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Judgment
O R D E R
PER S.RIFAURRAHMAN,AM:
This appeal filed by the assessee is directed against the assessment order dated 25.09.2024 passed by the Assessment Unit, Income Tax Department, Circle 25 (1), New Delhi under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (for short ‘the Act”) for AY 2021-22 pursuant to the directions of the Dispute Resolution Panel u/s 144C of the Act raising following grounds of appeal :-
“The following grounds are independent of and without any prejudice to one another:
1.On the facts and circumstances of the case and in law, the Ld. Transfer Pricing Officer (' Ld. TPO)/ Assessing Officer ('AO') has erred in enhancing the income of the Appellant under section 143(3) read with section 144C(13) read with section 1448 of the Act, for AY 2021-22 by INR 4,39,59,554 for provision of back office support services holding that the international transaction pertaining to provision of back office support services do not satisfy the arm's length principle envisaged under the Act.
2.On facts and in law, the Ld. Ld. TPO / Hon 'ble Dispute Resolution Panel ('DRP') erred in rejecting the economic analysis adopted by the Appellant in its Transfer Pricing ('TP') Documentation, by modifying/adding/selecting filters thus rejecting comparable companies and selecting non-comparable companies, thereby contravening the provisions of Rule 10B(2) of the Income Tax Rules, 1962 ('the Rules').
3.On facts and in law, the ld. TPO/Hon’ble DRP has further erred in including the following companies which are non-comparable to the Appellant in view of their functions performed, assets owned, risks assumed vis-à-vis the Appellant :
a)Russell Reynolds Associates India Pvt. Ltd.
b)Kamdar & Kamdar Associates Pvt Ltd
c)Global Innovsource Solutions Pvt Ltd
d)AAA Technologies Ltd
e)Interactive Manpower Solutions Pvt Ltd
f)Aparajitha Corporate Services Pvt Ltd
4.On facts and in law, the Ld. TPO has further erred in excluding the following comparable companies having similar functional profile as that of the Appellant :
a)Sundaram Business Services Ltd.
b)Silgate Solutions Ltd
c)Cosmic global Ltd
5.On facts and in law, the Ld. TPO/ Hon'ble DRP has erred in rejecting the following comparable companies stating significant related party transactions ('RPT') even though they pass the RPT filter as applied by the Ld. TPO himself:
a)Thomson Reuters International Services Private Limited
b)NGA HR (India) Private Limited
6.On facts of the case and in law, Ld. TPO/ Hon'ble DRP has erred in disregarding the principal of consistency while rejecting certain comparables even though the same was accepted by tax authorities in Appellant's own case, all other facts remaining the same.
7.On facts of the case and in law, the Ld. TPO/ Hon'ble DRP has erred on the facts and circumstances of the case and in law by-not considering that the margins are subject to economic adjustments on account / of difference in working capital employed and risks assumed by the Appellant vis-a-vis the comparable companies as per the provisions of Rule 10B(1) and Rule 10B(3).
8.On facts and in law, Ld. TPO erred in incorrectly computing the operating margins of the companies selected by the Ld. TPO and not even providing the detailed computation of the margins as computed by the revenue even when directed by the Hon'ble DRP to pass a speaking order in this regard.
9.On facts and in law, the Ld. TPO/ Hon'ble DRP erred in not appreciating that the outstanding receivables are a result consequence of the international transaction with the associated enterprises ('AEs') and is not a separate international transaction per se and therefore, do not warrant a separate determination of arm's length price under Section 92C of the Act. While doing so, they further erred in:
9.1re-characterizing the receivables as an 'unsecured loan';
9.2disregarding the fact that the working capital adjustment subsumes the impact of outstanding receivables;
9.3disregarding the fact that no interest has been charged by the AE on such outstanding payables
9.4in alleging that funds carrying interest cost were utilized by the Appellant to grant extra credit period to AEs. This is grossly incorrect given that the Appellant is a debt-free company.
10.On the facts and circumstances of the case and in law, the assessment proceedings are barred by limitation in view of Section 153 read with Section 144C of the Act.
11.That on the facts and circumstances of the case and in law, the AO erred in levying interest u/s 234A, 2348 and 234C of the Act.
12.On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act.
Grounds No.1 and 2 are general in nature, hence not adjudicated.
With regard to Ground No.5, ld. AR submitted that Ground no. 5 with respect to erroneous exclusion of companies having significant Related Party Transaction (‘RPT’) is not being pressed by the assessee. While as per the financials, the RPT disclosure shows no RPT, the AOC 2 filed by the said comparable companies discloses that the entities are providing 100% of the services to their AEs, thereby failing the RPT filter. Based thereon, the assessee wishes not to press Ground no. 5. Accordingly, Ground No.5 is dismissed as not pressed.
Grounds No.8 and 10 are not pressed, hence the same is dismissed as not pressed. Grounds No.11 and 12 are consequential in nature. Additional grounds raised by the assessee are also not pressed, hence the same are also dismissed as not pressed.
At the time of hearing, ld. AR of the assessee brought to our notice the relevant facts relating to other grounds and submitted his submissions as under.
WSP Consultants India Private Limited (‘assessee’ or ‘WSP India’) is engaged in providing support services w.r.t design and engineering services (‘EDS’) to its Associated Enterprises (‘AEs’) which deals with third party clients in property, environment, transport, and infrastructure sectors. In addition, the Company provides back-office support services (in the nature of low-end IT enabled services) to its AEs.
During FY 2020-21, the assesseeentered into several international transactions which were considered at arm’s length by the Ld. Transfer Pricing Officer (‘Ld. TPO’) except the international transactions mentioned below:
S. No | Nature of international transactions | Value in INR | Adjustment proposed (Refer Page 197 of the appeal set) | Method applied |
|---|---|---|---|---|
| 1 | Provision of back-office support services | 29,38,34,483 | 4,56,47,907 | Transactional Net Margin Method (‘TNMM’) |
Additionally, Ld. TPO considered assessee’s outstanding receivable from its AEs as an international transaction. Consequently, interest at the rate 6 months Libor plus 425 basis points i.e., 4.621% was imputed on the receivables which were outstanding for a period exceeding 60 days. An adjustment of INR 3,82,392 (Refer Page 210 of the appeal set) was proposed by the Ld. TPO on the account of interest on outstanding receivables.
Pursuant to the DRP directions (Refer Page 41 to 72 of the appeal set), the following adjustments were incorporated in the final assessment order (Refer Page 39 of the appeal set):
| S. No. | International Transactions | Amount of adjustment (INR) |
|---|---|---|
| 1 | Provision of back-office support services | 4,38,71,117 |
| 2 | Interest on outstanding receivables | 88,437 |
| Total Adjustment | 4,39,59,554 | |
Ld. AR submitted that under the provision of back-office support services segment, the assessee undertakes low end IT enabled services with respect to accounting, finance, accounts payable, administration and human resource management. During the year, the assessee earned an operating margin on costs of 11.61%. He further submitted that the summary of the proceedings are as under:
| Particulars | Position as per TP Documentation | Approach adopted by Ld. TPO (TP order dated 28.10.2023) | Approach adopted by Ld. DRP (DRP directions dated 31.08.2024; TPO appeal effect order giving effect to DRP directions dated 24.09.2024 and AO order dated 25.09.2024 |
| Arm’s Length margins | No. of comparables : 11 Unadjusted Range : 6.34% to 13.60% | No. of comparables : 11 Unadjusted Range : 15.80% to 32.51% Median : 28.78% | No. of comparables : 10 Unadjusted Range : 15.08% to 33.84% Median : 28.28% |
Ground No. 3, 4 & 6 – Inclusion/ Exclusion of comparable companies
Ld. AR submitted that on facts and in law, the Hon’ble DRP/ Ld. TPO erred in rejecting the economic analysis adopted by the Assessee in its TP documentation, by selecting non-comparable companies as well as rejecting comparable companies selected by the Assessee, thereby contravening the provisions of Rule 10B (2) of the Income Tax Rules, 1962 (‘the Rules’). Thus, ld. AR pleaded for inclusion of 2 comparable companies erroneously excluded by the Ld. TPO and exclusion of 6 comparable companies included by the TPO as under:
1 Sundaram Business Services Limited - Seeking Inclusion
2 Silgate Solutions Limited - Seeking Inclusion
3 Global Innovsource Solutions Private Limited - Seeking Exclusion
4 Russel Reynolds Associates India Private Limited – Seeking Exclusion
5 Aparajitha Corporate Services Private Limited - Seeking Exclusion
6 AAA Technologies Limited - Seeking Exclusion
7 Kamdar & Kamdar Associated Private Limited - Seeking Exclusion
8 Interactive Manpower Solutions Private Limited - Seeking Exclusion
Ld. AR submitted the detailed contentions regarding inclusion/ exclusion of the comparable companies which is tabulated hereunder:
| S.N o | Name of the comparable company | assessee’s Submission | Ld. TPO / Hon’ble DRP Remarks |
|---|---|---|---|
| 1 | Sundaram Business Services Limited Seeking Inclusion | 1. Functional Comparability: On review of the Annual Report, it was observed that the company is engaged in provision of information technology enabled services in the areas of accounting, insurance, banking, human resources, document conversion, data processing, health care, media and publishing, telecom and other areas for and on behalf of banks, companies, bodies corporate, trusts, funds, firms, associations, institutions, individuals and any other person in India and abroad. (Refer Page B12 of Volume II of the paper-book) also (Refer Page 1-2 of Annexure 1) Further, as per the business description of the company it is engaged in business process outsourcing (‘BPO’) and related activities (Refer Page B3 of Volume II of the paper-book). BPO services rendered falls within the ambit of IT enables services as per the definition mentioned in Rule 10TA of Income Tax Rules (‘the Rules’). | TPO Order “…But it could be seen that the functions of the Assessee is different from the assessee profile. Therefore, this comparable is rejected.” (Refer Page 191 of appeal set) |
| S.N o | Name of the comparable company | assessee’s Submission | Ld. TPO / Hon’ble DRP Remarks |
Thus, the services provided by Sundaram Business Services Limited is comparable to the services of a back-office support service provider like the assessee.
Further, as per the transfer pricing documentation maintained by the assessee for AY 2019-20 and AY 2020-21, Sundaram has been consistently selected as a comparable company.(Refer page 3 of Annexure 1)
Reliance placed on: Syngenta Services (P.) Ltd. vs. ACIT {[2023] 157 taxmann.com 306 (Mumbai - Trib.)} – Assessee’s business profile: Engagedin low end IT enabled services with respect to accounting, finance, accounts payable, administration and human resource management
Syngenta Services’s business profile:“3. …Engaged in the business of providing Business Support Services to its Affiliate Companies in relation to finance, human resources and Corporate Information Technology.”
Sundaram’s business profile: “4.1. …Sundaram Business Services is engaged in the business of processing and ITES in the areas of accounting, insurance, banking, human resources, etc.”
Considering the business profile of the assessee and Syngenta Services is similar and Sundaram was considered to be a comparable company in Syngenta Services (supra) for benchmarking the transaction of business support services to its AE, placing reliance on the said case, Sundaram ought to be included in the final list of comparable when there is no change in the business profile of the assessee and Sundaram.
