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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI R C SHARMA & SHRI AMIT SHUKLA
आदेश ORDER �ी अिमत शु�ला, �याियक सद�य PER AMIT SHUKLA, J.M.:
The aforesaid Cross appeals have been filed by the assessee as well as by the revenue against Final Assessment Order dated 21.12.2015, passed under section 143(3) r.w.s. 144C(13) in pursuance of direction given by the Dispute
2 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 Resolution Panel (DRP) under section 144C(5), vide order dated 19.11.2015 for the assessment year 2011-12. The common issues involved in both the appeals relates to Transfer Pricing adjustment in respect of provision of Information Technology Enabled Services (ITES) which mainly revolves around inclusion and exclusion of certain comparables. In assessee’s appeal, amongst various grounds, the assessee has mainly challenged the Transfer Pricing Adjustment of Rs.36,54,65,763/- out of total adjustment of Rs.50,60,63,848/- made by the TPO. The grounds of appeal raised by the assessee reads as under:- “I. Ground No. 1 1.1 On the facts and circumstances of the case, the learned Assistant Commissioner of Income Tax, Range -9(2)(1) (‘the AO’) erred in framing the assessment under Section 143(3) read with Section 144C of the Income Tax Act, 1961 (the ‘Act’) by upholding the action of the Transfer Pricing Officer (“TPO”) / Dispute Resolution Panel (‘DRP’) in making a Transfer Pricing (‘TP’) adjustment of Rs.36,54,65,763/- in respect of provision of Information Technologies enabled Services (‘ITeS’). 1.2 On the facts and circumstances of the case and in aw, the learned AO/ TPO / DRP erred on the following grounds: a. Rejecting the transfer pricing study which was maintained in good faith and with the diligence; b. Rejecting the methodical search process and the search criteria applied by the Appellant; c. Rejecting multiple year data and determining the arm’s length price based on single year data. d. Not following a structured search process and applying inappropriate filter while selecting a different set of comparables. e. Resorting to cherry picking of comparable companies; and f. Not granting working capital adjustment and risk management
3 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 1.3 On the facts and circumstances of the case and in law, the Appellant be granted the benefit of ± 5% range as provided under the proviso to section 92C(2) of the Act. 1.4 The Appellant therefore submits and prays that the aforesaid adjustment be deleted. II. Ground No.2 2.1 On the facts and circumstances of the case and in law, the learned AO erred in levying interest under Section 234B and 234C of the Act. 2.2 The Appellant submits and prays that the Learned Assessing Officer be directed to delete the aforesaid interest levied under the Act”.
2. Whereas, in revenue’s appeal, the grounds of appeal
read as under:-
1. Whether the DRP is correct in holding M/s Informed Technologies as comparable in absence of any segmental Profit & Loss Account separately for ITES activity and rental activity?
Whether the DRP is correct in directing the TPO to accept M/s Informed Technologies Ltd as a comparable inspite of the fact that this company is engaged predominantly in rental activities?
Whether the DRP is correct in comparing the assessee having turnover of Rs.388 crores with the company which is having the turnover of less than Rs.2 crores?
4. Whether the DRP is correct in not considering the decision of the High Court of Bombay at Goa in the case of M/s Pentair Water India Pvt. Ltd in IT Appeal No.18 of 2015 wherein the Hon’ble Court has given a finding that only companies of equal size should be considered as a comparable.
5. Whether the DRP is correct in holding M/s Informed Technologies Ltd as comparable by artificially calculating the profit margin by arbitrarily considering only one item of expenses as being relatable to rental activities?
6. Whether the DRP is correct in directing the TPO to accept M/s Jindal Intellicom Pvt. Ltd as comparable without considering the fact that this is not a company of equal size”?
4 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 3. Brief facts and the background of the case are that, the assessee, i.e., Capita India Private Limited is part of Capita Group Plc which is a United Kingdom based company mainly into BPO and professional services. In India, the assessee is engaged in providing full spectrum of Information Technology Enabled Services (ITES) to Capita Group covering both voiced and non-voiced based segments. During the year under consideration, the assessee had entered into following international transactions, which was reported in Form no. 3 CEB:- S.No. Description of the transactions Amount (Rs.) 1 Provision of IT enabled services 388,05,26,377 2 Reimbursement of salaries of expatriate 2,54,42,383 Employees
The Functions performed for ITES were stated to include:- data entry and validation, indexation of documents, payment/ form processing and transcription services, HR and payroll administration, registration and administration of share plan services processing for pension administrations and administration of reinsurance and brokerage; Review of accounting discrepancies and pending account, and to maintain accounts, so as to ensure that the best possible position of outstanding entries is maintained. Life and pension claims processing, policy amendments, etc. and customer contract services for inquiries, customer, complaints, change of address switching between different policies, surrenders, maturities, etc;
5 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 Mutual fund and hedge fund accounting and reconciliation, claims adjudication and processing, asset valuation and reconciliation, etc., and Servicing of unit linked policies, annuity pension payments, prefund policies, technical services migration, etc. Capital India is responsible for making all the operational decision that affect the delivery of services to the customers. Capita India is also responsible for ensuring that the necessary infrastructure and personnel are available for provision of the services”. Training of Personnel.
The Assets employed have been stated to as under:- (i) Tangibles owned by Capita India – Capita India utilizes its facilities, infrastructure, leasehold office premises, communication facilities, etc for the purpose of its business;
(ii) Intangibles – Capita India does not own any significant intangibles and does not undertake any activity that leads to the development of non-routine intangibles. Capita India uses the trademarks, processes, software, operating quality standards, etc. developed/owned by the Capita Group.
For benchmarking the provision of ITES services, the assessee adopted TNMM as Most Appropriate Method (MAM) and PLI was taken on the base of Operating profit upon Total cost (OP/TC). The profit margin was declared at 14.99%. After carrying out detail search process and applying various quantitative and qualitative filters, the assessee selected 14
6 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 comparables with weighted average margin of 13.69%. Hence, it was reported that the international transactions of the assessee met the Arm’s Length standard. The Ld. TPO, analyzed the various filters adopted by the assessee for carrying out the search process including use of multiple year data, etc. which has been highlighted and discussed by him from pages 3 to 6 of his order. He also carried out his independent search and gave 11 additional comparables to the assessee and show caused the assessee as to why these comparables should not be taken into comparability list. After dealing with the assessee’s objections on various comparables and also justifying some of his set of comparables, finally, the TPO shortlisted 5 comparable companies with average arithmetic mean of 30.01%. Out of the said five comparable companies, two were from the assessee’s own comparables and three from his own comparables. The lists of comparables finally adopted by the TPO were as under:- S. Name of the comparable Margins (%) Comparable No. OP/TC As per 1 Infosys BPO Ltd 17.86% Assessee 2 e4e Healthcare Business Services 9.77% Assessee Pvt. Ltd. 3 Accentia Technologies Ltd. 29.18% TPO 4 Acropetal Technologies Ltd 23.95% TPO (Segmental) 5 TCS eServe Ltd 69.31% TPO Average Mean 30.01% Assessee’s Margin 14.99% He also rejected the assessee’s plea for working capital adjustment and finally made the adjustment of Rs.50,60,63,848/-.
From the stage of the DRP, out of the three comparables selected by the TPO, two comparable companies, viz. M/s
7 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 Accentia Technologies Ltd. and M/s TCS eServe as selected by the TPO were confirmed as comparables and one comparable company namely, Acropetal Technologies Ltd. (Segmental) has been rejected. For these two comparable companies, the assessee is in appeal before us and for the one comparable company, Department is in appeal. That apart, the DRP has further included two more comparables, which were selected by the assessee, that is, M/s Informed Technologies India Ltd; and M/s Jain Intelecom Pvt. Ltd. for which Department is not in dispute. Thus, after the DRP’s directions, six comparable companies stand in the comparability list out of seven as one has been rejected by the DRP.
Before us, the Ld. Counsel has mainly confined his arguments on two comparable companies which were selected by the TPO and confirmed by the DRP, that is, M/s. TCS eServe; and M/s. Accentia Technologies Ltd. i) TCS e-Serve: Regarding this company, the Ld. Counsel submitted that, this company is engaged in BPO services apart from rendering ITES services. However, no segmental results for the both the segments have been reported by this company in its Annual report. Drawing our attention to profit & loss account, he submitted that it has revenue of more than Rs.1442 crores which consists of both the segments and hence, it is very difficult to segregate as to what part and component relates to ITES services. He further submitted that this company got merged with TCS in the year 2009 and it for this reason that its margin shoot-up from 13% to 68%-70%.
8 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 The TCS e-Serve owns huge brand value of Tatas, whereas, assessee being captive service provider does not have any brand impact. Thus, this company cannot be held to be comparable. He pointed out that, DRP it its order has followed the ITAT order of the Delhi Bench in the case Techbooks International Pvt. Ltd in for the assessment year 2010-11. On this decision he submitted that, in this case, there were two comparable companies, namely, TCS e-Serve International Ltd; and TCS e-Serve Ltd. In the case of TCS e-Serve International Ltd, though this company was providing ITES services, however, due to lack of segmental information regarding providing of software services and also segregation of total revenue, the Tribunal had rejected this comparable. However, with regard to the M/s TCS e-Serve, same was held to be comparable without noting the fact that, for this company also no segmental results were available. He further pointed out that, in fact, Delhi Tribunal in subsequent three decisions has taken note of this decision of ITAT (Techbook International Pvt. Ltd (supra)) and held that TCS e-Serve cannot be compared with the company providing ITES services due to lack of segmental details. The list of three decisions of Delhi ITAT where this company has been held to be non-comparable with ITES companies as filed before is as under:- Sr Case Laws Citations No 1 Ameriprise India Pvt Ltd vs DCIT ITA No.7014/Del/2014(Del Trib) 2 Equant Solutions India Pvt Ltd vs DCIT ITA No.1202/Del/2015(Del Trib) 3 Bechtel India Pvt Ltd vs DCIT ITA No.1478/Del/2015 (Del Trib) 4 Hyundai Motors India Engineering Pvt ITA No.1743 & 1917/Hyd/ Ltd. vs ACIT 2014 (Hyd. Trib.)
After referring to relevant portion where it has been dealt by the Tribunal, he pointed out that, TCS e-Serve Ltd have been 9 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 analyzed in detail and have been found to be incomparable with ITEs companies mainly on the ground that there is absence of availability of segregation of the total revenue. Thus, he submitted that, following the subsequent decisions of the Delhi Tribunal and also on basis of the facts and material on record, this comparable company should be rejected. ii) Accentia Technologies Ltd.: Regarding said comparable company, Ld. Counsel submitted that, this company is mainly rendering KPO services and is mainly into development of its own products and is also having huge intangibles. These factors, he pointed out from the Annual report of the company. He further pointed out that its services and focus is mainly on Medical transcription and medical coding and products list is also very high. Thus, the said company cannot be held to be comparable at all. He further drew our attention to intangibles owned by the said company from the ‘scheduled fixed assets’. He further pointed out that its revenues are also from its products for which there are no segmental data. He also relied upon the following two decisions, wherein, these comparables have been directed to be excluded from comparability analysis with ITEs companies: i) Equant Solutions (supra) ii) Bechtel India (supra) He further pointed out that, in assessment year 2009-10, the TPO has excluded the comparables where segmental details were not available, thus, following the same principle the comparables which do not have segmental details same should not be accepted.
10 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016
Lastly, he pointed out that, if these two comparables are removed from the comparability analysis, then assesee’s margin will fall within the range of ± 5% range of the Arm’s Length Price.
On the other hand, Ld. CIT DR strongly relied upon the order of the DRP and submitted that, Accentia Technologies Ltd is into Health Care BPO including medical transcription products being especially developed and marketed independently, therefore, it cannot be reckoned as KPO but as ITES Company. Regarding TCS e-Serve, she pointed out that, it is leading ITES service company, and functionally very similar to the assessee company, therefore, under the TNMM, where only broad comparability is to be seen this company can be held to be a comparable company with any other ITES company.
We have heard the rival submissions and also perused the relevant finding given in the impugned orders. The sole dispute which has been argued before us in the assessee’s appeal is with regard to two comparable companies, namely M/s TCS e-Serve and M/s Accentia Technologies Ltd. As discussed above, the assessee is providing full spectrum of ITES services to its AE which includes various functions as has been illustrated in the foregoing paragraphs. So far as the assets employed are concerned it is seen that no significant intangibles are owned by the assessee which are mostly owned by the AE; and as far as tangible/fixed assets are concerned they are mainly certain facilities and infrastructure, leasehold premise and communication
11 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 facilities for the purpose of running of the business. The assessee had shown margin of 14.99% on the transaction of provision of ITES services and same has been benchmarked by various comparables by adopting TNMM as MAM. Our findings on the inclusion/ exclusion of the two comparables as argued before us are as under:- i) M/s TCS e-Serve:- From the perusal of its Annual reports, it is seen that, this company is engaged in the business of providing ITES services and BPO services primarily to ‘Citi Group’ entities globally. It operations comprised of 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. From the perusal of the profit and loss account, the revenue shown from transaction processing and other services is approximately Rs.1442.42 crores. There are no segmental details and any other bifurcation as to what comprised of transaction processing charges and other services. That apart, it is seen that, this company is a part of Tata Group and has a huge brand value across the world and also owns huge intangibles. Thus, there is a huge difference in the assets employed by this Company as compared to the assessee which also reflects in its revenue and profit margin. Its intangible assets itself is more than Rs. 3337.4 crores as on 1st April, 2010 and additions during the year were more than Rs.756.24 crores. Thus, this company having huge intangibles assets cannot be compared with the assessee who
12 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 has no significant intangibles. That apart, it has been pointed out by the Ld. Counsel that, this company has been emerged with TCS in the year 2009 which has led to shooting up of its profit margin to 13% to 68%-70%. This factor itself points out that its high profit margin were due to its huge brand value, which cannot be held to be comparable with captive service provider like Assessee Company. So far as the decision of ITAT Delhi Bench in the case of ‘Techbooks International Pvt. Ltd’ is concerned as pointed out by the Ld. Counsel, we find that this decision of the Tribunal has been distinguished and explained by the subsequent three decisions of the Delhi Bench of the ITAT, wherein, the Tribunal has categorically held that, in absence of any segmental details and segregation of the total revenue this comparable company cannot held to be comparable. The relevant observation of the Tribunal in the case of Ameriprise India Pvt. Ltd (supra) reads as under:- 12.5 We have gone through the annual report of Company and have carefully considered the reasoning given by the coordinate Bench in the case of Techbook International P Ltd (supra). On perusal of Schedule ‘O’ – Notes to Accounts of the Standalone financials of the Company, it is clear that the Company is engaged in “transaction processing” – and “technical services” activities. No separate segmental details are available. On a careful reading of the decision of coordinate Bench in Techbook International P td (supra) it is clear that Schedule ‘O’ – Notes to Accounts in respect to carried out by Company and relevant segmental details were never brought to the attention of the Bench. We find that in the absence of availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of “Transaction processing services”. Thus, the entity level figures render this company as unfit for comparison. Following the above reasons also taken note in the case of TCS e-Service
13 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 International Limited, we order for the elimination of this company from the final set of comparables”.
Subsequently in the case of Equant Solutions India Pvt. Ltd also this company has been held to be un-comparable on the following reasoning: “We have also considered the rival contention for exclusion of TCS e-service td. It is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and uses of Tata Brand, which has definitely benefited this comparable, it is directed to be excluded”. This, in view of our discussion and also following the precedence in the aforesaid cases, we hold that TCS e-Serve cannot be held to be comparable company, accordingly, we direct the AO/TPO to exclude the same from comparability list.
(ii) Accentia Technologies:- From the perusal of the Annual report of this company, it is seen that it is mainly in to rendering of Knowledge processing, outsourcing (KPO) services in the field of Medical. Following services are being provided by this company:- Medical Transcription Discrete Medical Transcription Medial Coding Billing Receivable
14 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 Practice Management Consultancy Software as a Service (SaaS) The products developed by this company are mainly Instakare- EMR Software, which is into healthcare management systems for Doctors and web based application for the Doctors. Thus, this company is mainly into Medical Transcription and its revenue is from medical transcription, billing and collection and income from coding etc. This company has been found to be un-comparable from companies rendering ITES companies by the Tribunal in the case of Equant Solutions India Pvt. Ltd and also Ameriprise India Pvt. Ltd. (supra). Thus, following the said cases and on comparability analysis, this company cannot be held to be comparable and accordingly, the same is directed to be removed from the comparability list.
So far as other arguments on various issues raised in ground No.2, the same are not being adjudicated because as pointed by the Ld. Counsel, if these two comparable companies as decided above are removed from comparability list then average arithmetic mean will fall within the tolerance range of ± 5% range. Hence we are treating the contentions raised in ground no.2 as academic and are dismissed as such.
As regards other grounds raised by the revenue also, it has been admitted by both the parties that the same would be purely an academic exercise, because even if the comparable contested by the department is included in the list then also assessee’s margin will fall within ± 5% range. In view of this fact alone, we are not adjudicating the grounds raised by the 15 Capita India Private Ltd. ITA 356/Mum/2016 IT(TP) 105/Mum/2016 revenue and same are kept open. Hence revenue’s appeal is being dismissed as in fructuous.
In the result, appeal of the assessee is partly allowed and revenue’s appeal stands dismissed. Order pronounced in the open court on 19th September, 2016.
Sd/- Sd/- (आर सी शमा�) (अिमत शु�ला) लेखा सद�य �याईक सद�य (R C SHARMA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 19th September, 2016. ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT (Appeal) –I/CIT(A) Concerned___, Mumbai. 4) The CIT/Pr. CIT -2___, Mumbai 5) िवभागीय �ितिनिध “के”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “K” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /