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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
Date of Hearing – 20.07.2016 Date of Order – 18.10.2016
O R D E R PER SAKTIJIT DEY, J.M.
Aforesaid appeal at the instance of the assessee is directed against the assessment order dated 28-11-2014 passed for the assessment year 2010–11 in pursuance to the directions of the Dispute Resolution Panel (DRP).
Briefly the facts are, assessee an Indian company is a wholly owned subsidiary of ABM BPO, UK. The assessee is basically engaged in providing back office support services to its AE mainly in the field of accounting services. During the relevant previous year assessee had 2 Aditya Birla Minacs BPO Pvt. Ltd. entered into international transactions with its associated enterprise (A.E) earning revenue of Rs. 24.09 crore. For benchmarking the arm’s length price (ALP) assessee had undertaken a Transfer pricing adjustment by adopting transactional net margin method (TNMM) as the most appropriate method by considering itself as the tested party with operating profit to operating cost (OP/OC) as the profit level indicator (PLI). Assessee had selected eight companies as comparables with average margin of 11.52%. As the assessee’s margin at 9.01% is within +/- 5% of the average margin of the comparable companies, the price charged to AE was considered to be at arm’s length. The TPO however rejected the TP study of the assessee pointing out various defects/deficiencies. After considering the functionality of the comparables selected by the assessee the TPO rejected most of them and selected the following companies as comparable is with average margin of 14.56%.
Particulars Amount (`) Operating Income (A) ` 24,06,34,674 Operating cost (B) ` 21,54,04,071 Operating profit (C) (As per TP study) ` 1,93,99,128 OP/OC (actual) 9.01% Arm’s length OP/OC 14.56% Arm’s length operating profit (D) = B x 3,13,62,832 14.54% Adjustment = ` 1,41,04,412
3 Aditya Birla Minacs BPO Pvt. Ltd.
This resulted in determination of arm’s length operating profit of Rs.3,13,62,832 as against operating profit of Rs. 1,93,99,128 shown by the assessee. The resultant shortfall of Rs. 1, 41, 04, 412 was treated as the transfer pricing adjustment. On the basis of the adjustment proposed by TPO assessing officer passed the draft assessment order making addition on account of TP adjustment. Against the draft assessment order assessee filed objections before the DRP. The DRP after considering the submissions accepting assessee’s claim that Tata communication transformation services Ltd fails RPT filter of more than 25% directed the TPO to verify the RPT and reject the company if it exceeds 25%. As far as Acropetal Technologies ltd. is concerned, the DRP observed, the activities of this company are in the category of ITES and segmental results are also available. The DRP therefore retained it as a comparable. In pursuance to the directions of the DRP the assessing officer passed the impugned assessment order. Being aggrieved assessee is in appeal before us.
The learned authorised representative restricted his argument to selection of one comparable viz; Acropetal Technologies Ltd and rejection of two comparables viz; Aditya Birla Minacs Worldwide Ltd and R systems International Ltd. Hereinafter we will deal with selection/rejection of comparables argued before us.
4 Aditya Birla Minacs BPO Pvt. Ltd. Acropetal Technologies Ltd.
The learned authorised representative objecting to selection of this company submitted, assessee provides low end BPO services, whereas, this company renders high end K PO services, therefore, the company is functionally dissimilar. To demonstrate that the comparable is into high-end services he referred to the annual report of the comparable to show the business profile of the company. He submitted, this comparable is into diversified activities such as healthcare, energy and environment solutions, et cetera. Referring to schedule 9 of profit and loss account he submitted that company has incurred on-site development expenditure and as well as selling and marketing expenses which indicates that it is into software development. In this context he also referred to notes on accounts. He submitted, accounts of the company indicate unallocable expenses which require allocation for arriving at a comparable margin. He therefore submitted, it cannot be considered as a comparable. In support of such contention he relied upon the following decisions:-
Rampgreen Solutions Pvt. Ltd. v/s CIT, 52 taxmann.com 492; 2. Maersk Global Centres (I) Pvt. Ltd. v/s ACIT, 43 taxmann.com 100.
