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Income Tax Appellate Tribunal, DELHI BENCH ‘I’ NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI L.P. SAHU
ORDER
Per L.P. Sahu, Accountant Member:
This appeal, at the instance of assessee, emanates from final assessment order dated 14.11.2014 under section 143(3) read with section 144C of the Income Tax Act, 1961 (“the Act” ) in pursuance to the directions of Disputes Resolution Panel (DRP) dated 10.10.2014 for the assessment year 2010-11. The assessee has raised following grounds in this 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. That, on the facts and circumstances of the case and in law:
1. 1. The learned TPO / AO / DRP have erred in making an addition of INR 82,093,645 to the total income of the Appellant in respect of international transactions pertaining to provision of IT-enabled back-office services by the Appellant to its Associated Enterprises (“AEs”) and imputed interest on outstanding inter-company receivables arising therefrom (hereinafter referred to as ‘impugned transactions’).
2. The learned TPO / AO / DRP has erred by not accepting the economic analysis undertaken by the Appellant 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 without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of sub-section (3) of section 92C of the Act.
3. The learned TPO / AO / DRP have erred in: a. Not accepting the use of multiple year data, as adopted by the Appellant in its Transfer Pricing (‘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 Appellant at the time of complying with the Indian TP documentation requirements.
4. The learned TPO / AO / DRP have erred in rejecting certain comparable companies selected by the Appellant by applying inappropriate comparability criteria such as : a. Turnover less than INR 5 crore; b. Diminishing revenue; c. Export turnover less than 75 percent of operating revenues; and d. Different accounting year 5. The learned TPO / AO / DRP have erred in erroneously rejecting the comparable companies selected by the Appellant and adding certain companies to the final set of comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparables to determine ALP.
6. The learned TPO / AO have erred in arbitrarily including Genesys International Corporation Limited and Omega Healthcare Limited in the list of final comparables when the same were not considered as comparable in the assessment order passed by learned TPO under section 92CA(3) of the Act. 7. learned TPO / AO / DRP have erred in passing an order which has computational errors in the margin of comparable companies used in determination of arm’s length margin. 8. learned TPO/ AO have erred in passing an order with erroneous computation of working capital adjustment used in determination of arm’s length margin.
9. The learned TPO / AO / DRP has erred in treatment of operating and non-operating items while computing the margins of the Appellant and comparable companies. 10. learned TPO / AO / DRP have erred in selecting certain companies (which are earning super normal profits) as comparable to the Appellant. 11. learned TPO / AO / 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. 12. learned TPO / AO / DRP have erred in holding inter-company receivables arising from the international transaction pertaining to provision of IT-enabled back office services to constitute a separate
international transaction and proceeding to benchmark the same by application of Comparable Uncontrolled Price (“CUP”) method. 13. learned AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act. 14. learned AO has erred in levying interest under section 234B and 234D of the Act while completely disregarding the provisions of the Act and the judicial precedence.
Briefly stated, the facts of the case are that the assessee is a wholly owned subsidiary of Ameriprise, US, which parent company is engaged in the business of insurance, annuities, asset management and brokerage. The primary object of Ameriprise US is to provide services towards financial planning and other areas like institutional asset management and advisory, pension fund management, the management and administration of certain plans. The assessee was incorporated in August, 2005 and started operations in October, 2005. It is engaged in providing Information Technology (IT) enabled services to Ameriprise US. The assessee reported two international transactions, including remuneration from the `Provision of IT-enabled back office services’ with transacted value of Rs.60,57,56,819/-. The assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking the international transaction of provision of IT enabled back office support services. Profit level indicator (PLI) of Operating Profit/Operating Cost (OP/OC) was computed by the assessee at 15.66%. Eleven companies were considered as comparable which have been listed on page 10 of the Transfer Pricing Officer’s (TPO) order. It was shown that their arithmetic mean of operating profits compared favourably with assessee’s profit rate and, hence, the international transaction of `Provision of IT enabled back office services’ was at arm’s length price (ALP). On a reference made by the AO for determining the ALP of the international transactions, the TPO treated only five companies as comparable from the assessee’s list. He added eight new companies, thereby making a total of thirteen companies, considered as comparable, as under : S. No. Company Name OP/OC 1 Accentia Technology Limited 43.07% 2 Cosmic Global Limited 18.28% 3 E4e Healthcare Ltd. 31.03% 4 Fortune Infotech Limited 22.80% 5 iGate Global Solutions Ltd. 24.54% 6 Infosys BPO Ltd. 31.44% 7 Jindal Intellicom Ltd. 13.62% 8 Omega Healthcare Management Pvt. Ltd. 15.31% 9 TCS E-Serve International Ltd. 54.03% 10 TCS E-Serve Ltd. 63.42% 11 Microgenetics Ltd. 6.6% 12 Eclerx Services Ltd. 55.97% 13 Crossdomain Solutions Ltd. 17.13% Average 30.56%
The first issue pressed before us is against the inclusion/exclusion of certain companies in/from the list of comparables. In this regard, the assessee is aggrieved against the inclusion of the following six companies, viz., i. Accentia Technologies Ltd; ii. iGate Global Solutions Ltd. iii. Infosys BPO Ltd. iv. TCS E-Serve International Ltd.
