Louis Dreyfus Commodities India Pvt. Ltd., Gurgaon V. ACIT, New Delhi

ITA 1555/DEL/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7875 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 23-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M BARNWAL
• Keywords: Transfer pricing; International transaction; Tax effect

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER I.T.A. NO.1555/DEL/2016 ASSESSMENT YEAR: 2011-2012 LOUIS DREYFUS COMMODITIES INDIA PVT. LTD., BUILDING NO.5 TOWER A, 8 TH FLOOR, DLF CYBER CITY, DLF PHASE- III, GURGAON, HARYANA. VS. ASSTT. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-15(2), NEW DELHI. TAN/PAN: AAACL7361E (APPELLANT) (RESPONDENT) I.T.A. NO.1571/DEL/2016 ASSESSMENT YEAR: 2011-2012 ASSTT. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-15(2), NEW DELHI. VS. LOUIS DREYFUS COMMODITIES INDIA PVT. LTD., BUILDING NO.5 TOWER A, 8 TH FLOOR, DLF CYBER CITY, DLF PHASE-III, GURGAON, HARYANA. TAN/PAN: AAACL7361E (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI RAVI SHARMA & ANUBHAV RASTOGI, ADV. RESPONDENT BY: SHRI M. BARNWAL, SR.D.R. DATE OF HEARING: 23 07 2020 DATE OF PRONOUNCEMENT: 27 08 2020 O R D E R PER AMIT SHUKLA, JUDICIAL MEMBER: THE AFORESAID APPEALS HAVE BEEN FILED BY THE ASSES SEE AS WELL AS BY THE REVENUE AGAINST FINAL ASSESSMENT ORD ER DATED I.T.A. NO.1555 & 1571/DEL/2016 2 29.01.2016, PASSED IN PURSUANCE OF DIRECTION GIVEN BY THE DISPUTE RESOLUTION PANEL VIDE ORDER DATED 10.12.201 5 FOR THE ASSESSMENT YEAR 2011-12. 2. IN THE REVENUES APPEAL, I.E., ITA NO. 1571/ DEL/2016, IT HAS BEEN ADMITTED BY BOTH THE PARTIES THAT TAX EFFE CT ON THE DISPUTED AMOUNT CHALLENGED IN THE APPEAL IS LESS TH AN RS.50 LAC. IN SUPPORT, FOLLOWING COMPUTATION OF TAX EFFEC T HAS BEEN GIVEN. PARTICULARS REFERENCE AMOUNT (INR) AMOUNT OF INCOME AGAINST WHICH APPEAL IS FILED BY THE TAX DEPARTMENT (REFER PAGE NO.1 OF THE DEPARTMENTS APPEAL) A 5,170,421/- TAX ON ABOVE @ 30% B 1,551,126 SURCHARGE AT 7.5% ( IF INCOME EXCEEDS 1 CRORE) C EDUCATION CESS AT 3% D 46,534 TAX EFFECT (COMPUTED AS PER CBDT CIRCULAR NO.17/2019 R.W. CIRCULAR NO. 3/2018) ENCLOSED HEREWITH AS ANNEXURE A AND ANNEXURE B, RESPECTIVELY) [B+C+D] 1,597,660/- 2.1 THUS, IN VIEW OF CBDT CIRCULAR NO. 17/2019 DATE D 08.08.2019, THE APPEAL OF THE DEPARTMENT IS DISMISS ED IN LIMINE. 