2018 (8) TMI 1970 - AT - Income Tax

TP Adjustment - comparable selection - Functional dissimilarity - HELD THAT - As referring to ITES service segment of assessee undertakes data management information analysis and control activities for export to various American Express affiliates worldwide. The services are exported to the AEIPL customers mainly through telecom link whereby it receives input in the form of data in electronic form which is subsequently processed. It is compensated for services rendered with a cost-plus mark basis that is equal to operating expenses incurred plus an amount equal to 20% of operating expenses. The assessee in transfer pricing study report has reported that it is a captive contract IT enabled services provider catering to the needs of the American Express Group. Though the cumulative services as provided by the assessee may not be classically put into bracket of high-end KPO service provider but at the same time it cannot be said that that it is purely low-end ITES service provider in line of BPO services. KPO services normally carry out high end data analysis and data processing solutions which requires highly qualified and technical human resource and skilled persons to carry out such kind of activities. As compared to the BPO where focus is on processing and call service the KPO requires specialize knowledge and ability to handle more complex activities thus companies functionally dissimilar with that of assessee need to be deselected from final list. E Clerx Services Ltd. cannot be held as comparable to assessee as functional different. Vishal Information Technologies Ltd has a different business model in as much as its outsourcing charges is 90.57% which reflects that it has a different business model all together and outsourcing model is different from a company which carries out its work through its own resources as it reflects huge difference in employee cost ratio to turnover. The assets in the form of human resources and other intangible are completely different in such kind of companies. Further this company has been held to be non-comparable by the Hon ble Delhi High Court in the case of Rampgreen Solutions Private Ltd. 2015 (8) TMI 931 - DELHI HIGH COURT ICRA Online Limited (segment) - Functions carried out by ICRA Online which is again in the field of financial and economic analysis it cannot be held that functionally this company is different and cannot be compared with the assessee. Even though ICRA Online has classified itself a pure KPO but on a deeper analysis of the functional profile of the assessee as well as ICRA Online we find that there is not much of functional differences. On deployment of assets and risks assumed again no distinguishing features has been brought on record. Moreover this company has been selected by the assessee in its T.P study analysis and was not challenged before AO which goes to prove that on FAR analysis this company is comparable to the assessee. Therefore this company has rightly been included by the TPO from assessee s list. Accordingly we hold that the ICRA Online is good comparable company for benchmarking the assessee s margin. Allsec Technologies Limited should be included in the comparable list - There is no rule or mechanism for putting specific ceiling of limit in a particular filter. These are only used for quantitative analysis while the selecting comparables by applying filter. The TPO cannot suo moto apply the filter later on for selecting or rejecting the comparable of the assessee because that amounts to cherry picking. There is no dispute with regard to otherwise functional or FAR comparability with that of the assessee. Therefore the reasons assigned by TPO of putting such a ceiling for exclusion of this company cannot be upheld looking to the fact that the difference of the ceiling put by the TPO is only 0.5%. We find that in the case of Mercer Consulting (India) Pvt. 2016 (8) TMI 1163 - PUNJAB AND HARYANA HIGH COURT on similar ground this Tribunal has rejected the TOP s contention on the same very grounds. R Systems International Limited rejected on the ground that it has a different financial year ending i.e. 31st December and not 31st March - If the quarterly results are available in the public domain wherein the figures between 1st January 2009 to 31st March 2009 are available then there cannot be any difficulty to work out the proportionate profit margin. This issue has been discussed in detail by this Tribunal in the case of Cadence Design Systems (India) Ltd. 2017 (10) TMI 49 - ITAT DELHI we direct the TPO to consider the quarterly results and work out the proportionate profit margin. CG-VAK Software Exports Ltd.company has been rejected for inclusion on the ground it has low turnover which is less than 1 crore - We find that in the case of Chrys Capital Investment Advisors India Pvt. Ltd. Vs. DCIT 2015 (4) TMI 949 - DELHI HIGH COURT after detailed analysis of rule 10B(3) has been reiterated the same principle that if the company is functionally comparable then same cannot be rejected on the basis of turnover. The Hon ble High Court in its very detailed judgment wherein it was required to answer whether the comparable can be rejected on the ground that they have high profit margin as compared to the assessee in TP analysis has also dealt upon the turnover factor in detail and held that if the company is functionally comparable then same cannot be rejected on the basis of turnover. Thus we hold that the company cannot be held to be incomparable simply on the ground of low turnover unless it is demonstrated that the assets and risk are completely different and are incomparable. Thus we direct the TPO to include CG Vak Software and Export Ltd. as a comparable company. Cepha Imaging Limited rejected on the ground that it fails the export turn over - Once the export of the said company is stated to be 100% then how the TPO has held that it fails export turn over and what is the source of information is not borne from the records. Ld. Counsel has drawn our attention to the annual report and pointed out that during the year all its revenues are from export only. Thus the reason given by the TPO to reject this comparable is contrary to the facts and records; and accordingly we deem it proper to direct the TPO to examine this aspect of export turnover and if the contention of the assessee is found to be correct then he must include this company as comparable. Fortune Infotech Limited and Microland Limited - These comparables were taken up by the assessee for inclusion before the DRP for the first time. However there is no discussion in the said DRP order. Therefore we remit these comparables to the file of the TPO to examine the functionality and other parameters for inclusion or exclusion of this comparable. ALP on purchase of fixed assets - assessee s contention has been that it has purchased the fixed assets on a fair market value determined by the valuer and WDV of assets cannot be the same as fair market value which may be lower and higher - HELD THAT - TPO made the observation that in arm s length scenario WDV of assets should be taken at arm s length price. Though he has made the discussion but has not made any adjustment. It is for this reason assessee did not file any objection before the DRP. Even in the final assessment order no such adjustment has been made. Now TPO much after the completion of final assessment order has made this adjustment without any discussion and has made the adjustment without any discussion. Since the present appeal has been filed by the assessee against the final assessment order where there is no such discussion and if assessee is aggrieved by such a rectification order passed after the passing of final assessment order then assessee can go for other remedies and cannot challenge the issue which is not borne out from the impugned order because it neither can be entertained by way of additional ground or additional plea under the rules. This issue is thus treated as infructuous. Entitled for deduction u/s 10A on the ground that it has established a new unit - HELD THAT - Once already deduction u/s 10A on the same unit has been allowed in the earlier years by the Tribunal therefore no different view can be taken for the same unit on similar set of facts for denying the deduction in A.Y. 2009-10. Accordingly we direct the AO to allow deduction u/s 10A in respect to the said unit. Credit of the TDS denied as claimed in the return of income - HELD THAT - Direct AO to verify the claim of the assessee and give credit of the TPS after verifying and in accordance with law.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for ITES Segment
2. ALP on Purchase of Fixed Assets
3. Deduction u/s 10A for AEGSC (STP Unit)
4. Credit of Tax Deducted at Source (TDS)
5. Interest on Receivables

Detailed Analysis:

1. Transfer Pricing Adjustment for ITES Segment:
The primary issue pertains to the transfer pricing adjustment of ?67,05,58,495/- made for the provision of export data processing and back office support services (ITES). The assessee, a subsidiary of American Express International Inc., USA, operates as a captive contract IT enabled services provider. The TPO rejected four comparable companies proposed by the assessee and included two additional comparables, leading to an average margin of 29.91%. The TPO also denied working capital and risk adjustments and recalculated the operating margin of the assessee, resulting in an adjustment of ?14,560,915. The Tribunal analyzed the inclusion and exclusion of various comparables:

- E-Clerx Services Ltd.: Excluded as it provides high-end KPO services, which are not comparable to the assessee's low-end ITES services.
- Vishal Information Technologies Ltd.: Excluded due to its outsourcing business model, making it functionally different from the assessee.
- ICRA Online Limited: Included as its financial and analytical services are similar to the assessee's functions, despite being classified as a KPO.
- Allsec Technologies Limited: Included as it meets the functional comparability criteria, despite minor deviations in export turnover.
- R Systems International Limited: Included as quarterly results are available, allowing for proportionate profit margin calculation.
- CG-VAK Software & Exports Ltd.: Included despite low turnover, as it meets the functional comparability criteria.
- Cepha Imaging Limited: To be re-examined for export turnover compliance.
- Fortune Infotech Limited and Microland Limited: Remitted to TPO for functional analysis.

2. ALP on Purchase of Fixed Assets:
The assessee challenged the adjustment made by the TPO for the purchase of fixed assets post-DRP direction. The Tribunal noted that no such adjustment was made in the original or final assessment order and directed the assessee to pursue other remedies for challenging the rectification order.

3. Deduction u/s 10A for AEGSC (STP Unit):
The assessee claimed a deduction of ?58,93,05,999/- u/s 10A, which was denied by the AO. The Tribunal upheld the assessee's claim, citing earlier Tribunal decisions allowing the deduction for the same unit in previous assessment years.

4. Credit of Tax Deducted at Source (TDS):
The assessee raised an additional ground for the full credit of TDS as claimed in the return of income. The Tribunal directed the AO to verify and grant the TDS credit accordingly.

5. Interest on Receivables:
The revenue's appeal challenged the DRP's direction that no separate adjustment for interest on receivables was necessary as it was subsumed in the working capital adjustment. The Tribunal dismissed the revenue's appeal due to the tax effect being less than ?20 lacs, in line with Circular No. 3/2018.

Conclusion:
The Tribunal's order addressed various aspects of transfer pricing adjustments, the applicability of deductions, and procedural issues related to TDS and interest on receivables, providing a comprehensive resolution to the disputes raised by both the assessee and the revenue.