INTERCONTINENTAL HOTELS GROUP (INDIA) PVT. LTD.,GURGOAN V. ACIT, CIRCLE-1(1), GURGAON

ITA 2013/DEL/2022

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The case involves Inter Continental Hotels Group (India) Pvt. Ltd., which appealed against the final assessment order passed by the AO under sections 143(3) and 144C(13) of the Income Tax Act, 1961. The dispute centered on the adjustments made by the TPO concerning the arm's length pricing of international transactions related to IT enabled support services and support services provided to associated enterprises. The assessee contested the economic analysis and selection of comparable companies used by the TPO. The Tribunal's decision involved a detailed examination of the comparables and the application of the correct transfer pricing method, leading to a partial allowance of the appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 23814 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Assessment Year: 2018-2019
• Other Referred Cases: CIT vs Aimil Ltd. & Ors. (321 ITR 508/188), Checkmate Services Pvt. Ltd. Versus CIT 143 taxmann.com 178
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S.K. JADHAV
• Assessee Lawyers: AJIT KUMAR JAIN
• Keywords: Opportunity of being heard; Transfer pricing; International transaction; Principle of natural justice; Rectification of order; Related party transaction
• Section: 143(3); 143(1); 13; 234B; 144C

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : H : NEW DELHI BEFORE SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No.2013/Del/2022 Assessment Year: 2018-19 Inter Continental Hotels Group (India) Pvt. Ltd., 11th Floor, Building No.10, Tower-C, DLF Cyber City, Phase-2, Gurgaon, Haryana – 122 002. PAN: AAGCS7613G Vs ACIT, Circle-1(1), Gurgaon. (Appellant) (Respondent) Assessee by : Shri Ajit Kumar Jain, CA, Ms Nikhila Bhalla, CA & Ms Suchita Kanodia, CA Revenue by : Shri S.K. Jadhav, CIT-DR Date of Hearing : 08.01.2025 Date of Pronouncement : 26.03.2025 ORDER PER ANUBHAV SHARMA, JM: This appeal is preferred by the assessee against the final assessment order dated 28.06.2022 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the ACIT, Circle 1(1), Gurgaon (hereinafter referred to as the Ld. AO). ITA No.2013/Del/2022 2 2. The assessee is engaged in the business of providing hotel management services to hotels in India owned by third parties. The assessee offers back office support services in the nature of marketing support services (MSS) with respect to system fund, brand support, regional office support to its associated enterprises (AEs) and also provides law-end Information Technology enabled Services (ITeS) in the nature of accounting services to its AEs. During the financial year 2017-18, the assessee entered into several international transactions which were considered to be 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 Method applied 1. Provision of support services 307,582,804 40,327,453 Transactional Net Margin Method (TNMM) 2. Provision of IT enabled support services 1,024,075,535 39,510,408 3. The assessee approached DRP challenging the proposed enhancement in the income of the assessee by rejecting the economic analysis adopted by the assessee in its TP documentation relating to the afore-referred two international transactions. The assessee had also alleged that TPO had erred in modifying/adoption of filters and rejecting functionally comparable companies selected by the assessee. It was alleged that new comparable companies are either not comparable to the assessee in terms of the functions performed, assets employed and risk assumed was based on quantitative filters proposed by the ld. ITA No.2013/Del/2022 3 TPO himself. Pursuant to the DRP directions, the following adjustments were incorporated in the final assessment order:- S. No. International Transactions Amount of adjustment (INR) 1. Provision of IT enabled support services 25,917,910 2. Provision of support services 39,510,408 Total adjustment 65,428,318 4. Thereafter, the assessee filed a rectification application requesting for rectification in the TPO order dated 30th July, 2021 r.w. effect giving order dated 31.05.2022 by rejecting the companies having significant related party transactions and rectified order dated 24th February, 2023 was passed wherein the revised adjustments stood as follows:- S. No. International Transactions Amount of adjustment (INR) 1. Provision of IT enabled support services 9,786,473 2. Provision of support services 39,510,408 Total adjustment 49,296,881 5. Further, a disallowance of employees contribution to PF and labour welfare fund amounting to Rs.11,19,770/- on account of delay in deposit beyond the due date was made by the CPC and the AO had taken the same while computing the income. After DRP directions, the addition has been maintained by the AO. Accordingly, the assessee is in appeal before the Tribunal raising the following grounds:- “The following grounds are independent of and without any prejudice to one another: General Grounds ITA No.2013/Del/2022 4 1. On the facts and circumstances of the case and in law, the Ld. AO has erred in enhancing the income of the Appellant under section 143(3) read with section 144C(13) of the Act, for AY 2018-19 by INR 6,65,48,088 2. On the facts and circumstances of the case and in law, the Ld. AO has erred in violating the provisions of section 144B of the Act and principles of natural justice by not providing an opportunity of being heard and failing to issue a show-cause notice for the proposed variation. 3. On facts and in law, the Ld. AO has erred in passing the order beyond the timeline given under section 144C of the Act. Thus, making the order passed by the Ld. AO bad in law and liable to be quashed. IT enabled services (INR 2,59,17,910) 4. 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'). 5. On facts and in law, the Ld. TPO has erred in continuing to include companies which clearly fail the related party transaction to revenue filter as applied by the Ld. TPO himself-The action of the TPO is in contravention of Rule 10B(1)(e) read with Rule 10A of the Rules as various companies have related party transactions higher than 90% of value of their revenue. Marketing support services (INR 3,95,10,408) 6. 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 Rules. 7. On facts and in law, the Ld. TPO has erred in excluding Cyber Media Research & Services Ltd. on the ground that the company is making persistent losses not appreciating that-  The company has actually earned operating profits in the AY 2017- 18 and AY 2018-19  Loss/ profit cannot be the barometer of comparability under Rule 10B(2). ITA No.2013/Del/2022 5 8. On facts and in law, the Ld. TPO has erred in excluding ICRA Management Consulting Services Ltd. on the ground that the company is making persistent losses not appreciating that  The company has actually earned operating profits in at least one out of three selected years and losses in other years are operating in nature  Loss/profit cannot be the barometer of comparability under Rule 10B(2)  The company has been accepted to be functionally comparable by the TPO himself on an year on year basis historically and the functionality of the company remains the same. Corporate tax grounds 9. On the facts and in law, the Id. AO and Centralised Processing Centre ('CPC') have erred in disallowing an amount of INR 11,19,770 under section 36(1)(va) of the Act on account of delay in deposit of employees' contribution to Provident Fund ('PF') and Labour Welfare Fund ('LWF'). 10. On the facts and in law, the Id. AO has erred in considering the income of INR 11,19,770 on the final assessment order, as per the intimation u/s 143(1) dated 19th March 2020 wherein disallowance of employee's contribution to PF and LWF amounting to INR 11,19,770 on account of delay in deposit was made by CPC. 11. On the facts and in law, Id. AO, has erred in not complying with the directions of the Hon'ble DRP, wherein the Id. AO was directed to consider the submission of the Appellant and pass a speaking order in relation to disallowance of employee contribution to PF/LWF. 12. On the facts and in law, the Id. AO has erred in making a double disallowance of INR 262,518 out of total disallowance of INR 11,19,770, as the amount of INR 262,518 was suo-moto disallowed by the Appellant in its computation of income. 13 On the facts and in law, the Id. AO has erred in not following the favorable judicial precedents including the Delhi High Court judgment in case of CIT vs Aimil Ltd. & Ors. (321 ITR 508/188) wherein it has been held that employees' contribution to Provident Fund will be an allowable expense if the same is deposited before the due date of filing of Income-tax return. Other Grounds 14. On facts and in law, the Ld. AO has erred in computing interest under section 234B of the Act for computation of tax liability. ITA No.2013/Del/2022 6 15. On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270 A of the Act. The Appellant craves leave to alter, amend, or withdraw all or any of the Grounds of Appeal herein or add any further grounds as may be considered necessary and to submit such statements, documents and papers as may be considered necessary either before or during the appeal hearing. The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case.” 6. Heard and perused the record. The ground No.1 to 3 are general in nature and 14-15 are consequential so require no separate discussion. Further, we find that ground No.5 arises out of the error allegedly committed by the AO in not giving benefit to the assessee out of the revised TP order dated 24th February, 2023. In this regard, we find that the TPO had passed rectification order rejecting the companies having related party transactions and, accordingly, revised adjustments. However, admittedly, the AO has not given effect to the same. Thus, we find substance in the contention of the ld. AR and restore the issue to the AO for giving effect to the rectification order passed by the TPO dated 24th February, 2023. Accordingly, this ground No.5 is sustained. 7. The grounds No.4, 6, 7 and 8 primarily arise out of the claim of inclusion and exclusion of certain comparable companies and for convenient conclusions on the assertions of the ld. counsel, we proceed to decide the grounds cumulatively, but, taking up the comparables individually. However, before that, certain facts need to be brought on record. ITA No.2013/Del/2022 7 8. Admittedly, under the provisions of IT enabled support segment, the assessee undertakes business process outsourcing services primarily accounting services in the nature of bank reconciliation, invoice processing, account receivables, account payables, account reconciliation, analyzing profit & loss account and assisting in statutory audit. During the year, the assessee earned a cost plus mark up of 13%. It is pertinent to observe that the company IHG IT Services (India) Pvt. Ltd. merged with Inter Continental Hotels Group India Pvt. Ltd. w.e.f. 1st April, 2016 and operated as a separate ITeS segment for TP purposes for the assessee. Thus, the judicial precedence in the case of erstwhile entity is relevant for the ITeS segment of the assessee. It comes up that for the purpose of benchmarking the international transaction pertaining to provision of ITeS, TNMM was selected as the most appropriate method with MCP mark up as the relevant PLI. The ten comparable companies earned at weighted average margin in the range of 5.85% to 9.13%. Since the margin of 13% earned by the assessee was higher than the range of 35 percentile to 65 percentile, i.e., 5.85% to 9.31%, the NCP margin 13% earned by the assessee was considered to be at arm’s length standard from an India TP perspective. 9. The TPO rejected/ modified the quantitative filters applied by the Assessee in its TP Documentation and proposed certain new filters for benchmarking the Assessee's international transaction relating to provision of ITeS. Thereafter, the TPO rejected 4 out of 10 comparable companies selected ITA No.2013/Del/2022 8 by the Assessee (as selected in the TP study) and proposed to introduce 6 new companies, resulting in a range of NCP of 16.55% to 20.47% with a median of 17.45%. 10. The TPO rejected/ modified the quantitative filters applied by the Assessee in its TP Documentation and proposed certain new filters for benchmarking the Assessee's international transaction relating to provision of marketing support services. Thereafter, the TPO rejected 3 out of 8 comparable companies selected by the Assessee (as selected in the TP study) and proposed to introduce 5 new companies, thereby resulting in a range of NCP of 17.28% to 26.60% with a median of 24.13%. 11. The contentions of ld. AR and ld. DR are considered and they have primarily relied on the respective case as casted below. We thus proceed to examine the disputed comparables individually. (i) Wipro Limited. Assessee is seeking exclusion of this comparable. Admittedly there is extra ordinary events during the year, as Wipro acquired two companies, ie., InfoSERVER and Cooper. InfoSERVER is a Brazilian company engaged in IT services and Cooper is engaged in designing and business strategy consultancy. Considering the merger and acquisition would lead to synergies into the business of the Wipro Limited as well, the profit and loss account of the company cannot be considered be reliable. We thus ITA No.2013/Del/2022 9 accept the contention of ld. AR that since it is not apparent how these synergies/goodwill affected the profitability of the company, it makes the company to be incomparable to the Appellant. Then functionally Wipro is not comparable as it is engaged in diversified activities, like it provides advanced and digital IT services and is a global leader in consulting information technology outsourcing and next generation services. The services include digital, modern application, cloud and infrastructure services, data analytics and AI and robotics Process Automation. On the other hand, the appellant merely undertakes routine back-office support services. Ld. AR also established that there has been no segmentation provided in the annual report based on the functions performed. Most importantly, Wipro incurred significant expenses with respect to brand building activities (INR 2,596 Million). It can be inferred that Wipro owns its own brand and is involved in brand building exercise, accordingly, operates in the capacity of an 'Entrepreneur. This all leads us to hold that it deserves to be excluded. (ii) E-Zest Solutions Ltd. The assessee is seeking exclusion of this comparable. We find that it is functionally dissimilar as e-Zest provides diverse solutions and services in product engineering and software development and it is engaged in providing digital engineering, big data, AI, ML, IoT, digital commerce, Cloud, ITA No.2013/Del/2022 10 DevOps, Visual designing, prototyping and user testing services. Hence, cannot be compared to IT enabled service provider like Appellant. Ld. AR has also pointed out that segmental details are not available