v. TCS E-Serve Ltd. and vi. eClerx Services Ltd.
The assessee is also aggrieved against the non-inclusion of (i) CG Vak Software & Exports Ltd., and (ii) R. Systems International Ltd.
In order to decide as to whether the above eight companies are comparable or not, it is sine qua non to consider the functional profile of the assessee in respect of the international transaction of `Provision of IT-enabled back office services’. Page 2 onwards of the TPO’s order enlists the functions performed by the assessee, which have been classified broadly into certain categories. The first category is `Financial services’ which includes Accounting support, Mutual fund accounting, Sales and use tech support. Under this category, the assessee provides services to Ameriprise US in the nature of Credit purchasing cards, Bank reconciliation, Inter-company reconciliations, Maintenance of fixed asset registers and Payroll, etc. The second category is `Financial planning services’, which refers to the assessee providing support in client data entry for assistance in preparation of draft reports for customers. The third broad category is `General counsel office’ services, which includes E-discovery, Compliance, Profit and loss relations, Intellectual property claims and contracts drafting. This category refers to the assistance provided by the assessee in sorting legal cases and classifying them on the basis of reasons entailed therein and also assistance in drafting contracts for intellectual property claims. The next broad category is `Data analytics services’, which involves scrambling and assembling of data into a more meaningful form to enable Ameriprise, US to review the performance of various products offered to its customers and other related activities. The next broad category is `Vendor management services’ which means performing data processing services in respect of call centres and back office operations of certain companies, outsourced by Ameriprise US. The assessee is required to convert the data into presentable form to enable Ameriprise, US to evaluate the performance of its outsourced call centres and back office operations. Next category is `Procurement services’. Under this category, the assessee conducts basic analytics for better understanding of the `spend’ and determines how to optimize such spend across commodities. The next broader category is `Human resources shared services’ under which the assessee helps manage some human resources processes for the US employees including processing payroll, calculating benefits, managing leave of absence, etc.
A narration of the above nature of services depicts that the conceptualization of the services is primarily done by Ameriprise US which collects data and sends the same in raw form to the assessee or the other relevant data is procured by the assessee directly from the sources referred by the Ameriprise US. The assessee compiles such raw data in desired format/sequence and undertakes processes, such as, merging of data, sequencing, etc. This is an in-house function performed by the assessee for further actions to be taken by Ameriprise US.
At this juncture, we deem it expedient to take note of the contents of Agreement between the assessee and Ameriprise US, a copy of which is available on page 128 of the paper book, under which the assessee undertook to provide services to its AE. Clause 3 of the Agreement discusses the nature of services to be provided by the assessee to Ameriprise US, as under :
3. PRODUCTS AND SERVICES TO BE SUPPLIED BY AIPL(Ameriprise India Pvt. Ltd.) AIPL shall, at the request of Ameriprise USA, supply to Ameriprise USA, or its Designated Offices, the specified products and services as follows: 3.1 AIPL shall process the raw data received/sourced from or on directions of Ameriprise USA and, as applicable, its Designated Offices. 3.2 AIPL shall present the customized/processed data in the form of reports/graphs/diagrams as the final output. 3.3 AIPL shall use the IT infrastructure in the form of computers, leased lines, etc., to process/customize the data and supply it to Ameriprise USA and, as applicable, its Designated Offices. 3.4 AIPL shall also render/undertake other Information Technology enabled activities of Back Office operations including Data Management, Information processing, Revenue accounting, Support Centre, Design or Implementation of Management Information Systems and Decision Support System, Financial Control Accounting Systems, Back Office/Remote Data Entry and any other similar activities. 3.5 AIPL shall also analyse the performance data of third party vendors appointed by Ameriprise USA in India for rendering of outsourced call centre and back office services. This would include: 3.5.1 Collection of data on performance of back office operations in India; 3.5.2 Analyse, evaluate and process such data into specified formats by applying information technology tools and provide suitable observations thereof. 3.6 To the extent necessary or desirable, the Parties shall be free to add one or more schedules to this Agreement to describe in greater detail the Specified Products and Services.
A perusal of the clause 3 of the Agreement between the assessee and Ameriprise US, reveals that the assessee is to collect and then process the data received/sourced from Ameriprise US and thereafter send the reports to Ameriprise US in the desired form. The other services referred to in this Agreement also are essentially in the nature of collection of data in one form or the other and then, sending reports to Ameriprise US. In other words, the assessee is involved in providing back office support services to Ameriprise US without any direct involvement in the conduct of business of Ameriprise US. With the above background of the assessee’s nature of work done for its AE, which is primarily in the nature of rendering IT enabled services, which position has also been admitted by the TPO as well, we proceed to determine the comparability or otherwise of the companies challenged before us.
A. Challenge to the inclusion of companies 8 Accentia Technologies Ltd. 8.1 The assessee objected to the inclusion of this company in the list of comparables on several reasons namely – “Reasons for rejection (1). Extraordinary events during AY 2010-11 (acquisitions) (pg. 38,39,79 of Paperbook-1) (2). Functional dissimilarity – It’s a KPO and has diversified business operations (pg. 4 of Paperbook-1) (3). Insufficient segmental details (pg. 81 of Paper book -1) This comparable has been rejected recently by the Hon’ble ITAT, in Assessee’s own case for AY 2009-10 ( Ameriprise India Pvt. Ltd. vs. ACIT) for the reason that apart from ITES, the company also generates revenue from software products and segmental figures are not available. (pg. 15, 16 of the order)
Also, recently rejected as a comparable in Techbooks International Pvt. Ltd. (ITA No. 240/Del/2015 for AY 2010-11) (pg. 18 and 19 of the order- year of amalgamation-extraordinary financial event). Moreover, applying the Hon’ble Delhi High Court judgment in the case of Rampgreen Solutions vs. CIT (ITA No. 102/2015), Hon’ble Delhi ITAT in Avaya India Pvt. Ltds. vs. ACIT (ITA No. 5528/Del/2011) has excluded this comparable on the ground that KPO services cannot be compared to BPO services.”
8.2 The TPO discussed the functional comparability of this company and, in the ultimate analysis, came to hold that it was functionally comparable with the assessee company and hence includible.
8.3 We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company, a copy of which has been placed in the paper book. Notes to Accounts of this company, indicate about the amalgamation of Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon’ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015 and Techbook International P. Ltd. vs DCIT (ITA No. 240/Del/2015) vide its order dated 06.07.2015. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables.
i-Gate Global Solutions Sdn. Bhd. 9.1 The assessee objected to the inclusion of this company in the list of comparables on the ground of company offering both IT and ITES services, viz. there being insufficient segmental information and also on the ground of peculiar circumstance of amalgamation of i-Gate Global Solutions Sdn. Bhd., with this company during the financial year 2009-10.
9.2 The TPO discussed the functional comparability of this company and, in the ultimate analysis, came to hold that it was functionally comparable with the assessee company and hence includible.
9.3 We have gone through the Annual report of this company which is available in the paper book. Notes to accounts of this company indicate amalgamation of i-Gate Global Solutions Sdn. Bhd. This amalgamation took place with the approval of the members of the company on 12.8.2009 and subsequently sanctioned by the Hon’ble High Court by its order dated 24.2.2010. As the financial results of this company also include the results of amalgamating company, in our considered opinion, this is an extraordinary financial event, which renders it unfit for comparison with the assessee company. While discussing the comparability of Accentia Technologies Ltd. (supra), we have referred to certain decisions in which it has been held that a company loses the tag of comparability due to amalgamations, mergers, etc., taking place during the year in question. Adopting the same reasoning, we order for the exclusion of this company from the list of comparables.
Infosys BPO 10.1 The TPO included this company in the list of comparables. The assessee’s objections against its inclusion were overturned. The assessee objected to the inclusion of this company in the list of comparables on the following points –
“Reasons for rejection- 1) Significantly large scale of operations (pg. 242, 243 of PB-2) 2) Exceptional year of operations (acquisitions- pg. 213 of PB-2) 3) High brand value and intangibles (increase in goodwill- pg. 235 of PB- 2)Recently rejected as a comparable in Techbooks International Pvt. Ltd. (ITA No. 240/Del/2015) (AY 2010-11) for the same reasons (pg. 29 of the order- exceptional year of operations-acquisition of McCamish Ltd.)”
10.2 After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, that there was acquisition by this company of McCamish Systems LLC. Acquisition of McCamish Systems LLC during the year, being an extraordinary financial event, renders it incomparable. Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables.
TCS E-Serve International Ltd. 11.1. The assessee objected to the inclusion of this company on the ground that there is exceptional rise in turnover and profits, as this is the second year of operations of the Company and first full-year as a step down subsidiary of TCS. It was also agitated that Company is functionally dissimilar and there are insufficient segmental information. The TPO noticed that this company was also offering ITES. He did not treat high turnover of this company as a relevant factor in considering the comparability. Eventually, this company was included in the final set of comparables.
11.2 We have heard the rival submissions and perused the relevant material on record. Notes to Accounts indicate that this company is engaged in the business of providing IT enabled services/BPO services primarily to Citigroup entities globally. The operations of this company : ‘broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving 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.’ It is manifest that this company is engaged in rendering BPO services to the banking and financial services industry (BFSI) and Travel, Tourism and Hospitality (TTH). It is providing services to BFSI and TTH and such services include `Transaction processing’ and `Technical services’. In other words, the remuneration of this company from the above referred two segments includes compensation for rendering `Technical services’ and `Transaction processing’. Insofar as the `Transaction processing’ services are concerned, these are ITES, which are broadly similar to those rendered by the assessee, though not specifically similar. However, the `Technical services’ involve software testing, verification and validation of software item, implementation and data centre management activities. The `Technical services’ rendered by this company are in the nature of servicing and maintenance of software. At this stage, it is relevant to note that a company providing software services may be of two types, viz., a company providing software development services and a company providing software services other than software development services (hereinafter also called ‘a company providing non-development software services’).
11.3 At this juncture we are inclined to quote view taken by the Delhi Bench of Tribunal in Techbook International P. Ltd. (supra), while considering the same comparable, it is observed that –
“In order to properly appreciate the vital difference between these two types of companies, it is significant to note that a company which develops software is called a company rendering software development services. Software development services also include maintenance of software and updation of the software so as to suit the ever changing requirements of the users. A company using, inter alia, a software for obtaining the desired results, is called a company providing non-development software services. Thus, it is crystal clear that there is a phenomenal difference between a company providing software development services and a company providing software non-development services in terms of expertise, professional qualification and experience required for rendering such services. A company providing software non-development services performs a relatively low-end service. Thus the line of distinction is that whereas a company providing software development services helps in the creation, maintenance or updation of a software, on the other hand, a company providing non-development software services obtains the desired result with the use of an existing software. Further, whereas the output of the former is a software in itself or a stage in the ultimate creation of a software, the output of the later is the processed information from the raw data obtained with the help, inter alia, of a software. From the above discussion, it is overt that a company providing software development services is distinct from and incomparable with a company providing non-development software services.”
11.4 We find that the assessee is a company providing non-development software services, in the nature of conversion of data from hard copy or files into electronic format. The assessee is not providing any software development services to its AE. On the other hand, this company is also providing `Technical services’ to its AE involving software testing, verification and validation of software, which are akin to software maintenance services falling, within the overall category of software development services. The TPO has taken entity level figures of TCS E-Serve International Ltd. for comparison. We note that, there is no bifurcation available in respect of the revenues of this company from Transaction processing (which are in the nature of ITES, the same as provided by the assessee) and Technical services (which are in the nature of software development, absent in the assessee’s case). In the absence of the 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’. As such, the entity level figures render this company as unfit for comparison. Therefore, we order for the removal of this company from the final set of comparables.
TCS e-Serve Ltd. 12.1 The assessee objected to its inclusion by contending that this is exceptional year of operation for this company as it is the first full year of operations after its takeover by TCS. It was also contended that this company is functionally dissimilar and the segmental information are insufficient. The TPO repelled the assessee’s objections and included it in the final set of comparables.
12.2. We have heard the rival submissions and perused the relevant material on record. A copy of the Annual report of this company is available on page 398 of the paper book. Ld. Counsel for the Assessee submitted that like TCS e- Serve International Limited, this Company is also engaged in providing ‘Transaction processing’ and ‘Technical services’. By referring to Profit & Loss Account in standalone financials of the Company it was pointed out that during the relevant financial year, the Company has received Income of Rs. 1,35,94,110/- from Transaction Processing and Other Services. On referring to Schedule ‘O’ – Notes to Accounts it is given that – “Background and principal activities TCS e-Serve Limited is engaged in the business of providing Informaiton Technology – Enables Services (ITES) / Business Process Outsourcing (BPO) services, primarily to Citigroup entities globally. The Company’s operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities.”
12.3 We also note that ‘Segmental Information’ given in Point No. 8 of Schedule ‘O’ – Notes to Accounts in standalone financials of the annual report shows that Company is engaged in Business Process Outsourcing (transaction processing) services to the Banking & Financial Services Industry (BFSI), which is considered as a single segment.
12.4 It was fairly conceded by Ld. AR that this company has been considered as Comparable by the Delhi Bench of Tribunal in Techbook International P. Ltd. (supra), by observing as follows : “The company’s overview has been discussed on page 467 of the paper book, which divulges that this company : “is in the business of providing business process management services in the banking and financial services (BFSI), vertical ( i.e. industry vertical) to help its customers achieve their business objectives by providing innovative best-in-class services.” We find that this company is also providing ITES. Unlike TCS e- Serve International Ltd., this company is not providing any technical services involving software testing, verification and validation of software etc. Since the functional profile of this company on a broader basis is no different from that of the assessee, both being involved in rendering ITES, we are not inclined to treat this company as incomparable. The ld. AR argued that the nature of the ITES provided by this company is different from that of the assessee and hence the same be excluded. We are disinclined to sustain this objection. Matching of the exact functional similarity is dispensed with under the TNMM, which is not so under the Comparable uncontrolled price method. The TNMM approves comparability on the basis of broader overall similarity. When we consider the nature of services provided by this company, being the ITES, which is similar to that of those rendered by the assessee, again the ITES, we cannot order its exclusion simply for the reason that the verticals of ITES are somewhat different. If one goes to make a comparison in the way suggested by the ld. AR under the TNMM, then it will be very difficult, if not impossible, to find out a ditto comparable. A company which satisfies the broader parameters of comparability in the overall same segment, cannot be excluded due to somewhat different nature of such overall activity. An examination of the comparables chosen by the assessee, which have been accepted by the TPO, also satisfy only the test of overall similarity and not the peculiar similarity, as has been now contrastly contended for the exclusion of this company. This argument, therefore, fails.”
12.5 We have gone through the annual report of Company and have carefully considered the reasoning given by 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. Ltd. (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 the 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-Serve International Limited, we order for the elimination of this company from the final set of comparables.
eClerx Services Limited 13.1 The assessee objected to the inclusion of this comparable on following points – “Reasons for rejection- 1) Significant intangible assets (pg. 137, 144 of PB-1) 2) Insufficient Segmental details (Financials-pg. 134 and pg. 144 of PB-1) This comparable has been rejected recently by the Hon’ble ITAT, in Assessee’s own case for AY 2009-10 (ITA No. 2010/Del/2014- Ameriprise India Pvt. Ltd. vs. ACIT) for the reason that it is a KPO providing data analytics and data process solutions to global clients. Also provides end to end support through trade life cycle including trade confirmations and settlements, provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability services. Moreover, the company has significant intangibles. (pg. 16, 17 of the order) Also, rejected as a comparable in Maersk Global Centres India Pvt. Ltd. (ITA No. 7466/Mum/2012 for AY 2009-10- Special Bench) for the same reasons. Recently, the Hon’ble Delhi High Court, in the case of Rampgreen Solutions vs. CIT (ITA No. 102/2015) has held that this comparable is a KPO and is functionally different from other BPO service providers. It relied on the aforementioned Special Bench decision and held that this company is engaged in data analytics, data processing services, pricing analytics,
bundling optimization, content operation, sales and marketing support, product data management, revenue management. Also offers financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. (pg. 33-37 of the High Court order).”
13.2 We have heard rival submissions of both the parties and also perused the material on record. We note that there is no change in functional profile of assessee from preceding year. Respectfully following the decision of Coordinate Bench in immediately preceding year (Assessment Year 2009-10) (ITA no. 2010/Del/2014 & 2575/Del/2014, order dated 14.08.2015) and ratio laid down by jurisdictional High Court in the case of Rampgreen Solutions (supra), we direct the exclusion of this comparable from the final list of comparables.
B. Challenge to the exclusion of companies
R. Systems (Seg.) 14.1 The TPO eliminated R. Systems (Seg.) on the ground that it was following different year ending, namely, 31st December and, hence, was not comparable. The ld. AR fairly accepted that the company was following calendar year for maintaining their accounts, in contrast to the assessee following financial year ending 31st March. It was, however, submitted that R System should not have been excluded for this reason alone when this company is otherwise functionally similar, a fact which has not been disputed by the TPO. The ld. DR opposed this contention by submitting that the data for the year ending of these companies was not similar to that of assessee company and hence such companies were rightly excluded.
14.2. After considering the rival submissions and perusing the relevant material, it is noticed that the assessee company is having financial year ending covering the period 1.4.2009 to 31.3.2010. In that view of the matter, a valid comparison can be made only if the comparable companies too have the same financial year. In this regard, we consider it appropriate to note the relevant part of sub-rule (4) of Rule 10B which provides that: “the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction had been entered into.” It is obvious from the language of sub-rule (4) that the comparability of an uncontrolled transaction can be analyzed only with the “data relating to the financial year” in which the international transaction has been entered into. In other words, if the tested party has March year ending, then, the comparables must also have the data relating to the financial year ending 31st March itself. If such a data is not available, then, a company albeit comparable, also disqualifies. Espousing the facts of the instant case, we find that insofar as the functional comparability of this Company is concerned, the TPO has not disputed the same. The only reason given for its exclusion is the non-availability of data for the relevant financial year. The ld. AR contended that though the year ending of the above referred Company is different, yet, the data for the relevant period is available from Annual report itself. It was so stated on the basis of the availability of the quarterly data from the Annual reports of the Company, which could be adjusted for the financial year ending 31.3.2010.
14.3 We note that in the immediately preceding year, this Company was considered by Coordinate Bench of Tribunal. It was directed that if the contention of the assessee is correct, that the relevant data for the concerned financial year can be deduced from the information available from their annual reports, then, there can be no objection to the inclusion of these companies in the list of comparables with the adjusted data for the relevant financial year itself. Respectfully following the reasoning of Coordinate Bench in immediately preceding year, we set aside the impugned order and remit the matter to the file of TPO/AO for examining this aspect of the matter.
CG-VAK Software and Exports Ltd. (Seg.) 15.1 The assessee included the segmental figures of this company in the list of comparables. The TPO eliminated this company on the ground that it was providing software services and ITES and its turnover from ITES was only 0.83 crore, which was less than the requisite turnover.
15.2 Having heard both the sides on this issue, we find that the TPO has accepted the functional comparability of this company on segmental level. The ld. DR was also fair enough to candidly accept the functional similarity of the relevant segment of this company. In such circumstances, the question arises as to whether the relevant segment of this company can be excluded from the list of comparables merely on the ground that the revenue from this segment is only Rs.83 lacs? In our considered opinion, the quantum of turnover can be no reason for the exclusion of a company which is otherwise comparable. We find that Hon’ble jurisdictional High Court in the case of ChrysCapital Investment Advisors (India) P. Ltd. Vs. DCIT has held, vide its judgment dated 27.4.2015, that high turnover or high profit can be no reason to eliminate an otherwise comparable company. The same applies with full force in the converse manner as well to a low turnover/low profit company. We, therefore, hold that a company cannot be excluded from the list of comparables on the ground of its low turnover. In principle, we direct the inclusion of the relevant segment of this company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for determination of the operating profit margin etc.
Treatment of Foreign Exchange Fluctuation 16.1. The next issue taken up before us is against treating foreign exchange difference as non-operating as against the assessee’s treatment of operating cost. On a pertinent query, it was stated by the ld. AR that the foreign exchange loss relates to its transactions from operations by which the revenue has been earned and offered for taxation. It was also pointed out that a similar issue arose in immediately preceding year, (Assessment Year 2009-10) which had been decided in favour of assesse by Coordinate Bench of Tribunal.
16.2. We find merit in the contention raised on behalf of the assessee about the inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the comparables. When we advert to the nature of such foreign exchange gain earned by the assessee, it has also been admitted by the ld. DR that the same is in relation to the trading items emanating from the international transactions. When the foreign exchange loss directly results from the trading items, we fail to appreciate as to how such foreign exchange fluctuation loss can be considered as non-operating.
16.3. 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 is its integral part and cannot be differentiated from the export proceeds simply on the ground that the 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 detached from the exports and be considered as an independent transaction. Eventually, the Special Bench held that such exchange rate fluctuation gain/loss arising from exports cannot be viewed differently from sale proceeds.
16.4. 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 (2011) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT (2013) 32 taxman.com 196 has also laid down to this extent. In view of the foregoing discussion and respectfully following the view taken by Coordinate Bench in immediately preceding year, 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, both of the assessee as well as comparables. We, therefore, hold that the AO was not justified in considering forex loss as non-operating cost as against the assessee’s claim of operating cost.
16.5. With the above remarks, we set aside the impugned order and send the matter back to the file of TPO/AO for determining the ALP of the international transaction afresh in conformity with our above observations. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings.
Inter-company Receivables 17.1 Briefly stated, the factual matrix concerning this ground is that the assessee had shown certain receivables from its AE. On examination of the assessee’s balance sheet, it was noticed by the TPO that payments against the invoices raised by the assessee were not received within the stipulated time as provided in the Agreement. On being called upon to furnish the time period for payment as per Service agreement and why the delayed payments be not treated as unsecured loans advanced to the AEs, the assessee submitted ‘receivables was not an international transaction which warranted benchmarking.’ The TPO rejected this contention and held that interest at the rate of 14.74% was chargeable at arm’s length level in respect of delayed receipt of invoice values. He tabulated on page 117-118 of his order the date of invoices, the date of receipt of payments and days for which the invoices remained outstanding. Considering the period of delay beyond 30 days as chargeable to interest, he proposed TP adjustment of Rs.41,039/-. The DRP has discussed this aspect on page 46 of its direction. It was held that since, normal business practice requires payment of dues beyond a reasonable period, the TPO was justified to charge interest beyond the Arm’s length period. Any delay beyond a period of 30 days, in an arm’s length situation would have warranted a return base on opportunity cost of the money. Accordingly, DRP upheld that any delay beyond the arm’s length period should be subject matter of adjustment.
17.2 The ld. AR contended that this issue has been considered by the Coordinate Bench of Tribunal in assesse’s own case in immediately preceding year (AY 2009-10). The relevant extract of order passed by the Coordinate Bench is reproduced herein below for ready reference - “25. The foregoing discussion discloses that non-charging or undercharging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined.
Now, we come to the computation of the ALP of the international transaction of debt arising during the course of business. The TPO has calculated TP adjustment on account of interest on outstanding debts beyond a period of 30 days by noting the number of days after which the relevant invoice was realized. From this Table given on page 83 of the TPO’s order, it can be seen that the days of realization range from the lowest of two days to the highest of 59 days from the date of the respective invoice. The TPO has considered interest of a period of 30 days as a part of invoice value and computed this TP adjustment only where the realization has been made beyond 30 days. A reading of the Agreement dated 1.10.2005 between the assessee and Ameriprise US manifests that clause 6 deals with ‘Price and payment.’ Para 6.5 of the Agreement provides as under:
6.5 All payments shall be made on the basis of the invoices raised by AIPL and shall be cleared within thirty days from the date of the invoice. Under no circumstances shall the payment be delayed for more than sixty days from the date of the invoice. Any revision to the credit period may be agreed by parties by exchanging e-mails or other forms of correspondence without requiring any change or modification to this Agreement.
Above para of the Agreement divulges that all the payments are required to be made by the AE within 30 days from the date of invoice and latest by 60 days from the date of invoice. It transpires that the maximum period allowed by the assessee to its AE for payment of invoice is 60 days. This indicates that interest for the period up to 60 days from the date of invoice is factored in the price charged for the rendering of the services, which means that no interest can be separately charged in case of realization of invoices up to a period of 60 days from the date of invoice. As we have noticed above that all the invoices stood realized within a period of 60 days, there can be no question of charging any interest as a separate transfer pricing adjustment.
We do not approve the reasoning given by the DRP about the subsuming of such interest in the working capital adjustment. It is axiomatic that the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for the credit period allowed as per the Agreement is factored in the price charged for the rendering of services. Au contraire, the non-realization of invoice value beyond the stipulated period is a separate international transaction, whose ALP is required to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per the Agreement. The amendment made by the Finance Act, 2012 in terms of insertion of Explanation to section 92B with retrospective effect from 1.4.2002 by considering `any other debt arising during the course of business’ as a separate international transaction, impliedly disapproves
the view canvassed by the DRP in obliterating the determination of the ALP of the separate international transaction of interest on allowing the working capital adjustment in the international transaction of rendering of services. In our considered opinion, both the transactions are separate and distinct from each other. Whereas the international transaction of rendering services contemplates comparison of the price charged for rendering services by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of rendering of services. There is one more fallacy in the reasoning given by the DRP about the subsuming of interest income in the working capital adjustment. It is simple that working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivables and payables. The TP adjustment on account of interest on delayed realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization on transaction to transaction basis. To put it differently, suppose an invoice is raised on 1st May; period allowed for realization is two months; and the invoice is actually realized on 31st December. Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from 1July to 31December), but the amount of invoice will not be receivable as at the end of the financial year on 31st March. As such, this receivable would not have an impact on the working capital adjustment in any manner, but would call for addition on account of the late realization of invoice value for a period of six months. We, therefore, reject the reasoning given by the DRP in deleting the addition. However, in view of the fact that all the invoices were realized within the maximum period of 60 days allowed as per the Agreement, we hold that the charging of interest on receivables is not sustainable on the extant facts.”
17.3 We note that there is no change in the terms and conditions of the Agreement between Ameriprise USA and assessee. Clause 6.5 of the agreement provides that the payment shall be cleared within thirty days from the date of invoice, however, under no circumstance shall the payment be delayed for more than 60 days. In the instant case, the payment was realized in 32 days, which is well within the outer time limit of 60 days. In the instant facts, we don’t feel necessary to get into the issue of whether the instant transaction is an international transaction or not. Respectfully following the decision of Coordinate Bench in preceding year, we direct that there can be no question of charging any interest as a separate transfer pricing adjustment.
On the conspectus of what has been discussed above, the appeal of the assessee deserves to be allowed for statistical purposes in the terms stated above.
The issue of interest u/s. 234B and 234D is consequential in nature and shall be decided by the AO accordingly.