3. IN THE ASSESSEES APPEAL, THE ASSESSEE HAS CHALL ENGED THE TRANSFER PRICING ADJUSTMENT OF RS.81,33,706/- ON PRO VISION OF BACK OFFICE SUPPORT SERVICES. THOUGH VARIOUS GROUND HAVE BEEN TAKEN, HOWEVER, THE LD. COUNSEL FOR THE ASSESS EE SUBMITTED THAT ONLY ONE COMPARABLE HAS BEEN CHALLEN GED EFFECTIVELY, THAT IS, TCS-E-SERVE LTD. FOR EXCLUSIO N WHICH HAS BEEN INCLUDED BY THE TPO AND CONFIRMED BY THE DRP. FURTHER, I.T.A. NO.1555 & 1571/DEL/2016 3 LD. COUNSEL ALSO SUBMITTED THAT IN THE CASE OF THE ASSESSEE, THIS TRIBUNAL WHILE DECIDING THE APPEAL FOR THE ASS ESSMENT YEAR 2012-13 IN ITA NO. 6575/DEL/2016 VIDE ORDER DA TED 30.10.2019, HAS HELD THAT TCS-E-SERVE LTD. CANNOT C OMPARED WITH THE ASSESSEE. SINCE, SAME MATERIAL FACTS ARE P ERMEATING IN SO FAR AS COMPARABILITY OF ASSESSEE AND TCS-E-SE RVE LTD. IS CONCERNED, THEREFORE, MATTER STANDS SQUARELY COVERE D. 4. ON THE OTHER HAND, LD. DR REFERRED TO THE VARIOU S OBSERVATIONS MADE BY THE TPO AS WELL AS BY THE DRP. 5. THE BRIEF FACTS QUA THE ISSUE INVOLVED ARE THAT ASSESSEE IS SUBSIDIARY OF LOUIS DREYFUS COMMODITIES ASIA PTE LTD. SINGAPORE. THE ASSESSEE IS AN INDIA BASED TRADER OF AGRI- BASED PRODUCTS SUCH AS CRUDE PALM OIL, COFFEE, COTT ON, SOYBEAN, BARLEY, MAIZE, SUGAR AND GRAIN ETC. THE AS SESSEE COMPANY IS INTO TRADING OF COMMODITIES WITH AES AND UNRELATED PARTIES IN DOMESTIC AND INTERNATIONAL MAR KET. IN ADDITION TO THE TRADING ACTIVITIES, THE ASSESSEE IS ALSO ENGAGED IN PROVIDING BACK OFFICE BUSINESS SUPPORT SERVICES TO LD COMMODITIES ASIA PVT. LTD. DURING THE RELEVANT FINA NCIAL YEAR THE ASSESSEE HAS UNDERTAKEN INTERNATIONAL TRANSACTI ON OF BACK OFFICE SUPPORT SERVICES OF RS.7,49,33,645/-. T HE ASSESSEE HAS RENDERED BACK OFFICE SUPPORT SERVICES FOR VARIO US AGRI- BASED COMMODITIES TO ITS AES WHICH INCLUDE PROVISIO N OF LOGISTIC SUPPORT EXECUTION ALONG WITH MAN POWER SER VICES. THESE SERVICES PRIMARILY INCLUDE RELATED SERVICES, LOGISTIC SUPPORT, TRADE SUPPORT, TRAVEL SUPPORT, INTERNATION AL AID I.T.A. NO.1555 & 1571/DEL/2016 4 SERVICES AND INSPECTION SERVICES. IN CONSIDERATION THEREOF, THE ASSESSEE COMPANY WAS REMUNERATED ON A COST PLUS BAS IS WITH A MARKUP OF 10%. IN TP STUDY REPORT, THE ASSESSEE C LAIMED THAT IT IS PROVIDING IT ENABLED SERVICES TO ITS AE AND ADOPTED TNNM AS A MOST APPROPRIATE METHOD AND PLI WAS TAKEN AS OP/OC. THE OPERATING REVENUE WERE AT RS.7,44,33,645 /- AND OPERATING EXPENSES AT RS.6,81,21,495/- AND ACCORDIN GLY, THE PLI WORKED OUT TO 10%. THE ASSESSEE HAD CHOSEN 12 COMPARABLES AND MEAN MARGIN OF THE COMPARABLES AFTE R ADJUSTMENT WAS ARRIVED AT 12.6%. HENCE, IT WAS REPO RTED THAT THE ASSESSEES TRANSACTION ARE AT ARMS LENGTH PRIC E. LD. TPO SELECTED 8 COMPARABLES AND THE AVERAGE MARGIN DETER MINED WAS AT 29.53% WHICH INCLUDED THE COMPARABLE COMPANY OF TCS-E-SERVE LTD. WHICH HAD A MARGIN OF 69.3%. HOWEV ER, AFTER DRPS DIRECTION IN THE FINAL ASSESSMENT ORDER , THE MARGIN WAS ARRIVED AT 29.4%. 