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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
Per Vijay Pal Rao, Judicial Member
This appeal by the assessee is directed against the assessment order dated 29.11.2016 passed u/s. 143(3) r.w.s. 144C(13) of IT Act in pursuant to the directions of DRP dated 01.09.2016 for the assessment year 2012-13. The assessee has raised the following grounds.
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The only issue raised by the assessee in this appeal is regarding comparability of certain companies selected by the TPO and consequent adjustment made in respect of ALP of international transactions. The assessee was a subsidiary of Swiss Re Insurance Group, Zurich and engaged in providing IT enabled back office services like contract administration, claim administration and technical reinsurance accounting support to its AE. During the year under consideration the assessee has reported the financial results and international transactions as reproduced by the TPO in para 2.2 and para 3 as under.
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To bench mark its international transaction the assessee selected six comparable companies in TP study having mean margin of 12.97% and claimed its international transaction at arms length. The TPO rejected three companies out of the six selected by the assessee. The TPO has then carried out the fresh search and added six more companies to the three companies already accepted from the set of the assessee’s comparables. Accordingly, the TPO has determined the arms length price by considering ten companies as under:
IT(TP)A No. 2315/Bang/2016 Page 6 of 13 4. After allowing the negative working capital adjustment of 1.74% the TPO has arrived at the adjusted mean margin of 29.85%. Accordingly, the TPO has proposed an adjustment u/s. 92CA of Rs. 11,67,33,647/-. The assessee challenged the action of the TPO before the DRP. The DRP has not accepted the objections of the assessee however suomoto rejected one company from the set of comparables on the ground of different business model. Thus the DRP has excluded M/s. Accentia Technologies Limited from the set of comparables. After the directions of the DRP, the final assessment order was passed by considering the nine comparable companies. Before the Tribunal, the assessee is seeking exclusion of six comparable companies out the nine companies from the set of comparables are as under:
Turnover as per TP S.No. Company Name Order (in INR crores) M/s. Universal Print Systems 1. 6.18 Limited (Segmental) M/s. Informed Technologies 2. 1.94 India Limited 3. M/s. Infosys BPO Limited 1312.41 M/s. Microgenetic Systems 4. 1.30 Limited 5. M/s. TCS E-Serve Limited 1578.44 M/s. BNR Udyog Limited 6. 1.47 (Segmental)
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The ld. AR of the assessee has submitted that the TPO has applied a turnover filter of less than one crore while selecting the comparables whereas no higher limit of turnover was applied by the TPO. He has thus submitted that when turnover was considered as a relevant factor by the TPO then both the lower end and higher end of turnover filter should have been applied. In support of his contention he has relied upon the decision dated 02.07.2015 of Hon’ble Punjab & Haryana High Court in case of Agilent Technologies (International) Pvt. Ltd. Vs ACIT in of 2014 (O & M) and submitted that the Hon’ble High Court has upheld the order of the Tribunal for considering the impact of the turnover on the comparability. He has also relied upon the decision dated 16.09.2015 of Hon’ble Bombay High Court in case of CIT Vs M/s. Pentair Water India Pvt. Ltd. in Tax Appeal No. 18 of 2015. Thus, the ld. AR has submitted that the Hon’ble High Court has again upheld the order of the Tribunal wherein the companies having huge turnover were excluded by the Tribunal. Thus the ld. AR has submitted that if the filter of ten times of the turnover of the assessee is applied on both sides then all these six companies have to be excluded from the set of comparables.
IT(TP)A No. 2315/Bang/2016 Page 8 of 13 6. On the other hand, the ld. DR has submitted that when the TPO has applied only lower turnover filter then at this stage of proceedings it cannot be amended or changed which disturbs the entire process of selection. She has relied upon the orders of the authorities below.
Having considered the rival submissions as well as relevant material on record we find that the turnover is a relevant factor for the purpose of determining the comparability of the proposed companies for the purpose of determining the arms length price. The Hon’ble Bombay High Court in case of Vs M/s. Pentair Water India Pvt. Ltd. (supra) while dealing with the issue of the comparability of companies having high turnover in comparison to the assessee held in para 5 and 6 as under.
“ 5. On perusal of the impugned Order passed by the Tribunal dated 23.05.2014, we find that the Tribunal has recorded the reasons for not accepting the said three companies are comparable by stating as follows: (i) HCL Comnet Systems & Services Ltd:- We find force in the submission of the Id. AR that this company cannot be a comparable as the turnover of this company is 260.18 crores while in the case of the Assessee, the turnover is around Rs.11 crores only. While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of Rs.11 crores cannot be compared with a company which is having turnover of Rs.260 crores which is more than 23 times the turnover of the Assessee. This company cannot be regarded to be in equal size to the Assessee. We, accordingly, direct the AO to exclude this company out of the comparables. (ii) Infosys BPO Ltd. :- In this case also we noted the turnover in respect of this Company is Rs.649.56 crores while the turnover of the Assessee company is around Rs. 11 crores which is much more than 65 times IT(TP)A No. 2315/Bang/2016 Page 9 of 13 of the Assessee's turnover. We, therefore, do not find any illegality or infirmity in the order of CIT(A) in excluding this Company out of the comparables. Accordingly, we confirm the order of the CIT(A). (iii) Wipro Ltd.:- After hearing the rival submissions, we noted that the CIT(A) applying the turnover filter has excluded this company out of the comparables. The turnover reported in the case of Wipro Ltd. is Rs.939.78 crores while in the case of the Assessee the turnover is around Rs. 11 crores. Therefore, on the basis of the turnover filter itself this company cannot be regarded to be comparable to the Assessee company and accordingly, we do not find any infirmity in the finding of CIT(A) while he excluded this company on the turnover criteria following the decision of this tribunal in : Sony India (P) Ltd. vs. DCIT, 114 ITD 448 Delhi, E-Gain Communication, 2008 TIOL 282 ITAT (Pune) Deloittee Consulting India Pvt. Ltd. vs. DCIT, Genisys Integrating System (India)(P.) Ltd. vs DCIT, 53 Sot 159 (Bang)"
The said findings of the Tribunal in respect of the said three Companies are on the basis of appreciation of evidence on record. We find no infirmity in the said findings of the Tribunal on that count. In fact, the Tribunal has endorsed the views of the CIT Appeals whilst coming to such conclusions. The concurrent findings of facts arrived at by the Authorities below, cannot be re-appreciated by this Court in the present Appeal.”
Thus the Hon’ble High Court has upheld that there was no infirmity in finding of the Tribunal on this issue wherein it was held that the company having turnover of more than 23 times of the assessee’s turnover cannot be compared with the assessee. A similar view has been taken by the Hon’ble Punjab and Haryana High Court in case of Agilent Technologies (International) Pvt. Ltd. Vs ACIT (supra). It is pertinent to note that this Tribunal in a series of decision has taken a consistent view that in case
IT(TP)A No. 2315/Bang/2016 Page 10 of 13 turnover filter is applied it should be in the multiple of the assessee’s turnover and accordingly the Tribunal has taken a view that in normal circumstances ten times of the assessee’s turnover on both sides lower as well as higher would be an appropriate tolerance range of turnover while selecting the comparable companies. In the case in hand the assessee’s turnover is Rs. 71.37 crores. Accordingly by applying the said parameter of ten times of assessee’s turnover on both sides the companies which are having less than Rs. 7.1 crores and more than Rs. 713 crores on turnover would be excluded. Thus we find from the above details that these six companies are breaching the said tolerance range of turnover either on the lower side or on the higher side. In view of the above discussion as well as facts and circumstances of the case, we direct the AO / TPO to exclude the above mentioned six companies from the set of comparables.
The next issue raised by the assessee is regarding the foreign exchange fluctuation gain to be treated as operating in nature. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The ld. AR of the assessee has submitted that the DRP has directed the AO / TPO to consider the foreign exchange fluctuation gain as operating in nature however the TPO / AO has not given effect to the directions of the DRP while passing the final order. At the outset we note that the IT(TP)A No. 2315/Bang/2016 Page 11 of 13 DRP while dealing with this issue has directed the AO / TPO in para 11.1 as under.
11.1 Panel: In relation to objection regarding treating foreign exchange gain / loss as non-operating in nature by the TPO, the decision of Bangalore Bench of ITAT in the case of SAPLab India Pvt Ltd (2010-TII-44-ITAT- BANG-TP) is applicable. Following the same, objection of the assessee is accepted and Assessing officer / TPO is directed to consider the foreign exchange fluctuation in respect of the assessee as well as the comparables as operating in nature while determining the ALP in the case of the assessee.
Thus it is clear that the DRP has directed the TPO to consider the foreign exchange fluctuation in respect of the assessee as well as the comparables as operating in nature. Since the assessee has contented that the TPO has not given effect to the said directions of the DRP, accordingly we direct the AO / TPO to give effect to the directions of the DRP on this issue.
The next issue raised by the assessee is regarding incorrect margins computed by the TPO in respect of certain comparable companies. The ld. AR of the assessee has pointed out that the DRP has directed the TPO to recompute the margins of these comparable companies by excluding certain components which are found to be not in operating in nature.
However, the TPO has not given effect to the said directions of DRP.
The ld. DR has submitted that this is only a matter of rectification and not appeal.
IT(TP)A No. 2315/Bang/2016 Page 12 of 13 12. Having considered the rival submissions and careful perusal of the directions of the DRP we find that the DRP in para 10.1 has dealt with this issue as under. ”10.1 Panel: In respect to the provision for doubtful debts, provision written back, bank charges, miscellaneous income etc. the same cannot be considered as normal expenses as it is dependent upon number of factors in relation to the business transaction, Accretion of a debt or making provisions for the doubtful debt depends upon the wisdom of the business enterprises with regard to timing of its identification and claim as expenditure. The very nature of doubtful debts, that it is not peculiar to all the business transactions, it cannot be considered as normal and direct operating expenses. The principle laid down by the Hon'ble ITAT in the case of M/s Telcordia Technologies India Pvt. Limited 22 taxmann.com 96 is squarely applicable to the assessee case in which it was decided that the provision for doubtful debt cannot form part of operating cost. Further, In the case of Thyssen Krupp Industries India Pvt Ltd, 33 taxmann.com 107 the Hon'ble Mumbai Tribunal held that provision for doubtful debts is to be considered as non-operating in nature because it is only a provision. Similar is the position regarding liabilities no longer required written back, bank charges and miscellaneous income. While working out the operating profit, only items of receipts and expenditure, which have direct relation for determining the profit have to be taken into account. Thus the TPO is correct in holding exclusion of provision for doubtful debts, provision written back, bank charges, miscellaneous income etc. as non-operating items. As regards factual error in computation if any, TPO/ AO is directed to verify the same and correct it if there is any inaccuracy in the same.”
The assessee has contented that the TPO has not given effect to the directions of the DRP. Accordingly, we direct the AO / TPO to give effect to the directions of the DRP on this issue.
IT(TP)A No. 2315/Bang/2016 Page 13 of 13 14. Since we have directed for exclusion of six companies from the final set of TPO and further the directions of the DRP are to be given effect on certain issues therefore the TPO / AO is directed to recompute the arms length price after giving effect to this order of the Tribunal and also consider the benefit of proviso to section 92C(2) of the Act.
In the result the appeal of the assessee is partly allowed.
Pronounced in the open court on this 13th day of April, 2017