Passes all filters applied by Ld. TPO.
| S.N o | Name of the comparable company | assessee’s Submission | Ld. TPO / Hon’ble DRP Remarks |
|---|---|---|---|
| 2 | Silgate | 1. Functional comparability – On review of the | TPO Order |
Solutions annual report, it is observed that the company is “Assessee has Limited engaged in the business of providing BPO submitted in his services.(Refer Page B254 of Volume II of the reply that the Seeking paper-book). BPO services rendered falls company is Inclusion within the ambit of IT enables services as per performing the the definition mentioned in Rule 10TA of function as Income Tax Rules (‘the Rules’). mentioned in his profile. After Further, the company is engaged only in one line perusal of the of business, i.e., BPO as can be substantiated record it has been from the segmental reporting of the company. seen that (Refer Page B248 of Volume II of the paper- company is book) engaged in BPO and KPO which is functionally Without prejudice to the above, the TPO himself has different from the considered Global Innovsource Solution Private profile of the Limited and Aparajitha Corporate Services Private assessee. Limited as companies comparable to the assessee, Therefore, this despite that these companies are engaged in comparable is rendering KPO services. Considering the above and rejected.” without prejudice to our contentions for rejection of Global Innovsource and Aparajitha Corporate (Refer Page 191 Services, if at all the TPO has consider to consider of appeal set) the entities rendering KPO services, Silgate Solution may ought to be accepted. DRP directions “Since the
Passes all filters applied by Ld. TPO. transaction of the assessee under dispute is back-office support services, this comparable appears to have FAR same as that of the assessee. Assessee has also contended about applicability of filters. TPO is directed to re-verify FAR profile and applicability of filters and redetermine
| S.N o | Name of the comparable company | assessee’s Submission | Ld. TPO / Hon’ble DRP Remarks |
|---|---|---|---|
| inclusion/exclusion in the final list. TPO is directed to pass speaking remarks in the final order in this regard.” (Refer Page 49 of appeal set) (Refer Pg 22 of appeal set – OGE) | |||
| 3 | Global | 1. Insufficient financial information ‐The | TPO Order |
Innvosource financial data of the company is not available on “…after perusal Solutions Ministry of Corporate Affairs (‘MCA’) (refer of the records it Private screenshots furnished by the Assessee vide show could be seen that Limited cause reply dated 24 October 2023 on pg. no. the comparable is A73-A74 of Volume I of the paper-book)or on engaged in back Seeking any other public platform. Since data availability office work which Exclusion is the lifeline of any analysis, the assessee is not is similar to the able conclude whether the same is a fit assessee’s profile. comparable. Thus the
contentions of the
Reliance placed on the following case laws assessee is rejected. IHG IT Services (India) Pvt. Ltd. vs DCIT Therefore, this (ITA No.6381/Del/2022) comparable is “3. … when the assessee asked for the complete included in the annual report at the time of the original TP final list.” proceedings or the proceedings pursuant to the (Refer Page 194 DRP, the TPO failed to provide the complete of appeal set) annual report of the said comparable to the assessee. If the TPO wanted to use Wipro BPO as DRP Directions a comparable, the onus was on him to provide the “TPO has not complete annual report to the assessee. It is a passed speaking settled law that onus is on the person who asserts remarks in the the facts. In any case, we fail to see how without draft order to the complete annual report of Wipro BPO, the hold aforesaid DRP upheld the inclusion of the said company. companies as From the Annual Report, which is few pages of comparable. the extract, we take note that no revenue or Assessee has segmental break up is available between software contended about services and infrastructure support services and applicability of no information about the nature of business is filters. TPO is available in the annual report. We find force in directed to re-
| S.N o | Name of the comparable company | assessee’s Submission | Ld. TPO / Hon’ble DRP Remarks |
the submissions advanced by ld. AR that in the verify FAR profile absence of the Director’s Report and Notes to and applicability Account for this comparable are not available in of filters and re public domain it would not be prudent to take determine this company as a comparable. Ld. DR has not inclusion/exclusio been able to controvert this fact. Since sufficient n in the final information for this comparable is not available, list.” we direct exclusion of this company as a (Refer Page 50 of comparable as we have done in the case of appeal set) Avaya India (P) Ltd. vs. Addl.CIT, Range 2, (Refer Pg 25 of New Delhi in ITA No.5528/Del./2011 for AY appeal set – 2007-08 order dated 18.09.2015.” OGE) BanTec TPS India (P.) Ltd. vs. ACIT {[2019] 108 taxmann.com 109 (Mumbai - Trib.)} – “23. … No material has been furnished before us by the Department to controvert the contention of the assessee that financial results of the company for the year under consideration are not available in public domain. Further, the Department has failed to substantiate the nature of information gathered by the Transfer Pricing Officer to consider the company as a comparable to the assessee. If the financial results of the company for the impugned assessment year are not available, as alleged by the assessee, the company cannot be considered as a comparable.” Mavenir India (P.) Ltd. vs. DCIT {[2022] 141 taxmann.com 160 (Delhi - Trib.)} – In the said case, audited financial statements of the comparable – Febulka Advertising Pvt. Ltd. was not available on public domain. Thus, the company was not included as a comparable. Placing reliance on the same, considering that the financial statements of Global Innovosource Solutions Private Limited is not available in the public domain, the company doesn’t qualify to be a fit comparable for benchmarking analysis. Relevant extract is as follows: “21. …Thus, when the audited financial statement of the company is not available on public domain, it will not be safe to include the company as a
| S.N o | Name of the comparable company | assessee’s Submission | Ld. TPO / Hon’ble DRP Remarks |
|---|---|---|---|
comparable.More so, when there is no material on record to suggest the source from which the TPO has obtained the information regarding this company and the authenticity of such information. It doesn't appear on record that the TPO has made any independent inquiry with this company either by issuing notice under section 133(6) of the Act or in any other manner.” 2. Functionally dissimilar -On review of limited information available in public domain, it is observed that pre-amalgamation during the year, company was engaged in providing high-end management consultancy services which if at all can be classified as KPO services. Hence, not comparable to the back-office support services provider like assessee.(Refer Page A74 of Volume I of the paper-book) | |||
| 4 | Russel Reynolds Associates Private Limited Seeking Exclusion | 1. Functionally dissimilar: On review of website, the Company is engaged in rendering services in the nature of search and succession for board of directors including CEO, AI and tech transformation, assisting in optimization of board leadership, other board and CEO advisory, assisting in digital transformation etc. (Refer Page 8-9 of Annexure 1). The aforementioned services require application of knowledge and technical expertise and results in value addition of the business. Whereas the assessee is an additional leg in terms of managing the overseas HR desk in the coordination activities such as short listing of CV, coordination of interviews with the suitable candidates etc. and is engaged in rendering of back-office support services. The non comparability of the functions performed by the assessee and Russel Reynolds, render the companies incomparable to each other. Further, on review of the financials, the business model of Russel Reynolds is not comparable to | TPO Order “This company is engaged in financial services and it is similar to the profile of the assessee therefore the contention of the assessee is rejected. Thus, this comparable is included in the final set.” (Refer Page 192 of appeal set) DRP directions “TPO has not passed speaking remarks in the draft order to hold aforesaid companies as comparable. |
Name of S. Ld. TPO / the N assessee’s Submission Hon’ble DRP comparable o Remarks company the assessee. Russel Reynolds is an Assessee has entrepreneurial entity and earns revenue from contended about third party also on the account of royalty. The applicability of detail of royalty earned for two years is provided filters. TPO is below: directed to re-verify FAR profile and applicability of filters and re determine inclusion/exclusio n in the final list.”
Particulars FY 2020-21 FY 2019-20 (Refer Page 50 of
appeal set) Royalty Income 17,08,04,90 15,00,96,29 2 1 (Refer Pg 24 of appeal set – Revenue 74,37,63,79 61,44,35,04 OGE) 1 0 Royalty/Revenu 22.97% 24.43% e Reference (Refer Page B673 of Volume II of paperbook) The entity is also paying royalty for use of technical know-how (which cannot be considered as operating/comparable to the Assessee).
| Particulars | FY 2020-21 | FY 2019-20 |
|---|---|---|
| Royalty Expenditure | 3,80,52,256 | 3,24,08,888 |
| Reference | (Refer Page B673 of Volume II of paperbook) | |
Hence, Russel Reynolds cannot be considered as an appropriate comparable for the assessee.
Abnormal growth in net profits / Fluctuating profit / (loss)– As per the audited financial statement of the company for AY 2021-22, the company has reported a significant growth of 659% in profit before tax as compared to previous year. (Refer Page B669 of Volume II of the paper-book)
Name of S. Ld. TPO / the N assessee’s Submission Hon’ble DRP comparable o Remarks company
Particular AY 2021- AY 2020- % s 22 21 Profit 18,27,43,96 2,40,75,28 659 before tax 4 3 % Further, the profits / (loss) margins of the company had widely fluctuated and inconsistent margins over the period of three years. This renders the company incomparable.
5 Kamdar & 1. Functionally dissimilar – On review of the TPO Order Kamdar annual report of the Company, it is engaged in This company is Associates providing consultancy services on Foreign Trade engaged in Private Policy and is a recognised export house providing corporate support Limited services in the nature of Duty Exemption / services. The Remission Scheme, E.P.C.G. Scheme, company provides Seeking Promotional Schemes, Export & Import audit, taxation Exclusion Registrations. and other professional It is professionally managed consultancy services which is company providing services for claim of benefits similar to the of export promotion schemes under foreign trade profile of the policy and procedures. This requires assessee therefore application of knowledge and technical skills. the contention of (Refer Page 10-11 of Annexure 1). Hence, the the assessee is company is not comparable rejected. Thus, Further, on review of the website, it can be this comparable observed that the company helps in value is included in the addition to consultancy assignments. (Refer final set.” Page 10-11 of Annexure 1). (Refer Page 193 of appeal set)
Hence, not comparable to the back-office support DRP directions services provider like assessee. TPO has not passed speaking remarks in the draft order to hold aforesaid companies as comparable. Assessee has contended about applicability of filters. TPO is directed to re-
| S.N o | Name of the comparable company | assessee’s Submission | Ld. TPO / Hon’ble DRP Remarks |
|---|---|---|---|
| verify FAR profile and applicability of filters and re determine inclusion/exclusion in the final list.” (Refer Page 50 of appeal set) (Refer Pg 25 of appeal set – OGE) | |||
| 6 | Aparajitha | 1. Functionally dissimilar – On review of | TPO Order |
Corporate financial statements, it is observed that the “…after perusal Services company is engaged in providing high-end of the records it Private management consultancy services which if at all could be seen that Limited can be classified as KPO services as per the the comparable is Rules. Hence, not comparable to the back-office engaged in HR Seeking support services provider like assessee. (Refer compliance Exclusion Page B268 and B296 of Volume II of the services work paper-book) which is similar to the assessee’s 2. Extraordinary financial event of acquisition profile. Thus the of another company renders the company contention of the non-comparable. – From February 2020 assessee is onwards, Aparajitha Capital Growth Private rejected. Limited was undergoing merger with Aparajitha Therefore, this Corporate Services Private Limited. The merged comparable is entity i.e., Aparajitha Capital Growth Private included in the Limited operates as an investment holding final list.” company and offered investing in, acquiring, and (Refer Page 195 dealing in shares of the group companies (Refer of appeal set) Page 7 of Annexure 1). This is functionally DRP directions distinct from the assessee’s business of “TPO has not providing back-office support services in the passed speaking nature of accounting and HR support. This remarks in the further disqualifies Aparajitha as a valid draft order to comparable, thereby, rendering it non- hold aforesaid comparable to the assessee. (Refer Page B280 of companies as Volume II of the paper-book) comparable.
Assessee has
Diversified business operations – It can be contended about observed from the website of the company that it applicability of offers certain products/ software to its customer. filters. TPO is (Refer Page 5-6 of Annexure 1) directed to re-verify FAR profile
| S.N o | Name of the comparable company | assessee’s Submission | Ld. TPO / Hon’ble DRP Remarks |
|---|---|---|---|
4. Owns significant intangibles – The entity owns significant intangible asset and have intangibles under development. (Refer Page B331 and B398-B406 of Volume II of the paper-book) The assessee does not own any intangible asset/ have intangible asset under development nor provide product/software to its customers. Thus, the said company is not comparable to the assessee. | and applicability of filters and re determine inclusion/exclusion in the final list.” (Refer Page 50 of appeal set) (No remarks but included in the final set of comparables by TPO in OGE) | ||
| 7 | AAA | 1. Fluctuating and inconsistent margins‐ As per | TPO Order |
Technologie the financials of the company, the board has “…after perusal s Ltd. categorically mentioned that there has been of the records it extraordinary fluctuation in the margin of the could be seen that Seeking company vis-à-vis the last year i.e., decrease in the comparable is Exclusion net profit by 69.23%. This indicates engaged in inconsistency in the margin of the company and Auditing and therefore renders it incomparable to the assessee. Consulting (Refer Page B536 of Volume II of the Company work paperbook) which is similar to the assessee’s 2. Functionally dissimilar: On perusal of the profile. Thus the annual report of AAA Technologies Limited for contention of the FY 2020-21, it has been observed that the assessee is company is an IT and information security rejected. Auditing & Consulting company. It provides Therefore, this services such as Information System Audit, comparable is Cyber security, IT Assurance & Compliance, included in the Information security and IT governance to BFSI, final list.” Government, Regulatory Agencies and Public (Refer Page 194 and Private sector organizations. Hence, not of appeal set) comparable to the back-office support services DRP directions provider like assessee. (Refer Page B577 of “TPO has not Volume II of the paper-book) passed speaking remarks in the 3. Revenue earned from government companies: draft order to As per the Annual report of the company, it hold aforesaid procures business from BFSI, Government, companies as Regulatory Agencies and Public Sector comparable. Companies. They bid for tenders available for Assessee has CERT-In empanelled IT Security Organizations; contended about and NICSI a company under National Informatics applicability of Centre, Ministry of Electronics and Information filters. TPO is Technology, GOI for providing and procuring IT directed to re-solutions for multiple E-governance projects verify FAR profile undertaken by NIC, MeitY, Governments, and applicability Government Organization and PSU. The of filters and re Company is also empanelled with government determine bodies, PSU’s and banks to directly procure inclusion/exclusio business from them. (Refer Page B577 of n in the final Volume II of the paper-book) list.” (Refer Page 50 of
4.Reliance is placed on assessee’s own case, appeal set) (Refer ACIT Vs. WSP Consultant India Limited Pg 25 of appeal (ITA. 370/DEL/2016, wherein similar company set – OGE) i.e., entity earning its revenue from the government company was rejected for the engineering and design service segment. Relevant extract is as follows:
“15.This company offers Transaction Advisory, Policy Advisory and Capacity Building, encompassing the entire gamut of Industrial and Urban infrastructure for projects like Jawaharlal Nehru National Urban Renewal Mission Programme of the Government of India and similar assignments from West Bengal Tourism Development Corporation Ltd. This company was formed as a joint venture with the West Bengal Industrial Development Corporation which is a Government of West Bengal undertaking. Most of the Revenue comes from government and functions performed by this company are also not comparable with that of the assessee. Exclusion is upheld.”
The order of Hon’ble ITAT was also upheld by the Hon’ble High court.
Considering, the above high-end services being provided to government companies could not be compared to engineering design services, the same cannot be compared with back-office support services in the nature of accounting and other related support.
Hence, a company rendering services to government company on a tender basis is not
| S.N o | Name of the comparable company | assessee’s Submission | Ld. TPO / Hon’ble DRP Remarks |
|---|---|---|---|
| comparable to a cost-plus captive entity company rendering services to it AE. Therefore, AAA Technologies Limited is not comparable to the assessee. | |||
| 8 | Interactive Manpower Solution Private Limited Seeking Exclusion | 1. Functionally dissimilar: On review of the annual report the company is engaged recruitment process outsourcing services. (Refer Page B704 of Volume II of the paper-book). Theassessee is an additional leg in terms of managing the overseas HR desk in the coordination activities such as short listing of CV, coordination of interviews with the suitable candidates etc. Hence not comparable to the back-office service provider like assessee. 2. Brand Name: On review of the annual report of Interactive Manpower, the company is utilizing the brand name of Empresaria Group PLC and also acquiring technical know-how, research, database, license and intellectual property etc. from Empresaria Group PLC for its business which (may affect the financial results of the company and thereby directly impacting the operating margins earned by Interactive Manpower) which cannot be compared with a limited risk captive service provider. (Refer Page B713 of Volume II of the paper-book) | TPO Order “…after perusal of the records it could be seen that the comparable is engaged in accounting support work which is similar to the assessee’s profile. Thus, the contention of the assessee is rejected. Therefore, this comparable is included in the final list.” (Refer Page 194 of appeal set) |
On the other hand, ld. DR brought to our notice page 49 of the appeal set which is ld. DRP’s order. With reference to above, ld. DR brought to our notice detailed findings of TPO relating to 5 comparables from the TPO order andsubmitted that Russel Reynolds Associates Private Limited company is engaged in financial services which is similar to the profile of the assessee. He submitted that Kamdar & Kamdar Associates Private Limited is engaged in providing corporate support services. He further submitted that this is also similar to the profile of the assessee. With regard to Global Innvosource Solutions Private Limited, he submitted that this company is engaged in the back-office work which is also similar to the profile of the assessee. With regard to AAA Technologies Ltd., he submitted that they are engaged in auditing and consultancy company work which is also similar to the profile of the assessee company. Therefore, he heavily relied on the detailed findings of the Assessing Officer/TPO.
Considered the rival submissions and material placed on record. Before us the assessee had raised grounds of appeal and argued that the comparables selected and excluded by the TPO in order to benchmark the ALP is not proper and not justified. He made detailed submissions as discussed above. We shall deal with each comparables as under:
Inclusion:
a. With regard to Sundaram Business Services, we observed that it is engaged in provision of information technology enabled services in the areas of accounting, insurance, banking, human resources, document conversion, data processing, health care, media and publishing, telecom and other areas for and on behalf of banks, companies, bodies corporate, trusts, funds, firms, associations, institutions, individuals and any other person in India and abroad. The functions performed by the assessee is more or less similar and it is within the ambit of ITES. Even the same comparable was selected by the assessee consistently in the earlier two assessment years. In the case of Syngenta Services P Ltd case, the ITAT Mumbai held that the functions of the Sundaram Business Services Ltd.
b. With regard to Silgate Solutions Limited, we observed that the company itself declared the source of income in their financial statement as income from BPO export/domestic (refer Page B254of the PB). We noticed that even Ld DRP observed the above comparable appears to have FAR same as that of the assessee and TPO was asked to verify the same and based on the applicability of filter the same may be included or excluded. However, we noticed that the TPO in OGE, observed that it is leading IT solutions company offering software development, web development, healthcare IT solutions, international call centre etc., The company offers end to end IT solutions covering a wide range of industry verticals and service portfolio encompassing all inbound, outbound services etc., He had not quoted the source of the above information. Even then what is relevant is the actual service offered by them. In the financial statement, they have declared that they have only engaged in BPO services, not in any other services like software development etc., It clearly shows that they are into KPO. Hence, we are inclined to direct the TPO to include the above comparables in the list of final comparables.
Exclusions:
a. With regard to Global Innvosource, we noticed that the TPO had included the above company as comparable for the reason that it is engaged in back office work, according to him it is similar to the profile of the assessee. On objections raised by the assessee, Ld DRP observed that TPO has not passed speaking remarks in DAO to hold the same as comparable. It directed TPO to apply the filters and redetermine inclusion/exclusion. In OGE, TPO had included the same as comparable. We observe that there is no financial information available in the public domain. In case the TPO had collected the information through his source, it should have been shared with the assessee. In the similar situation, in the case of IHG IT Services (India) Pvt Ltd (supra), the coordinate bench held that “when the assessee asked for the complete annual report at the time of the original TP proceedings or the proceedings pursuant to the DRP, the TPO failed to provide the complete annual report of the said comparable to the assessee. If the TPO wanted to use Wipro BPO as a comparable, the onus was on him to provide the complete annual report to the assessee. It is a settled law that onus is on the person who asserts the facts. In any case, we fail to see how without the complete annual report of Wipro BPO, the DRP upheld the inclusion of the said company. From the Annual Report, which is few pages of the extract, we take note that no revenue or segmental break up is available between software services and infrastructure support services and no information about the nature of business is available in the annual report.We find force in the submissions advanced by ld. AR that in the absence of the Director’s Report and Notes to Account for this comparable are not available in public domain it would not be prudent to take this company as a comparable. Ld. DR has not been able to controvert this fact. Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable as we have done in the case of Avaya India (P) Ltd. vs. Addl.CIT, Range 2, New Delhi in ITA No.5528/Del./2011 for AY 2007-08 order dated 18.09.2015.”Similarly in the case of BanTec TPS India (P.) Ltd. (supra) the ITAT Mumbai held that No material has been furnished before us by the Department to controvert the contention of the assessee that financial results of the company for the year under consideration are not available in public domain. Further, the Department has failed to substantiate the nature of information gathered by the Transfer Pricing Officer to consider the company as a comparable to the assessee. If the financial results of the company for the impugned assessment year are not available, as alleged by the assessee, the company cannot be considered as a comparable.” With regard to functional dissimilarity issue, we noticed that Ld AR submitted that in the pre-amalgamation it was engaged in providing high end management consultancy, KPO services, in our view, it is not relevant what the company was indulged prior to amalgamation, only relevance the services rendered by it during the year under consideration. We are not inclined to take any view on this issue. Therefore, we are inclined to follow the above decisions / directions of the coordinate benches and direct the TPO to exclude the above comparable from the final comparables.
b. With regard to Russel Reynolds Associates, TPO held that it is in financial services and it is similar to the assessee’s services, however, the Ld DRP directed TPO to re-verify the FAR and apply the filters to determine whether this comparable can be included. However, in the OGE, TPO retained the same. Before us, it was submitted that its functions are dissimilar to the assessee and it earned separate royalty income which consists of about 25% of the total revenue. It also pays huge royalty toward technical know-how. It also registered inconsistent and abnormal profit compared to previous years result. We noticed that the TPO only analysed the FAR without going through the other abnormal results like substantial increase in profit earned during the year and substantial royalty income and expenditure. This makes this company uncomparable.
c. With regard toKamdar & Kamdar Associates Private Limited, TPO selected the same as comparable on the basis of its functions however the assessee objected the same with the prayer that it is functionally dissimilar. We observed that it is engaged in providing consultancy services on Foreign Trade Policy and is a recognised export house providing services in the nature of Duty Exemption / Remission Scheme, E.P.C.G. Scheme, Promotional Schemes, Export & Import Registrations. This cannot be different than the BPO services and back-office support services. There is no separate skill required for such advisory services. Therefore, we are inclined to dismiss this prayer and retain the same as comparable.
d. With regard to Aparajitha Corporate Services Private Limited, we observed that TPO had retained the above company as comparable in OGE. We observed that in the original TP order, the company was selected by the TPO as comparable to the assessee even though the assessee had objected to the same. Before Ld DRP also, raised objections but Ld DRP had not discussed regarding this comparable in their final order. Since, the TPO had retained the same as comparable in the final OGE, the assessee had raised the issue of exclusion of this comparable before us. We observed from the financial statements, it is into management consultancy activities whereas the TPO had observed that it is into HR compliance services, after careful consideration, HR compliance is different from consultancy. The consultancy involves more of KPO, will not fall under the category of BPO. Further we observed that there is merger activities in the present assessment year in which the Aparajitha Capital Growth Pvt Ltd was merged into the assessee vide merger order dated 22.01.2021, with effect from the appointed date of 01.04.2020, the above said company was merged as going concern. This will have an financial impact, which was not segregated by the TPO or by the company in their financial statements, this itself makes this company as not to have selected as comparable company. Therefore, in our considered view, the above said company should be excluded from the final comparables.
e. With regard to AAA Technologies Ltd, we observed that TPO had retained the above company as comparable in OGE. We observed that in the original TP order, the company was selected by the TPO as comparable to the assessee even though the assessee had objected to the same. Before Ld DRP also, the assessee raised objections but Ld DRP had rejected the same. Since, the TPO had retained the same as comparable in the final OGE, the assessee had raised the issue of exclusion of this comparable before us. We observed that it is engaged in the auditing and consulting services, it has declared very abnormal net profit during the year under consideration. Since it is engaged in IT and information security auditing and consultancy services, these services cannot be included under BPO services, it requires special skill and knowledge to execute the above services. Therefore, on this issue itself this company should be excluded from the final list of comparables. However, it is submitted before us that this company is engaged in providing services to the government agencies and it is also empanelled with various government agencies. It should not be selected as comparable on this issue also and relied on the decision of WSP Consultant India Ltd (supra). In the above decision, it was held that substantial business was with government and government agencies, therefore, similar company was directed to be excluded. However, in the case of AAA Technologies, there is no specific information in their financial statements about the business carried on with the government agencies, whether it is substantial or part of the business. We cannot take decision on the basis of incomplete data. Since, the services offered by this company is high end, the same cannot be included in the final comparables.
f. With regard to Interactive Manpower Solutions,we observed that TPO had retained the above company as comparable in OGE. We observed that in the original TP order, the company was selected by the TPO as comparable to the assessee even though the assessee had objected to the same. Before Ld DRP also, raised objections but Ld DRP had not discussed regarding this comparable in their final order. Since, the TPO had retained the same as comparable in the final OGE, the assessee had raised the issue of exclusion of this comparable before us.
We observed from the submissions made before us that this company is engaged in recruitment process outsourcing services and it is additional leg in terms of overseas HR desk in short listing of CV and coordinating for conducting interviews. The information submitted by the assessee from the financial statements that the principal business activities is recruitment process outsourcing services, it is not clear what are the key functions performed, mere coordination activities for recruitment without there being any technical support, the activities carried on by them will fall under the category of BPO. In our view, the information put before us very narrow and we cannot appreciate from the same.
Further, it was submitted that they ae using brand name of Empresaria Group PLC and also utilising technical know-how etc,. there is nothing on record to show that how it is impacting the operating margins. The risk pattern can be evaluated only on the basis of imparting services and functional profile. It cannot be presumed that this leads to impacting the operating marking earned by the above company. In the result, we are inclined to reject the above submissions of the assessee. Hence, the above submissions are dismissed.
In the result, the ground raised by the assessee on the issue of inclusions are allowed and on the issue of exclusions, are partly allowed as indicated above.
With regard to Ground No.7 regarding working capital adjustment ought to be granted, ld. AR submitted that strictly without prejudice to the above, ld. TPO and ld. DRP have erred in not granting working capital adjustments as envisaged under Rule 10B(1)(e) of the Rules. The detailed working capital adjusted margins are provided as Annexure 2.
Ld. AR submitted that TPO and ld. DRP summarily disposed off the assessee’s contention by stating arbitrarily that the impact of working capital adjustment was not demonstrated by the assessee. In this regard, ld. AR submitted that differences in working capital position of assessee v/s comparables need to be adjusted for:
Owing to apparent differences in working capital levels employed by the assessee and comparable companies, accurate adjustments ought to be made to margins to account for such differences. [Rule 10B(1)(e)(iii) , 10B(2) and 10B(3) of the Rules]
Assessee’s net collection period is ~15 days as compared to ~161 days of the comparable(s). (Refer Annexure 2)
Implying that there is an apparent difference in working capital of the Appellant vis-à-vis its comparable(s).
To bring the comparable(s) at par, working capital adjustment ought to be granted to adjust for the differences in time value of money.
Ld. AR furthers submitted that this issue is covered by the decision of Hon’ble Delhi High Court in the case of PCIT vs Kusum Healthcare Pvt.
Ltd. [TS-412-HC-2017(DEL)-TP] [Delhi HC] wherein appeal of the Revenue has been dismissed. He further brought to our notice the relevant findings of the aforesaid decision as under :
“8.In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/ profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted.
14.As mentioned earlier, the differential impact of working capital of the assessee vis-a-vis its comparable has already been factored in the pricing/ profitability of the assessee and therefore, any further adjustment to the margins of the assessee on the pretext of outstanding receivable is unwarranted and wholly unjustified.”
Accordingly, ld. AR of the assessee pleaded to allow ground no.7.
On the other hand, ld. DR of the Revenue submitted that the assessee had not filed any data to demonstrate the requirement of working capital adjustment. He relied on the specific findings of Ld DRP.
Considered the rival submissions and material placed on record. We noticed that the TPO had not made any working capital adjustment in this case and on filing objections before Ld DRP, it observed that the assessee had not submitted any data related to prove its point. It observed that working capital adjustment cannot be allowed without demonstrating the working capital has a one-to-one connection to profitability and that no other factors compensate for differing levels of working capital available with a company. Hence, the plea was rejected. Before us, it is submitted that working capital adjustment is statutory requirement as per TP rules, it cannot be set aside. Further it is submitted that the net collection period is only 15 days compared to about 161 days in the comparables. It will have a substantial impact on the profitability and comparison should be at par. The assessee also submitted the relevant data in annexure 2. Considering the decision of Kusum Healthcare (supra), which is binding, hence we are inclined to remit this issue back to the file of TPO to give working capital adjustment on the basis of workings submitted by the assessee after giving proper opportunity of being heard to the assessee. In the result, grounds raised by the assessee is allowed for statistical purposes.
With regard to Ground No.9, ld. AR submitted that on facts and in law, the Ld. TPO/ Hon’ble DRP erred in not appreciating that the outstanding receivables are a result/ consequence of the international transaction with the AEs and is not a separate international transaction per se and therefore, do not warrant a separate determination of arm’s length price under Section 92C of the Act. Ld. AR submitted that TPO imputed the interest at the rate of 6 month LIBOR plus 425 basis points i.e., at the rate of 4.621% for the delays exceeding 60 days, however the ld. DRP’s direction was that the TPO imputed the interest at the rate of 6 month LIBOR plus 425 basis points i.e., at the rate of 4.621% for the delays exceeding 90 days and referred to Page 38 of the appeal set.
Further, ld. AR submitted in his contentions that :
Outstanding receivables cannot be considered as a separate international transaction
At the outset, it may be inferred that early or late realization of service proceeds is incidental to the transaction of sale/ service, and not a separate transaction in itself. Once ALP is determined in respect of the service transaction, it would be deemed to be covering all the elements and consequences of such transactions. Comparison of Average Realization period (‘ARP’) of the Appellant vis--à-vis the comparable companies
The ARP in case of independent comparable companies was 161 days whereas that in case of the Appellant was only 15 days. (Refer Annexure 2)
The ARP of comparable companies is higher than that of the Appellant, hence it can be inferred the period of realization of payment by the Appellant is lower than the market scenario. Hence, no adjustment is warranted for such delay.
Considering the Appellant is a debt free company, no adverse inference can be taken from outstanding receivables from AE:
The Appellant has not paid any interest on account of any delayed payments made to third-party operational creditors. Thereby, it cannot be inferred that any funds carrying interest borrowed by the Appellant was utilized to grant extra credit period to its AE.
Following screenshot from financial statement substantiates that Appellant is a debt free company:
Ld. AR further relied on the following decisions :-
PCIT vs Kusum Healthcare Pvt. Ltd. [TS-412-HC-2017(DEL)-TP] [Delhi HC]– relevant findings relied upon are already reproduced above.
Bechtel India Pvt. Ltd. v. DCIT [TS-638-ITAT-2015(DEL)-TP] affirmed by Hon’ble High Court of Delhi [TS-508-HC-2016(DEL)-TP]. Special leave petition before the Supreme Court has also been dismissed [TS-591-SC-2017-TP] – If the assessee is a debt free company, it is not justifiable to presume that, borrowed funds have been utilized to pass on the facility to its AEs; and
PCIT v. Inductis India (P.) Ltd. {[2023] 157 taxmann.com 87 (Delhi)}- assessee being a debt free company, it would not be justifiable to presume that the borrowed funds have been utilized to pass on the facilities to its AEs.
On the other hand, ld. DR of the Revenue relied on the findings of lower authorities.
Considered the rival submissions and material placed on record. We observed from the overall facts on record. We noticed that one hand, the tax authorities refused to give working capital adjustment and another hand, they are carrying on with calculating interest on delayed remittances. It is submitted before us that it is debt free company and there is no interest cost to the assessee and there is no requirement to determine interest cost on receivables. After careful consideration, we are inclined to remit this issue also to the file of AO/TPO to analyse the balance sheet and if the company is debt free, no adjustment can be made on the issue of outstanding receivables. Further, this issue will be addressed when the working capital adjustment is granted, there is no separate requirement only when the average collection period is abnormally high in comparison to the industry average. No such exercise was done in this case. Therefore, we are inclined to remit this issue back to the file of AO to determine the average collection period and whether the same is abnormal compared to industry average. It is needless to say that the assessee may be given proper opportunity of being heard. In the result, this grounds of appeal also allowed for statistical purposes.
In the result, appeal filed by the assessee is partly allowed in above terms.