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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI RAJENDRA & SHRI SAKTIJIT DEY
आदेश / ORDER शक्तिजीि दे, न्याययक सदस्य के द्वारा / PER SAKTIJIT DEY, J.M. Aforesaid cross appeals are directed against order dated 14th May 2012, passed by the learned Commissioner (Appeals)–15, Mumbai, for the assessment year 2007–08.
Brief facts are, the assessee an Indian company is a demerged division of Hinduja TMT Ltd. The assessee is basically engaged in ITES–BPO services involving insurance claim processing, call centre operations, etc. During the relevant previous year, assessee entered into various international transactions with its A.E. However, in the present appeal, we are concerned with the international transaction pertaining to rendering of ITES and purchase of EDP software. Therefore, we will confine our factual analysis to these two aspects only. As far as ITES segment is concerned, the assessee earned revenue of ` 83.32 crore towards provision of ITES to its A.E. For bench marking its transactions, carried out with its A.E. assessee undertook a transfer pricing analysis by adopting transactional net margin method (TNMM) as the most appropriate method with operating profit to total cost (OP/TC) as the Profit Level Indicator (PLI). By conducting a search process in the data bases, 14 companies with weighted average of 9.59% on multiple year data was selected as 3 Hinduja Global Solutions Limited comparables. As the margin shown by the assessee at 16.5% was higher than the margin of the selected comparables, the international transactions with A.E. was found to be at arm’s length. The Transfer Pricing Officer, however, did not accept the transfer pricing analysis of the assessee. Pointing out defects / deficiencies Transfer Pricing Officer rejected the transfer pricing study and proceeded to select his own set of comparables. In the process, out of the 14 comparables selected by the assessee, the Transfer Pricing Officer rejected 10 comparables while retaining 4. Besides, Transfer Pricing Officer added 21 new comparables. Thus, the Transfer Pricing Officer selected, in total, 25 comparables with weighted average margin of 30.75%. As a result, an upward adjustment of ` 10.08 crore was made to the arm's length price shown by the assessee. Being aggrieved of such adjustment, assessee preferred appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals), after considering the submissions of the assessee, rejected five out of 25 comparables selected by the Transfer Pricing Officer. The companies excluded by the learned Commissioner (Appeals) are Bodhtree Consulting Ltd., Infosys BPO Ltd., Maple E–Solutions Ltd., Tritan Corp. Ltd. and Wipro Ltd. After exclusion of the aforesaid five companies, the weighted average margin of the remaining 20 companies worked out to 30.27%.
4 Hinduja Global Solutions Limited
As far as purchase of EDP software for a value of 2.32 crore is concerned, though, the assessee had submitted a valuation report for bench marking the international transaction, however, the Transfer Pricing Officer did not accept the valuation shown by the assessee by stating that as per the valuation report, the value of software is 2.05 crore. Accordingly, he made an adjustment of ` 27 lakh. The learned Commissioner (Appeals) also confirmed the same. Being aggrieved of the aforesaid adjustments, assessee is in appeal before us. Of–course, apart from transfer pricing adjustments the Assessing Officer while framing the assessment has made part disallowance of deduction claimed under section 10A which was sustained by the learned Commissioner (Appeals). Being aggrieved of the aforesaid decision of the learned Commissioner (Appeals), assessee is in appeal before us raising five grounds.
Ground no.1, being general in nature, no specific adjudication is required.
Ground no.2, which relates to transfer pricing adjustment on provisions of ITES is being dealt with herein after.
The major issue which arises for consideration in these grounds relate to selection / rejection of comparables which we propose to deal
5 Hinduja Global Solutions Limited with at the outset. The assessee has objected to rejection of NIIT Smart Serv Ltd. as a comparable.
Learned Authorised Representative submitted, the Transfer Pricing Officer has rejected the company as a comparable on the ground that related party transactions (RTP) of the company at 25.26% exceeds the permissible RPT limit of 25%. The learned Authorised Representative submitted, as per the financials of the comparables, the RPT is 11.72% which is less than 25% RPT filter applied by the Transfer Pricing Officer. She submitted, as per the annual report of the comparable, it has total RPT of ` 155,378,842 and its revenue is ` 560,648,554, which works out to 27% on revenue / sales. She submitted, Transfer Pricing Officer has worked out this percentage at 25.26% and has applied related party filter of 25% on sales. She submitted, learned Commissioner (Appeals) has taken total RPT (expenditure plus income) and divided it to total income. Therefore, numerator and denominator are not consistent. She submitted, RPT calculation can be done either on the basis of RPT income divided by total income or RPT expenses divided by total expenditure or RPT income plus expenditure divided by total income plus expenses. She submitted, if the RPT is worked out applying the aforesaid principle, it will work out to 11.72% which is less than the 6 Hinduja Global Solutions Limited 25% RPT filter applied by Transfer Pricing Officer. In support of her contention, she relied upon the following decisions:–
i) CIT v/s P.T.C. Software India Pvt. Ltd., of 2014, dated 26.9.2016; ii) PTC Software India Pvt. Ltd. v/s ACIT, ITA no.1605/Pn./2011; and iii) Sunguard Solutions Net Pvt. Ltd. v/s DDIT, ITA no.1670/Pn./ 2011.
Learned Departmental Representative agreeing in principle with the submissions of the learned Authorised Representative contended that the RPT computation has to be aligned to any one of the criteria proposed by the learned Authorised Representative. He, therefore, submitted, it may be restored back to the file of the Assessing Officer for doing the necessary exercise.
We have considered the submissions of the parties and perused the material available on record. Basic difference between the assessee and the Departmental Authorities as far as selection of this comparable is RPT. While the Transfer Pricing Officer / learned Commissioner (Appeals) have excluded the company on the reasoning that RPT has exceeded the threshold limit of 25%. Learned Authorised Representative pointed out flaws in computation of RPT and has submitted that as per actual computation, RPT of the comparable is 11.72% which is well within the threshold limit applied by Transfer
7 Hinduja Global Solutions Limited Pricing Officer. Having considered the submissions of the parties, we find that the Tribunal, Pune Bench, in PTC Software India Pvt. Ltd. (supra), observed the ratio of RPT to total transactions have to be worked out by dividing RPT sales and RPT expenses with total sales and total costs. The aforesaid view expressed by the Tribunal, Pune Bench, was approved by the Hon'ble Jurisdictional High Court in CIT v/s PTC (I) Pvt. Ltd. (supra) while holding that RPT has to be considered in the context of total transactions. In view of the aforesaid, we restore the issue relating to comparability of the aforesaid company to the Assessing Officer / Transfer Pricing Officer for deciding afresh after working out the RPT keeping in view the decisions referred to above.
Objecting to selection of this company, learned Authorised Representative submitted, it is functionally different since it is providing data analytics services, operations management service and audits and reconciliation services. She submitted, these activities are not even remotely comparable to the activities carried on by the assessee. She submitted, the functions performed by the comparable is in the higher end of the BPO service which is known as Knowledge Process Outsourcing (KPO), hence, cannot be compared to low end
8 Hinduja Global Solutions Limited BPO service provider. In support of such contention, learned Authorised Representative relied upon the following decisions:– i) Rampgreen Solutions Pvt. Ltd. v/s CIT, [2015] 377 ITR 533 (Del.); ii) ITO v/s Knoah Solutions P. Ltd., ITA no.1407/Hyd./2013, order dated 25th April 2014; iii) C3i Support Services Pvt. Ltd., v/s ACIT, [2014] 151 ITD 348 (Hyd.); and iv) iQor India Services Pvt. Ltd. v/s ITO, [2015] 57 taxmann.com 416 (Del. Trib.).
Learned Departmental Representative relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record. From the material on record, it is evident that this company is engaged in activities which are totally different from the assessee. It is also relevant to note that comparability of this particular company with BPO service providers has come up for consideration in case of number of other assessees and consistent view of different benches of the Tribunal is, this company since is engaged in providing KPO services is not a comparable to BPO service providers. In fact, the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. (supra), approving the 9 Hinduja Global Solutions Limited aforesaid view has observed that company being involved in providing KPO services is not comparable. The relevant observations of the Hon'ble Delhi High Court is reproduced below:–
“37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s Capital Iq Information Systems (India) (P.) Ltd. v. Additional Commissioner of Income-tax (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits.
In the aforesaid view of the matter, we are of the opinion that this company cannot be treated as comparable to the assessee.
Objecting to inclusion of this company as a comparable, the learned Authorised Representative submitted, this company is 10 Hinduja Global Solutions Limited engaged in the business of engineering service to high rise buildings in U.S. and Canada. She submitted, during the relevant previous year, it has acquired cross road detailing Inc. an engineering service KPO. She submitted, as against this, the assessee is providing services relating to insurance claim processing and call centre service which are routine ITES. Therefore, company should not be treated as a comparable. In support of such contention, assessee relied upon the following decisions:–
i) Rampgreen Solutions Pvt. Ltd. v/s CIT, [2015] 377 ITR 533 (Del.); ii) ITO v/s Knoah Solutions P. Ltd., ITA no.1407/Hyd./2013, order dated 25th April 2014; and iii) C3i Support Services Pvt. Ltd., v/s ACIT, [2014] 151 ITD 348 (Hyd.).
Learned Departmental Representative relied upon the order of the Assessing Officer and the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record. As could be seen from the material on record, this company is providing highly technical and speciliased engineering service which comes in the category of KPO. That being the case, it cannot be treated as comparable to the assessee. This view was taken by the Tribunal, Hyderabad Bench, in Capital IQ Information Systems India Pvt. Ltd. v/s DCIT, [2013] 25 ITR (Trib.)
11 Hinduja Global Solutions Limited 185 (Hyd.) and subsequently followed in a number of other decisions of the Tribunal including the decisions relied upon by the learned Authorised Representative. In fact, in case of Ramp Green Solutions Pvt. Ltd. (supra), the Hon'ble Delhi High Court approving the view expressed in the case of Capital IQ Information Systems India Pvt. Ltd. (supra), held that KPO service provider cannot be compared with a normal BPO service provider. Respectfully following the consistent view expressed in the judicial precedents referred to above, we exclude this company from the list of comparable.
Objecting to the inclusion of this company, learned Authorised Representative submitted the company under no circumstances can be comparable to the assessee as a major portion of its work is out sourced to third parties. Learned Authorised Representative referring to the financials of the company for the year under consideration submitted, the assessee had paid an amount of ` 13.31 crore towards data entry charges and vendor payments which works out to almost 65% of the total expenditure. She submitted, the personnel cost of the company is merely 3.47% of the total cost as against assessee’s personnel cost of 66.52%. She, therefore, submitted, the business model of the company being totally different from the assessee, it
12 Hinduja Global Solutions Limited cannot be treated as comparable. In support of this contention, learned Authorised Representative relied upon the following decisions:– i) Rampgreen Solutions Pvt. Ltd. v/s CIT, [2015] 377 ITR 533 (Del.); ii) Capital IQ Information Systems (I) Pvt. Ltd., v/s DCIT, [2013] 25 ITR (T) 185 (Hyd.); iii) Techbooks International Pvt. Ltd. v/s ACIT, ITA no.4990/Del./2011, order dated 2.4.2014, and iv) C3i Support Services Pvt. Ltd., v/s ACIT, [2014] 151 ITD 348 (Hyd.).
Learned Departmental Representative supported the findings of the learned Commissioner (Appeals) and the Assessing Officer.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On examining the financials of the company, we have noted, major part of expenditure incurred by the company is towards data entry charges and vendor payment which works out to almost 65% of the total expenditure. It is further seen, the salary cost of the company works out to 3.47% of the total cost which signifies that the company is itself not engaged in providing ITE services but gets it done through others. In other words, it out–sources the work to third party vendors. Therefore, this company cannot be a comparable to the 13 Hinduja Global Solutions Limited assessee on the basis of function performed and assets employed. Considering the aforesaid aspects, the Tribunal, Hyderabad Bench, in Capital IQ Information Systems India Pvt. Ltd. (supra) has held that this company cannot be considered as comparable as it out sources its activities. The aforesaid view of the Tribunal has been approved by the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra). For better appreciation, we consider it appropriate to reproduce the observations of the Hon’ble High Court in this regard.
“38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity.”
In view of the aforesaid, we are of the opinion, this company cannot be treated as comparable to the assessee.
At this stage, it is necessary to deal with the Department’s appeal in ITA no.4950/Mum./2012, since, the only issue involved therein is in relation to exclusion of two comparables by the learned Commissioner (Appeals) viz. Wipro Ltd. and Infosys BPO Ltd. As could
14 Hinduja Global Solutions Limited be seen from the materials on record, these two companies were not in the list of comparables selected by the assessee. The Transfer Pricing Officer had included these two companies as comparables in the course of proceedings before him.
The learned Commissioner (Appeals) had excluded the aforesaid companies on the reasoning that they have brand value, incurring heavy marketing and selling expenses and cost of software package for own use.
Learned Departmental Representative objecting to the exclusion of these two companies submitted, only on the basis of high turnover companies cannot be excluded from the list of comparable. He submitted, if high turnover filter was not applied earlier, it cannot be applied at a later stage.
Learned Authorised Representative on the other hand relied upon the observations of the learned Commissioner (Appeals).
Having considered the submissions of the parties and perused the material on record, we are of the considered opinion that under no circumstances, these two companies can be considered as comparable to the assessee as they will not qualify on FAR analysis owing to various factors including their brand value, size, owning of intangibles,
15 Hinduja Global Solutions Limited etc. In various decisions, different benches of the Tribunal have held that these companies cannot be considered as comparable to a captive service provider. The same view has also been expressed by the Hon'ble Jurisdictional High Court in CIT v/s Pentair Water India Pvt. Ltd., [2016] 381 ITR 216. Keeping in view the aforesaid facts, we agree with the learned Commissioner (Appeals) that these two companies cannot be treated as comparable to the assessee.
At the time of hearing, learned Authorised Representative has submitted before us a chart showing computation of margin after exclusion of the following companies:–
i) Bodhtree Consulting Ltd. ii) eClerx Services Ltd. iii) Infosys BPO Ltd. iv) Mapel–e Solutions Ltd. v) Molteck Technologies Ltd. vi) Triton Corp. Ltd. vii) Vishal Information Technologies Ltd. viii) Wipro Ltd.
As per the said chart, after exclusion of the aforesaid companies, the weighted average margin of the rest of the comparables works out to 20.89%. Since we have excluded E–clerx Services Ltd., Moldteck Technologies Ltd. and Vishal Technologies Ltd. and rest of the five companies have been excluded by the learned Commissioner
16 Hinduja Global Solutions Limited (Appeals) which is also upheld by us while dismissing Revenue’s appeal, the weighted average margin of the rest of the comparables at 20.98% is within ±5% of margin shown by the assessee on 16.50% requiring at further adjustment to the arm's length price as far as ITES segment is concerned. That being the case, other grounds raised by the assessee on determination of arm's length price in ITES segment having been reduced to mere academic interest do not require adjudication.
In ground no.3, assessee has challenged the addition made on account of adjustment to the arm's length price of purchase of EDP software.
As discussed earlier, the Transfer Pricing Officer noticing that as per the valuation report submitted by the assessee, the value of EDP software is ` 2.05 crore as against ` 2.32 crore shown by the assessee added back an amount of ` 27 lakh as adjustment to the arm's length price.
The learned Commissioner (Appeals) also confirmed the addition accepting the reasoning of the Assessing Officer.
Learned Authorised Representative submitted, the assessee had purchased EDP software alongwith other assets from CCC Philippines
17 Hinduja Global Solutions Limited for setting–up of Manila Branch and the purchase price was at the WDV of the said asset in the books of account of CCC Philippine. In this context, she drew our attention to the Balance Sheet of CCC Philippine at Page–84/85 of the paper book. Referring to the valuation report, the learned Authorised Representative submitted, the valuer has specifically stated that software having estimated book value of 2,27,71,892=60 peso were excluded in the valuation made, therefore, the Transfer Pricing Officer cannot assume that value of software is what is mentioned in the notes to the valuation report. Hence, Transfer Pricing Officer cannot make an ad–hoc adjustment without following the prescribed methods in the rules. Without prejudice to the aforesaid contention, she submitted software is depreciable, hence, depreciation cost is to be taken for PLI computation using ` 2.32 crore as the base.
Learned Departmental Representative supporting the view expressed by the learned Commissioner (Appeals) submitted the assessee has failed to discharge its onus that the price paid for acquiring the software is at arm's length.
