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Income Tax Appellate Tribunal, DELHI BENCH ‘I’, NEW DELHI
Before: SHRI PRAMOD KUMAR & SMT. BEENA A. PILLAI
Date of hearing: 27.04.2016 Date of Pronouncement: 27.06.2016 ORDER
PER BEENA A. PILLAI, JM:
The present appeal has been preferred by the assessee against the order passed by DCIT circle-4, Gurgaon on 29/12/2014 for assessment year 2010-11.
The assessee filed its return of income on 13/10/2010 declaring a total income of Rs.2,54,66,749/-. The case was selected for scrutiny and notices under section 140 to 1 and 143 to Word issued to the assessee. In response to the notices the assessee filed its written submissions along with the necessary documents and explanation as per the questionnaire. During the course of 2 I.T.A.No.750./Del/2015 the scrutiny proceedings the learning AO noticed that the assessee has entered into international transaction with its AE. A reference was made to the Transfer Pricing Officer (TPO). Accordingly the Ld.AO referred the assessee’s case to the ld. TPO, for determination of the arms length price (ALP) in respect of international transactions entered into by assessee with its AE during the financial year 2009-10. On the reference being made to the ld.TPO, notice under section 92CA was issued to the assessee. In response to the same the assessee filed documentations prescribed under rule 10 D of the rules.
2.1 During the year under consideration the ld. TPO observed that Sun Life group is a diversified financial service organization, providing retirement and pension products and life and health insurance in Canada, US, UK and Asia. It also operates mutual fund and investment management business. Sun Life India (assessee) was incorporated on 28 separate 2006 as a wholly owned subsidiary of Sun Life financial (Mauritius) Inc.,(Sun Life Mauritius). The assessee was set up to provide software development and maintenance support service and back office support service to its Sun Life information services Ireland Ltd (AE) for assistance in their projects. The international transactions entered into by the assessee company with its associated enterprises during the year are as below:
3 I.T.A.No.750./Del/2015 Type Method selected Total value TP Comparables international of margin margin (%) MAM PLI transaction transaction (%) (Rs.) Provision of TNMM OP/TSC 378,141,457 12.45 6.21 software development and maintenance support services Provision of TNMM OP/OC 103,089,512 12.78 13.00 back office support services Provision of TNMM OP/OC 7,963,346 13.46 12.53 F&S support services Provision of TNMM OP/OC 52,295,871 12.98 11.66 advisory services Reimbursement TNMM OP/OC 35,979,612 - - of expenses to AEs Reimbursement N.A. - 7,725,6198 NA NA of expenses by AEs 2.2 The segmental results furnished by the assessee are as under:
Financial 2009-10:
Parti- Software Back office F&A Strategic Total culars development support Support advisor and services Services services maintenance services Income Service 378,141,457 103,089,512 7,963,346 51,295,671 541,490,186 Income
4 I.T.A.No.750./Del/2015 Other 731,023 266,901 13,490 1,011,414 income Operating 378,872,480 103,356,413 7,976,836 52,295,871 542,801,600 income Expendit ure Operating 336,911,425 91,642,923 7,030,593 46,286,935 481,871,876 expendit ure Operating 336,911,425 91,642,923 7,030,593 46,286,935 481,871,876 cost Operating 41,961,055 11,713,490 946,243 6,009,936 profit OP/OC 12.45% 12.78% 13.46% 12.98% 2.3 The assessee has benchmarked the international transactions relating to the 4 segments by using the transactional net margin method (TNMM) as the most appropriate method (MAM) with operating profit to total cost (OP/TC) as PLI. The assessee has chosen itself as the tested party for the purposes of TP study.
2.4 The Ld.TPO has not objected the MA M as well as the PLI calculated by the assessee. The only issue that has been disputed by the ld.TPO is in respect of the selection of comparables. Following are the set of comparables selected by the assessee for each segment.
Software development and maintenance services Company Name 2009- 2008- 2007- WA 10 09 08 OP/TC (%) Akshay Software NA 10.54 5.73 8.51 Technologies Ltd. Ancent Software NA -8.13 -18.29 -13/61 International Ltd. Aziecsoft Ltd. NA 3.43 2.40 2.98
5 I.T.A.No.750./Del/2015 CG Vak Software & Exports -13.90 3.74 -7.92 -5.58 Ltd. Gold stone technologies Ltd. NA -10.30 19.35 8.06 Helios & Matheson 12.61 NA 29.16 18.90 Information Technologies Ltd Indium Software (I) Ltd. NA -12.96 -3.45 -7.64 Infosys Tech. Ltd. 43.24 38.69 35.53 39.45 KPIT Cummins Info systems NC 9.27 8.94 9.12 Ltd. Larsen & Tubro Infotech Ltd. 16.23 13/49 14.04 14.56 LGS Global Ltd. NA 13.75 22.36 17.29 Mindtree Ltd. 16.34 1.36 12.49 9.25 Persistent Systems Pvt. Ltd. 27.16 13.39 24.61 21.13 Quintegra Solutions Ltd. NA -8.32 13.55 2.40 RS Software (India ) Ltd 7.64 8.82 5.46 7.52 Sasken Communication 25.47 13.29 13.64 17.11 Technologies Ltd. SIP Technologies & Exports NA -33.28 -38.98 -36.84 Ltd. Softsol India Ltd. NA NC 10.50 10.50 Thinksof Global Services Ld. 8.59 15.86 15.51 12.77 TVS Infotech Ltd. NA -15.59 NC 15.59 Zylog Systems Ltd. NA 9 11.80 10.21 Average 6.21% Back-office support segment S.No. Name of company OP/OC (%) 1 CG-VAK Software & Export Ltd. (Seg) 0.53 2 Cosmic Global Ltd 16.59 3 Datamatics Financial Services Ltd. -3.73 4 Fortune Infotech Ltd. 19.62 5 Informed Technologies India Ltd. 24.96 6 JIndal Intellicom Pvt. Ltd. 18.79 7 Micropgenetics Systems Ltd. 6.49 8 Microland Ltd. (Seg) 0.79 R. Systems International Ltd. (Seg.) 9 7.15 Average 10.31% F&A support service Name of the Operating Profits On op company operating costs (%) 2010 2009 2008 Cepha NA -4.89% -1.92% -3.44% Imaging Pvt . Ltd. Cosmic NA 47.61% 20.73% 34.71%
6 I.T.A.No.750./Del/2015 Global Ltd. R. Systems -3.41% 8.52% 6.70% 6.32% International Ltd. (Seg.) Arithmetic Mean 12.53% Advisory services
S.N. Name of the company OP/OC(%) 1 Cyber Media Research Ltd. (Earlier IDC 13.00 India Ltd.) 2 ICRA Management Consulting Services 0.41 Ltd. 3 Indus Technical Consultant Limited 11.99 Average 8.47% 2.5 The ld.TPO rejected the comparables selected by the assessee by applying certain comparables a criteria such as turnover filter, there companies less than 5 crores were rejected, the companies where multiple year data has been used, comparables where employee costs was less than 25% of the total cost, comparables where the related party transactions exceeded 25% of sales and comparables with different financial year data. The ld.TPO in turn selected additional comparables where the ratio of service income to total income was 75%, where the income from export was 75%. The ld.TPO thus arrived at a new set of comparables which included some of the comparables selected by the assessee under each segment. The comparables shortlisted by the TPO for each segment are as under: software development and maintenance support services
7 I.T.A.No.750./Del/2015 No. Name of the company OP/OC (%) 1 Akshay Software Technologies Ltd. -1.04 2 E-Infochips Bangalore Ltd. 72.69 3 Evoke Technologies Ltd. 19.02 4 E-Zest Solutions 18.66 5 Infinite Data Systems Pvt. Ltd. (Merged) 88.25 6 Infosys Ltd. 45.08 7 Larsen & Toubro Infotech Ltd. 20.48 8 LGS Global Ltd. 12/79 9 Mindtree Ltd. 16/62 10 Persistent Systems Pvt. Ltd. 30.50 11 RS Software (I) Ltd. 10.29 12 Sasken Communication Tech. Ltd. 17.54 13 Tata Elxsi Ltd. 19.82 14 Thinksoft Global Services Ltd. 17.35 15 Thirdware Solutions 41.63 Average 28.65% Back-office support and F&A support service segments S. Company Name OP/OC WC Adj. No. OP/OC (%) 1 Accentia Technologies Ltd. 43.07 37.30 2 Cosmic Global Ltd. 18.28 17.40 3 e4e Healthcare 31.03 28.66 4 Fortune Infotech Ltd. 22.80 18.49 5 I-gate Global Ltd 24.54 21.20 6 Infosys BPO Ltd. 31.46 27.27 7 Jindal Intellicom Ltd. 13.62 12.05 8 Microland Ltd. … -5.18 9 Omega Healhcare … 11.84 10 TCSE-Serve International Ltd. 13.80 52.53 11 TCSE-Serve Ltd. 63.38 62.38 Average 28.56% 25.81% 2.6 This led to the proposal for a transfer pricing adjustment in respect of software development service and Back-office support and F&A support service amounting to Rs.4,49,58,039/-.
8 I.T.A.No.750./Del/2015 S.No. Segment Adjustment in INR 1 Software Development Service 31,879,747 2 Back-office supports and F&A support 13,088,292 services Average 44,968,039 2.7 Thereafter the assessee carried the matter before the dispute resolution panel (DRP)-III, New Delhi. The DRP under section 144C (5) of the IT act, 1961 gave directions on 24/11/20153, determining the total income at Rs.4,49,58,039/., confirming the addition made by the Ld.TPO to the arms length price. Apart from the adjustment made to the ELP, the DRP confirmed the addition made by the Ld.TPO in respect of foreign exchange fluctuation while computing the operating margins of the comparable companies as well as the assessee. On receipt of the directions passed by the DRP, the Ld. AO passed the assessment order on 29/12/2014, making the impugned additions.
Aggrieved by the order of the Ld.AO the assessee is in appeal before us on following grounds of appeal:
“On the facts and circumstances of the case and in law, the learned Assessing Officer ("AO") has erred in passing the assessment order under section 143(3) read with section 144C of the Income-tax Act, 1961 (''the Act") after considering the adjustments proposed by the learned Transfer Pricing Officer (''TPO'') in his order passed under section 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ("DRP"). Each of the ground is referred to separately, which may kindly be considered independent of each other.
9 I.T.A.No.750./Del/2015
Grounds relating to Transfer Pricing Matters: Ground No.1 The learned TPO/ AO/ DRP have erred in making an adjustment of INR 35,171,538 to the total income of the assessee in respect of international transactions pertaining to provision of software development services and back office and finance and accounting ("F&A") support services by the assessee to its associated enterprises ("AEs") (hereinafter referred to as "impugned transactions"). Ground No.2 : The learned AO / TPO / DRP has erred by not accepting the economic analysis undertaken by the assessee in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('the Rules'), and modifying the same for the determination of the Arm's Length Price (,ALP') of the impugned transactions to hold that the same are not at arm's length. Ground No.3 : The learned AO / TPO / DRP has erred, in law and on facts and circumstances of the case, by aggregating the transactions pertaining to 'provision of finance and accounting ("F&A") support services' with transaction pertaining to 'provision of back office support services'. Ground No.4 : (a) Not accepting the use of multiple year data, as adopted by the assessee in TP documentation; and (b) Determining the arm's length margins / prices using data pertaining only to financial Year ('FY') 2009-10 which was not available to the assessee at the time of complying with the Indian TP documentation requirements. Ground No.5 :
10 I.T.A.No.750./Del/2015
The learned TPO / AO / DRP has erred, in law and on facts and circumstances of the case, in rejecting certain comparable companies selected by the Appellant by applying inappropriate comparability criteria such as: a) Turnover less than INR 5 crore; b) Different accounting year; c) Diminishing revenues; d) Employee cost less than 25 percent of total cost; and e) Export turnover less than 75 percent of operating revenues. Ground No.6 : The learned TPO/ AO/ DRP have erred in selecting certain companies (which are earning supernormal profits) as comparable to the Appellant to benchmark the said transactions. Ground No.7: The learned TPO/ AO/ DRP have erred in wrongly rejecting certain companies from and adding certain companies to the final set of com parables for the said transactions on an ad-hoc basis, thereby resorting to cherry picking of comparable for benchmarking the impugned transactions. Ground No.8 : The learned TPO/ AO/ DRP have erred in not considering gains/ losses arising out of foreign exchange fluctuations while computing the operating margins of the comparable companies as well as the Appellant. Ground No.9 The learned AO has erred in not considering the directions passed by the learned DRP and passing an order under section 143(3) read with section 144C of the Act which has computational errors in margins of the Appellant and 11 I.T.A.No.750./Del/2015 certain comparable companies, for determination of arm's length margin in respect of the said transactions. Ground No.1 0: The learned TPO / AO / DRP have erred in treatment of operating and non-operating items while computing the margins of the Appellant and comparable companies. Ground NO.11: The Ld. TPO/A.O. / DRP have erred in not making suitable adjustments to account for differences in the risk profile of the appellant vis-à-vis the comparable companies. Grounds relating to Corporate Tax Matters Ground No. 12: The Learned AO/DRP has erred in facts and in law in re- computing deduction under section 10A at INR 77,961,617 as against INR 79,744,865 claimed in the return of income by the assessee. Thereby, Learned AO has proposed an addition of INR 1,783,248 to the total income of the assessee. While doing so, the Learned AO/DRP have: “ Reduced expenditure in foreign currency on lease line charges of INR 10,939,324 being the nature of telecommunication charges incurred in foreign currency from export turnover in terms of clause (iv) of Explanation 2 to section 10A of the Act, without making the similar adjustments from 'total turnover'. • without prejudice, erred in facts and in law in making the reduction of expenditure in foreign currency on lease line charges from 'export turnover' without making the corresponding adjustment from 'total turnover' for the purpose of computing deduction under section 10A of the Act. Thus, not maintaining parity in the numerator and denominator i.e. to say, export turnover and total turnover respectively. • Erred in law and in facts in not considering the order passed by the Hon’ble ITAT for AY 2007-08 wherein the 12 I.T.A.No.750./Del/2015 disallowance on similar ground has been deleted thereby violating the Doctrine of Binding Precedents. Ground No. 13: The learned AO has erred in levying consequential interest under section 234B of the Act. Ground No. 14: The learned AO has erred in initiating penalty proceedings under section 271 (1)( c) of the Act. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time or at the time of hearing the appeal. The' Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case.”
4. We have heard the rival contentions of both the sides, perused the orders passed by the authorities below, the paper books filed by the assessee and the case laws relied upon by both the sides.
5. Grounds 1 and 2 are general in nature.
6. Ground No. 3 6.1 It is noted that the assessee has agitated the clubbing of back-office support services with F& A support service segment by the ld.TPO for the purpose of benchmarking. The assessee’s grievance against the computation of ALP under this merge segment is only confined to selection of comparables made by the ld.TPO. Apart from these the assessee satisfied on all other aspects of the computation of ALP of this merged set of 13 I.T.A.No.750./Del/2015 transactions by the ld.TPO. We therefore dismiss this ground is unanswered.
Ground No. 4 This ground has been raised by the assessee as the Ld.TPO/DRP has rejected the usage of multiple year data. We agree with the findings of the ld.TPO, unless the assessee is able to make out where certain factors relevant to those years that have affected the transfer price of the year under consideration. It is observed that comparables that are in dispute relates to the same year vis-à-vis, the year under consideration. We are therefore inclined to dismiss this ground of appeal
. 8.Ground No. 5 to 7 8.1. The main dispute that arises is with respect to selection of the comparables. To be precise, the controversy rotates around the exclusion of the following companies the list of comparables in respect of:- Software Development segment
1. E- Infochips Bangalore Ltd 2. Infinite Data Systems private limited 3. Thirdware solutions Ltd 4. Tata Elxsi Ltd Back-office support and F&A support segment 1. Accentia technologies Ltd 2. Infosys BPO Ltd 3. I Gate global solutions Ltd 14 I.T.A.No.750./Del/2015
TCS E-Serve international Ltd 5. TCS E-Serve Ltd 8.2.. Apart from that the assessee is insisting on inclusion of the following companies, which were not included by the DRP as well as the TPO in their list of comparables:- Software Development segment 1. CG-VA K software and exports Ltd 2. R Systems International Ltd 3. Calibra point business solutions Ltd 4. Helios and Matheson information technology Ltd Back-office support and F&A support segment 1. R Systems international Ltd 2. CG-VA K software and exports Ltd 3. informed technologies Ltd 4. Microgenetic systems Ltd 8.3. We shall take up these companies one by one to ascertain their compatibility or otherwise with the assessee. Before embarking upon this exercise it is sine qua non to precisely consider the functional profile of the assessee. Functional analysis of the assessee from the TP study: 9. From the TP study it is seen that assessee was providing software development and maintenance support service, back-office support services, financing and accounting services and advisory services to its AE since it’s incorporation. Tendered the aforesaid services under the directions issued by Sun Life Ireland. Further
15 I.T.A.No.750./Del/2015 it stopped rendering F and A support service and advisory services to its group entities during financial year 2009- 10. 9.1 From the TP study it is seen in respect of software support service segment, the assessee undertakes development of modules as well as parts of modules for software, being used by overseas group entities which included bug fixing, carrying out maintenance support services on software used by overseas entities. In back-office support segment the assessee updated the financial and personal data (such as name, address and other personal details) of the clients, both individual and group) of overseas group entities. Based on the information provided by the overseas group entities assessee generated insurance contracts for the customers of overseas group entities and sends them to the respective overseas group entities. 9.2 In F&A segment, the assessee provided finance and accounting support services to its group entities. In advisory segment the assessee provided advisory services to its AE. However these segments were discontinued during the financial year 2009-10. 9.3 It has been mentioned in the TP study that the assessee is responsible for day to day management activities, human resources, financial management and routine administration activity. It has its own finance, recruitment, administration and training departments
16 I.T.A.No.750./Del/2015 which supports the overall services being rendered to its AE’s. Thus the assessee performs the following functions in relation to software development and maintenance support segment to its AE’s: • identification of problem (Limited) • software specifications/requirement analysis (Limited) • coding and documentation • project management (Limited) • testing and integration 9.4 In respect of back-office support services, F&A support services and advisory services, the assessee undertakes the following functions: • project management (Limited) • human resources • quality control (Limited) 9.5 From the TP study it is seen it has been mentioned that the assessee do not face any risk in respect of all these segments.
9.6 It is also observed that all the intangibles and specific know-how are owned by the Sun Life group. The assessee may use these intangibles for providing services to its AE but does not own or develop any intangibles or specific know-how on its own. Thus on the basis of the above functional analysis the assessee can be 17 I.T.A.No.750./Del/2015 characterized as a routine service provider operating in a low risk or almost risk mitigated environment.
9.7 With the above understanding of the nature of services provided by the assessee to its AE’s, we will now proceed to examine the compatibility or otherwise of the companies disputed by the assessee to the extent.
We shall 1st take up the comparables under both the segments where the assessee contends for exclusion.
Software development segment :
E-Infochips Bangalore Ltd. 10.1. It has been submitted by the ld.AR that this comparable was selected by ld.TPO (page33- 35 of TPO order) even though assessee objected to the same. The assessee had objected that the company is functionally different and is having two different segments that there is IT and ITeS and that it has earned supernormal profits due to this similar nature of services. It was further contended that this company is engaged in hard designing, product re-engineering, product life cycle management enterprise IT consulting and IT enabled services. Ld.TPO did not accept the contentions of the assessee and retained this company as a comparable. It was further submitted that this company was not selected by TPO either in earlier year or in later years. The ld.AR submitted that segmental information was not available in 18 I.T.A.No.750./Del/2015 respect of this comparable. The counsel has relied on the order passed by the TPO for assessment year 2009-10 10.2. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that E-Infochips Bangalore Ltd is a comparable company with that of assessee.
10.3. After considering the rival contentions and pursuing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable for TP analysis, because it is engaged in both software development as well as ITeS. Assessee being characterised as a routine service provider, the above company cannot be considered as comparable on functional basis.
10.4. As this company is functionally different from assessee and in absence of segmental information we direct the AO/TPO to exclude this company from the final list of comparables.
Infinite Data Systems private limited 10.6. This company was selected by ld.TPO (page 36-38 of TPO order) even though assessee objected to the same. The assessee had objected that the company is functionally different as during the said year the company has earned supernormal profits and the profitability of the company has increased by 1496% as compared to 19 I.T.A.No.750./Del/2015 financial year 2008-09. Ld.AR further contended that this company is engaged in technical consulting, systems integration, infrastructure management services. He also submitted that this company is exposed to significant customer address due to sole customer being Fujitsu services Ltd. Ld.TPO did not accept the contentions of the assessee and retained this company as a comparable. It was further submitted that this company was not selected by ld.TPO, either in earlier year or in later years. The ld.AR submitted that insufficient segmental information was available in respect of this comparable. The counsel has relied on the order passed by ld.TPO for assessment year 2009-10.
10.7. Ld. DR, however, referred to the extracts from the order of ld.TPO, and submitted that Infinite Data Systems Pvt Ltd is a comparable company with that of assessee.
10.8. After considering the rival contentions and pursuing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable for TP analysis. A perusal of the annual report of this company for assessment year 2010-11, suggests that it is a full-fledged IT consulting organisation and provides services in the nature of technical consulting, design and development of software, maintenance, system irrigation, implementation, testing and infrastructure management services. Further this company as a sole
20 I.T.A.No.750./Del/2015 customer, Fujitsu services Ltd, and accordingly is exposed to significant single customer risk. The above company cannot be considered as comparable on functional basis.
10.9. As this company is functionally different from assessee and in absence of segmental information we direct the AO/TPO to exclude this company from the final list of comparables.
10.10. This company was selected by ld.TPO (page 43- 44 of TPO order) even though assessee objected to the same. The assessee had objected that the company is functionally different as during the said year the company was engaged in providing software product development implementation and consulting based on ERP and business intelligences.
10.11. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that Thirdware Solutions Ltd is a comparable company with that of assessee.
10.12. After considering the rival contentions and pursuing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable for TP analysis. Here it is pertinent to mention that this company was considered by the ld.TPO as a comparable in the immediately preceding year in ITA No.
21 I.T.A.No.750./Del/2015 1489/del/2014 for assessment year 2009-10 as well. The Tribunal by aforenoted order has held it to be incomparable. Since no distinguishing features of the functional profile of this company and the assessee for the current year vis-a-vis the preceding year have been brought out to our notice, following the preceding, we direct the TPO/AO for removal of this company from the list of comparables.
10.13. This company was selected by ld.TPO (page 41- 42 of TPO order) even though assessee objected to the same. The assessee had objected that the company is functionally different as during the said year the company was engaged in providing sale of equipment and software licenses along with providing IT enabled and software product services.
10.14. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that Tata Elxsi Ltd. is a comparable company with that of assessee.
10.15. After considering the rival submissions and pursuing the relevant material on record, says we find that the total revenue of this company for the year under consideration stands at rupees for 1866.05 Lacs, consisting of revenue of sale and services amounting to Rs. 41,851.60 Lacs and other income amounting to Rs. 14.45 Lacs is. Segmental reporting done by this company
22 I.T.A.No.750./Del/2015 indicates the split of total revenue of 41,866.05 Lacs into 2 segments. Here it is pertinent to mention that this company was considered by the ld.TPO as a comparable in the immediately preceding year in for assessment year 2009-10 as well. The Tribunal by aforenoted order has made it to be incomparable. Since no distinguishing features of the functional profile of this company and the assessee for the current year vis-a-vis the preceding year have been brought out to our notice, following the preceding, we direct the TPO/AO for removal of this company from the list of comparables.
Back-office support and F&A support segments 10.16. Ld.TPO considered this company as a comparable. Assessee objects to the same due to functional incompatibility. The ld.AR submitted that the DRP had excluded this company as a comparable in its own case for assessment year 2011-12. He further contended that this Tribunal in assessee’s own case for assessment year 2009-10 has excluded this company.
10.17. Ld.DR, however, referred to extracts from the ld.TPO’s order to submit that Accentia Technologies Ltd. is comparable with assessee. The ld. DR relied upon order dated 27.04.2015 passed by Hon’ble Delhi High Court in the case of Chris Capital Investment versus DCIT reported
23 I.T.A.No.750./Del/2015 in I.T.A.No. No.417/2014, wherein Hon’ble Delhi High Court has held that: “the mere fact that an entity makes high / extremely high profits / losses does not ipso facto, lead to its exclusion from the list of comparables for the purpose of determination of ALP. In such circumstances enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable.”
10.18. After considering the rival submissions and pursuing the relevant material on record, we find that functionally, this company is into development of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DTO), high end software services. It is submitted by the ld.AR that segmental information in respect of this company is not available. We find that the Ld. TPO had adopted this company as a comparable for assessment year 2009-10. Coordinate bench of this Tribunal has considered the comparibility of the assessee and has directed this company to be excluded from the final list of comparables. Applying the same ratio we direct the learner TPO/AO to reject this company from the final list of comparables
24 I.T.A.No.750./Del/2015 10.19. The TPO included this company despite assessee’s objections. Assessee had objected for inclusion of this company as it provides high-end integrated services in the nature of business platforms, customer service outsourcing, finance and accounting LPO, HR outsourcing, sourcing and procurement outsourcing etc. The company also has a high brand value of goodwill and has acquired a company or by the name McCsmish Systems LLC to provide end-to-end solutions.
10.20. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that Infosys BPO Ltd. is a comparable company with that of assessee. The ld.DR relied upon the extract of the decision of Hon’ble Delhi High Court in the case of Chris Capital Investment vs. DCIT (supra), which has been reproduced hereinabove. 10.21. After considering the rival submissions and pursuing the relevant material on record, we find that for the year under consideration, this company has had extraordinary financial events. It is noted that the company is providing high end integrated service by assisting its clients in improving their competitive positioning by managing their business process in addition to providing increased value. On the other hand, assessee is engaged in providing routine support services in the nature of data collection and analysis which is low end in nature bearing minimal risks.
25 I.T.A.No.750./Del/2015 10.22 Ld. A.R. has rightly placed his reliance upon the decision of Agnity India Technologies Pvt. Ltd. passed by Hon'ble Delhi High Court in I.T.A.No. 3856/2010 wherein, it has been held that this comparable must be rejected on account of difference in risk levels assumed, huge revenues derived and the fact that they are market leaders. Hon’ble court held as under:
“it is argued that the case of assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giants in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded.” 10.23 Since there is no similarity in the functional profile of this company and assessee respectfully following the ratio laid down in Agnity India Technologies (supra), we direct the TPO/AO for removal of this company from the list of comparables.
10.24. The TPO included this company in the list of comparables despite the objections raised by the assessee. The assessee contended that this company offers both IT and ITES services and it has amalgamated with I Gate
26 I.T.A.No.750./Del/2015 Global Solutions Sdn.Bhd., during the year under consideration.
10.25. Ld.DR, however, referred to the extracts made by the ld.TPO in the order to submit that Infosys BPO Ltd. is a comparable company with that of assessee. The ld. DR relied upon the extract of the decision of Hon’ble Delhi High Court in the case of Chris Capital Investment vs. DCIT (supra), which has been reproduced hereinabove. 10.26. After considering the rival submissions and pursuing the relevant material on record, we find that the financial results of this company due to restructuring activities during the relevant year.
10.26 A perusal of the Annual repro of I-Gate for F.Y. 2009-10, makes it clear that during the yea this company had acquired I Gate Global Solution Sdn.Bnd. Further, this company is engaged in providing variety of services in nature of I T Services and I T enabled Services for which there is no segmental information available. Coordinate Bench of this Tribunal in case of Capital I Q Information Systems (I) Pvt. Ltd. VS DCIT in I.T.A.No. 1961/Hyd/2011 has held as under:
“11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra- ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such even takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial
27 I.T.A.No.750./Del/2015 result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded.” 10.27 Similar view has been taken by Hon’ble jurisdictional High Court in the case of Rampgreen solutions private limited in where it has been held that a company loses the tag of comparability due to extraordinary events like amalgamations mergers etc taking place during the year in question. Respectfully following the same we direct the learner TPO/AO to reject this company from the list of comparables.
10.28. The Ld.TPO had included this company as a comparable despite objections by the assessee, as this company was also offering ITES services. The assessee objected the inclusion of this company on the ground that it provided financial information processing and customer contact services with high-level of foreign expenditure and abnormal profits.
10.29. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that TCS E Serve International Ltd. is comparable with assessee. The ld.DR relied upon the extract of the decision of Hon’ble Delhi High Court in the case of Chris capital investment vs. DCIT (supra), which has been reproduced hereinabove.
28 I.T.A.No.750./Del/2015 10.30. After considering the rival submissions and pursuing the relevant material on record, we find that the financial results of this company shows that this company is into business of providing IT enabled services/BPO services primarily to Citigroup entity globally. The operations of this company broadly comprises of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving processing, collections, customer care and payment in relation to services offered by Citigroup to its corporate and retail clients. The technical services offered by this company are in the nature of servicing and maintenance of software testing, verification and validation of software, which are akin to software maintenance services falling within the overall category of software development services and has created a lot of applications which are in the nature of intellectual property in terms of reconciliation software, fund transfers, etc. The company also undertakes software testing and validation activities. Possession of intellectual property rights has to be factored if such a company is to be taken as comparable. Further, from the TP study we observe that, this company is a wholly owned subsidiary of Tata Consultancy Services. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post
29 I.T.A.No.750./Del/2015 acquisition. In such factual background, the ratio relied upon by Ld. D.R. in case of Chrys Capital Vs DCIT (supra) cannot be applied. Instead the ratio laid down by Hon'ble High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) would be applicable. Hence we are of the opinion that this company cannot be taken as a comparable. We therefore direct to exclude this comparable.
TCS E-Serve Ltd 10.31. The ld.TPO had included this company as a comparable despite objections by the assessee. The assessee objected the inclusion of this company as it provided financial information processing and customer contact services with high-level of foreign expenditure and abnormal profits.
10.31. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that TCS E serve Ltd. is a comparable company with that of assessee. The ld.DR relied upon the extract of the decision of Hon’ble Delhi High Court in the case of Chris Capital Investment vs DCIT (supra), which has been reproduced hereinabove.
10.32. After considering the rival submissions and pursuing the relevant material on record, we find that the financial results of this company shows that this company is into financial services to help its customers achieve their business objectives by providing innovative best in class services. During the year under consideration, this 30 I.T.A.No.750./Del/2015 company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post acquisition. It is observed from the order passed by ld.TPO for assessment year 2009-10 that the ld.TPO himself had not considered this company as a comparable. Without any proper reason or change in the functionality and financial data for the year under consideration, it cannot be held that this company can be considered as a comparable. The Ld. TPO has to bring some material on record to show that’s why this comparable was a bad comparable, in the previous year and in the succeeding year it is a good comparable. Admittedly neither the TPO nor the Ld. DR has been able to demonstrate the difference in the functionality and financial data. Hence following the rule of consistency, we are of the opinion that this company cannot be considered as comparable for the year under consideration. We therefore direct to exclude this comparable.
Cosmic Global Ltd:
10.33. The ld.TPO had included this company as a comparable despite objections by the assessee. The assessee objected the inclusion of this company as the main revenue generation of this comparable is from medical transcription and consultancy services. Thus the 31 I.T.A.No.750./Del/2015 ld.AR contended that this comparable is a high ended KPO. 10.34. Ld.DR, however, referred to the extracts made by the ld.TPO in the order to submit that Cosmic Global Ltd., is a comparable company with that of assessee. 10.35. After hearing the rival submission and pursuing the relevant material on record we find that this company was subject matter of consideration before this Tribunal in assessee’s own case for assessment year 2009-10. After making a detailed analysis this Tribunal had approved the view taken by the TPO in considering this company as a fit comparable. As there is no difference in the functional profile and financial results o the assessee for the year under consideration vis-à-vis Assessment Year 2009-10, respectfully following the view taken by this tribunal in the immediately preceding assessment year, we uphold the TPO’s order, rejecting the assessee’s contention for exclusion of this comparable. Now we shall take up the comparables that were selected by the assessee and rejected by the TPO.
Software Development Segment CG-VAK Software and Exports Ltd (Seg.)
10.36. The ld.TPO excluded this company from the list of comparables by holding that this company does not satisfy the employee cost filter.
32 I.T.A.No.750./Del/2015 10.37 We find that the Ld. TPO has accepted the submissions of assessee which is as under: “38.2 In its reply, the assessee has stated that the employee cost to total cost of the company is 68.22%, and it satisfies all the filters applied by the TPO and being functionally comparable to the assessee, this company should be accepted as a comparable”
10.38 However, the Ld. TPO rejected this comparable as it did not satisfy the turnover filter. The Ld. A.O. has not brought on record any material / documents contrary to the above submissions of the assessee. The Ld. TPO has also not been able to bring out any instance of functional dissimilarity of this comparable with that of assessee. The Ld. D.R. placed his reliance on the findings of the authorities below. 10.36. We have perused the orders passed by authorities below, and arguments advanced by both the parties. It has been observed that the assessee in its TP study has objected to the adoption of the turnover filter applied by the TPO. It has been submitted that turnover filter could be deployed if the tested party is a risk bearing entrepreneur. However, to the facts of the present case, the assessee does not assume any risk and is remunerated at cost plus basis. Ld. A.R. has placed reliance in the case of Willis Processing Services Pvt. Ltd. in I.T.A.No. 4547/Mum/2012 wherein the Co-ordinate bench of this Tribunal has held as under:
33 I.T.A.No.750./Del/2015
“The turnover is not a criteria as prescribed under the Rule 10B(2) for selecting the comparables. It is settled proposition that the decisive factor for determining inclusion or exclusion of any case as a comparable are prescribed under Rule 10B(2) which does not specify any such factor of turnover on the basis of which a particular case can be included or excluded in the list of comparables.”
“In service industry, turnover does not play any significant role as far as the margins are concerned…. This reinforces the view that turnover does not play a significant role in service industry and there is no link between turnover and margins…. The turnover is not a relevant factor for choice of comparables has been confirmed in many decision, as listed below.”
10.37 Further, the Ld. A.R. had submitted that the TPO had applied turnover filter of less than 1 crore for back office support segment as a criterion. It is observed that the Ld. TPO has not provided nay rational or logic for changing the said limits. Such an approach adopted by the TPO is not in accordance with law and against the principles of application of TP regulations. There ought to be a uniformity in treatment and consistency when the facts and circumstances are identical particularly in the case of same assessee. We accordingly direct the ld. TPO/AO to include this company to the list of comparables. R Systems International Ltd 10.38. The ld.TPO has rejected the company on account of different financial year ending vis-a-vis the assessee. The ld.AR submitted that companies whose
34 I.T.A.No.750./Del/2015 financial data was available for the relevant period, were considered in view of rule 10 D (4), which provides that information to be used must be contemporaneous. The ld. AR further submitted that though the Company has different financial year ending, were operating during the same period of time as the assessee, and were also facing similar business cycles, market and economic conditions as faced by assessee having financial year from April to March. He thus submitted that in absence of evidence available to the contrary that there has been a significant impact on the margins due to change in different reporting/accounting period, it is incorrect to disregard the comparable using this filter. Ld.DR, however, referred to the extracts made by the ld.TPO in his order to submit that R Systems International Ltd., should not be considered comparable with assessee. 10.39. After considering the rival submissions and pursuing the relevant material on record we find that the ld. TPO has not pointed out exact difference, the change of accounting year has made to the financial results of the comparable. The ld.TPO has further not pointed out whether it would not be possible to restate those financial results for a different accounting period without significant change in net profit margins or any other parameters considered relevant. Multinational companies generally operate in different geographical regions and different countries follow different accounting or financial
35 I.T.A.No.750./Del/2015 years, functionally similar or even identical companies, cannot be held to be incomparable, only owing to differences in the date of ending of the financial year. As most of the business enterprises operate on the going concern concept, which is so fundamental to present the accounting, the PB at concept used in accounting is just an artificial means to reckon the operating results of business operation at a given point in time and nothing would turn up on changing the end of accounting period from 31st March to any other date within a short span of time. Assuming a situation where the tested party is following a different financial year ending (say 01/01/2010 to 31/12/2010), following the filter adopted by the ld.TPO, one would reject all the company with the financial year ending 31st of March 2010 and only consider companies with financial year ending 31/12/2010. The number of comparable companies available after using such a filter would be very limited and therefore, in such a case the net margin earned by the comparable companies would be different from the one that would be computed without using this filter. This view is supported by the coordinate bench of this Tribunal in the case of DCIT vs. McKinsey knowledge Centre India private limited in wherein it has been held that if a company is functionally comparable, it cannot be rejected merely on the ground that data for the entire financial year was unavailable, if the data can be 36 I.T.A.No.750./Del/2015 reasonably extrapolated. Hon’ble tribunal further observed that rule 10 B (4) cannot be interpreted in such a rigid manner so as to defeat the basic objective of the rule. The relevant extract of the ruling are reproduced below: “ 23. ….. However, in our considered opinion, if a comparable is functionally same as that of the tested party then the same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record the results were financial year can be reasonably extrapolated, then the comparable cannot be excluded solely on this ground. The learn ADR as referred to rule 10 B (4) which only mandates that the data which is to be utilised for analysing the comparability of uncontrolled transactions with an international transaction, has to be financial year only in which the international transaction has been entered into. This rule is based on matching principle but this role cannot be interpreted in such a rigid manner so as to defeat the basic object of rule viz., selection of the comparable for determination of arms length price of an international transaction” (emphasis supplied) 10.40. In any case the ld.TPO has not cited any instances of functional dissimilarity of this comparable company with that of assessee. We therefore direct the ld. AO/TPO to consider this company in the final list of comparable. Calibra Point, Business Solutions Ltd, Helios & Matheson Information Technology Ltd 10.41. These comparables have been rejected by the ld.TPO applying the same filter of having different financial year. The ld.TPO has not cited any instance of 37 I.T.A.No.750./Del/2015 functional dissimilarity of these comparable companies with that of assessee. The submissions advanced by both the sides are identical with that as raised while dealing with R Systems International Ltd. As we have this filter at length while dealing with R Systems International Ltd, the same are not being repeated. 10.42. We accordingly direct the ld.TPO/AO to consider these companies in the final list of comparables. Back office support and F&A support segments R Systems international Ltd 10.43. The ld.TPO has rejected this comparable by using the filter of different financial year ending. We have dealt with this comparable above. It is also observed that the ld.TPO has not cited any instance of functional dissimilarity of this comparable company with that of the assessee under the segment. Relying upon the discussions made hereinabove we direct the ld.AO/TPO to consider this company in the final list of comparables. CG-VAK Software and Exports Ltd, Informed technologies Ltd and Microgenetic systems Ltd 10.44. The ld.TPO has rejected this comparable using turnover filter. We have dealt with this comparable above. It is also observed that the ld.TPO has not cited any instance of functional dissimilarity of this comparable company with that of the assessee under the segment. Relying upon the discussions made hereinabove we direct
