ITA No. 1446/Del/2016
Assessment year 2011-12
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `I-2' NEW DELHI
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA NO. 1446/DEL/2016
Assessment Year: 2011-12
Keystroke Pro India Pvt. Ltd., Income Tax Officer,
F-3/4, 1st & 2nd Floors, Ward 14(3),
Okhla Industrial Area, vs Room No. 305,
Phase-I, New Delhi. C.R. Building,
New Delhi.
Appellant Respondent
Assessee by : Shri Sandeep Sapra, Adv.
Department by: Ms Saweta Nakra, Sr. DR
Date of hearing : 14.06.2019
Date of pronouncement : 20.06.2019
ORDER
PER SUDHANSHU SRIVASTAVA, JM:
This appeal is preferred by the assessee against the
final assessment order dated 29.01.2016 passed subsequent to
the directions of the Ld. Dispute Resolution Panel-1, New Delhi
(DRP) for assessment year 2011-12.
2.0 Brief facts of the case are that the assessee company
was incorporated in the year 2000 and has been engaged in the
business of providing Information Technology (IT) enabled
services. During the year under consideration, the assessee
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Assessment year 2011-12
company had provided services to its Associated Enterprise (AE)
M/s Keystroke Pro India Pvt. Ltd. which included sourcing,
providing and processing various types of data as well as
providing information technology enabled services including
electronic processing of data. The services provided by the
assessee company fall within the meaning of `computer software'
as per clause (b) of item (i) of Explanation to section 10A of the
Income Tax Act, 1961 (hereinafter called 'the Act'). The
undertakings of the company at Vadodara, Gujarat and Noida are
also registered in the Software Technology Park of India (STPI) at
STPI, Gandhi Nagar and Noida respectively. The undertaking at
Noida had commenced production/manufacture on 1.9.2001 and
the assessment year under consideration is the ninth year of
operation of the undertaking while the undertaking at Vadodara
had commenced operations on 1.5.2009 and the assessment year
under consideration is the second year of operation.
2.1 The return of income was filed declaring an income of
Rs. 82,010/- after claiming deduction u/s 10A of the Act at Rs.
45,78,637/- for the undertaking at Noida and at Rs. 5,14,486/-
for the undertaking at Vadodara. The assessee declared book
profit of Rs. 43,75,175/- u/s 115JB of the Act and also paid tax
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Assessment year 2011-12
as per the provisions of section 115JB. The case was selected for
scrutiny through CASS to examine the claim of exemption u/s
10A of the Act.
2.2 During the year under consideration, the company had
also entered into international transaction of providing IT enabled
services to its UK based AE and the value of transaction was Rs.
5,33,73,181/-. The assessee had used Transactional Net Margin
Method (TNMM) to determine the Arm's Length Price (ALP) of the
said transaction. As per the assessee, this transaction was at
arm's length. Since the value of international transaction
exceeded Rs. 5 crore, reference to the TPO was made u/s 92CA of
the Act.
2.3 The assessee had selected 16 companies as
comparables by using OP/TC to determine the Profit Level
Indicator (PLI). The average margin of the comparables as worked
out by the assessee was 12.91% whereas the assessee had
worked out its own margin at 10.94%. Based on this analysis,
the assessee had concluded that its international transactions
were at arm's length. The TPO accepted the methodology adopted
by the assessee and accepted TNMM as the Most Appropriate
Method but rejected nine comparables out of the 16 as selected
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Assessment year 2011-12
by the assessee and introduced two additional comparables and
worked out the mean operating margin at 25.77%. Based on
this, the TPO proposed an upward adjustment of Rs. 71,54,140/-.
