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Income Tax Appellate Tribunal, ‘B’ BENCH: BENGALURU
Before: SHRI INTURI RAMA RAO & SHRI LALIET KUMAR
Date of hearing : 16/03/2017 Date of pronouncement : 04/04/2017 O R D E R Per INTURI RAMA RAO, AM :
IT(TP)A No.233/Bang/2015 is an appeal filed by the revenue directed against the final assessment order passed u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 [‘the Act’ for short] dated 292/01/2015 for the assessment year 2010-11.
IT(TP)A Nos.233 & 809/Bang/2015 Page 2 of 12 2. The respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is wholly owned subsidiary of SMS Mauritius and SMS US. It is engaged in the business of provision of marketing data management services to customers of SMS USA. It has filed return of income for assessment year 2010-11 on 24/09/2011 declaring total income of Rs.25,55,666/-. The assessee-company also reported the following international transaction with its AE in Form 3CEB: Sl. Type of transaction Amount No. 1 Provision of software development 109,36,86,188 services 2 Reimbursement of expenses 69,16,775 received by SMS India
The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm’s length. The assessee-company had also submitted transfer pricing study report adopting the operating profit to total cost (OP/TC) as a profit level indicator for the transfer pricing study. For the purpose of TP study, the assessee-company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assessee- company’s profit margin was computed at 15.79% and the assessee-company claimed that the same was comparable with other companies rendering software development service IT enabled Services. For the purpose of transfer pricing study, the IT(TP)A Nos.233 & 809/Bang/2015 Page 3 of 12 assessee-company had chosen 10 comparable entities and arithmetic average of operating profit margins of said comparables was computed at 13.6%. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm’s length. The assessee- company had chosen the following 10 entities as comparables whose average profit margin was computed at 9.73%:
The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO). The TPO, by an order dated 28/01/2014 passed u/s 92CA(3) of the IT Act, 1961 computed the transfer pricing adjustment at Rs.14,29,87,975/-. The TPO accepted the TNMM adopted by the assessee-company but rejected the transfer pricing study report as according to the TPO, information used by the assessee-company is not reliable. The TPO proceeded to identify different set of comparable entities for the purpose of determining the ALP. While doing so, the ld. TPO had applied the following filters:
IT(TP)A Nos.233 & 809/Bang/2015 Page 4 of 12 • Use of current year data only; • Companies whose IT enabled Services income is less than Rs.1 crore excluded. • Companies whose service income is less than 75% of the total operating revenues were excluded. • Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded. • Companies who have export sales less than 25% of the sales were excluded. • Companies who have persistent losses for the last three years upto and including FY 2009-10 were excluded. • Companies having different financial year ending i.e. not March 31,2010) or data of the company does not fal within 12 month period i.e. 01/04/2009 to 31/03/2010 were rejected. • Companies that are functionally different from the tax payer were excluded. • Companies that are having peculiar economic circumstances were excluded.
Applying the above filters, the TPO rejected 8 companies selected by the assessee-company in its TP study report and accepted 2 comparables selected by the assessee-company and introduced 8 new comparables. Finally selected the following comparables:
IT(TP)A Nos.233 & 809/Bang/2015 Page 5 of 12 The TPO computed average profit margin of the comparables finally selected at 26.86% and after adjustment of working capital adjustment of 0.23% the arithmetic mean PLI was determined at 26.63%. On the above said basis, the TPO computed the transfer pricing adjustment as follows:
The AO passed draft assessment order u/s 143(3) r.w.s. 144C vide order dated 14/3/2014 incorporating the above TP adjustments and also restricting the deduction u/s 10A by IT(TP)A Nos.233 & 809/Bang/2015 Page 6 of 12 reducing telecommunication expenses, insurance expenditure in foreign currency from export turnover without reducing from total turnover.
After receipt of draft assessment order, the assessee- company filed objections before the DRP contending inter alia that the TPO was not justified in rejecting TP study report and ought to have applied upper limit of turnover filter of Rs.2 crores to all the comparables, ought not to have rejected the employee cost filter of 25% of revenue. It was also contested the doubtful debts should be treated part of operating cost and risk adjustment should have been granted to the assessee-company as it is only on captive service provider to its only AE.
The DRP, after considering the submissions of the assessee- company issued directions dated 12/12/2014 wherein the DRP upheld rejection of TP study report and upheld the contention that companies whose turnover is more than Rs.200 crores should be excluded, following the decision of the coordinate bench of Tribunal in the case of Genesis Integrating System. The DRP also upheld the application of filter of employee cost to sales less than 25%. DRP also directed the TPO to decide percentage of risk adjustment by adopting accepted method of calculation. After receipt of directions from DRP, final assessment order dated 29/01/2015 u/s 143(3) r.w.s. 144C was passed after TP adjustment of Rs.10,80,26,404/- and reducing telecommunication
IT(TP)A Nos.233 & 809/Bang/2015 Page 7 of 12 expenditure and travel expenditure incurred in foreign currency from export turnover along.
Being aggrieved revenue is in appeal before us. The revenue raised the following grounds of appeal:
10. Grounds No.1, 4 and 5 are general in nature and do not require adjudication. Ground No.2 challenges the direction of the DRP holding that size, turnover and brand name are deciding factors for treating company as comparable and to exclude Infosys Technologies Ltd. No doubt this Tribunal, in the case of M/s.Societe Generale Global Solution Centre Pvt. Ltd. in IT(TP)A No.1188/Bang/2011 dated 22/04/2016 held that turnover is not a IT(TP)A Nos.233 & 809/Bang/2015 Page 8 of 12 relevant criteria for deciding comparability of an entity. However, it is equally settled that Infosys Technologies Ltd., cannot be compared with any other company and reliance in this regard can be had to the decision of this Tribunal in the case of M/s. NTT DATA Global Delivery Services Ltd., in IT(TP)A No.1487 & 1496/Bang/2013 dated 06/04/2016, to which one of us is party i.e. Accountant Member is the author. The relevant para. is extracted below:
“24. We now deal with each of these companies. Before adverting to the comparables, it is worth mentioning here that there are divergent decisions of the Tribunal whether high turnover is a relevant for accepting/rejecting a comparable in the case of a service company. For example, the Mumbai bench of the Tribunal in the case of Capgemini India Pvt Ltd. Vs. ACIT (TS 45 ITAT 2013(Mum)(TP) held that the turnover was relevant only to the manufacturing concerns not to the service oriented companies. On the other hand, the coordinate (Bangalore) bench of the Tribunal in the case of Genesis Integrating Systems (India) Pvt. Ltd. (cited supra) held that turnover is a relevant factor for accepting/rejecting the comparable. However, without going into the turnover factor, we hold that Infosys Ltd., cannot be considered as comparable with that of the assessee-company since Infoysis Ltd. is a giant in the area of software development and it assumed all risks leading to higher profit. On the other hand, the assessee-company is a captive unit of its parent company in US and assumed only limited risk. In the similar circumstances, the Hon’ble Delhi High Court in the case of CIT vs. Agnity India Technologies P.Ltd. held that Infosys cannot be treated as a comparable. Even several co-ordinate benches of Tribunal held that Infosys Ltd. cannot be considered as comparable as it is having high intangibles and goodwill. Accordingly, Infosys cannot be considered as a comparable.
We now deal with each of these companies. Before adverting to the comparables, it is worth mentioning here that there are divergent decisions of the Tribunal whether high turnover is a relevant for accepting/rejecting a IT(TP)A Nos.233 & 809/Bang/2015 Page 9 of 12 comparable in the case of a service company. For example, the Mumbai bench of the Tribunal in the case of Capgemini India Pvt Ltd. Vs. ACIT (TS 45 ITAT 2013(Mum)(TP) held that the turnover was relevant only to the manufacturing concerns not to the service oriented companies. On the other hand, the coordinate (Bangalore) bench of the Tribunal in the case of Genesis Integrating Systems (India) Pvt. Ltd. (cited supra) held that turnover is a relevant factor for accepting/rejecting the comparable. However, without going into the turnover factor, we hold that Infosys Ltd., cannot be considered as comparable with that of the assessee-company since Infoysis Ltd. is a giant in the area of software development and it assumed all risks leading to higher profit. On the other hand, the assessee-company is a captive unit of its parent company in US and assumed only limited risk. In the similar circumstances, the Hon’ble Delhi High Court in the case of CIT vs. Agnity India Technologies P.Ltd. held that Infosys cannot be treated as a comparable. Even several co-ordinate benches of Tribunal held that Infosys Ltd. cannot be considered as comparable as it is having high intangibles and goodwill. Accordingly, Infosys cannot be considered as a comparable” Therefore, we hold that Infosys Technologies cannot be compared with any other company like that of the assessee- company. This ground of the revenue is dismissed.
Ground No.3 challenges the direction of the DRP that DRP ought not to have given a direction to give IT risk adjustment to assessee-company. From the perusal of paa.12 of the DRP order, it is clear that DRP only as a means of guidance has sought IT risk adjustment but the matter was restored to the file of the TPO to calculate risk adjustment in accordance with well accepted method. By this direction, the revenue could not be aggrieved. Hence, this ground of appeal is also dismissed.
IT(TP)A Nos.233 & 809/Bang/2015 Page 10 of 12 12. In the result, the appeal filed by the revenue is dismissed.
IT(TP)A No.809/2015:
This is an appeal filed by the revenue directed against the final assessment order passed u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 [‘the Act’ for short] dated 29/01/2015 for the assessment year 2010-11. The assessee moved a petition before the DRP praying that it has not adjudicated the ground relating to restriction of benefit u/s 10A by reducing telecommunication expenditure and insurance incurred in foreign currency from export turnover. On receipt of this 154 petition, DRP vide order dated 26/02/2015 had directed the AO to reduce this expenditure from export turnover as well as total turnover for the purpose of calculating benefit u/s 10A in the light of the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Tata Elxsi Ltd. (349 ITR 98). The AO passed modification order to the assessment order dated 31/3/2015 giving effect to the DRP direction.
Being aggrieved, revenue is in appeal before us in the present appeal. The revenue raised the following grounds of appeal:
IT(TP)A Nos.233 & 809/Bang/2015 Page 11 of 12
The issue sought to be raised in the above grounds is covered in favour of the assessee by the decision of the Hon’ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra). Since the DRP has only followed the decision of the jurisdictional High Court in the cased of Tata Elxsi Ltd. (supra), we do not find any merit in the appeal raised by the revenue, hence dismissed.