2015 (3) TMI 839 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Accentia Technologies Ltd.- there is no segment wise result available in case of medical transcription and billing and coding. It is not known by how much the margin is affected by trading in software. Therefore in our view this company could not be considered as a good comparable. We therefore hold that this company has to be excluded. Apex Knowledge Solutions Ltd.- annual report of the company for the relevant year shows that entire revenue has been generated from export of software and related information technology enabled services activities. There is no segment wise result available for information tech nology enabled services activity. This company had also been excluded by the Tribunal in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT 2013 (3) TMI 415 - ITAT MUMBAI . We therefore, hold that this company is not a good comparable and has to be excluded. Apollo Helathcare Ltd - 81 per cent. of the transactions in case of the company are with related parties. With such high RPT, this comparable could not be considered as a good comparable. Asit C. Mehta (Nucleus Net Soft).- almost the entire revenue, i.e., ₹ 6.09 crores is from information tech nology enabled services and only a sum of ₹ 23.26 lakhs is from portfolio management service which is insignificant and in our view will not have much impact on the margins. Content development is a high end service but as held earlier on this ground alone it cannot be excluded. As there is no material to show that in case of high end services in information technology enabled services industry margins are higher than those in the low segment. Caliber Point Business Solutions Ltd. - the entire revenue for the purpose of comparison which in our view will not be appropriate. We therefore, direct that the results of only BPO segment have to be considered for the purpose of comparability and subject to the above, the inclusion of this comparable is upheld. Argument based on high segment as held earlier has to be rejected. Cosmic Global Ltd. - the main revenue, i.e., ₹ 4.05 crores is from translation business where as revenue from medical transcription is only ₹ 9.72 lakhs and from BPO at ₹ 12.41 lakhs. The translation business is not comparable to the case of the asses see. Therefore, in our view, this company has to be excluded from the list of comparables. We accordingly direct the Assessing Officer to exclude this comparable. Datamatics Financial Services Ltd. (Seg). - about 50 per cent. of the revenue is from printing services. The segment wise result from information technology enabled services is not available. Therefore in our view, this company could not be considered as a good comparable and accordingly we direct the Assessing Officer to exclude this company from the list of comparables. Eclerx Services Ltd. - no doubt goodwill is an asset which can bring more customers and can increase turnover but as we have discussed in the subsequent part of this order there is no linear relationship between margin and turnover and that the concept of economy of scale is not relevant in case of service companies. The argument thus, has no merit and has to be rejected. Therefore, in our view, this comparable has to be included and accordingly we uphold its selection. Genesys International Corporation Ltd. - is an information technology enabled service. The entire revenue of the company as per the annual report placed on record is from GIS activities. Only on the ground of high end or low end segment, comparable could not be excluded or included. We therefore uphold the inclusion of this company. HCL Comnet Systems and Services Ltd. - related party transaction affect the comparability and in case of high RPT the company could not be really considered as independent unrelated party. In the case of Willis Processing Services India P. Ltd. supra the Tribunal held that related party transaction can be accepted only up to 15 per cent. We therefore accept the plea of the assessee to exclude this comparable. Informed Technologies India Ltd. - he annual report of the company to point out that revenue is derived from BPO activities and there is no reference to KPO activities in the annual accounts. We also find from perusal of accounts that BPO is only reportable segment and the entire revenue is from BPO activities. Therefore, we uphold the selection of this company as a comparable. I Services India P. Ltd. - It is clear from the rules that for the purpose of comparability, data of current year and upto past two years in certain circumstances can only be considered and not the data of the subsequent year. It has not been shown before us that profit this year was exceptionally high compared to the last year due to some extraordinary factor, which affected the comparability. The argument raised is therefore rejected. With these observations we direct the Transfer Pricing Officer/Assessing Officer to verify the actual activities of the company from the annual account of the relevant year and include the same if it is found to be engaged in information technology enabled services activities. Mold Tek Technology Ltd. - the company is a good comparable subject to the verification of merger aspect and its impact on functional comparability. R Systems International Ltd. (Seg.) - the assessee has also a BPO division for which segmental results are available. The Transfer Pricing Officer has also taken only BPO segment for the purpose of comparability. We have already held that the company could not be excluded only on the ground of high end services. We hold that this company has to be included as a good comparable Vishal Information Technologies Ltd. - The Tribunal in case of Willis Processing Services (I) P. Ltd supra had considered the argument of the learned Departmental representative that the company had seating capac ity of 75 out of which 60 had been utilised by the company and, therefore, it was pointed out that the argument that the company was outsourcing work was not correct. The Tribunal further noted the argument of the learned authorised representative that the said information which had been obtained by the learned Departmental representative under section 133(6) was not addressed to the Transfer Pricing Officer. The Tribunal, therefore, restored the issue of outsourcing to the Assessing Officer/the Transfer Pricing Officer for fresh examination of relevant facts. The facts in the present case are identical. We, therefore, restore the issue of outsourcing to the Assessing Officer/the Transfer Pricing Officer for fresh examination and order after hearing the assessee. Optimus Global Services Ltd. - we are convinced that this company which has persistent losses for the last three years has to be excluded. Bodhtree Consulting Ltd. (Seg.) - Commissioner of Income-tax (Departmental representative) has placed some fresh materials before us, which has been collected by the Revenue under section 133(6) which shows that the assessee in addition to developing software, is also engaged in data cleansing services, the segmental results for which are available which is an information technology enabled services activity. The learned authorised representative for the assessee pointed out that there is some element of software develop ment also involved in providing such services. We find that this issue had come up for consideration by the Tribunal in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT supra in which the Tribunal restored the issue to the file of the Assessing Officer/the Transfer Pricing Officer for examination of material collected under section 133(6) of the Income-tax Act. Therefore, following the decision of the Tribunal, we restore this issue to the file of the Assessing Officer/the Trans fer Pricing Officer for fresh decision after considering the fresh material and after hearing the assessee. ICRA Techno Analytics Ltd. (Seg.) - exclusion of this comparable by the Commissioner of Income- tax (Appeals) is held valid as any company having related party transactions more than 15 per cent. has to be excluded as comparable. Infosys BPO Ltd. - reject the argument advanced based on high marketing expenses and branding and as regards the quality of employees for exclusion of Infosys BPO Ltd. and accordingly hold that this has to be accepted as a good comparable. Wipro Ltd. (Seg.) - uphold the inclusion of this comparable by the Assessing Officer/the Transfer Pricing Officer for the same reasons given in case of Infosys BPO Ltd. .Maple E Solutions - there is also no material to show that this company had merged with Triton Corp. Ltd. in the relevant year. We accordingly, reject the argument raised based on merger. We are therefore, unable to accept the order of the Commissioner of Income-tax (Appeals) excluding this comparable and therefore the order is set aside and this company is included as a comparable Triton Corp. Ltd. - The revenue from trading in IT peripherals is small at about 11 per cent. which in our view will not have much impact on the margin. It is also clear from the fact that the margin in case of Triton Corp. Ltd. is 34.93 per cent. which is almost similar to the margin in case of Maple E Solutions Ltd. which is wholly in call centre business, which shows that trading in IT peripherals has not impacted the margin. No details of merger/amalgamation as mentioned by the Commissioner of Income-tax (Appeals) has been placed before us to show that it has impacted the comparability. We, therefore, do not agree with the Commissioner of Income-tax (Appeals) for excluding this comparable. Accordingly, we set aside the order of the Commissioner of Income-tax (Appeals) on this point and include this case in the list of comparables. Method of computation of margin for the purpose of comparability - Held that - The OECD as well as United Nations Practical Manual provide that ROCA/ROA are suitable for manufacturing and other capital or asset intensive industries. The assessee is in the service sector which is not capital asset intensive. No doubt in every sector there is some use of equipments and other assets but the same cannot be said to be as capital intensive as in case of manufacturing concerns. Moreover, in case of service companies, main asset is employees which is not reflected in the balance-sheet and, therefore, ROCA/ROA in our view will not be an appropriate method for the purpose of computation of margin. We accordingly, do not see any infirmity in the order of the Commissioner of Income-tax (Appeals) rejecting ROCA/ROA as profit level indicator. The order of the Commissioner of Income-tax (Appeals) is accordingly held on this point. Working capital adjustment and adjustment on account of other costs - Held that - Under the provisions of rule 10B(2)(d) the comparability has to be judged with respect to various factors such as marketing conditions, geographical locations, cost of labour and capital in the market, accounts receivable/payable affect the cost of working capital. The more accounts receivable would mean more capital blocked with debtors which may also mean higher sale prices. Therefore, in our view it will be appropriate to make working capital adjustment to improve the comparability. Further we agree with the submissions of the learned Commissioner of Income-tax (Departmental representative) that while making the working capital adjustment guidelines framed by OECD must be followed. We therefore, do not uphold the order of the Commissioner of Income-tax (Appeals) rejecting the working capital adjustment. The issue therefore, is restored to the file of the Assessing Officer/the Transfer Pricing Officer for working out the working capital adjustment as per OECD guidelines and after allowing the opportunity of hearing to the assessee. Adjustment claim by the assessee on account of linked cost and other cost incurred by the associated enterprise on behalf of the assessee - Held that - We agree with the submission of the learned Commissioner of Income-tax (Departmental representative) that adjustment on account of linked cost and other cost incurred by the associated enterprise on behalf of the assessee is not justified as the margins are unaffected in case these costs were incurred by the assessee. The claim is rejected and the order of the Commissioner of Income-tax (Appeals) on this point is upheld. Benefit of /-5 % deviation in the computation of margin - Held that - In this case proceedings were pending before the Assessing Officer/the Transfer Pricing Officer as on October 1, 2009. Therefore, the assessee is not entitled to the benefit of 5 per cent. as the arm's length price determined has exceeded the transfer price by more than 5 per cent. We therefore see no infirmity in the order of the Commissioner of Income-tax (Appeals) in rejecting the claim and the same is therefore upheld. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Applicability of Transfer Pricing Provisions.
2. Selection and Exclusion of Comparables.
3. Computation of Margin.
4. Working Capital Adjustment.
5. Adjustment on Account of Linked Cost and Other Costs.
6. Benefit of +/-5% Deviation in Margin Computation.

Detailed Analysis:

1. Applicability of Transfer Pricing Provisions:
The assessee contended that transfer pricing provisions should not apply as its income was exempt under section 10A of the Income-tax Act. The Tribunal rejected this argument, stating that once there is an international transaction, the arm's length price must be computed as per the law, without requiring the Revenue to prove tax avoidance. This view is supported by the decisions of the Tribunal in the cases of 24/7 Customer.Com.Pvt. Ltd. and Aztec Software and Technology Services Ltd.

2. Selection and Exclusion of Comparables:
The Tribunal dealt with various disputes regarding the selection of comparables:

- Accentia Technologies Ltd.: Excluded due to involvement in software sales and lack of segment-wise results.
- Apex Knowledge Solutions Ltd.: Excluded as it was engaged in software and database creation services.
- Apollo Healthcare Ltd.: Excluded due to high related party transactions.
- Asit C. Mehta (Nucleus Net Soft): Included despite involvement in portfolio management services, as the revenue from this was insignificant.
- Caliber Point Business Solutions Ltd.: Included, but only BPO segment results to be considered.
- Cosmic Global Ltd.: Excluded as the main revenue was from translation business, not comparable to the assessee.
- Datamatics Financial Services Ltd. (Seg.): Excluded due to significant revenue from printing services and lack of segment-wise results.
- Eclerx Services Ltd.: Included despite high profit margins, as high margin alone was not a valid ground for exclusion.
- Genesys International Corporation Ltd.: Included as it was engaged in GIS activities, an information technology enabled service.
- HCL Comnet Systems and Services Ltd.: Excluded due to high related party transactions.
- Informed Technologies India Ltd.: Included as it was engaged in BPO activities.
- I Services India P. Ltd.: Included, subject to verification of actual activities.
- Mold Tek Technology Ltd.: Included, subject to verification of merger impact.
- R Systems International Ltd. (Seg.): Included as it had a BPO division with segment-wise results.
- Vishal Information Technologies Ltd.: Included, subject to verification of outsourcing activities.

3. Computation of Margin:
The assessee argued for using Return on Asset Employed (ROA) or Return on Capital Employed (ROCA) for margin computation. The Tribunal rejected this, stating that ROA/ROCA are suitable for manufacturing or asset-intensive industries, not for service sectors like call centers where employees are the main assets.

4. Working Capital Adjustment:
The Tribunal agreed that working capital adjustment should be made to improve comparability, following OECD guidelines. The issue was restored to the Assessing Officer/Transfer Pricing Officer for proper computation.

5. Adjustment on Account of Linked Cost and Other Costs:
The Tribunal rejected the claim for adjustment on account of linked cost and other costs incurred by the associated enterprise, as the margins would remain unaffected due to the cost-plus model followed by the assessee.

6. Benefit of +/-5% Deviation in Margin Computation:
The Tribunal upheld the denial of the benefit of +/-5% deviation as per the amended proviso to section 92C(2), applicable to all assessments/reassessments pending as on October 1, 2009.

Conclusion:
Both appeals were partly allowed, with specific directions for inclusion/exclusion of comparables and adjustments to be made by the Assessing Officer/Transfer Pricing Officer as per the Tribunal's findings.