WNS BUSINESS CONSULTING SERVICES PVT. LTD.,MUMBAI vs. DCIT, NEW DELHI

PER VIMAL KUMAR, JUDICIAL MEMBER:

3. Against order dated 21.04.2014 of Ld. AO, the appellant/assessee filed appeal before Ld. CIT(A) which was partly allowed vide order dated 18.11.2016.

“General Ground 1. The Hon'ble CIT(A)/ Deputy Commissioner of Income-tax-18(1), New Delhi ('learned AO') erred in adjusting the total taxable income of the Appellant for Assessment Year ('AY') 2010-11 instead of accepting the income offered by the Appellant in the income tax return for the subject AY under normal provisions of the Act. Your Appellant prays that the entire adjustment upheld by the Hon'ble CIT(A) in his order should be deleted. Transfer Pricing Grounds General ground challenging the transfer pricing adjustment

2. The Hon'ble CIT(A)/ learned TPO erred in law and in facts, in making transfer pricing adjustment under Section 92C(4) of the Act to the total income of the Appellant on the premise that the international transaction of provision of information technology ('IT') enabled services entered by the Appellant with its Associated Enterprises ('AEs') was not at arm's length. Your appellant prays that the entire transfer pricing adjustment be deleted. Reference made to the learned Transfer Pricing Officer

4. The learned AO failed to grant an opportunity of being heard to the Appellant at the time when the reference was made to the learned TPO. Your Appellant prays that the reference of the Appellant's case to the Learned TPO should be considered bad in law and void and accordingly the entire adjustment to the total income made by the learned TPO/ Hon'ble CIT(A) should be deleted Economic analysis undertaken by the Appellant

5. The Hon'ble CIT(A)/ learned TPO erred in law and in facts, in rejecting the benchmarking analysis undertaken by the Appellant in its transfer pricing documentation, maintained under Rule 10D(4) of the Income-tax Rules, 1962 ('Rules') for its international transaction of providing IT enabled services without satisfying the conditions set out in Section 92C(3) of the Act.

6. The Hon'ble CIT(A)/ learned TPO erred in law and in facts, in not accepting the Appellant's contention that the benchmarking analysis should be undertaken by using three year weighted average data of comparables and instead determining the arm's length margin using data of comparables for only FY 2009-10, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. Your Appellant prays that the economic analysis undertaken by the Appellant using 3-year weighted average data of comparables, in accordance with the provisions of the Act read with the Rules, should be upheld. Appellant's comparable companies rejected by the Hon'ble CIT(A)/ learned TPO 7. The Hon'ble CIT(A)/ learned TPO erred in rejecting Aditya Birla Minacs Worldwide Limited, Datamaties Financial Services Limited and Axis IT & T Limited as comparable companies on the premise that only companies having an export turnover exceeding 75% should be considered comparable to the Appellant for its international transaction of provision of IT enabled services.

8. The Hon'ble CIT(A)/ learned TPO erred in rejecting the company Caliber Point Business Solutions Limited on the premise that companies having a different accounting years cannot be considered comparable.

9. The Hon'ble CIT(A) erred in rejecting the company Microland Limited by alleging that the company having turnover of less than one crore should not be considered. Your Appellant prays that the above companies are comparable to the Appellant and should be included in the final set of comparable companies. Comparables introduced by the learned TPO and upheld by the Hon'ble CIT(A) 10. The Hon'ble CIT(A)/ learned TPO erred in considering TCS e-Serve International Limited and TCS e-Serve Limited as comparable to the Appellant for benchmarking the international transaction of provision of IT enabled services. Your Appellant prays that the aforesaid mentioned companies should be rejected as comparable companies.

Erroneous margin computation of comparable companies

11. Without prejudice to the above, the learned TPO/ Hon'ble CIT(A) have erred in computing the operating margins of certain companies considered to be comparable to the Appellant. Your Appellant prays that the correct operating margins should be used for calculating the arm's length margin. Operating Margin of the Appellant 12. The Hon'ble CIT(A)/ learned TPO erred in determining the Appellant's operating margin to be 9.47% on operating costs instead of the operating margin of 19.72% on operating costs as determined by the Appellant on account of 'Gratuity provision written back', 'Excess provision written back' and 'Miscellaneous income' being considered to be non-operating in nature. Your Appellant prays that operating margin as computed by the Appellant during the course of transfer pricing assessment proceedings should be upheld. Risk Adjustment

Initiation of penalty proceedings under Section 271(1)(c) of the Act

5.1 Learned Authorized Representative for the appellant/assessee by referring to ground of appeal no. 10, submitted that Ld. CIT(A)/Ld. TPO erred in considering TCS e-Serve International Limited and TCS e-Serve Limited as comparable to the appellant for benchmarking the international transaction of provision of IT enabled services. Considering the working capital of assessee, the exclusion of comparable introduced by Ld. TPO viz. TCS e-Serve International Limited and TCS e-Serve Limited, Ld. CIT(A) has directed the Ld. TPO to use margins of comparable of working capital adjustment margin.

6.1 Learned Authorized Representative for the Revenue referred to the decision of Hon’ble ITAT, Mumbai in & 4547(MUM) of 2012 in the case of Willis Processing Services (I) (P) Ltd. Vs. DCIT-2(3), Mumbai.

“45.2 Further, the Delhi Benches of the Tribunal in the case of Actis Advisors (P.) Ltd. (supra) has considered and decided an identical issue in para 26 as under: "26. We have heard the rival contentions and gone through the record carefully. On pages 24 to 26, learned TPO has considered this aspect. According to the learned TPO, the filters applied by the assessee in the TP Study report for eliminating the companies who had incurred expenses of more than 3% of the sales on advertisement and marketing is not an appropriate filter. According to the learned TPO independent enterprises has to incur marketing expenditure. In a service industries like I.T. enabled services, the assessee did not provide the basis on which such expenses resulted in any intangible unlike in manufacturing industries where substantial marketing expenditure create an intangible. Learned TPO invited the explanation of the assessee as to why this filter be not ignored. The assessee has filed a reply to the query of the TPO which has duly been noted by the learned TPO on pages 24 & 25 of the impugned order. On due consideration of assessee's objections, learned TPO has observed that the operative force of the assessee's contention is that marketing and advertisement activities carried out by the comparable companies result in creation of marketing intangible, which would give return on such investment. In other words, the expenses incurred on advertisement and marketing creates a marketing intangible. Learned TPO rejected this contentions on the ground that such an argument is not based on any substantial analysis. The assessee made reference to WIPRO & Flex Tronic Software System and submitted that these companies have created marketing intangible, therefore, they are earning more profit then any other captive entity. Learned TPO rejected the contention of the assessee on the ground that 95% of the revenue of Infosys is from repeat business. The marketing intangible did not help Infosys to get any better business according to the learned TPO. On an analysis of the learned TPO's order coupled with the contentions of the assessee, we are of the view that learned TPO has rightly observed that in the case of manufacturing or distribution companies marketing expenses over a period of time may create marketing intangible which will helpful to them for getting better business but it may not be applicable with equal force on service industries like I.T. Enabled Services. The instances of Infosys referred by the assessee has been specifically dealt with by the learned TPO, he has reproduced relevant portion of the annual report of Infosys on page 25. For buttressing this plea, learned counsel for the assessee mainly gave two explanation. In his first reasoning he pointed out that profit ratio of the companies who have incurred expenses less than 3% of the sales is 22.26%. The companies who have incurred expense more than 3% but less than 5% of the sales on AMP, their profit is 45.52%. Similarly, the companies who have incurred expense on AMP at 5% to 7% of sales, the profit is between 67.46%. These figure have been put from the result of comparable. We have extracted such comparable in para 24 on page 32 of this order. Contrary to this, Learned DR also pointed out that HCL Comnet System Services incurred 0.65% of sales on AMP but shown profit at 45.91%. Similarly, Maple E-solution incurred 0.16% and shown profit at 32.06%. Visual Infra-tech did not incur any expenditure but shown profit at 44,15%. Thus, the details referred by the learned counsel for the assessee do not advance the case of the assessee. What is the actual impact on the earning of income could not be demonstrated on the basis of these comparative details, graph etc. The next reasoning is that such companies are 8 functionally different. Creation of marketing intangible is brand by incurring such expenses may be helpful in future. But how their FAR is substantially so different could not be explained. Learned TPO has looked into this aspect, He observed that material showing impact on Information & Technology Industry by such expenses had not been produced by the assessee. After taking into consideration the discussion made by the learned TPO as well as the DRP on this issue, we do not find any merit in the contentions of learned counsel for the assessee for exclusion of eight companies, extracted supra from the list of comparables." 6.2 Learned Authorized Representative for the Revenue relied on decision of Hon’ble ITAT, Hyderabad in & 1084(HYD.) of 2010 in the case of DCIT, Circle 1(2), Hyderabad held as under:

“36. Now, we deal with the issue relating to inclusion of Vishal Information Technology Ltd. ('VITL' in short) in the final list of comparable companies by the TPO. It is contention of the assessee company that VITL has employee-cost at 1.38% of its revenue when compared to that of the assessee company which is at 52.12%. Thus, the VITL cannot be considered as comparable company and to be excluded from the list of comparable companies. It is also an alternate contention of the assessee that VITL owns valuable intangible when compared to the assessee company. Hence, the said company has to be excluded. The assessee company itself agreed before the TPO that VITL is a comparable company offering IT enabled services and this company is an extension of one Indian company Amex IT Ltd., having agreed so it is not correct on the part of the assessee company to raise a new plea that the VITL has got low wages compared to the assessee company. It appears that the VITL has outsourced the manpower and the cost of outsourcing appears to have been included in the other heads of the expenditure instead of wages-employee cost. Moreover, the intangibles will not materially affect the price or profit earning. By outsourcing the manpower, the VITL would have incurred more cost compared to the assessee company, thus resulting in lesser operating profit. But, having considering the findings of the TPO, we find that the intangibles or outsourcing the manpower will not materially affect the price or profit margin. In our considered opinion, no two comparable companies can be replicas of each other. The application of rule 10B should be carried out and judged not with technical rigor, but on a broader prospective. In this view of the matter, we find no infirmity in the order of the CIT(A) in confirming the action of the TPO by selecting the VITL as comparable company. The case-law relied on by the learned counsel for the assessee is distinguishable on facts. Hence, the ground raised by the assessee on this issue is rejected”.