The learned departmental representative, referring to the annual report of the assessee submitted that assessee’s functional profile
5 Aditya Birla Minacs BPO Pvt. Ltd. shows that they are also into similar activities as the comparable. He submitted, unallocable expenses is for the reason that management is for the whole company and some expenditures cannot be identified with particular segment. He submitted, if the TPO has not taken un allocated expenditure some adjustment on that account can be given. He submitted, on-site expenses do not confine to software development and otherwise also expenditure is miniscule. As far as employee cost is concerned he submitted, this contention was never taken by the assessee earlier before the departmental authorities. He therefore submitted, there is no reason to exclude this comparable.
We have considered the submissions of the parties and perused the material on record. On a perusal of the annual report of the comparable we have noted that it is engaged in various activities including healthcare, energy and environment solutions etc. Further, the notes on accounts clearly mentions that the company is engaged in development of computer software and quantitative details of sales is not possible to be given. Schedule-9 to the profit and loss account indicates that the company has incurred expenditure towards on-site development charges and schedule 11 indicates that it has incurred selling and marketing expenses. These facts clearly demonstrate that the company is engaged in software development,hence, functionally dissimilar to the assessee. We have also noted different benches of the 6 Aditya Birla Minacs BPO Pvt. Ltd. tribunal in the decisions cited by ld. AR have rejected this company as comparable to low end BPO service providers on the reasoning that this company is providing KPO services. In view of the aforesaid, we hold that this company cannot be considered as a comparable to the assessee.
The learned authorised representative submitted, this company was selected by the assessee on the basis of functional similarity. He submitted during the TP proceedings, TPO finding that the financial year of the company ends in December, whereas, assessee’s financial year ends in March, thereby indicating that the comparable has a different financial year, on that basis alone excluded it from the list of comparables. The ld. authorised representative submitted, there cannot be any doubt about the functional similarity of comparable with the assessee as in the assessment year 2009–10 this company was taken as a comparable. He submitted, only because of different financial year the company cannot be rejected, if otherwise it is functionally similar to the assessee. In this context ld. authorised representative relied upon the following decisions.
i) CIT v/s Mckinsey Knowledge Centre India P. Ltd., dated 27.3.2015; ii) Mercer Consulting (I) Pvt. Ltd. v/s DCIT, 47 taxmann.com 84;
7 Aditya Birla Minacs BPO Pvt. Ltd. iii) Ameriprise India P. Ltd. v/s ACIT, 62 taxmann.com 237; iv) Techbooks International Pvt. Ltd. v/s DCIT, 63 taxmann.com 114; v) Macquarie Global Services P. Ltd. v/s DCIT, 55 taxmann.com 259.
The learned departmental representative objecting to the inclusion of this company submitted that the assessee before the DRP has not objected to exclusion of this company. Referring to paragraph 7.3 of TP order learned departmental representative submitted, the TPO applied certain filters consistently followed from earlier assessment years and one of such filter being, company having financial year ending other than 31st March is to be rejected. He submitted quantitative filters may change from year to year, however, qualitative filter cannot be changed. He submitted, this company is having calendar year as its financial year, whereas, assessee’s financial year ends on 31st March. He submitted, as per the provisions of rule 10B(4) data relating to the financial year is to be taken. Therefore, as in case of this comparable data for the entire financial year is not available it cannot be treated as a comparable. He submitted, only because the company was included in AY 2009-10, it cannot be included in the impugned assessment year as principle of res judicata doesn’t apply to tax proceedings. He further submitted, as the assessee has not objected to this company before the DRP, at this 8 Aditya Birla Minacs BPO Pvt. Ltd. stage assessee should not be permitted to raise the issue other than by way of an additional ground.
In the rejoinder ld. authorised representatives submitted, different financial year issue is a legal issue and assessee has raised a specific ground before the ITAT. He submitted, if the assessee can raise such a legal issue by way of additional ground there is no reason why he should not be permitted to raise such issue in the main ground itself. The ld. authorised representative submitted, only serial number 1 of para-7.3 of the TPO is a qualitative filter and all other filters applied by TPO are quantitative filters. He submitted, assessee could not have applied the quantitative filters as they were applied by the TPO in course of proceedings before him.
