IN THE INCOME TAX APPELLATE TRIBUNAL,
DELHI BENCH `I' NEW DELHI
BEFORE : SHRI I.C. SUDHIR, JUDICIAL MEMBER &
SHRI L.P. SAHU, ACCOUNTANT MEMBER
ITA No. 7014/Del./2014
Asstt. Year : 2010-11
Ameriprise India Pvt. Ltd., vs. D.C.I.T., Circle 1(1),
Plot No. 14, Sector-18, New Delhi.
Udyog Vihar, Gurgaon.
[PAN: AAFCA3489B]
(Appellant) (Respondent)
Appellant by : Sh. Harpreet Singh, Advocate &
Ms Ananya Kapoor, Advocate
Respondent by : Sh. Amrendra Kumar, CIT/DR
Date of hearing : 03.11.2015
Date of pronouncement : 19.01.2016
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
2 ITA No.7014/Del./2014
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. 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;
3 ITA No.7014/Del./2014
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
4 ITA No.7014/Del./2014
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
5 ITA No.7014/Del./2014
(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%
2. 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.
6 ITA No.7014/Del./2014
v. TCS E-Serve Ltd. and
vi. eClerx Services Ltd.
3. The assessee is also aggrieved against the non-inclusion of (i) CG Vak
Software & Exports Ltd., and (ii) R. Systems International Ltd.
4. 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
7 ITA No.7014/Del./2014
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.
5. 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.
6. 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 :
8 ITA No.7014/Del./2014
"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."
9 ITA No.7014/Del./2014
7. 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 ( ITA No. 2010/Del/2014- 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)
10 ITA No.7014/Del./2014
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
11 ITA No.7014/Del./2014
this extra-ordinary financial event. Accordingly, the same is directed to be
excluded from the final list of comparables.
9. 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.,
12 ITA No.7014/Del./2014
taking place during the year in question. Adopting the same reasoning, we
order for the exclusion of this company from the list of comparables.
10. 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.
11. 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
13 ITA No.7014/Del./2014
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
14 ITA No.7014/Del./2014
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
15 ITA No.7014/Del./2014
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.
12. 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-
16 ITA No.7014/Del./2014
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
17 ITA No.7014/Del./2014
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.
18 ITA No.7014/Del./2014
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.
13. 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,
19 ITA No.7014/Del./2014
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
14. 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.
20 ITA No.7014/Del./2014
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
21 ITA No.7014/Del./2014
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.
15. 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,
22 ITA No.7014/Del./2014
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.
16. 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.
23 ITA No.7014/Del./2014
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
24 ITA No.7014/Del./2014
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.
17. 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
25 ITA No.7014/Del./2014
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.
26. 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:
26 ITA No.7014/Del./2014
"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."
27. 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.
28. 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
27 ITA No.7014/Del./2014
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
28 ITA No.7014/Del./2014
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.
18. 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.
19. The issue of interest u/s. 234B and 234D is consequential in nature and
shall be decided by the AO accordingly.
20. In the result, the appeal of the assessee is allowed for statistical
purposes.
Order pronounced in the open court on 19.01.2016.
Sd/- Sd/-
(I.C. SUDHIR) (L.P. SAHU)
Judicial Member Accountant Member
Dated : 19.01.2016
*aks/-
Copy of order forwarded to:
(1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative (6) Guard File
By order
Assistant. Registrar
Income Tax Appellate Tribunal
Delhi Benches, New Delhi
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