Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, BENGALURU BENCH A, BENGALURU
Before: SMT. ASHA VIJAYARAGHAVANS & SHRI. S. JAYARAMAN
PER S. JAYARAMAN, ACCOUNTANT MEMBER :
This appeal is filed by the assessee, against the order of the DCIT, Circle -5(1)(2), Benglauru, for the assessment year, passed u/s.143(3) r.w.s.144C in pursuance of the DRP directions dt 12.12.14.
Outsource Partners International P. Ltd, the assessee, has two units- one in Bengaluru and the other in Delhi, operates as an offshore processing centre of Outsource Partners International Inc. USA and renders IT(TP)A.337/Bang/2015 Page - 2 similar services to customers in India. It provided business process outsourcing and software development services to its AEs. The international transactions entered into during the FY 2009-10 on Business Process Outsourcing Services was at Rs.119,89,39,009/- . The assessee in its TP study chose 10 comparables adopting TNMM as the most appropriate method. The TPO rejected its TP study, conducted a fresh one, retained 4 comparables chosen by the assessee, introduced 4 new comparables , adopted TNMM ,arrived the net margin at 29.17% , after adjusting for working capital arrived the adjusted margin at 28.32 and determined the shortfall at Rs.12,50,87,839/-. The assessee filed its objections before the DRP . The DRP directed the TPO to exclude certain comparables from the final set on grounds of functional dissimilarity and application of certain quantitative filters. The DCIT vide his order giving effect to the DRP directions determined the final TP adjustment at Rs.133,512,120/-.
Aggrieved against that order, the assessee filed this appeal with following grounds :
IT(TP)A.337/Bang/2015 Page - 3 IT(TP)A.337/Bang/2015 Page - 4 IT(TP)A.337/Bang/2015 Page - 5
3. The AR did not press grounds nos 1,2,3 & 3a being general . With regard ground no 3b & 5, he pressed for the inclusion of R systems international Ltd alone. He submitted that the DRP excluded this company on the ground that the financial year ending is different and argued as under :
“The Appellant had selected R Systems as a comparable company since it is functionally comparable. The learned TPO had selected R Systems as a comparable company in the transfer pricing order for the assessment year ("AY") 2006-07, 2007-08 and 2008-09. Further, in this regard, the Appellant would like to submit that the data for the relevant financial year for the company can be derived from the audited quarterly data available on the website and hence the same can be considered for the purpose of IT(TP)A.337/Bang/2015 Page - 6 comparability analysis. Further, in this regard, reliance may be placed on the recent judgement in the case of Mercer Consulting (India) Pvt. Ltd. (ITA No. 966/Del/2014), wherein the Hon'ble Delhi Bench has held that if the data relating to the financial year in which international transaction has been entered into is directly available from the annual accounts of that comparable, then a functionally comparable company should not be rejected. The relevant extract on the application of different financial year end filter and exclusion of otherwise functionally comparable companies is provided below:
"But if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test given under sub-rule (4) of rule lOB. In the case under consideration before the Mumbai Bench, there is no mention of the audited quarterly data of such comparable being available for consideration. It is quite natural that if the data of the financial year is not available or not capable of being directly deduced from the annual accounts of such company, then such case deserves to be excluded. If, however, the audited accounts of such comparable directly give the figures in such a manner that the data of the financial year in which the assessee has entered into an international transaction can be easily deduced, then there is no reason for excluding such an otherwise comparable case.
11.7. We find that R. Systems International Ltd. has been excluded by the TPO solely for the reason that its financial year is different without considering that the data for the financial year adopted by the assessee can be easily compiled from the audited statements of such company."
Further, the Assessee placed reliance on the ruling by the Hon'ble Punjab & Haryana High court in respect of The Commissioner of Income Tax, Faridabad vs M/s Mercer Consulting (India) Pvt. Ltd. Gurgaon (ITA No. 101 of 2015 (O&M) wherein the High Court held as follows-
“We are unable to agree with the decision of the TPO and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP.
We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that IT(TP)A.337/Bang/2015 Page - 7 comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B.” Further the Appellant would like to rely on the Delhi Tribunal judgement in the case of Ameriprise India Private Limited vs. ACIT (ITA No. 7014/De/2014) wherein it was held that company having different financial year can be considered as a comparable if the extrapolation of rest three months data is available. The extract from the case is given below:
“14.3 We note that in the immediately preceding year, this Company was considered by Coordinate Bench of Tribunal. It was directed that if the contention of the assessee is correct, that the relevant data for the concerned financial year can be deduced from the information available from their annual reports, then, there can be no objection to the inclusion of these companies in the list of comparables with the adjusted data for the relevant financial year itself. Respectfully following the reasoning of Coordinate Bench in immediately preceding year, we set aside the impugned order and remit the matter to the file of TPO/AO for examining this aspect of the matter.”
Further, the Appellant would like to highlight that R Systems has been accepted as a comparable company in the transfer pricing order passed by the learned TPO year-on-year basis from AY 2006-07 to 2008-09, on the basis that the it has an Information Technology Enabled Services segment and qualifies all filters. Hence, considering that there is no change in the business of R Systems in the current assessment year i.e. AY 2010-11 from the previous assessment years rejecting this company would be inappropriate. Also, in view of the fact that the learned TPO has accepted this company in the previous three assessment years, hence in order to maintain consistency in his approach R Systems should be considered as a comparable company.”
Hence, considering the above evidences, it is submitted that R Systems should be accepted.”
We have heard the rival submissions. Since the assessee has made out a case, supra, we remit this matter to the TPO for re-examination and re- adjudication.
With regard to ground no 3c, ie the comparable companies selected by the TPO which do not pass the test of comparability , the AR briefly submitted as under :
IT(TP)A.337/Bang/2015 Page - 8
Accentia Technologies Ltd, with unadjusted Margin of 43.06 %, has to be rejected for the following reasons :
• Functionally not comparable : Product development company • Presence of Intellectual Property rights (Approx.57% of the net fixed assets) • Extraordinary events during the year • No segmental data available.
2. Fortune Infotech Ltd , with unadjusted margin of 22.80%, has to be rejected for the following reasons :
• Functionally not comparable : Product development company • Presence of Intellectual Property rights (Approx.57% of the net fixed assets) • RPT of more than 25%.
ICRA Online Ltd , with unadjusted margin of 43.39%, has to be rejected for the reason that it is not functionally comparable and fails export earning filter. The detailed written submissions made in this regard are extracted as under :
IT(TP)A.337/Bang/2015 Page - 9 IT(TP)A.337/Bang/2015 Page - 10 IT(TP)A.337/Bang/2015 Page - 11 IT(TP)A.337/Bang/2015 Page - 12 IT(TP)A.337/Bang/2015 Page - 13 IT(TP)A.337/Bang/2015 Page - 14 IT(TP)A.337/Bang/2015 Page - 15 IT(TP)A.337/Bang/2015 Page - 16 We heard the rival submissions and find that the assessee has made out a case, supra, and hence direct the TPO to exclude the above comparables.
The AR did not press ground nos 4,6,10.
The next ground pertains to ground no 7 ie the A O/ DRP not considering provision for bad and doubtful debts as non-operating in nature. In this regard, it is submitted that the provision for doubtful debts fit IT(TP)A.337/Bang/2015 Page - 17 the description of "operating items" associated with the rendering of services and should be considered as part of the operating costs and relied in case of Techbooks International Pvt. Ltd. Vs. DCIT [ITA No.240/Del/2015]. In this regard, relevant extract of said judgment is provided below:
“Both the provision for bad debts as well as doubtful advances are in the realm of the operations of the business. It is not the case of the either side that the assessee made any excess provision. In our considered opinion, the same has been rightly taken as an item of operating expense of the assessee."
We heard the rival submissions. In light of the above, provision for bad and doubtful debts should be treated as operating expenses as they are closely linked with the business operations and accordingly direct the TPO to do so.
The ground no 8 is with regard to the computation of working capital adjustment. In this regard, it is submitted that the TPO has considered its submission and granted the benefit of working capital adjustment.
However, the TPO is of opinion that working capital adjustment should be restricted to 0.85%. Thus, he has not given the basis of arriving at the average cost of capital of the comparable companies. The assessee relied on the decision of this Tribunal in Moong Controls India P Ltd ITA 551/Bang/2015 ay 2010 dt 27.11.2015 , wherein this Tribunal directed the TPO to allow actual adjustment towards the differences in the of working capital position between the assesseee and the entrepreneurial companies selected as comparable . We direct the TPO to follow this decision.
IT(TP)A.337/Bang/2015 Page - 18
The ground no 9 is in not providing appropriate risk adjustment .In this regard, it is submitted that the assessee is a captive contract IT enabled service provider to its AEs. Being a captive service provider, the it is devoid of any significant risks relating to its business operations.
Further, the significant business and entrepreneurial risks are borne by the AE as it owns all the valuable intellectual property rights (know- how. copyrights etc.) and other commercial or marketing intangibles (brand names, trademarks etc) related to the services being provided by the Appellant. Accordingly, being a mere service provider, the it does not own any interest in these intangibles and provides mere services based on the requirements of the AEs in return for a fixed mark up on cost incurred in rendering of services and placed reliance on the following Tribunal judgments, wherein comparability/ economic adjustments are also mandated by the Tribunal:
• Sony India (P) Limited [114 lTD 448] • E-Gain Communication Pvt. Ltd. [118 lTD 243] • Mentor Ruling • Motorola Solutions India Private Limited vs ACIT [ITA No. 5637/Del/2011] Further, in addition to the above rulings, the principle has also been upheld by the recent High Court ruling in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. Vs DCIT [ITA 41712014], wherein the Hon'ble Court has held that appropriate adjustments should be carried out in situations where there are differences between the tested parties and IT(TP)A.337/Bang/2015 Page - 19 comparables and in case such differences perceptible in the comparables cannot be eliminated on account of adjustments or otherwise, then such comparables have to be rejected.
We heard the rival submissions and find that the assessee has made out a case, supra, and hence direct the TPO to make appropriate risk adjustment.
The ground no 11 is in not providing appropriate depreciation adjustment ie depreciation adjustment on account of difference in the rates of depreciation of the assessee vis- à-vis comparable companies :
In this regard, the assessee depreciates its assets at a higher rate than the rates prescribed by Schedule XIV of the Companies Act, 1956. However, most of the comparable companies considered by the TPO follow rates as prescribed under Companies Act, 1956, thereby charging a lower rate of depreciation. Therefore, it seeks an adjustment on account of differential in the rates of depreciation charged by the Appellant viz-a-vis comparables.When applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin). In case, there are any such differences, IT(TP)A.337/Bang/2015 Page - 20 reasonably accurate adjustments need to be made to eliminate the effect of any such differences.
It placed reliance on the Tribunal judgment in the case of assessee's group company viz, ExlService.com India Private Limited vs ACIT [l.T.A .No.
1939lDeI/2008] for one of the preceding years i.e., AY 2003-04, wherein the Tribunal granted adjustment on account of higher rates of depreciation of the Appellant viz-a-vis the comparables. In this regard, the relevant extract from the ruling is provided below :
“We, therefore, sum up our conclusion on this aspect of the matter by holding that if the assessee as well as the comparable companies are using the SLM and there is a difference in the rates of depreciation charged by them, then there is a need to make suitable adjustment to the profits of the comparables.” It also relied on the judgment by the Bangalore bench of ITAT in case of ACI Worldwide Solutions Private Ltd [TS-176-ITAT-2015(Bang)-TP], wherein the ITAT allowed assessee's claim for depreciation adjustment for the reason that assessee was charging higher depreciation than rates adopted by comparable companies. Relevant extracts from the judgement are provided below :
“10. The next request made on behalf of the assessee was that the assessee provided depreciation at a higher rate than what is prescribed under the Income-tax Act, 1961, whereas the comparable cases chosen by the TPO charged depreciation as per the I. T. Act. xxx.. ..xxx. . ..xxx
The assessee also relied on the decision of the Hon'ble Tribunal in the case of Egain Communications Pvt. Ltd. v. /TO (2008) TIOL 282, ITAT, Pune, wherein it was held that proper adjustment has to be given where the rates of depreciation adopted by the tested party and the comparable companies are different IT(TP)A.337/Bang/2015 Page - 21
xxx....xxx....xxx
Before us, the limited request of the Id. counsel for the assessee is to allow proper adjustments on account of rates of depreciation adopted by the comparable companies. In our view, the request of the assessee is proper and deserves to be accepted in the light of the decision of the Pune Bench cited by the Id. counsel for the assessee supra. We accordingly direct the TPO to allow appropriate adjustments while working out the margins of the assessee as well as comparable cases."
Thus, it is submitted that the OP / TC margin of TPO comparables (post factoring the impact of depreciation as per the assessee's rate of depreciation) as under:
(The computation of the depreciation adjustment for the comparable companies are attached as Appendix A)
Based on the above table, it submitted that the arithmetic mean OP/ TC margin (post factoring the impact of depreciation) of the comparable IT(TP)A.337/Bang/2015 Page - 22 companies considered by the TPO is 22.80% which falls within the + / -5% range of the OP / TC margin of 17.63% (as computed by the TPO) earned by the assessee during the FY 2009-10. Accordingly, the prices of international transactions of the assessee in relation to provision of IT enabled services comply with the Arm's Length standard prescribed under the Indian Regulations.
We have considered the rival submissions. We find merit in the above submissions. Hence, we remit this matter to the TPO for re-examination and re-adjudication in accordance with this Tribunal decision, supra.
In the result, the appeal of the assessee is treated as allowed.
Order pronounced in the open court on 6th day of February, 2017.