We have considered the submissions of the parties and perused the material is on record in the light of decisions relied upon. A perusal of the TP order makes it clear that R Systems International Ltd was rejected by the TPO as a comparable only for the reason that it has a financial year different from the assessee. It is also not disputed, before the DRP assessee has not objected to such exclusion. However, in our view the reasoning on which this company was rejected being a purely legal issue, assessee should not be debarred from raising such issue before the tribunal considering the fact that assessee has objected to its exclusion before the TPO and before us also assessee
9 Aditya Birla Minacs BPO Pvt. Ltd. has raised a specific ground for inclusion of this company. That being the case, we do not accept departments contention that assessee should not be permitted to raise this issue other than by way of an additional ground. Having held so, it is necessary now to examine whether the company can be included as a comparable. Undisputedly, the accounting year of this comparable is calendar year, whereas ,the accounting year of the assessee is financial year. Therefore, both are having different financial years. A reading of rule 10B(4) would suggest that data relating to relevant financial year of the assessee as well as comparable has to be considered for comparability analysis. Therefore, to that extent a company having a different financial year cannot be treated as comparable. From a reading of the decisions relied upon by the ld. authorised representative we have noted that ITAT Delhi Bench in some of the decisions have held that only for the reason that a comparable is having a different financial year it cannot be excluded if otherwise it is functionally similar to the assessee. However, subsequently it has come to our notice that the Hon’ble jurisdictional High Court in case of CIT vs. PTC Software Private limited, Income tax Appeal No. 732 of 2014 dated 26 September 2016 interpreting rule 10B(4) observed, it obliges that the data that are to be used for comparability analysis should be of the same financial year in which the international transactions were entered into by the tested party. The Hon’ble High Court rejecting the contention of the 10 Aditya Birla Minacs BPO Pvt. Ltd. Department that mandate of rule 10B(4) can be ignored as the difference is only of three months, held that no such liberty can be granted in terms of rule 10B(4) of the rules. Keeping in view the aforesaid decision of the honourable jurisdictional High Court of which neither the assessee nor the department had the benefit of and considering the fact that assessee had not raised the issue before the DRP we are inclined to remit the issue of comparability of this company to the AO/TPO for examining afresh in the light of the relevant judicial precedents and of course after due opportunity of being heard to the assessee.
Aditya Birla Minacs Word Wide Ltd. and Tata communication transformation Ltd.
As far as these two comparables are concerned, while the TPO rejected Aditya Birla Minacs World Wide Ltd on the reasoning that it fails the related party transaction (RPT) filter, however, he included Tata communication transformation Ltd as a comparable. Before the DRP it was pleaded by the assessee that the reason for which TPO rejected Aditya Birla Minacs World Wide Ltd as a comparable equally applies to Tata communication transformation Ltd of exceeding RPT filter of 25%. Considering the aforesaid submission of the assessee, DRP directed the TPO to verify the RPT of Tata communication
11 Aditya Birla Minacs BPO Pvt. Ltd. transformation Ltd and reject the same if it is found that RPT of the company is more than 25%.
The ld. authorised representative submitted before us, the concept of international transaction in the TP provisions clearly indicate that it is restricted to transaction between associated enterprises. Therefore, RPT filter should be applicable only to international transaction with related parties and the entire turnover of the company cannot be considered to compute the RPT as a percentage of sales. He therefore submitted, both these companies should be considered as comparable if the RPT in relation to international transaction does not exceed the threshold limit of 25%. For such proposition ld. authorised representative relied upon the decision of the ITAT Delhi Bench in case of Nokia India Private Limited private limited (153 ITD 508).
The learned departmental representative submitted, for computing RPT the transaction of the company as a whole should be taken and it cannot be restricted to international transaction only.
Having considered the submissions of the parties and perused the materials on record in the light of decision relied upon. We are of the considered opinion assessee’s contention in relation to application of RPT filter to these two comparables needs to be looked into fresh
12 Aditya Birla Minacs BPO Pvt. Ltd. keeping in view the observations of the ITAT in case of Nokia India (P) Ltd. v/s DCIT (supra). We, therefore, remit the issue of comparability of the aforesaid two comparables to the Assessing Officer / Transfer Pricing Officer for deciding afresh after due opportunity of being heard to the assessee.
In view of the aforesaid, we direct the AO/TPO to determine the arm’s length price afresh in the light of the observations made hereinabove. All other grounds which were not specifically argued before us by ld.AR, are deemed as not pressed, hence, dismissed.
In the result, appeal is partly allowed. Order pronounced in the open Court on 18.10.2016