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Judgment
PER SUDHIR KUMAR, JUDICIAL MEMBER:
This appeal by the assessee is directed against the assessment order dated 19-09-2024 framed under section 143(3) r.w.s.144(C)(13) read with section 144B of the Income Tax Act, 1961 (in short “the Act”) which was passed as per the direction dated 16-08-2024 of the Dispute Resolution Panel-1 New Delhi [hereinafter referred to as “Ld. DRP”] pertaining to A.Y. 2021-22.
The assessee has raised the following revised grounds in appeal:
1.Transfer Pricing adjustment of INR 4,74,01,254/-
a. The learned Assessing Officer (‘AO’) /Transfer Pricing Officer(‘TPO’) and the Hon’ble Dispute Resolution Panel (“DRP”) have erred in facts and in law in proposing an upward adjustment to appellant’s income and making an addition of INR 4,74,01,254/- in relation to the international transaction of ‘Provision of IT/ITES services’ and Provision of BSS services’ to Associated Enterprises (‘AEs’)
b. The ld. AO/TPO/DRP have erred in facts and in law in conveniently disregarding the contentions of the appellants in relation to above actions and not considering the detailed statutory documentation maintained and furnished by the appellant and the submission filed during the assessment/ DRP proceedings.
2.Unjust modification of filters used by the appellant The ld. AO/TPO/DRP have erred in modifying the filters used by the appellant, including RPT filter, export filter different financial year filter and persistent loss filter.
3.Difference in opinion on the comparables selected by the appellant
a. The AO/TPO/DRP have erred in selecting certain functionally incomparable companies to benchmark appellant’s services of provision of IT/ITES and BSS services without providing any specific and clear rationale.
b. The AO/TPO/DRP have erred in rejecting comparable companies selected by the appellant at the time of preparing its study on erroneous reasons.
4.Difference in calculation of comparable margins The AO/TPO/DRP have grossly erred in margin computation of the comparable companies adopted by the Ld. TPO, despite the specific directions issued by the Hon’ble DRP.
5.Denial of double taxation relief available u/s 90 of the Act wile computing the demand arising out of the impugned order.
a. That the AO/TPO/DRP have grossly erred in facts and in law by not allowing the double taxation relief of INR 52,04,942/- u/s 90 of the Act while computing the demand arising out of the impugned order, without providing any cogent reason and did not make any variation as can be evidenced through para 7 of the impugned order.
b. That on the facts and circumstances of the case, the denial of the Double Taxation Relief of INR 52,04,942/- while processing the tax return is not justified and liable to be deleted.
6.That in facts and in law, the Ld. AO/CPC was not justified in imposing consequential interest u/s 234A of the Act.
7.Penalty proceedings under section 270A of the Act ought not to be initiated.
The Ld.AO/DRP has erred in initiating penalty proceedings under section 270A of the Act without appreciating the submissions made during the assessment proceedings.
The appellant craves leave, to add, amend, modify, rescind, supplement, or alter any or all of the Grounds stated herein above, either before or at the time of hearing of this appeal.
The brief facts of the case are that the assessee is engaged in the business of providing designing and technical consultancy services in respect of offshore and underwater construction activities for offshore oil and gas business. The assessee also providing design engineering services, back-office support services in the nature of IT/ITES, business support services and availing of engineering and general support services. The assessee filed its return of income for the A.Y.2021-22 electronically on 15-02-2022 declaring total income of Rs. 79,16,78,239/- vide acknowledgment no. 218348110150222 under the normal provisions of the Act. The case of the assessee was selected for Complete Scrutiny under CASS for the reason that High Risk International Transaction (Entity reported in CbCr data) (TP Risk Parameter). The statutory notices u/s 143(2) of the Act were issued on 28-06-2022 and duly served on the assessee. Again, notice under section 142(1) of the Act along with questionnaire was issued on 06-10-2022 which was duly served. Since the assessee entered into various international transactions the AO made a reference to the Ld. TPO for determining arm’s length price under section 92CA of the Act. The Ld. TPO adopted the Transactional Net Margin in Metod (‘TNMM’) and made the following adjustment as under;
| S. No | Nature of International Transaction | Value of International Transaction | Adjustment as per TPO order |
| 1 | IT and IT enabled back office support services | 69,64,85,455 | 4,86,47,191/- |
| 2 | Provision of Business Support Services | 7,91,92,174 | 45.14,971/- |
| Total Adjustment | 5,31,62,162/- |
IT and IT enabled back- office support services
During the AY 2020-21the assessee entered into transactions related to software support services of Rs.69,64,85,455/-. The assessee selected 11set of companies as comparable and their operating profit margin using year data and calculated as 9.46% with an inter-percentile range of 8.49% to 12.81%. The assessee’s own margin worked out at 12.01 %. This is how the assessee demonstrated that its international transaction with its AEs under this segment is in compliance with the transfer pricing regulations.
During the transfer pricing proceeding, the Ld. TPO after analysing the data bases, annual reports, application of filters and considering objections raised by the assessee, modified the search to arrive at the following final set of 19 comparable companies with median of 20.42% after working capital adjustment and arm’s length price (ALP) pertaining to provision of software development support services segment (page no 35&36 of the TPO order)
| Sl. No | Name of the Comparable | 3 years weighted average of OP/OC In % |
| 1 | Iservices India Pvt Ltd | 2.43 |
| 2 | Jindal Intellicom Ltd | 8.49 |
| 3 | Sundaram Business Services Ltd | 8.71 |
| 4 | Microland Ltd (Seg) | 9.37 |
| 5 | Anderson Business Solutions Pvt Ltd | 13.21 |
| 6. | Mindtree | 15.79 |
| 7 | GeP Solutions Pvt Ltd | 17.14 |
| 8 | Tech Manindra Business Services Ltd | 18.63 |
| 9 | 24/7 Customer Pvt. Ltd | 19.30 |
| 10 | Suprawin Technologies Ltd(Merged) | 20.42 |
| 11 | Karvy Data Management Services Ltd | 21.31 |
| 12 | Virinchi Ltd (Seg) | 21.91 |
| 13 | Vitae International Accounting Services Pvt Ltd | 25.27 |
| 14 | E Clerx Services Ltd | 28.01 |
| 15 | RProcess Outsourcing Services Pvt Ltd | 28.24 |
| 16 | Inteq BPO Services Pvt Ltd | 29.74 |
| 17 | Datamatics Business Solutions Ltd | 32.51 |
| 18 | Secmark Consultancy Ltd | 33.20 |
| 19 | Domexe Data Pvt Ltd | 38.05 |
Arm’s Length Price
| Particulars | Amount (In INR) |
| Operating Cost (A) | Rs.57,83,80,215/- |
| Arm’s Length Revenue at a Margin of 20.42% (B) = A*120.42% | Rs.69,64,85,455/- |
| Price actually Received ( C ) | Rs. 64,78,38,264/- |
| Proposed Adjustment u/s 92CA (D=B-C) | Rs. 4,86,47,191/- |
Business Support Services Segment
The assessee selected 9 set of companies for business support services considering as comparable and their operating profit margin using multiple year data and calculated as 7.78% with an inter-percentile range of 4.98 to 14.86%. The assessee calculated operating profit margin as 12.02%.
During transfer pricing proceedings, the Ld. TPO after the detail search process, accept/reject matrix of companies considered for analysis and application of filters, modified the search to arrive at the following final set of 17 and the arm’s length margin is taken on the Median 18.79%.
| Sl. No | Name of comparable | 3 year weighted average of OP/OC in % |
| 1 | Concept Public Relation (India) Limited | 0.37 |
| 2 | Paradigm Plus Marketing Communication Private Limited | 0.67 |
| 3 | Banyan Netfaqs Pvt Ltd | 1.17 |
| 4 | Hindustan Field services Private Limited | 4.98 |
| 5 | PR Pundit Public Relations Pvt Ltd | 14.79 |
| 6 | Praveg Ltd | 16.59 |
| 7 | DRG Analytics & Insight Pvt Ltd | 17.56 |
| 8 | Proactive In & Out Advertising Pvt Ltd | 17.87 |
| 9 | Ketchum Sampark Private Limited | 18.79 |
| 10 | Pressman Advertising Ltd. | 21.30 |
| 11 | Lintas India Pvt Ltd | 21.72 |
| 12 | Kamdar &Kamdar Associates Pvt Ltd | 24.04 |
| 13 | Just Dial Ltd | 26.55 |
| 14 | Netsscribes India Pvt Ltd | 30.68 |
| 15 | Remunance Systems Pvt Ltd. | 30.92 |
| 16 | Adfactors PR Private Ltd | 42.93 |
| 17 | UnitedLex BPO Pvt Ltd | 55.56 |
Arm’s Length Price
| Particular | Amount In Rs. |
| Operational Cost(A) | Rs.6,66,65,691/- |
| Arm’s Length Revenue at Margin of 18.79%(B) =A*118.79% | Rs.7,91,92,174/- |
| Price actually received | Rs.7,46,77,203/- |
| Proposed Adjustment u/s 92CA (D=B-C) | Rs.45,14,971/- |
The Hon’ble Dispute Resolution Panel (“DRP”) vide its order dated 16-08-2024 rejected the objections raised against the draft assessment order. However, passing the order the Hon’ble DRP directs the AO to reverify the application of quantitative filters and verify and rectify any computation errors in margin computation of comparables companies. The ld. TPO issued the final order dated 11-09-2024 after give effect to direction of the Hon’ble DRP under section 144C of the Act reducing the amount of transfer pricing adjustment to INR 4,34,99,607/- from the original adjustment of INR 4,86,47,1921/- with respect to the ITES segment and to INR 39,01,647/- from the original adjustment of INR 45,14,971/- with respect to the BSS segment.
Aggrieved, the assessee filed an appeal before the tribunal.
We have heard the parties and perused the material available on record.
Inclusion/ Exclusion of comparables
The assessee has objected to the inclusion of certain comparable companies by the Ld. DRP/TPO/AO in ITeS and BPO segment. The Ld. AR of the assessee submitted that if the two comparable namely Karvy Data Management, services Ltd and Secmark Consultancy Ltd for ITES segment and one for Just Dial for BSS excluded, the margin earned by the assessee from this segment will be at arm’s length therefore, we deal these comparables firstly.
Comparables selected by the Ld. TPO
Karvy Data Management Services Ltd.
The Ld. TPO included this company in the final list of companies on the ground that company passes RPT filter. The company provides ITES services like business and knowledge process service etc. which are similar to the function perform by assessee. The Ld. TPO observed in his order that the export filter as mentioned by the assessee has neither been applied by the assessee in TP nor considered by this office. Also, the application of export filter without analysis of the jurisdiction of the customers to whom the service is rendered by comparable companies is not correct. Moreover, a comparable cannot be excluded if it satisfied all qualitative and quantitative filters applied by the TPO, hence the contention of the assessee is rejected, Karvy Data Management Services Ltd. is one of the 19 comparables selected by TPO and selected as a comparable.
The Hon’ble DRP in its order dated 16-08-2024 recorded that however as regards the assesee’s contention regarding non availability of data the TPO is directed to address the same by passing a speaking order regarding the source of data used to come to the conclusion that the comparable passes all the quantitative filters applied by him.
The contention of the assessee is that this company was unable to discharge payments to its operational creditors during the FY 2019-20 and subsequent years, pursuant to which the comparable company Karvy Data Management Services Ltd. was admitted in corporate Insolvency Resolution Process. The financial statements of the company are not available from FY2020-21 in public domain. He further stated that the Ld. TPO has not followed the direction issued by the Hon’ble DRP. There is a significant high turnover approximately 6 times of the assessee company and the turnover of the assessee INR 64.78 Crore, whereas Karvy’s turnover is INR 382 crores. He further submitted that the Karvy company has been introduced as a comparable by the Ld. TPO in A.Y 2021-22.
In support, the Ld. AR relied on the ITAT decision in the case of Techbooks International Pvt Ltd. [2023]147 taxmann.com 561 (Delhi)(ITA No.5736/Del/2022) for 2007-08 wherein the Hon’ble ITAT held as under:-
“10.5.2After considering the rival submissions and perusing the relevant material, we find from the Annual report of this company, which is available on page 449 onwards of the paper book, that there was acquisition by this company of McCamish Systems LLC. Such information is available on page 456 of the paper book. 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 comparable.” The Ld. AR also relied the case of Global Logic India in ITA No. 370/Del/2022 (Delhi Tri) in this case the comparable company excluded on the basis of the extraordinary event. Reliance also placed the decision of the Hewit Associates (India) Ltd. [2022] 142 taxmann.com 322 (Delhi-Trib)
The Ld. DR relied upon the order of the Ld. AO/TPO.
The financial data for Fy 2020-21 are not available in public domain and the comparable company was unable to discharge payments to its operational creditors during the FY 2019-20 and subsequent years for which the comparable company was admitted in Corporate Insolvency Resolution Process (paper book page No. 871 to 883). The comparable company fails export filter also. Following the reasons taken note of the above, we order to exclude this company from the final list of the comparable companies.
Secmark Consultancy Ltd.
The Ld. TPO has included this company for the reasons that it qualifies all the filter applied by him. The relevant extract of the Ld. TPO’S order as under;
para 6.4.1 (10) The contention of the assessee has been considered. The functional profile of this comparable company is again verified. It has been observed that this company performs functions like consulting, technology and outsourcing services to financial market participants etc., which are similar to the function perform by assessee. Furthermore, TNMM provides wider flexibility to select comparables in terms of FAR analysis. The export filter as mentioned by the assessee has neither applied by assessee in TP study nor considered by this office. Also, the application of export filter without analysis of the jurisdiction of the customers to whom the service is rendered by comparable companies is not correct. Hence, the contention of the assessee is rejected. This comparable is included in the final list of comparables.
The Hon’ble DRP has made the direction. The relevant extract of the Hon’ble DRP order is reproduced below:-
“This company performs functions like consulting technology and outsourcing services to financial market participants etc., which are broadly similar to the function performed by assessee and hence satisfied the comparability criteria under TNMM.” The Panel however directs the TPO to reverify if this comparable passes export filter applied filter by him and pass a speaking order in this regard.
In the compliance of the direction of the Hon’ble DRP the Ld. TPO re-verified the comparable and found that the export filter as mentioned by the assessee has neither been applied by the assessee in TP study nor applied by the LD. TPO in order dated 25-10-2023. This comparable retained in the final list of comparable.
The contention of the assessee is that this company fails export filter for all three years. No export transactions have been reported in FY 2020-21, 2029-20, and 2018-19. He further submitted that the assessee has applied the export turnover filter applied in the TP report and same has been duly accepted by the Ld. TPO in his order dated 25-10-2023. He further stated that export filter is crucial for ensuring that the benchmarking study accurately reflects the economic realities of the assessee’s business model. Export markets often have different economic conditions, customer preferences and pricing structures compared to domestic markets. By applying an export filter, the assessee can select comparables that better reflect the dynamics of cross -border transactions ensuring that the arm’s length principle is adhered to. The comparable company is engaged in consulting, Technology and outsourcing services in the area of compliance, operations, risk management, outsourcing software development. Reliance placed the case of Acits Global Services Pvt Ltd, in ITA No. 30/Del/2015 (Delhi-Trib
The Ld. DR relied upon the order of the Ld. TPO/AO.
Upon careful consideration of the contentions of the parties, we find the merit in the submissions of the Ld. AR of the assessee. The comparable company engaged in consulting technology and outsourcing services. The assessee company does not outsource work. The assessee company functionally dissimilar and comparable company has not passed the export filter. Accordingly, this company cannot be compared to the assessee company and be excluded from the list of the comparables for determination of the arm’s length price of international transactions.
Business Support Services Segment
Just Dial Ltd.
This company was selected as a comparable by Ld. TPO. The relevant extract of the Ld. TPO’s order is as follows:
“The functional profile of this comparable company is again verified. It has been observed that this company provides support services like search related services and software services etc., which are similar to the function, perform by assessee. Furthermore, TNMM provides wider flexibility to select comparables in terms of FAR analysis. Moreover, a comparable cannot be excluded if it satisfied all qualitative and quantitative filters applied by the TPO hence the contention of the assessee is rejected. This comparable is included in the final list of comparables.
The Hon’ble DRP in its order dated 11-09-2024 has observed as under:
“This company provides support services like search related services and software services etc., which are broadly similar to the functions performed by assessee under BSS segment and hence satisfies broad comparability criteria under TNMM. Ownership of intangibles or high turnover cannot be criteria for exclusion unless it can be demonstrated with reliable data that the same has material effect on distorting the profit margins of the company, In any case the range concept of ALP determination has the automatic effect of eliminating the outliers.”
The Contention of the assessee is that this company is functionally dissimilar to that of the assessee, since within the software development and service segment, it is engaged in business listings, product information, user reviews and ratings. (paper book page no.671 to 673). There is a significant high turnover approximately 90 times of the assessee company and the turnover of the assessee INR 7.47 Crore whereas comparable company turnover is INR 675.18 crores, which 90% higher from the assessee. Further this company holds owns significant Ips including computer software, proprietary databases trademarks and patents amounting to INR 116 Lakhs.
In support thereof, the Ld. AR relied upon the decision of Nokia India Pvt. Ltd. ITA No. 6502/Del/2017(Delhi-Trib) in which the co-ordinate bench direct the AO to exclude this company from the final set of comparable. The co-ordinate bench has observed as under:
“In respect of just Dial Limited we, find merit in the contention of the ld. Counsel for the assessee that this comparable is functionally different. Just Dial Limited operates a local search engine which assists general public in finding information pertaining to nearby area. Further, no segmental data is available and the company owns significant intangible assets in the form of good will, application development and unique phone numbers, We , therefore, hold that this is not a valid comparable and direct the Assessing Officer/TPO to exclude this company from the list of comparables.
The Ld. DR relies upon the order of the Ld. AO/TPO.
In respect of Just Dial Limited, we find merit in the contention of the Ld. AR for the assessee that this comparable is functionally different. The company operates a local search engine which assists general public in finding information pertaining to nearby area and the turnover of the company is high, we hold that this company is not comparable. Accordingly, we direct the Assessing Officer to exclude this company from the final list of comparable.
In view of the above discussion, the Ld. TPO/AO is hereby directed to exclude three comparables and recompute the Arm’s length Price. Incase value falls within the permissible limit in that case the Ld. TPO/AO will delete the disallowance. Since the Ld. AR for the assessee did not argue on other comparables and restricted his arguments to these three comparables, only therefore this grounds of the assessee are partly allowed.
Ground No.4 Difference in calculation of comparable margins
The ld. AR of the assessee submitted that the Ld. TPO has not complied the direction of the Hon’ble DRP, in calculating the margin computation. We have heard the parties and perused the material available on record. The ld. Assessing officer is directed to apply the specific directions to calculate the margin computation of the Hon’ble DRP, if the assessee demonstrated before him. The ground is decided accordingly.
Ground No 5 Denial of double taxation relief available u/s 90 of the Act-
The ld. AR of the assessee submitted that the credit of foreign taxes of INR 52,04,942/- was not provided to the assessee. He stated that the foreign tax credit claim was denied without providing any reason. He also submitted that if the claim was allowed by the Ld. AO after appropriate verification, there is no reason such claim be denied to the assessee. Reliance is placed the judgement of the Hon’ble Madras High Court in the case of Thejo engineering Ltd. V. DCIT, CPC [2024]300 Taxman 403 (Madras). He also relied the assessee’s own case in ITA No.3310 /Del/2024 for AY 2020-21 in which, the CO-ordinate Bench held as under:-
The assessee has claimed that the ld. DRP as well as AO in its final assessment order has observed that the claim of the assessee wrt double taxation relief u/s 90 to the tune of Rs.1,11,34,019/- is found to be correct and no adverse inference was drawn, but the credit of the same was not given by the AO to the assessee while computing the tax payable in consequent to assessment framed. Both the parties before us are ad-idem that the matter can be restored back to the file of the AO for verification and accordingly grant of double taxation relief u/s 90 after due verification. Thus, this issue is restored to the file of the AO accordingly to grant double tax relief available to the assessee u/s 90 of the Act 1961 after verification in accordance with law. We order accordingly.
Respectfully following decision of the assessee’s own case, we restore the matter back to the file of the AO for verification and grant of double taxation relief under section 90 of the Act after due verification. The ground raised by the assessee is allowed accordingly.
Ground no 6- Interest under section 234A,234B and 234C of the Act are consequential in nature, and hence dismissed.
Ground No.7-is premature and dismissed at this stage.
In the result the appeal of the assessee is partly allowed in the manner as indicated above.