2.4 The assessee filed objections before the Ld. DRP
challenging the upward revision of the ALP by the TPO and the
Ld. DRP gave partial relief to the assessee by directing eClerx
Services Ltd. to be excluded from the list of comparables, TCS E-
serve Ltd. to be retained in the list of comparables, IServices India
Pvt. Ltd. to be considered as a comparable if the company passed
the filters and was functionally comparable. Savi Infoservices
India Pvt. Ltd. was also directed to be considered as a comparable
if this company passed the filters and was functionally
comparable. The remaining comparables selected by the assessee
but not accepted by the TPO were directed to remain excluded
from the list of comparables. Direction was given to give working
capital adjustment to the assessee as per the guidelines and the
assessee's prayer for risk adjustment was not accepted.
2.5 Based on the directions of the Ld. DRP, in the final
assessment order, the margins of the comparable companies were
re-calculated by the TPO and the mean was worked out to
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Assessment year 2011-12
21.07% and the revised TP adjustment was proposed at Rs.
48,92,246/-.
2.6 Now the assessee is before this Tribunal (ITAT) and has
challenged the final assessment order by raising the following
grounds:-
"1. That the Ld. Assessing Officer (AO), Ld. Transfer
Pricing Officer (TPO) and Hon'ble Dispute Resolution
Panel (DRP) have erred on facts and under the law in:
(i) passing the impugned order which is bad in law;
(ii) passing the order without demonstrating that the
Appellant Co. had motive of tax evasion;
(iii) rejecting/not considering three (3) comparable
companies (viz. IServices India Pvt Ltd, Savi Infoservices
India Pvt Ltd and Microgenetics Systems Ltd) as
selected by the Appellant Co while carrying out fresh TP
study for AY 2011-12;
(iv) not considering the facts/submissions/objections
made before them that out of the remaining eight (8)
comparable companies as selected by TPO, TCS e serve
Ltd. ought to be excluded on various grounds from the
list of such comparable companies;
(v) Without prejudice to 1 (i) to 1 (iv) above, if high
turnover companies having turnover of more than Rs. 200
crores are also to be considered/taken into account, then
there was no justification for excluding Infosys BPO as
comparable company.
(vi) Without prejudice to 1 (i) to 1 (iv) above, there was
no justification for not allowing economic adjustments for
differences on account of risks assumed by the Appellant
Co. vis-a-vis the comparable Cos
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(vii) inappropriately computing the operating margins
of comparables and the Appellant and not considering
the facts/submissions/ made before them to provide
detailed line by line margin computation/working of the
adjusted average OP/OC percentage of 21.07% of the 8
comparable companies as finally retained by TPO/AO
pursuant to directions of DRP;
not giving effect to the rectification order dated
(viii)
13.03.2015 as passed by DCIT, TPO- 2(1)(1)
2. That the addition on account of upward transfer
pricing adjustment of Rs.48,92,246/- as made by the
authorities below are arbitrary, unjust, illegal and at any
rate, without prejudice, very excessive.
That the penalty proceedings u/s 271 (1)(c) of I.T. Act as
initiated on the basis of TP Adjustment are illegal."
3.0 At the outset, the Ld. Authorised Representative (AR)
drew our attention to the final list of comparables which remained
after the TPO had given effect to the directions of the Ld. DRP.
The comparables are as under:-
S.No. Company Name Adjusted OP/OC
(i) Informed Technologies India 9.59
(ii) Accentia Technologies Ltd. 25.21
(iii) Datamatics Clobal Services Ltd. 4.65
(iv) E4e Healthcare Business Services Pvt. Ltd. 9.77
(v) Jindal Intellicom Ltd. 13.69
(Vi) TCS e-serve Ltd. 69.31
(vii) Stryker Global Services Pvt. Ltd. 17.00
(viii) SITEL India Ltd. 19.30
Average 21.07
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3.1 The Ld. AR submitted that the assessee was not
pressing ground nos. 1(i), (ii), (iii), (v), (vi), (vii), (viii) and 3 and 4.
The Ld. AR submitted that as per ground no. 1(iv), the assessee
was praying for exclusion for TCS E-serve Ltd. and inclusion of
IServices India Pvt. Ltd., Savi infoservices India Pvt. Ltd. and
Microgenetic Systems Ltd. The arguments of the Ld. AR vis-a-vis
the exclusion of TCS E-serve Ltd. and inclusion of the three
comparables were as under:-
i) TCS E-serve Ltd.
The Ld. AR submitted that the assessee was praying for
exclusion of this company as a comparable because this
company is engaged in the business of providing
ITES/Business Process outsourcing (BPO) services and its
operations broadly comprise of transaction processing
and technical processing and technical services,
collections, customer care and payments in relation to the
services offered by Citigroup to its corporate and retail
clients. It was further submitted that technical services
involve software testing, verification and validation of
software at the time of implementation and data centre
management activities. Our attention was drawn to page
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Assessment year 2011-12
450 of the paper book (Director's report and annual
accounts) wherein these activities were mentioned. It was
submitted that this company is functionally dissimilar to
the assessee company which is a low-end BPO providing
transaction and data centre management services only to
its UK based AE and, thus, is a captive service provider.
It was further submitted that this company had a huge
brand value because of its close connection with the Tata
Group and further that this company had a huge
turnover and goodwill being one of the giants of the
industry and, therefore, it could not be considered as a
comparable to the assessee company. It was submitted
that another giant company Infosys Pvt. Ltd. was
excluded on a similar reasoning in assessee's own case
for assessment year 2010-11. Reliance was also placed
on another order of ITAT Delhi Bench in the case of
Kronos Solutions India (P) Ltd. vs. ACIT reported 88
taxmann.com 310 (Delhi Tribunal) wherein this company
was directed to be excluded on a similar reasoning.
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(ii) I-Services India Pvt. Ltd.
The ld. AR submitted that the assessee was praying for
inclusion of this company as a comparable as it was
functionally similar and the Ld.DRP had directed that the
same be included if it passed the necessary filters as
applied by the TPO but the TPO had not given any reason
for excluding the same subsequent to the directions of
the Ld. DRP. Our attention was drawn to Para 3.4 of the
directions of the Ld. DRP wherein this direction had been
given by the Ld. DRP.
(iii) Savi Infoservice (India) Pvt. Ltd.
It was submitted that the assessee was praying for
inclusion of this company also in the final set of
comparables and that the Ld. DRP had directed the
inclusion of this company if it passed all the filters as
applied by the TPO but the TPO/Assessing Officer had
kept this company out of the final set of comparables
without assigning any reason. Attention was again
drawn to Para 3.4 of the directions of the Ld. DRP
wherein this company was directed to be included.
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(iv) Microgenetics Systems Ltd.
The Ld. AR submitted that the assessee was praying for
inclusion of this company also as this company was
engaged in medical transcription services and
accordingly it was functionally similar and it had passed
all the filters as applied by the TPO. It was also
submitted by the Ld. AR that the TPO has excluded this
company on the ground that the related party
transaction filter was not met although the relevant data
with respect to the related party transaction was duly
filed before the TPO. It was submitted that this
company was prayed to be included before the Ld. DRP
also and the prayer for its inclusion formed part of the
objections filed before the Ld. DRP but the Ld. DRP has
not discussed the issue.
4.0 In response, the Ld. Senior Departmental
Representative (Sr. DR) submitted that with respect to all the
companies under challenge by the assessee either for inclusion or
for exclusion had been duly considered and examined by the TPO
as well as the Ld. DRP. With respect to TCS E-serve Ltd., it was
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submitted that the assessee had not been able to meet the
observations of the TPO in this regard and further that the Ld.
DRP had also reached the same conclusion after considering the
observations of the TPO and no interference was called for. The
Ld. Sr. DR placed extensive reliance on the observations of the
TPO in respect of all the four comparables and vehemently argued
that the TPO and the Ld. DRP had given a finding of fact which
need not be disturbed.
5.0 We have heard the rival submissions and perused the
material available on record. We now take the comparables one
by one.
i) TCS E-serve Ltd.
It is the assessee's contention that this company deserves
to be excluded as a comparable company for the reason
that it is functionally dissimilar to this company. It is
undisputed that the assessee company provides IT
enabled services to its UK based AE only and, thus, it is a
captive service provider whereas TCS E-serve Ltd.
provides transaction processing as well as technical
services. It is further seen that TCS E-serve Ltd. provides
a broad spectrum of activities involving the processing,
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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.
This is evident from a reading from the notes to accounts
contained in the annual report of TCS E-serve Ltd. for
assessment year 2010-11. Thus, there is strength in the
contention of the assessee that TCS E-serve Ltd. has
entered in activities which are beyond transaction and
data processing services as being provided by the
assessee to its AE and, thus, it can be safely concluded
that this company is functionally dissimilar to the
assessee company. We also find support from the
judgment of the Hon'ble Delhi High Court in the case of
Actis Global Services Pvt. Ltd. in ITA 94/2017 wherein
vide judgment dated 15.5.2017, the Hon'ble Delhi High
Court had upheld the order of ITAT Delhi Bench in
directing the exclusion of this comparable on the ground
that TCS E-serve Ltd. was involved both in the
transaction processing and technical services and was not
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therefore a comparable with respect to a company
engaged only in BPO activities. Admittedly, the assessee
is also a BPO company and the finding to this effect has
been recorded by the ITAT in assessee's own case for
assessment year 2009-10 wherein it has been mentioned
that this company is into providing low-end BPO services.
Therefore, we deem it appropriate to exclude this
company from the final set of comparables.
ii) IServices India Pvt. Ltd.
The assessee is praying for inclusion of this company
on the ground that it is functionally similar. We note
that the Ld. DRP has also directed this company to be
included in the list of comparables if it passes all the
filters as applied by the TPO. We also note that this
direction of the Ld. DRP has not been implemented in
so far as the TPO has excluded this company without
recording any finding. Therefore, we deem it
appropriate to restore this comparable to the file of the
TPO with the direction to implement the direction of
the Ld. DRP and pass a speaking order on this
comparable.
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iii) Savi Inforservice (India) Pvt. Ltd.
The assessee is praying for inclusion of this company
on the ground that it is functionally similar and the Ld.
DRP has directed that the same be included if it passes
all the filters as applied by the TPO but again this
company has not been included without any reason
being assigned by the TPO. Therefore, we direct that
the TPO/Assessing Officer should give effect to the
directions of the Ld. DRP in respect of this comparable
also and decide on its inclusion/exclusion by passing a
speaking order.
iv) Microgenetics Systems Ltd.
We note that the TPO has excluded this company on
the ground that the related party transaction filter was
not met. On the other hand, it is the contention of the
assessee that data with respect to the related party
transaction was duly filed before the TPO. In view of
the contradictory stand by the assessee and the
department, we deem it appropriate to restore this
comparable also to the file of the TPO with the direction
to re-examine the inclusion of this comparable after
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duly considering the data with respect to related party
transactions.
5.1 The other grounds of appeal are dismissed as not
pressed.
6.0 In the final result, the appeal of the assessee stands
partly allowed.
Order pronounced in the open court on 20th June, 2019.
Sd/- Sd/-
(N.S. SAINI) (SUDHANSHU SRIVASTAVA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 20th JUNE, 2019
`GS'
Copy forwarded to: -
1) Appellant
2) Respondent
3) CIT(A)
4) CIT
5) DR
By Order
ASSTT. REGISTRAR
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Assessment year 2011-12
Date of dictation
Date on which the typed draft is placed before the
dictating Member
Date on which the typed draft is placed before the Other
Member
Date on which the approved draft comes to the Sr.PS/PS
Date on which the fair order is placed before the
Dictating Member for pronouncement
Date on which the fair order comes back to the Sr.PS/PS
Date on which the final order is uploaded on the website
of ITAT
Date on which the file goes to the Bench Clerk
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant
Registrar for signature on the order
Date of dispatch of the Order
16
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