and holds significant intangibles i.e., 33.73% of total fixed assets. This all leads us to hold that it deserves to be excluded. (iii) Pegasystems Worldwide India Pvt Ltd. Assessee is seeking the exclusion of this comparable. In this regard we find that this comparable fails related party transactions to sales filter as 100% revenue is derived from its ultimate holding company from sale/export of software development services rendered to its ultimate holding company and the revenue from same is recognized on accrual basis in accordance with the terms of specific contract, which is on the basis of cost incurred plus an agreed mark up. Then we find that company is engaged in assisting the software development needs of the Pegasystems group and develops patented software products of Pegasystems Inc., in the field of Business Process Management. Thus is functionally not comparable to Information technology enabled services provider like the Appellant. Ld. AR has also pointed out that Pegasystems is engaged in advertising promotional activities and incurred INR 46 ITA No.2013/Del/2022 11 Million towards advertising and promotion during FY 2017-18. This all leads us to hold that it deserves to be excluded. (iv) DigiCall Global Ltd. The assessee is seeking inclusion of this comparable. We find that this company is functionally comparable as the company is engaged in the business of providing business process outsourcing services. TPO has rejected the said comparable stating that it is engaged in diversified activities. However, the TPO has failed to appreciate that the 'principal business activities of the company' is Call Centre Operations i.e., ITeS Business. The company is deriving 100% of the revenue from the same activity. It passes all filters proposed by the TPO. This all leads us to hold that it deserves to be included. (v) Crystal Voxx Ltd. The assessee is seeking inclusion of this comparable. We find that if its functionally similar as the company is engaged in IT and IT enabled services and BPO services. Ld. AR has pointed from the Annual Report of the company that the company is engaged in the provision of IT and IT enabled services and BPO services. Then it passes all filters applied by Ld. TPO. This all leads us to hold that it deserves to be included. (vi) Bhilwara Infotechnology Ltd. Assessee is seeking inclusion of this comparable as functionally comparable. We find that the company is engaged in the business of providing technology ITA No.2013/Del/2022 12 consulting and implementation services. Further, the TPO has wrongfully held that Bhilwara is engaged in software development and ecommerce and has brought nothing on record to substantiate the same. It is clearly evident from the extracts of the annual report and the website that Bilwara is engaged in business similar to that of the Assessee. Revenue from provision of medical transcription and support services which is similar to the back office operations, call center, data processing, software development and other information technology enabled services. Then it passes all filters proposed by the TPO. This all leads us to hold that it deserves to be included. (vii) Informed Technologies The assessee is seeking the inclusion of this comparable. We find that this is not a persistent loss-making company and has earned sufficient profits in the current financial year as well as preceding financial year and is not incurring losses. Then the fundamental principal of benchmarking is functional comparability not profitability under Rule 10B(2). It is sufficiently established that it is functionally comparable and passes all the filters applied by TPO 11.1 Thus where the aforesaid comparables are either excluded or included then it leads to acceptance of arm’s length margins of the assessee. Accordingly we are inclined to accept these grounds in hand. ITA No.2013/Del/2022 13 12. Ground no. 9 to 13. In regard to these grounds we find that ground no. 9, 10, 11 and 13 are not pressed as same are now covered against the assessee after the judgment of Hon’ble Supreme Court in Checkmate Services Pvt. Ltd. Versus CIT 143 taxmann.com 178. In regard to ground no. 12, we find that ld. AR has submitted that out of total disallowance of Rs. 11,19,765/- on account of delayed deposit of Employees contribution for PF/LWF, in its computation of income for AY 2015-16 and 2016-17 assessee has already disallowed an amount of Rs. 2,62,518/- by reporting in prior period expense and a rectification application also stands filed with AO. Thus these grounds are decided in favour of assessee only for the purpose of verification of the suo motto disallowance of Rs. 2,62,518/-. 13. Consequently the appeal of assessee is allowed partly with consequences to follow as per the determination of grounds as above. Order pronounced in the open court on 26.03.2025. Sd/- Sd/- (S. RIFAUR RAHMAN) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 26th March, 2025. dk ITA No.2013/Del/2022 14 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi "