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Facts
The assessee, Maersk Global Service Centres (India) Private Limited, appealed against an assessment order. The appeal concerned the inclusion of three comparable companies in the transfer pricing study and the denial of risk adjustment. The assessee argued that these companies failed the RPT filter, and that risk adjustment should be allowed for its role as a captive service provider.
Held
The Tribunal held that Ground No.5 of appeal regarding the inclusion of comparables was infructuous as the TPO had already excluded them. Regarding Ground No.7, the Tribunal directed the Assessing Officer to give effect to the TPO's order of exclusion. For Ground No.11 concerning risk adjustment, the Tribunal agreed with the assessee in principle but restored the issue to the Assessing Officer/TPO for factual verification of the risk adjustment computation.
Key Issues
Whether the TPO correctly applied the RPT filter for comparable companies and whether the assessee is entitled to risk adjustment as a captive service provider.
Sections Cited
92CA(3), 154, 143(3), 144C(13), 144B, 10B(1)(e)(iii)
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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI VIKAS AWASTHY & MS. PADMAVATHY.S
अपीलाथ� �ारा/ Appellant by : Shri Porus Kaka, Sr. Advocate with Shri Manish Kanth, Advocate �ितवादी�ारा/Respondent by : Shri Manoj Kumar –CIT DR/ Shri Pravin Salunkhe सुनवाई की ितिथ/ Date of hearing : 20/10/2023 घोषणा की ितिथ/ Date of pronouncement : 05/01/2024 आदेश/ORDER PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the assessment order dated 22/02/2022, for the Assessment Year 2017-18 passed u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 [ in short ‘the Act’].
Shri Porus Kaka, Sr. Counsel appearing on behalf of the assessee submitted at the outset that the assessee does not wish to press the application dated 19/01/2023 for admission of additional grounds of appeal.
The ld. Counsel submitted that in ground No.5 of appeal the assessee has assailed inclusion of three comparable companies by the Transfer Pricing Officer (TPO) i.e. (i) AGS Health Private Limited; (ii) Parexel International (India) Private Limited and (iii) E L I Research India Private Limited. In ground No.7 of appeal the assessee has assailed the action of Assessing Officer in not giving appropriate effect to the directions of the Dispute Resolution Panel (DRP). Narrating facts relevant to the aforesaid two grounds, the ld. Counsel submitted that the TPO vide order dated 29/01/2021 passed u/s. 92CA(3), while bench marking the transaction with Associated Enterprise (AE) inter-alia introduced three comparables viz: Parexel International (India) Private Limited, E L I Research India Private Limited and A G S Health Private Limited. One of the filter applied by the TPO for selection of comparable was RPT Filter <25%. The assessee filed objections before the DRP inter-alia assailing inclusion of the aforesaid three comparables on the ground that the companies do not qualify RPT filter. The DRP after examining the documents on record accepted the contentions of the assessee and directed the TPO to verify and if the said companies are found to be failing in RPT filter, the same should be excluded. While giving effect to the directions of the DRP, the TPO did not follow directions of the DRP to verify as to whether Parexel International (India) Private Limited, E L I Research India Private Limited and A G S Health Private Limited, qualify the RPT Filter. The assessee filed application u/s. 154 of the Act for rectification of mistake apparent from record before the TPO. The TPO vide order dated 20/10/2022 rectified the mistake and deleted the aforesaid three companies from the list of comparables. However, by the time rectification application of the assessee was disposed off by the TPO, the Assessing Officer had passed the final assessment order. He prayed that directions may be given to the Assessing Officer to give effect to the order of TPO dated 20/10/2022 placed on record at page–7 of the paper book,Volume-1.
The ld. Counsel for the assessee submitted that the only other ground on which he would be making submissions is ground No.11 for allowing risk adjustment. He submitted that the assessee is a part of A.P Moller-Maersk (APMM) group, a Danish business conglomerate. APMM group operates in various sectors including shipping and energy. The group has head quarters in Copenhagen, Denmark. The global operations of the group are managed through subsidiaries spread across the world. The assessee is a wholly owned subsidiary of Maersk GSC Holdings A/S(Denmark) which in turn is a downstream subsidiary of A.P Moller-Maersk A/S. The assessee is a captive service provider and is engaged in providing back office support services to its AE i.e. Maersk Line A/S. To benchmark the transaction with AE, for determining the ALP the assessee adopted Transactional Net Margin Method(TNMM) as the most appropriate method. In TP study the assessee had taken 12 companies as comparable with weighted average margin of 10.44%. The assessee’s margin is 12.55%. Since, margin of the assessee and weighted average margin of the comparables was within tolerance limit the assessee claimed that no adjustment is required to be made. The TPO agreed to TNMM as the most appropriate method but rejected some of the companies selected by the assessee as comparables and introduced new comparables. The assessee prayed for allowing working capital adjustment and risk adjustment. The TPO allowed working capital adjustment to the comparable companies but rejected risk adjustment on the ground that assessee being captive service provider is not a risk free entity. The ld. Counsel for the assessee pointed that in the TP Study the assessee had given reasons for allowing risk adjustment and had also given computation of risk adjustments on the comparable companies. He referred to pages 182 and 259 of the paper book in support of his contentions. He submitted that the assessee is a captive unit and does not bear any entrepreneur risk, therefore, an appropriate risk adjustment needs to be made to the margin of comparable companies to make equitable comparison. The ld. Counsel for the assessee referred to the decision in the case of Watson Pharma P. Ltd. vs. DCIT , 54 taxmann.com 88 (Mumbai-Trib)to contend that risk adjustment was allowed by the Tribunal where a company was absolute captive service provider. He pointed that the said decision of Tribunal was upheld by the Hon’ble Bombay High Court in PCIT vs. Watson Pharma (P)Ltd., 95 taxmann.com 281. He further referred to the decision of Tribunal in IT(TP)A No.3068/Mum/2017 in the case of TPG Capital India Pvt. Ltd. vs. DCIT decided on 21/06/2019. He submitted in the said case the Tribunal held, that even if assessee is captive service provider risk adjustment while computing margin of the comparables is to be allowed. The ld. Counsel for the assessee submitted that, if risk adjustment is allowed to the assessee, the margin of the assessee would be within arm’s length.
Per contra, Shri Manoj Kumar representing the Department vehemently defended the impugned order. In so far as ground No.7 of appeal, he submitted that the issue can be referred to the Assessing Officer for giving effect to the order of TPO, in accordance with law. With regard to risk adjustment supporting findings of the TPO he submitted that even if the assessee is a captive service provider still it is not a risk free entity, therefore, risk adjustment is not required to be made. He reiterated the findings of the TPO on risk adjustment in para 6.5 of TPO’s order.
Rebutting the arguments made on behalf of the Department, the ld. Counsel for the assessee submitted that the Special Bench of Tribunal in assessee’s own case i.e. Maersk Global Centre India Private Limited vs. ACIT for A.Y 2008-09 decided on 07/03/2014 the functions of assessee were examined threadbare. The Special Bench observed that the assessee is providing back office support services to its AEs, which are in the nature of low end services. There has been no change in functions of the assessee since the decision of Special Bench. He further contended that the Tribunal in the case of TPG Capital India Pvt. Ltd. vs. DCIT (supra) has taken care of all the arguments of the Department that has been raised in the instant case as well and thereafter held that risk adjustment has to be allowed in the case of captive service provider.
We have heard the submissions made by rival sides and have examined orders of authorities below. The assessee in ground No.5 of appeal has assailed the findings of TPO in selecting following three companies as comparables.
(i)Parexel International (India) Private Limited, (ii) E L I Research India Private Limited. (iii) A G S Health Private Limited. The ld. Counsel for the assessee has brought to our notice that the TPO in proceedings u/s. 154 of the Act vide order dated 20/10/2022 has excluded aforesaid companies from the list of comparables on the ground that they fail to qualify RPT Filter. The desired relief has already been allowed to the assessee by the TPO therefore, ground No.5 of appeal has become infructuous, hence, the same is dismissed as such.
In ground No.7 of appeal, the assessee has assailed the assessment order on the ground that the Assessing Officer has failed to give proper effect to the directions of the DRP. The DRP while deciding objections of assessee qua selection of comparables by TPO, had directed the TPO to verify the claim of assessee that the companies (i)Parexel International (India) Private Limited, (ii) E L I Research India Private Limited. (iii) A G S Health Private Limited. have failed to qualify RPT filter. The TPO while passing order giving effect, failed to examine the aforesaid comparables. Subsequently, the assessee filed rectification application u/s. 154 of the Act before the TPO. The TPO vide order dated 20/10/2022 accepted the claim of assessee and excluded the aforesaid companies from the list of comparables. However, the order u/s. 154 of the Act was passed by the TPO subsequent to the final assessment order. Therefore, the said order could not be given effect while passing the final assessment order. The Assessing Officer is directed to give effect to the order of TPO passed in proceedings u/s. 154 of the Act dated 20/10/2022 for Assessment Year 2017-18. Thus, ground No.7 of appeal is allowed for statistical purpose.
The only other ground in respect of which the ld. Counsel for the assessee 9. has made submissions is ground No.11 relating to disallowance of risk adjustment. It is an admitted position that the assessee is a captive service provider. The assessee is engaged in providing low end back office support services to the group entities alone. Thus, the assessee is not exposed to the risk. The assessee is seeking risk adjustment in respect of the comparable companies which are risk bearing entities. The TPO rejected the claim of assessee on the ground that the assessee is not a risk free entity. The DRP upheld the findings of TPO. We do not agree with the findings of TPO and DRP. Similar issue was considered by the Co-ordinate Bench in the case of TPG Capital India Pvt. Ltd. vs. DCIT (supra). The reasons given by the TPO for rejecting assessee’s claim of risk adjustment in the instant case, were also made in the case of TPG Capital India Pvt. Ltd. vs. DCIT(supra). The Tribunal after considering the same rejected the arguments of Revenue and held as under:
“ 24. We have considered rival submissions and perused the material on record. It is a fact that though in the transfer pricing study report, the assessee has not provided for any adjustment to the margin of the comparable on account of risk factor, however, it has made a risk analysis. It is evident, assessee is a captive service provider to its AE and is remunerated at cost plus mark–up basis. Thus, it is a fact that most of the risks are assumed by the AE and the assessee so to say is a risk mitigated entity. It is apparent, in course of proceedings before the Transfer Pricing Officer, the assessee in its submissions dated 30th July 2013, has claimed risk adjustment and has also furnished a working providing for risk adjustment while computing margin of the comparables. It is observed, neither the Transfer Pricing Officer nor learned Commissioner (Appeals) have properly appreciated the claim of the assessee vis–a–vis the facts on record. While the Transfer Pricing Officer has rejected assessee’s claim of risk adjustment by stating that the assessee has not done so in the transfer pricing study report, learned Commissioner (Appeals) has rejected assessee’s claim by stating that the assessee also bears single customer risk. In our view, assessee’s claim of risk adjustment requires consideration. Now, it is fairly well settled that in appropriate cases, adjustment towards risk factor can be allowed. In fact, rule 10B(1)(e)(iii) provides for such adjustment. The Hon'ble Jurisdictional High Court in Watson Pharma Pvt. Ltd. (supra) has approved the decision of the Tribunal in allowing risk adjustment. In case of DBOI Global Services Pvt. Ltd. (supra), the Tribunal rejecting the single customer risk argument put forward by the Department has restored the issue to the Assessing Officer / Transfer Pricing Officer for considering assessee’s claim of risk adjustment. The Tribunal in Walt Disney Co. Ltd. (supra) has also restored the issue with a direction to consider assessee’s claim of risk adjustment. In the facts of the present case, it is the plea of the assessee that compared to it, the comparables are risk bearing entities. In fact, it is seen from the order of the Transfer Pricing Officer, he had rejected one of the comparables selected by the assessee i.e., ICRA Management Consultancy Services Ltd. by stating that it is a high-risk entity. Thus, according to the Transfer Pricing Officer also, risk is a relevant factor for comparability analysis. In view of the aforesaid, though, in principle we agree with learned Sr. Counsel for the assessee that risk adjustment in appropriate cases has to be allowed, however, the working of risk adjustment furnished by the assessee requires verification at the end of the Assessing Officer / Transfer Pricing Officer. We, therefore, restore the issue to the Assessing Officer / Transfer Pricing Officer for factual verification of assessee’s claim of risk adjustment qua the comparables. Needless to mention, the Assessing Officer must decide the issue in accordance with law and after providing adequate opportunity of being heard to the assessee keeping in view the decisions to be cited by the assessee. This ground is allowed for statistical purposes” [Emphasized by us] In light of aforesaid decision by the Co-ordinate Bench on similar set of facts, we see no reason to take a different view. Hence, we find merit in ground No.11 of appeal. The issue is restored to Assessing Officer to verify assessee’s computation of risk adjustment. The Assessing Officer /TPO shall allow reasonable opportunity to the assessee to make submissions before concluding the issue, in accordance with law. Ground No.11 of appeal is allowed for statistical purpose.
In so far as other grounds of appeal i.e. ground NO.1 to 4, ground No.6, ground No.8 to10, ground No.12 & 13 , no submissions were made by the ld. Counsel for the assessee , hence, are left open at this stage.
In the result, appeal of assessee is partly allowed.