We have considered the submissions of the parties and perused the material available on record. As could be seen, the Transfer Pricing Officer relying upon the note of the valuer stating that various
18 Hinduja Global Solutions Limited software with an estimated book value of 2,27,71,892=60 peso (converted to Indian rupee ` 2.05 crore) were excluded from valuation, treated it as the value of EDP software purchased by the assessee. The learned Commissioner (Appeals) has also confirmed the view of the Assessing Officer primarily on the reasoning that assessee has not given any details as to why such figures in respect of valuation of EDP software was mentioned in the valuation report. According to the learned Commissioner (Appeals), the note given by the valuer is an indicator of the fair value of such EDP software. Though, it is a fact that the valuer in its note has stated that various software with estimated book value of peso 2,27,71,892=60 were excluded from the valuation, however, in our view, it will not be safe to presume that the amount so mentioned represents the purchase value of EDP software alone. The assessee on its part must bring on record material to show the exact value of EDP software in the books of the CCC Philippine. As sufficient material has not been brought before us to reach a conclusive finding with regard to valuation of EDP software purchased by the assessee, we are inclined to restore the issue to the file of the Assessing Officer / Transfer Pricing Officer for fresh adjudication after providing due opportunity of being heard to the assessee.
Ground no.4 relates to disallowance of assessee’s claim of deduction under section 10A.
19 Hinduja Global Solutions Limited
Brief facts are, in the course of assessment proceedings, the Assessing Officer while verifying assessee’s claim of deduction under section 10A of the Act found that assessee has claimed deduction as under:–
Unit–II ` 17,65,90,091 Unit–III ` 7,09,89,371 ––––––––––––– ` 24,75,79,462 ==========
On a perusal of the return of income, the Assessing Officer found that the assessee had claimed that it has five units engaged in the business of ITES. In respect of Unit–I and V, assessee did not claim any deduction under section 10A, as they are loss making units and Unit–IV was not eligible for deduction under section 10A. It is the claim of the assessee that Unit–I is engaged in I.T. service and Unit–II is engaged in providing ITES of insurance claim processing whereas Unit–III is engaged in the business of call centre. The Assessing Officer after verifying assessee’s claim vis–a–vis the information submitted in the return of income and audit report in Form no.56F observed that in assessment year 2005–06, assessee’s claim of deduction in respect of Unit–II and III were thoroughly examined and it was held by the Assessing Officer that deduction claimed under section 10A in respect of Unit–II and Unit–III is not allowable. The Assessing Officer
20 Hinduja Global Solutions Limited extensively relying upon the observations of the Assessing Officer in assessment year 2005–06 ultimately held that assessee’s claim of deduction under section 10A is not allowable as the Unit–II and III are not new Units.
The learned Commissioner (Appeals) also upheld the view of the Assessing Officer by relying upon the that Unit–II and Unit–III cannot be considered as new Units, but are expansion of the earlier Units.
Learned Authorised Representative submitted, the Tribunal while deciding assessee’s appeal arising out of set aside proceedings for assessment year 2005–06 after considering favourable remand report of the Assessing Officer has allowed assessee’s claim of deduction under section 10A in respect of Unit–II and Unit–III. She further submitted, the same view was again expressed by the Tribunal in assessee’s own case for assessment year 2010–11. Copy of the orders were also placed on record.
Learned Departmental Representative without disputing the fact that the Tribunal has decided the issue in favour of the assessee, relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).
21 Hinduja Global Solutions Limited
We have considered the submissions of the parties and perused the material available on record. Undisputedly, the Departmental Authorities relying upon the order passed in assessment year 2005– 06, have denied assessee’s claim of deduction under section 10A in respect of Unit–II and Unit–III on the reasoning that they are not new Units, but expansion of earlier Units. However, the Tribunal in ITA no.6394/Mum./2014 dated 21st January 2015 for assessment year 2005–06, have allowed assessee’s claim of deduction under section 10A in respect of Unit–II and Unit–III. The same view was again reiterated by the Tribunal in assessee’s own case for assessment year 2010–11, in ITA no.2228/Mum./2015 dated 13th April 2016. Therefore, respectfully following the consistent view of the Tribunal on the issue in assessee’s case as aforesaid, we allow assessee’s claim of deduction under section 10A of the Act for the impugned assessment year.