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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Per Shri A.T.Varkey, JM
1. This appeal has been filed by the assessee against the order of ACIT, Circle-2(2), Kolkata (in short “AO”) passed u/s. 144C r.w.s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act” dated 29.11.2016 for AY 2012-13, which is inconformity with the directions given by the Dispute Resolution Panel (DRP) passed u/s. 144C(5) Act dated 30.09.2016.
The assessee company M/s. Pricewaterhouse Coopers Service Delivery Center (Kolkata) (P) Ltd. (in short M/s. KSDC) operates primarily as a captive service provider. It provides various support services to its Associated Enterprises (AEs) in the area of Assurance, Tax and Advisory, which is akin to information technology enabled (IT enabled services) and back office consultancy support service. At the outset itself, the Ld. AR drew our attention to the fact that first ground is general in nature and second and third ground are of the Transfer Pricing issue and fourth and fifth ground are of Corporate Issues. First we will deal with the Transfer Pricing issue that is being raised in ground nos. 2 and 3. The ground nos. 2 and 3 read as under:
Pricewaterhouse Coopers Service Delivery Center (P) Ltd., AY: 2012-13 “2. That on the facts and circumstances of the case, the Ld. TPO/Hon’ble DRP and accordingly the Ld. AO have erred in rejecting the economic analysis undertaken by the Assessee, with respect to international transaction pertaining to receipt and rendering of services, in accordance with the provisions of the Income-tax Act, 1961 (‘the Act’) read with the Income-tax Rules, 1962 (‘the Rules’) for the determinatio0n of the arm’s length price (‘ALP’).
3. That on the facts and circumstances of the case, the Ld. TPO/Hon’ble DRP and accordingly the Ld. AO have erred in including companies having different functional profile as compared to the Assessee. The Ld. TPO and Ld. AO also erred in including companies which fails certain filters applied by Ld. TPO.”
The Ld. AR brought to our knowledge that only in one issue there is a dispute i.e. in respect to services received and rendered for which the value of International Transaction of rendering of services was to the tune of Rs.1,725,224,230/- and receipt of services of Rs.72,935,315/-. After the outcome of Transfer Pricing Order an adjustment of Rs.22,14,80,146/- was ordered against the assessee. Aggrieved, the assessee preferred an appeal before the Ld. DRP and after removing few comparables adjustment came down to Rs.9,42,28,794/-. The following comparables were retained as per the direction after Ld. DRP direction the final set of comparables is given below:
Aceemtia Technologies Ltd. 3.99% 2. Acropetal Technologies Ltd. (Seg.) 18.56% 3. BNR Udyog Ltd. (Seg.) 27.82% 4. e4e Healthcare Business Services Pvt. Ltd. 14.29% 5. Eclerx Services Limited 51.80% 6. Excel Infoway Ltd. (Seg) 33.73% 7. Informed Technologies India Ltd. 2.76% 8. Microgenetic Systems Ltd. 2.93% 9. T C S E Serve Ltd. 57.25% 10. E-care India Pvt. Ltd. 39.20% Mean PLI 25.23% Still aggrieved by the decision of Ld. DRP and final order of AO, the assessee is before us.
The Ld. AR drew our attention to the fact that the assessee is aggrieved by the inclusion of M/s. TCS E-SERVE LTD. as a comparable i.e. the only comparable company which the assessee wants to exclude from the list of comparables. The main thrust of the argument of Ld. AR against M/s. TCS E-SERVE LTD. being made a comparable was that the company was involved in software development services along with I T enabled services and since the assessee company is only into I T enabled services, the comparable M/s. TCS E-SERVE LTD. cannot be taken as a similar comparable. For that he drew our attention first
Pricewaterhouse Coopers Service Delivery Center (P) Ltd., AY: 2012-13 to page 2 of TPO wherein the assessee’s profile and function performed is stated wherein we note that the assessee functions as a contract service provider and has undertaken to provide I T enabled and back office consultancy services as specified by the AEs. The assessee provides support services to AEs in the area of assurance, tax and advisory, akin to I T enabled and back office consultancy support services. The Ld. AR drew our attention to page 7 where functions performed is given which reveals that it is into “I T enabled services”. Thereafter, he drew our attention to page 325 of the paper book which is the paper book containing the annual report of TCS E-SERVE LTD. from AYs. 2010-11 to 2012-13. First he drew our attention to page 325 which reads as under:
“Background and principal activities.
TCS e-Serve Limited is engaged in the business of providing information Technology-Enabled Services (ITES)/Business Process Outsourcing (BPO) Services, primarily to Citigroup entities globally. The Company’s operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities.”
The Ld. AR emphasized that TCS E-SERVE Ltd. is not only engaged in I T enabled services but is also into Technical Services which involves software testing etc. Thereafter, for AY 2010-11 the AR drew our attention to page 231 which is the pictorial description of the technology services rendered on a standalone basis is given which we note as 10%. Thereafter, he drew our attention to AY 2011-12 page 106 wherein the pictorial description shown the technology services at 14% on a standalone basis is given. Thereafter, he drew our attention to AY 2012-13 page 5 wherein we note the pictorial description gives a technology service of 17% on standalone basis. With the aforesaid inputs and the notes forming the part of financial statement of AY 2010-11 revealed from pages 23 to 25 which we have reproduced above, the Ld. AR stated that M/s. TCS E-SERVE LTD. was engaged in not only I T enabled services (ITES) but also KPO services to Citigroup. Since TCS E SERVICE LTD. was also into technical services and it has been clearly spelt out that technical service involved software testing, verification and validation of software at the time of implementation and data set up management activities which according to the Ld. AR was software development as observed by the Pune Tribunal in TIBCO Software India
Pricewaterhouse Coopers Service Delivery Center (P) Ltd., AY: 2012-13 Pvt. Ltd. Vs. DCIT in dated 11.02.2015 for AY 2008-09 wherein the Tribunal has held as under:
In our considered opinion, the aforesaid finding of the DRP goes to show, in the context of the fact situation of assessee's activities and that of Thioksfot Global Services Limited, that both are engaged in carrying out activities which are parts of the process of software development activities. It is quite justifiable to comprehend that the activity of verification of software and validation of software are activities which are part and parcel of the process of software development. In fact, before the DRP, assessee referred to the Wikipedia meaning of the expression 'Verification' and 'Validation' in the context of software. The expression 'Verification' was explained to be referring to the process of evaluating the software to determine whether the products of a given development phase specified the conditions imposed at the start of that phase. Similarly, the expression 'Validation' was explained to be the process of evaluating software during or at the end of the development process to determine whether it satisfies specified requirements. In our considered opinion, where it is admitted that the activity being performed by the assessee is also a part of process of software development for its associated enterprise, then the captioned activities being undertaken by Thinksott Global Services Limited, which ostensibly also are a part of the whole process of software development, would definitely be considered as comparable. The argument being set up by the lower authorities that the ‘Verification' and 'Validation' are steps to test the efficiency of the software, but not a part of software development, in our view is a hairsplitting argument, which is not justified in the context of the present comparability analysis. Ostensibly, 'Verification' and 'Validation' are broadly speaking, a part and parcel of the process of software development. Therefore, on this aspect, we are unable to uphold the action of lower authorities in excluding the said concern from the final set of comparables. We direct, accordingly.
Thereafter he drew our attention to the decision of ITAT, Delhi Bench in the case of BC Management Services (P) Ltd. Vs. DCIT (2017) 83 taxmann.com 346 (Del. Trib.) wherein it was held as under:
“One of the main points of distinction which is quite ostensible is that the TCS E-Serve' is a subsidiary of Tata Consultancy Services Limited', which is one of the leading and giant company in the world and has an inherent element of very high brand value associated with it. Such a high brand value definitely has an impact on the pricing policy, niche market, contractual terms, etc. and thereby affecting the profit margins. Annual report of this company reflects that huge payments have been made by TCS E-Serve to TCS Limited' for the use of the brand as a "royalty". This fact itself shows the effect of brand value in the pricing mechanism. On a further analysis it is seen that the employee cost base is more than 64 times than the assessee and even the turnover is also more than 67 times as compared to the assessee. This only goes to suggest that assets employed by TCS E-Serve" alongwith huge intangibles in the form of brand value definitely has a huge effect in PLI and vitiates the comparability under FAR analysis with a company like assessee which is a captive service provider without much intangibles and risks. Another important thing which has been pointed out by learned counsel is that, the operation of TCS E-Serve' broadly comprise of transaction processing and technical services including software testing, verification and validation for which no segmental bifurcation is available. In absence of such vital information of the margins of such varied segments it becomes quite difficult to put such company in the comparability basket so as to bench mark the correct profit margin. All the aforesaid factors have been held so in various decisions of this Tribunal in several cases as relied upon by the Ld. Counsel, including the decision of Ameriprise India (P) Ltd. (supra). Thus, in our opinion TCS E-Serve cannot be held to be a good comparable for the purpose of bench marking the assessee’s PLI
Pricewaterhouse Coopers Service Delivery Center (P) Ltd., AY: 2012-13 and accordingly, we direct the ld. AO/TPO to exclude TCS E-Serve from the comparability list.” So, according to Ld. AR, the TCES cannot be considered as a comparable because it is also engaged in software development.
We have heard rival submissions and gone through facts and circumstances of the case. Only one argument was strongly advanced by the Ld. AR which relates to difference in functional profile of the assessee and the comparable TCES. Though brand of TCES was contested, we note that appellant Pricewater is also having a global brand, so on the basis of brand both companies are on leval playing field, so on brand factor TCES cannot be rejected. In respect of difference in functional profile, the contention of the assessee is that TCES renders technical services in nature of software testing verification, and validation, which is in the nature of software development which is essentially a KPO function, whereas the assessee functions only as IT enable Services, so it is not comparable. He pointed out that segmental data in respect of technical services of TCES is not available and hence, the same cannot be taken as a comparable. Ld. DR drew our attention to the fact that percentage of revenue from such technical services is minimal and hence, does not affect the PLI. He submitted that when TNMM is taken as MAM, then such minor differences gets ironed out. He also submits that software testing, validation and verification of software is not the same as software development and is closer to ITES services and hence, there is no functional difference between the assessee and TECS. We have gone through the records and we note that TCES is into I. T enabled SERVICES to CITI group and revenue from technology services is low. The technology services like software testing, verification and validation done by the TCES to CITI Group while carrying out I. T. enable Services cannot be equated to development of software in strict sense, unless as a question of fact it is clearly brought out that TCES is indeed into software development. Anyway, when TNMM is applied as MAM, the minor differences are ironed out. However, to be fair and do justice to both the parties, we set aside the matter back to TPO, and let the TPO call for and get the segmental details from the TECS in respect to the technical support which it renders to CITI Group and appropriate adjustment to be made accordingly on this score. However, TCES is to be included as a comparable. This issue of assessee’s appeal is allowed for statistical purposes.
Pricewaterhouse Coopers Service Delivery Center (P) Ltd., AY: 2012-13 8. The corporate issue is in respect of club expenses which assessee claimed to be of Rs.11,03,000/- which was not allowed by the AO. We note that the Hon’ble Supreme Court in CIT Vs. United Glass Mfg. Co. in Civil Appeal No. 447 of 2012 which is placed at pages 1 and 2 of the paper book, wherein the Hon’ble Supreme Court has clearly held that club membership fees is purely business expenses, therefore, since this issue is no longer res integra, we direct the AO to allow the expenditure incurred by the assessee company as club expenditure.
The next ground is in respect of disallowance u/s. 40(a)(ia) of the Act of Rs.2,78,421/- though the assessee claims that it has substantial merits on the issue, however, taking note of the smallness of the amount involved it was not pressed. We are not adjudicating the issue on merit; however, taking into consideration, the smallness of the amount involved we dismiss this ground of appeal.
In the result, appeal of assessee is partly allowed for statistical purposes.
Order is pronounced in the open court on 15th December. 2017.