6. AFTER CONSIDERING THE RIVAL SUBMISSION AND ON PE RUSAL OF THE IMPUGNED ORDERS, WE FIND THAT THE ONLY DISPUTE IS WITH REGARD TO THE INCLUSION OF TCS-E-SERVE LTD. BY THE TPO. THE ASSESSEE HAD CHALLENGED THE INCLUSION OF THE SAID C OMPARABLE ON THE GROUND THAT, FIRSTLY, IT IS NOT FUNCTIONALLY COMPARABLE, BECAUSE, TCS-E-SERVE IN ADDITION TO BUSINESS PROCES S OUTSOURCING SERVICE, IT IS ALSO PROVIDING TECHNICAL AND COMPILATION OF THE SOFTWARE WHICH FALLS UNDER SOFTW ARE CONSULTING ACTIVITIES, FOR WHICH IT DOES NOT HAVE A NY SEGMENTAL DATA FOR SUCH SOFTWARE CONSULTING ACTIVITIES. SECON DLY, IT HAS A HUGE BRAND VALUE AND A PART OF LARGE BUSINESS ORGAN IZATION, I.T.A. NO.1555 & 1571/DEL/2016 5 THEREFORE, IT HAS A HUGE LEVERAGE AND CLIENT BASED WHICH ACCORDINGLY AFFECTS THE PROFITABILITY. APART FROM T HAT, IT WAS ALSO OBJECTED ON THE GROUND OF TURNOVER AND LARGE S CALE OPERATIONS AND ALSO HAVING HUGE BRAND EQUITY. HOWEV ER, THE LD. DRP HAS REJECTED THE EXPLANATION ON THE GROUND THAT TURNOVER CANNOT BE THE CRITERIA FOR EXCLUDING THE C OMPARABLE AND FURTHER THE ASSESSEE HAS NOT SHOWN HOW THE TATA BRAND EQUITY AND OWNERSHIP OF TANGIBLE LED TO HIGH PROFIT . THE ASSESSEE ALSO GETS LEVERAGE ON THE VALUABLE IPR AND ANOTHER COMMERCIAL INTANGIBLE OWNED BY THE AES WHICH PROVID E RANGE OF SERVICES. THUS, THERE IS NO FIXED RELATION BETWE EN BRAND AND MARGINS. 7. ONE OF THE KEY REASON WHY THE TCS-E-SERVE LTD. CANNOT BE HELD TO BE COMPARABLE WITH THE ASSESSEE COMPANY WHICH IS PROVIDING BACK OFFICE SUPPORT SERVICES, I.E., ITES/ BPO SERVICES, BECAUSE TCS-E-SERVE IN ADDITION TO ITES/B PO SERVICES ALSO RENDER TECHNICAL SERVICES LIKE SOFTWA RE TESTING AND VALIDATION OF SOFTWARE WHICH FALLS UNDER SOFTWA RE DEVELOPMENT SERVICES ACTIVITY. APART FROM THAT, FRO M THE PERUSAL OF THE ANNUAL REPORT IT IS SEEN THAT THERE IS NO SEGMENTAL INFORMATION WITH REGARD TO THE SOFTWARE DEVELOPMENT SERVICES ACTIVITY. ADMITTEDLY, THE ASSE SSEE IS A LOW RISK CAPTIVE UNIT INVOLVED IN PROVISION OF BACK OFFICE SUPPORT SERVICE TO ITS GROUP COMPANIES FOR WHICH I T IS REMUNERATED AT COST PLUS BASIS AND IS NOT EXPOSED T O ANY KIND OF RISK. WHEREAS, THE TCS-E-SERVE LTD. BEARS S IGNIFICANT RISK SUCH A MACRO ECONOMIC RISK, REGULATORY RISK, F INANCIAL I.T.A. NO.1555 & 1571/DEL/2016 6 RISK AND RISKS FROM OPERATIONS ETC. WHICH CLEARLY I NDICATES THAT THE TCS-E-SERVE LTD IS A FULL RISK BEARING COM PANY. ON RISK ANALYSIS ALSO IT CANNOT COMPARED WITH THE ASSE SSEE. BESIDES THIS, TCS-E-SERVE LTD IS NOT COMPARABLE ON ACCOUNT OF INTANGIBLE HELD BY THIS COMPANY AND HAS LARGE SCALE OF OPERATION AND HUGE BRAND VALUE. HONBLE DELHI HIGH COURT IN THE CASE AVAYA INDIA LTD. VS. ACIT IN ITA NO.532/20 19 HAS UPHELD THE EXCLUSION OF TCS-E-SERVE ON ACCOUNT OF L ARGE SCALE OF OPERATIONS, HUGE BRAND VALUE, LACK OF SEGMENTAL INFORMATION WITH THE COMPARABLES WHO ARE SIMPLY INV OLVED ITES/BPO SERVICES WHICH ARE CAPTIVE SERVICES PROVID ER. 8. APART FROM THE ABOVE, THIS TRIBUNAL IN ASSESS EES OWN CASE FOR THE ASSESSMENT YEAR 2012-13 HAS EXCLUDED T HIS COMPARABLE AFTER DETAILED DISCUSSION, WHICH FOR THE SAKE OF READY REFERENCE IS REPRODUCED HEREUNDER:- 15. TCS E-SERVE IS ALSO TPOS OWN COMPARABLE WHICH WAS CHALLENGED BY THE TAXPAYER BEFORE THE TPO AS WELL A S DRP. THE TAXPAYER CHALLENGED THE INCLUSION OF TCS E-SERVE AS A COMPARABLE ON GROUNDS OF FUNCTIONAL DISSIMILARITY, NON-AVAILABILI TY OF SEGMENTAL INFORMATION, DIFFERENCE IN RISK PROFILE, OWNERSHIP OF INTANGIBLES, PAYMENT FOR TATA BRAND AND INCOMPARABLE SCALE OF OP ERATIONS AND RELIED UPON THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN CASE OF AVAYA INDIA LTD. VS. ACIT IN ITA 532/2019 ORDER DAT ED 24.07.2019. 16. HOWEVER, ON THE OTHER HAND, ID. DR FOR THE REVENUE IN ORDER TO I.T.A. NO.1555 & 1571/DEL/2016 7 REPEL THE ARGUMENTS ADDRESSED BY THE ID. AR FOR THE TAXPAYER RELIED UPON THE ORDER PASSED BY THE ID. DRP AND CONTENDED THAT ALL THESE CONTENTIONS NOW RAISED BY THE ID. AR FOR THE TAXPAY ER HAVE BEEN EXTENSIVELY DEALT WITH BY THE ID. DRP AND RELIED UP ON CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. VS. DCIT 376 ITR 183 (DEL.) AND RAMPGREEN SOLUTIONS PVT. LTD. (2015) 377 ITR 533 DELIVERED BY HONBLE DELHI HIGH COURT. 17. WHEN WE EXAMINE THE BUSINESS PROFILE OF TCS E-SERV E, AVAILABLE AT PAGES 69, 83 AND 21 OF THE ANNUAL REPORT COMPILATIO N, NO DOUBT THE TCS E-SERVE IS PRIMARILY ENGAGED IN PROVIDING BUSIN ESS PROCESS SERVICES (BPO) TO ITS CUSTOMERS IN BANKING, FINANCIAL SERVICES AND INSURANCE DOMAIN BUT, AT THE SAME TIME, COMPANYS O PERATIONS INCLUDE DELIVERING CORE BUSINESS PROCESSING SERVICE S, ANALYTICS/INSIGHTS AND SUPPORT SERVICES FOR BOTH DA TA AND VOICE PROCESSES, WHICH MAKE TCS E-SERVE AS A KPO WHEREAS THE TAXPAYER IS A ROUTINE CAPTIVE BPO SERVICES PROVIDER TO ITS A E. 18. WHEN WE EXAMINE PAGE 66 OF THE ANNUAL REPORT COMP ILATION I.E. PROFIT AND LOSS ACCOUNT, SEGMENTAL INFORMATION IS NOT AVAILABLE. FURTHERMORE, TCS E-SERVE IS A SIGNIFICANT RISK BEAR ING COMPANY SUCH AS MACRO-ECONOMIC RISK, REGULATORY RISK, FINANCIAL RISK ETC., AS IS EVIDENT FROM ANNUAL REPORT COMPILATION UNDER THE HE AD RISK AND RISK MITIGATION WHICH INCLUDES MACRO-ECONOMIC RISKS, ABI LITY TO HIRE AND RETAIN, DATA PROTECTION, TECHNOLOGY, NETWORK AND TE LECOMMUNICATION RISKS, RISK FROM OPERATIONS, FINANCIAL RISK, LEGAL & STATUTORY LIABILITIES I.T.A. NO.1555 & 1571/DEL/2016 8 RISK ETC. WHEREAS TAXPAYER IS NOT PROVIDING LOW END SUPPORT SERVICES ON COST PLUS BASIS BEING A CAPTIVE SERVICE PROVIDER . 19. EVEN OTHERWISE, TCS E-SERVE IS HAVING SIGNIFICANT OWNERSHIP OF INTANGIBLES AND IT IS A BRAND IN ITSELF AS IT HA S MADE PAYMENT FOR TATA BRAND EQUITY CONTRIBUTION OF RS.3.67 CRORES DU RING THE YEAR UNDER ASSESSMENT, AS IS EVIDENT FROM NOTES TO FINANCIAL S TATEMENT, AVAILABLE AT PAGE 81 OF THE ANNUAL REPORT COMPILATI ON. FURTHERMORE, WHEN WE EXAMINE THE SCALE OF OPERATION OF TCS E-SERVE AT PAGE 66 OF THE ANNUAL REPORT COMPILATION, ITS TOTAL REVENUE IS RS.1733.34 CRORES AS AGAINST REVENUE OF THE TAXPAYER AT RS.8,90,95,28 0/-. 18. EXCLUSION OF TCS E-SERVE HAS BEEN UPHELD BY THE HONBLE DELHI HIGH COURT IN AVAYA INDIA LTD. (SUPRA) ON GROUND OF LARGE SCALE OPERATION, HUGE BRAND VALUE AND LACK OF SEGMENTAL B Y DISTINGUISHING CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. AND RAMPGREEN SOLUTIONS PVT. LTD. (SUPRA) RELIED UPON BY THE ID. DR FOR THE REVENUE BY RETURNING FOLLOWING FINDINGS:- 27. THERE IS MERIT IN THE CONTENTION OF THE ASSESS EE THAT THE SCALE OF OPERATIONS OF THE COMPARABLES WITH THE TES TED ENTITY IS A FACTOR THAT REQUIRES TO BE KEPT IN VIEW. TCS E-SERV E HAS A TURNOVER OF RS.1359 CRORES AND HAS NO SEGMENTAL REV ENUE WHEREAS THE ASSESSEES ENTIRE SEGMENTAL REVENUE IS A MERE24 CRORES. AS OBSERVED BY THIS COURT IN ITS DECISION D ATED5THAUGUST 2016 IN ITA 417/2016 (PCIT V. ACTIS GLOBAL SERVICES PRIVATE LIMITED) SIZE AND SCALE OF TCSS OPERATION MAKES I T AN INAPPOSITE COMPARABLE VIS--VIS THE PETITIONER. AS ALREADY POINTED OUT EARLIER THERE IS A CLOSER COMPARISON OF TCS E-SERVE LIMITED WITH INFOSYS BPO LIMITED WITH EACH OF THEM EMPLOYING I.T.A. NO.1555 & 1571/DEL/2016 9 13,342 AND 17,934 EMPLOYEES RESPECTIVELY AND MAKING RS.37 CRORES AND RS.19 CRORES AS CONTRIBUTION TOWARDS BRA ND EQUITY. WHEN RULE 10(B)(2) IS APPLIED I.E. THE FAR ANALYSIS , NAMELY, FUNCTIONS PERFORMED, ASSETS OWNED AND RISKS ASSUMED IS DEPLOYED THEN BRAND AND HIGH ECONOMIC UPSCALE WOULD FALL WITHIN THE DOMAIN OF ASSETS AND THIS ALSO WOULD M AKE BOTH THESE COMPANIES AS UNSUITABLE COMPARABLES. 28. THE DIRECTORS REPORT OF TCS E-SERVE LIMITED BE ARS OUT THE CONTENTION OF THE ASSESSEE THAT BOTH ENTITIES HAVE BEEN LEVERAGING TCSS SCALE AND LARGE CLIENT BASE TO INCR EASE THEIR BUSINESS IN A SIGNIFICANT WAY. THE SUBMISSION THAT THE TWO COMPARABLES OFFER AN ILLUSTRATION OF 'AN IDENTICAL TRANSACTION BEING CONDUCTED IN AN UNCONTROLLED MANNER OVERLOOK S THE EFFECT OF THE TATA BRAND ON THE PERFORMANCE OF THE IMPUGNE D COMPARABLES. THE QUESTION WAS NOT MERELY WHETHER TH E MARGINS EARNED BY THE TATA GROUP IN PROVIDING CAPTIVE SERVI CE TO THE CITI ENTITIES WERE AT ARMS LENGTH. THE QUESTION WAS WHE THER THEY OFFERED A RELIABLE BASIS TO RE-CALIBRATE THE PLI OF THE ASSESSEE WHOSE SCALE OF OPERATIONS WAS OF A MUCH LOWER ORDER THAN THE TWO IMPUGNED COMPARABLES. THE MERE FACT THAT THE TR ANSACTIONS WERE IDENTICAL WAS NOT IN TERMS OF THE LAW EXPLAINE D IN THE ABOVE DECISIONS, EITHER A SOLE OR A RELIABLE YARDSTICK TO DETERMINE THE APPOSITE CHOICE OF COMPARABLES. 29. FOR ALL OF THE AFOREMENTIONED REASONS, THE COUR T FINDS MERIT IN THE CONTENTION OF THE ASSESSEE THAT BOTH THE IMPUGN ED COMPARABLES VIZ., TCS E-SERVE LIMITED AND TCS E-SER VE INTERNATIONAL LIMITED OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE PURPOSES OF DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS INVOLVING THE ASSESSEE A ND ITS AES. 19. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT TCS E-SERVE CANNOT BE A VALID COMPARABLE VIS-A- I.T.A. NO.1555 & 1571/DEL/2016 10 VIS TAXPAYER ON GROUND OF ITS LARGE VOLUME OF OPERA TIONS HAVING HUGE BRAND VALUE, LACK OF SEGMENTAL AND FUNCTIONAL DISSI MILARITY, HENCE ORDERED TO BE DELETED. 9. ACCORDINGLY, WE DIRECT THE TPO TO EXCLUDE THE TC S-E- SERVE LTD. FROM THE COMPARABILITY LIST AND DETERMIN E THE ARMS LENGTH PRICE. ACCORDINGLY, THE APPEAL OF THE ASSESS EE IS TREATED AS ALLOWED. 10. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D AND THE ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH AUGUST, 2020 SD/- SD/- [O.P. KANT] [AMIT SHUKLA] [ACCOUNTANT MEMBER] JUDICIAL MEMBER DATED: 27/08/2020 PKK: