IMS HEALTH ANALYTICS SERVICES PRIVATE LIMITED,BANGALORE V. .INCOME TAX OFFICER, WARD-3(1)(1), BANGALORE

ITA 300/BANG/2022

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The case involves IQVIA Analytics Services Pvt. Ltd., which appealed against the order of the National Faceless Assessment Centre (NFAC), Delhi, concerning the assessment year 2017-18. The primary issues revolved around the inclusion of notional costs in the operating expenses for calculating the Profit Level Indicator (PLI) and the selection of comparable companies for benchmarking transfer pricing of international transactions. The TPO had included notional costs related to ESOPs and other expenses in the operating costs, which the assessee contested. The tribunal found merit in the assessee's arguments, referencing several judicial precedents, and directed the exclusion of such costs and certain comparables from the benchmarking process.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 24873 (ITAT-BANGALORE)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2017-2018
• Other Referred Cases: M/s Li and Fung India Private Limited vs. M/s. CIT, Commvault Systems (India) (P.) Ltd. vs. Dy. CIT, M/s I2 Technologies Software Private Limited vs. CIT, Maersk Global Centres (India) (P) Ltd. vs. ACIT, Principal Commissioner of Income-tax-13, Mumbai vs. Tecnimont (P.) Ltd., Rampgreen Solutions (P.) Ltd. vs. CIT, Mindteck (India) Ltd. vs. DCIT, M/s Rage Frameworks India Private Limited vs. CIT, Checkmate Services Private Limited vs. Commissioner of Income Tax, CAE Flight Training (I) Pvt. Ltd. vs. CIT, Tata Autocomp Systems Ltd. vs. CIT, Phoenix Mecano (India) (P.) Ltd. vs. CIT, Thyssen Krupp Industries (P.) Ltd. vs. CIT, Tara Jewels Exports (P.) Ltd. vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A SREENIVASA RAO
• Assessee Lawyers: AJIT TOLANI; DARPAN KRIPLANI
• Keywords: Set aside; Transfer pricing; International transaction; Retrospective amendment; Question of law; Depreciation; TDS; Notional interest; Date of conversion
• Section: 153; 43; 22; 13; 92CA; 234B; 43B; 191; 92B; 20

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER IT(TP)A No.300/Bang/2022 Assessment Years : 2017-18 IQVIA Analytics Services Pvt. Ltd., (formerly known as IMS Health Analytics Services Pvt. Ltd.,) Omega 9th Floor, Embassy Techsquare, Marathahalli-Sarjapur Outer Ring Road, Kadubeesanahalli, Bengaluru – 560 008. PAN – AADCP 1532 C Vs. The Income Tax Officer, Ward – 3(1)(1), Bengaluru. NFAC, Delhi. . APPELLANT RESPONDENT Assessee by : Shri Ajit Tolani & Sri Darpan Kriplani, CA Revenue by : Shri A Sreenivasa Rao, CIT (DR) Date of hearing : 10.10.2024 Date of Pronouncement : 18.12.2024 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the order passed by the National Faceless Assessment Centre (NFAC), Delhi, dated 22/02/2022 in ITA No. ITBA/AST/S/143(3)/2021-22/1039978192(1) for the assessment year 2017-18. 2. At the outset the ld. AR for the assessee before us submitted that he has been instructed not to the press the Ground Nos. 1, 2, 4, 5, 6, 7, IT(TP)A No.300/Bang/2022 Page 2 of 28 . and 9 raised in the memo of appeal, accordingly, we dismiss the same as not pressed. 3. The first issue raised by the assessee in ground No. 3 is that the ld. DRP/TPO/AO erred in treating services (tangible and intangible) provided by the AE, free of cost, as a part operating cost to the assessee. 4. The facts in brief are that the assessee is an Indian company and engaged in the business of sales & marketing analytics and business consulting services to the pharmaceutical & healthcare industry. The assessee company has two subsidiaries namely Pharma ARC Inc (USA) and Pharma ARC Consulting Services Gmbh (Switzerland). The company during the year has entered various international transactions with its AEs including the provision of IteS Services. The assessee to benchmark such international transaction (provision of ITES services) has adopted the TNMM method as most appropriate method to compute the ALP. The assessee by applying the TNMM method computed its PLI as OP/OC which comes 14.79% and based on TP study claims that the transaction of provision of ITES services is at ALP. 4.1 The TPO, however, was not satisfied with the process of computation of PLI made by the Assessee. As per the TPO, the cost incurred by the AEs relating to ESOP provided to the employee of the assessee company and notional cost/depreciation of assets either tangible/intangible provided by the AEs free of cost to assessee for rendering of services to AEs would also be the part of operating cost. IT(TP)A No.300/Bang/2022 Page 3 of 28 . Accordingly, the TPO has treated the expenses incurred by the foreign AE as part of the operating expenses as detailed below: IT(TP)A No.300/Bang/2022 Page 4 of 28 . 4.2 Finally, the TPO worked the PLI of the assessee at 3.68% and 3.55% as OP/OC and OP/OR respectively which was objected before ld. DRP. The ld. DRP in this regard has issued the following direction: “2.5.1 Having considered the submissions, The TPO is directed to verify the margin computation and recompute the same if necessary after taking into consideration the arguments of the assessee regarding certain items being non operational. 2.5.2 Assessee's argument is that notional costs on expenditure like ESOP etc must be computed on the basis of the mark up on such expenditure and not on the basis of 10% ad hoc rate. We find merit in the argument of the assessee and the TPO is directed accordingly.” 5. Being aggrieved by the direction/order of the ld. DRP/TPO/AO, the assessee is in appeal before us. 6. The learned AR before us filed a paper book running from pages 1 to 191 and the written submissions running from pages 1 to 7 and contended that the assessee has not incurred any cost on account of tangible/intangible and ESOP provided by the AEs. Therefore, the impugned cost on notional basis cannot be considered as part of operating expenses while calculating the PLI of the assessee. IT(TP)A No.300/Bang/2022 Page 5 of 28 . 7. On the other hand, the learned DR vehemently supported the order of the authorities below. 8. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, the controversy arises before us for our adjudication whether the notional cost discussed above is to be treated as part of operating cost of the assessee to work out the PLI of the assessee. In this regard, we find relevant to refer the judgement of Hon’ble Delhi High Court in the case of M/s Li and Fung India Private Limited (40 taxmann.com 300 (Delhi)) where the Hon’ble Delhi High Court while adjudicating the decision of the Tribunal held that the approach of the TPO and the tax authorities in essence imputes notional adjustment/income in the assessee's hands on the basis of a fixed percentage of the free on board value of export made by unrelated party vendors. The relevant extract of the order is as under: 39. The TPO's determination enhanced LFIL's cost base for applying the operating profit over total cost margin. LFIL's compensation model is based on functions performed by it and the operating costs incurred by it and not on the cost of goods sourced from third party vendors in India. Allotting a margin of the value of goods sourced by third party customers from Indian exporters/vendors to compute the appellant's profit is unjustified. This Court is of opinion that to apply the TNMM, the assessee's net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Textually, and within the bounds of the text must the AO/TPO operate, Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee's net profit margin for application of the TNMM. Rule 10B(1)(e) recognizes that \"the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs IT(TP)A No.300/Bang/2022 Page 6 of 28 . incurred or sales effected or assets employed or to be employed by the enterprise ...\" (emphasis supplied). It thus contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear. 40. The TPO's reasoning to enhance the assessee's cost base by considering the cost of manufacture and export of finished goods, i.e., readymade garments by the third party venders (which cost is certainly not the cost incurred by the assessee), is nowhere supported by the TNMM under Rule 10B(1)(e) of the Rules. Having determined that (TNMM) to be the most appropriate method, the only rules and norms prescribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded an ALP. The approach of the TPO and the tax authorities in essence imputes notional adjustment/income in the assessee's hands on the basis of a fixed percentage of the free on board value of export made by unrelated party vendors. 8.1 We also find relevant to refer the order of Hon’ble Mumbai Tribunal in the case Commvault Systems (India) (P.) Ltd. (126 taxmann.com 287) where it was held as under; 6. The ground No. B raised by the assessee is with regard to arm's length pricing adjustment made in the software distribution activity undertaken by the assessee. 6.1 The Company has started distribution of software products of CommVault Inc from 1st April 2010. Since this year being one of the initial years of distribution activity, the Company has incurred losses. As per the agreement entered between Commvault India and the AE, the AE shall not charge any amount towards cost of license if the operating cost of Commvault India is more than the revenue earned from distribution of software products. Accordingly, the AE has not charged any amount towards the license fee to Commvault India during the year under consideration. 6.2 In relation to activity of purchase of software for distribution, the Ld. TPO has held that the company is not acting as a distributor but rendering service to its AE by selling licenses on behalf of the AEs. The ld. TPO observed that the AE has supplied products free of cost to assessee for sale in India. This transaction was not reported in TP IT(TP)A No.300/Bang/2022 Page 7 of 28 . document as the receipt of products was free of cost and the sales were made to domestic parties. Accordingly, the assessee had treated the same as not falling within the definition of international transaction. The ld. TPO examined the distribution and license agreement dated 01/04/2010 and the terms and conditions agreed upon thereon. From the same, he concluded that even though the cost price as nil, but the product has a price. Therefore, the transaction of purchase is an international transaction with the AE in which the purchase cost is nil. He observed that if no cost is paid towards the licenses, then it can also be assumed that sales are made on behalf of the AE. The ld. TPO observed that the licenses are given free of cost to the company and the percentage of profits are to be shared after absorption of the losses for the assessee. He concluded that this arrangement is nothing but in the nature of services rendered. He also observed that if cost of software is nil, the assessee is losing a mark up on such cost and thereby double benefit is accruing to the AE i.e. one being not compensating the assessee on the cost incurred and the other being not owning up the losses and allowing it to remain in India. 6.3 Assessee in response to show-cause notice replied that no cost has been paid for supply of software by the AE and that assessee is only acting as a captive distributor and not distributing on behalf of its AE. It was stated that assessee company has started distribution of software products of Commvault INC for which there is a separate team of 6 employees and the office is located in Mumbai. It was also stated that this being the second year of distribution activity, the company has incurred losses in the said segment. As per the agreement, the AE will not charge any amount towards cost of licenses if the operating cost is more than the revenue earned. It was submitted that the company has started earning profits from F.Y.2013-14 however, AE has not charged any amount towards license in view of the losses incurred by the assessee in the earlier years. In other words, the AE had given time to the assessee to absorb all the losses incurred by it in the distribution segment and thereafter start making payment for the cost of licenses. 6.4 The ld. TPO however, did not heed to the aforesaid contentions of the assessee and proceeded to carryout the fresh search of comparables using public data base and arrive at the arithmetic mean of the comparables at 1.37% of revenue by adopting Profit Level Indicator (PLI) as operating profit IT(TP)A No.300/Bang/2022 Page 8 of 28 . divided by operating revenue (OP/OR). The assessee had shown margin at -22.70% in respect of this segment. Accordingly, the ld. TPO made adjustment of Rs. 1,66,53,598/- by working out as under:— Operating Cost - Rs. 6,94,16,582/- Arm's length Margin - 1.37% Arm's length Price (100 + AALM x OC) - Rs. 7,03,67,589/- Price received - 5,37,13,991/- Adjustment - Rs. 1,66,53,598/- The aforesaid working and the action of the ld. TPO was upheld by the ld. DRP. 6.5 The ld. AR vehemently argued that adoption of re-sale price method (RPM) would be ideal to benchmark the transactions carried out by the assessee with regard to the software distribution activity as against the Transaction Net Margin Method (TNMM) adopted by the ld. TPO and upheld by the ld. DRP. The ld. DR also agreed for adoption of resale price method in the instant case. We find as per 10B(1)(b) of the Income-tax Rules, re-sale price method could be applied where the property or service purchased from Associated Enterprises are resold to an unrelated enterprise. The facts of the assessee's case squarely fit into this parameter as assessee herein has purchased the software free of cost from its AE and had sold it to unrelated parties in India. Hence, we hold re- sale price method should be the most appropriate method in the instant case. Moreover, the re-sale price method is traditional transaction method which would always be preferable to transactional profit method like profit split method and TNMM. 6.6 Yet another excruciating fact which is relevant to be addressed in the instant case is that the arm's length price adjustment should be restricted only to the value of international transaction. Admittedly, the international IT(TP)A No.300/Bang/2022 Page 9 of 28 . transaction involved in the distribution segment is purchase of software by the assessee from the AE. Since the assessee is not making any payment to its AE for the software supplied to it, the value of international transaction had to be concluded as zero and consequently the transfer pricing adjustment thereon also would be only zero. The arm's length price adjustment should be restricted only to the value of international transactions and cannot be done at entity level is no longer res integra in view of the decision of the Hon'ble Bombay High Court in the case of CIT v. Phoenix Mecano (India) (P.) Ltd. [2019] 108 taxmann.com 124/265 Taxman 354/414 ITR 704 and in the case of CIT v. Thyssen Krupp Industries (P.) Ltd. [2016] 70 taxmann.com 329/381 ITR 413 (Bom.) and CIT v. Tara Jewels Exports (P.) Ltd. [2017] 80 taxmann.com 117/[2016] 381 ITR 404 (Bom.). 6.7 In any case we find that the issue in dispute is squarely covered by the Co-ordinate Bench of this Tribunal in assessee's own case for the A.Y.2011-12 in Comm Vault Systems (India) (P.) Ltd. v. Dy. CIT [2018] 92 taxmann.com 350 (Hyd. - Trib.) wherein this Tribunal after examining the nature and terms of the distribution agreement had held that assessee's functional profile is akin to a distributor and not a service provider. The relevant observations are made in para 10 of the said order which are not reproduced herein for the sake of brevity. 6.8 In view of the aforesaid observations, and respectfully following the judicial precedents hereinabove, we direct the ld. TPO to delete the adjustment made in the sum of Rs. 1,66,53,598/- in the software distribution segment. Accordingly, the various grounds raised in ground No. B are disposed off in the aforesaid manner. 8.2 So far, the cost incurred by the AE for ESOP provided to the employee of the assessee company whether that would be included in the operating cost of the assessee, regarding this we find relevant to refer the order of coordinate bench of This tribunal in the case of M/s I2 Technologies Software Private Limited [ITA(TP) No. 1207/Bang/2014 where it was held as under; 21.The TPO had also alleged that the assessee had not accounted for its cost regarding stock option granted to IT(TP)A No.300/Bang/2022 Page 10 of 28 . the employees of the assessee company by its AE and no doubt, the amount of Rs. 2.00 Crores added by the A.O. also includes the value in respect of such ESOP as well as cost of administrative and management support services received by its AE and the amount payable for using assets of AE. Regarding the value of ESOP, it is held in various Tribunal orders that it is not a part of operating cost and therefore, the value of ESOP has to be excluded from the amount of Rs. 2.00 Crores worked out by the TPO as cost incurred by the assessee from its AE without paying anything. 8.3 Based on the above, we can safely conclude that the stand of the lower authorities for including the notional cost (discussed above) in calculating the PLI of the assessee in the given facts and circumstances is not sustainable. 8.4 Moving further, it is necessary to take a note of the amendment brought under the Income Tax Amendment Rule 2017, where under rule 10TA in the definition of operating expense, share based compensation has been included in the definition of operating expenses and such amendment was applicable from 1st April 2017 with prospective effect. Regarding the applicability of rule 10TA, we note that such rule is applicable if the assessee opts for safe Harbour rules. But in the present case, the assessee has not opted such rule, therefore the impugned transaction of share-based compensation cannot be treated as operating expenses in the year under consideration in terms of such rule. 8.5 Going ahead, we also note that the assessee has also incurred similar cost in the earlier assessment years i.e 2015-16 and 2016-17 but there was no such adjustment made by the lower authorities in the PLI of the assessee. Accordingly, we are of the view that the principles of IT(TP)A No.300/Bang/2022 Page 11 of 28 . consistency in the present case also needs to be applied as there is no change in the facts and circumstances of the case in the year under consideration viz a viz the earlier assessment years. Accordingly, we direct the TPO not include the notional cost discussed above while calculating the PLI of the assessee. Hence, the ground of appeal of the assessee is hereby allowed. 9. The next issue raised by the assessee in ground No. 8 is that the ld. DRP/TPO/AO erred in considering certain comparables though the same are dissimilar to the activities of the assessee. 10. The assessee to benchmark the transaction relating to ITES segment adopted TNMM method to compute the PLI and selected the 4 comparable companies to determine the ALP. However, the Ld. TPO rejects the comparable companies selected by the assessee, citing the following reasons: i. The use of non-current year data. ii. Improper application of the export turnover filter. iii. Improper application of the employees cost filter. 10.1 Subsequently, the TPO conducted a fresh search for comparable companies using the following filters: - Companies not having current year data were excluded. - Companies with incomes of less than ₹1 crore were excluded. - Companies with revenue from ITES or software development (SWD) less than 75% of total turnover were excluded. - Companies with export turnover less than 75% of total turnover were excluded. - Companies with RPT of more than 25% of sales were excluded. IT(TP)A No.300/Bang/2022 Page 12 of 28 . - Companies with an employee cost of less than 25% of turnover were excluded 10.2 Based on these filters, the TPO selected a set of 13 comparable companies. Using the comparable companies’ data, the TPO calculated the PLI of the comparable companies at 24.37% as compared to the margin declared by the assessee at 3.68%. The list of comparable companies and the detailed working of the PLI by the TPO is available on pages 46 and 47 of the TPO order. Consequently, the TPO determined an upward adjustment of ₹69,18,16,840/- only and added the same to the total income of the assessee. 11. The aggrieved assessee filed an objection before the Ld. DRP, and among other contentions, objected to the comparability of the new set of comparable companies selected by the TPO. The learned DRP, after considering the facts in totality confirmed the order of the TPO after excluding one company i.e. ultra marine & pigment ltd. (SEG) subject to the inclusion two more company namely Cheers Interactive India Pvt. Ltd. And Informed Technologies India Ltd. in the list of comparables. Pursuant to the direction of the learned DRP, the ALP margin was recalculated at 22.90%, as against 24.37% computed by the TPO in the original proceedings. 12. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 13. The learned AR before us reiterated that certain companies should not be considered as comparable as these companies are IT(TP)A No.300/Bang/2022 Page 13 of 28 . functionally dissimilar. The companies which are functionally dissimilar are detailed in the subsequent paragraph. 14. On the other hand, the learned DR before us reiterated the findings contained in the order of the authorities below. 15. We have heard the rival contentions of both parties and perused the materials available on record. It is an admitted fact that the assessee's TP study for the ITES Segment was rejected by the TPO, who conducted fresh benchmarking after selecting a new set of comparable companies. On subsequent objection, the learned DRP confirmed the majority of selection of comparable companies by the Ld. TPO after some modification. The issue for our consideration is whether companies which is under dispute as pointed out by the ld. AR are functionally dissimilar and these companies are not fitted into the filter criteria selected by the Ld. TPO in the given facts and circumstances. 15.1 In this regard, we find that the ld. AR before us has filed a detailed note stating the above listed companies are dissimilar to the activities of the assessee. The submission of the ld. AR reads as under: “• Ground no. 8.1 The Ld. NFAC/ Ld. TPO erred in including the following companies as comparable, despite these companies being functionally dissimilar to the Appellant, the Ld. Panel erred in upholding the same: • Tech Mahindra Business Services Ltd. • Datamatics Business Solutions Ltd. • Infosys B P M Services Pvt. Ltd. rte' • Vitae International Accounting Services Pvt Ltd • Manipal Digital Systems Pvt. Ltd. • CES Ltd.. • S P ITechnologies India Pvt. Ltd.( • Inteq B P 0 Services Pvt. Ltd The Appellant prayed for the exclusion of following companies which are covered in the Appellants favour by a plethora of judicial precedents of the Hon'ble ITAT - IT(TP)A No.300/Bang/2022 Page 14 of 28 .