclude Wipro BPO Ltd from the list/set of comparable companies for the assessee's case in Assessment Year 2004-05.”
Following the earlier order of this Tribunal, we do not find any reason to interfere with the order of CIT (Appeals) qua this issue.
ULTRAMARINE & PIGMENTS LIMITED
The learned Authorised Representative of the assessee has submitted that the revenue recognition policy of this company states the sale of goods segment and not explicit regarding ITES segment. There is abnormal growth of revenue during the year of 123%. This company is primarily engaged in the manufacturing of laundry based products and ITES revenue account for only 18% of the total revenue. Further this company also fails employee cost filter as it is only 11.78%. The learned Authorised Representative has submitted that the functional comparability of this company has been considered by the co-ordinate bench of this Tribunal dt.21.8.2014 in the case of Mindteck (India) Ltd. Vs. DCIT in IT(TP)A No.70/Bang/2014. Therefore this company cannot be considered as a comparable of the assessee.
On the other hand, the learned Departmental Representative has submitted that the TPO has examined the functional comparability of this company. Since these objections were not raised before the TPO
13 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd therefore it is not clear from the order of the TPO where the objections raised by the assessee are factually correct or not. The learned Departmental Representative has contended that the decision relied upon by the assessee is not in respect of Assessment Year 2004-05 but these are in respect of different assessment year and there is a significant gap between the assessment year under consideration and the decisions of the Tribunal relied upon by the assessee.
Having considered the rival submissions as well as the relevant material on record, we note that the decision relied upon by the assessee in the case of Mindteck (India) Ltd. Vs. DCIT (supra) is in respect of the Assessment Year 2009-10 therefore without examining the comparable facts and functions of the said company for the Assessment Year 2004- 05 and 2009-10 it cannot be said that the dissimilarities found by this Tribunal for the Assessment Year 2009-10 were also in existence for the Assessment Year 2004-05. Since all these aspects have not been examined by the TPO therefore in the facts and circumstances of the case, we set aside this issue to the record of the TPO/A.O. for proper verification and examination of the facts on the basis of which the assessee has raised the objection against the comparability of this company.
14 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd
Spanco Telesystems & Solutions Ltd.
The learned Authorised Representative of the assessee has submitted that the revenue growth from the service segment of this company has increased by 2,187 % during the year. The revenue from the operations has increased 30.38%. This company is mainly involved in Telecom Infrastructure Management Business accepted contracts for BSNL & MTNL and therefore functionally not comparable with the assessee. In support of his contention, he has relied upon the decision of co-ordinate bench of this Tribunal in the case of Google India (P) Ltd Vs. DCIT 29 taxmann.com 412.
On the other hand, the learned Departmental Representative has submitted that the decision relied upon by the assessee is in respect of different assessment year i.e. 2006-07 and therefore without examination of these relevant facts for the year under consideration, the said decision cannot be applied in the case of the assessee. He has further contended that these objections regarding dissimilarity of functions were not raised before the TPO/A.O. therefore these aspects have not been examined by the TPO/A.O.
15 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd 15. We have considered the rival submissions as well as the relevant material on record. As regards the objections of abnormal high margin, it is settled proposition that the inclusion and exclusion of the companies in the set of comparables cannot be solely on the basis of high profit margin or loss. However if the high profit margin or loss has occurred as a result of some abnormal event occurred during the year then the said fact / event can be considered as a relevant criteria for selection of comparability of the company. Thus the high profit margin alone cannot be criteria or parameter for selection of the company in the list of comparables. Further, the learned Authorised Representative has submitted that this company is also functionally different as it is mainly in the business of Telecom Infrastructure Management and executed contracts of BSNL & MTNL, we find that these aspects have not been examined by the TPO/A.O. Therefore this issue is set aside to the record of the TPO/A.O. for proper examination of all the relevant facts and then decide the issue of functional comparability.
The assessee has also raised an objection regarding correct computation of margin in respect of Allsec Technologies Ltd.
We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant
16 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd material on record. We find that the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. Vs. DCIT (supra) has considered this issue in para 18.5 as under :
Allsec Technologies Ltd. 18.5 Both the assessee and the TPO agree that this company is to be considered as a comparable. The assessee, however, has disputed the computation of the margin taken by the TPO. The TPO while examining the concerned details, noted that two items of abnormal expenditure, namely, connectivity cost and data base cost, amounting to more than 60% of the revenue cannot be treated as regular operating costs and hence averaged the costs incurred on these items for the earlier years for comparability. The assessee contends that these are normal reasonable expenses and were incurred as the company was in an expansion mode which has been misconstrued as extraordinary expenses and therefore the adjustments made by the TPO are not called for. We have considered the material on record. We find that the TPO in her order has not explained as to why these expenses cannot be taken as regular operating expenses for comparability or the basis for making the adjustments worked out by averaging the costs on the basis of the previous two years. We, therefore, direct the Assessing Officer/TPO to examine the issue, based on the assessee's submissions and then decide on the adjustment, if any, that would be required to be made for comparability.
Accordingly, we direct the TPO/A.O. to examine the nature of the expenses incurred for business expansion and then decide the allowability of the same as operating or extra ordinary in nature.
As regards the benefit of proviso to section 92CA(2), it is clarified that the said proviso is only a tolerance range of + or – 5% and cannot be considered as a standard deduction. Accordingly, the TPO/A.O. is directed to consider the benefit of proviso to Section 92CA(2) of the Act.
17 IT(TP)A Nos.1191 & 1208/Bang/2011 Siemens BPO Services Pvt Ltd 19. In the result, the appeals of the assessee as well as revenue are partly allowed.
Order pronounced in the open court on the 5th day of June, 2017.