38 I.T.A.No.750./Del/2015 the ld.AO/TPO to consider these companies in the final list of comparables.
It is worthwhile to note at this juncture that the ld.TPO has cherry picked the comparable without considering the functional /similarity differences as well as insufficient data/information available on the public domain. It is also noted that the ld.TPO has to take reasonable approach while selecting/rejecting any of the comparables. The ld.TPO should not select any comparable on the basis of hypothetical approach. Merely because the accounting year ending is not similar, should not be a reason for rejecting a particular comparable without having any functional dissimilarity between the comparable with that of an assessee. The ld.TPO must consider a particular comparable company bit different any financial year ending if the data can be reasonably extrapolated. The ld.TPO must demonstrate with documentary evidence/research materials placed on record to the contrary to suggest otherwise. In the event the contemporary comparative analysis undertaken ease in accordance with the rule 10 B (2) and also in line with globally accepted practices, the use of different accounting year is appropriate, as long as the international transaction pertain to the same accounting year.
11.1 Ground No. 1, 2, 5 to 7 stands disposed off accordingly.
Ground No. 8
39 I.T.A.No.750./Del/2015 12.1 This issue raised is against the treatment of foreign exchange gain/loss as an item of non-operating nature. At the outset the ld.AR submitted that the issue stands covered in favour of assessee by an order of this tribunal in assessee’s own case for assessment year 2009- 10 in ITA No. 1489/del/2014. The Tribunal has held as under:
“32. We find merit in the contention raised on behalf of the assessee about the treatment of foreign exchange gain/loss as an item of operating nature. As regards the nature of such foreign exchange gain earned by the assessee, the ld. AR put forth that the same is in relation to the trading items emanating from the international transactions. No contrary material has been placed on record by the ld. DR. If the foreign exchange gain/loss resulted from the trading items only, we fail to appreciate as to how it can be treated as non-operating.
The Special Bench of the Tribunal in ACIT Vs Prakash I. Shah (2008) 115 ITD 167 (Mum)(SB) has held that the gain due to fluctuations in the foreign exchange rate emanating from export proceeds simply on the ground that he foreign currency rate has increased subsequent to sale but prior to realization. It went on to add that when goods are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreign currency and then converted into Indian rupees, the entire amount is relatable to the exports. In fact, it is only the translation of invoice value from the foreign currency to the Indian rupees. The Special bench held that the exchange rate gain or loss cannot have a different character from the transaction to which it pertains. The Bench found fallacy in the submission made on behalf of the Revenue that the exchange rate difference should be 40 I.T.A.No.750./Del/2015 detached from the exports and be considered as an independent transaction. Eventually, the Special Bench held that such an exchange rate fluctuation gain/loss arising from exports cannot be viewed differently from the sale proceeds.
In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (20ll) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addl.CIT (2013) 32 taxman. com 196 has also laid down to this extent. In view of the foregoing discussion, we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost. However, it is made clear that it should be dealt with identically both in the calculation of the PLI of the assessee as well as the comparable under all the three segments.”
12.2 The ld.AR submits that the facts are identical in the year under consideration vis-à-vis that of assessment year 2009-10. Respectfully following the same we hold that the foreign exchange gain/loss arising out of revenue transaction is required to be considered as an item of operating revenue/cost.
Ground No. 9 12.1 This ground has been raised by the assessee as the Ld.AO has not followed the directions of the DRP for 41 I.T.A.No.750./Del/2015 rectifying the arithmetical errors in computation of the margins of comparables.
12.2 We direct the ld.AO to follow the directions of the DRP and ratify the computational errors.
Ground No. 10 This ground has been raised by the assessee against dis- allowability of operating and non-operating items with respect to foreign exchange gain/loss, while computing the margins of the assessee and comparable companies. As we have dealt with this issue at length in grounds 8 & 9, referring to and relying upon the discussion made above, we dispose of this ground accordingly.
Ground No. 11 This ground has been raised by the assessee for not allowing suitable adjustments on account of differences in the risk profile of the comparable vis-a-vis that of the assessee.
15.1 As observed from the transfer pricing study the assessee functions in a low-risk or almost risk mitigated environment viz-a-viz enterprise a real risk borne by the comparables. The assessee is thus operating under economic circumstances that warrant adjustments to the margins made by the comparables so as to make the comparison between the margins earned by the comparable companies and the assessee appropriate we
42 I.T.A.No.750./Del/2015 therefore are of the considered opinion that the entitlement of the assessee in respect of adjustments on account of differences in the risk profile of the assessee with that of the comparable cannot be denied.
15.2 In view of the above this ground raised by the assessee stands allowed
Ground No. 12 16.1. This issue has been raised against the disallowance of benefit under section 10A, as claimed by the assessee. The ld.AO had reduced the lease line charges from export turnover, however rejected the similar treatment while computing total turnover. It is brought to our notice that, the issue has been considered at length in favour of assessee in assessee’s own case for assessment year 2007-08, 2008-09 and 2009-10. After considering the rival submissions and pursuing the relevant material on record we find force in the contentions advanced by the ld.AR, requiring the exclusion of lease line charges from total turnover as well.
16.2. Respectfully following the decision of coordinate benches of this tribunal in assessee’s own case for previous assessment years we allow this ground of appeal.
17. Ground No. 13 relates to interest under section 234B of the act which is consequential in nature hence left unanswered.
43 I.T.A.No.750./Del/2015
Ground No. 14 deals with the initiation of penalty proceedings under section 271(1)(c) of the act. As this is premature we are not inclined to answer this question.
Accordingly the appeal filed by the assessee stands disposed of. Order pronounced in open court on 27th June, 2016.
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