M/s. Xchanging Technology Services India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 1897/DEL/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90987 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 24-04-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 01-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JUDY JAMES
• Assessee Lawyers: NAGESHWAR RAO SHRI S KARHAIL; ANIKET D AGRAWAL S
• Keywords: Transfer pricing; International transaction
• Section: 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM ITA NO.1897/DEL/2014 ASSESSMENT YEAR : 2009-10 XCHANGING TECHNOLOGY SERVICES INDIA PVT. LTD., RECTANGLE-I, DISTRICT CENTRE, SAKET, NEW DELHI. PAN: AABCR5609L VS. DCIT, CIRCLE-18(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO, SHRI S. KARHAIL AND SHRI ANIKET D. AGRAWAL, ADVOCATES DEPARTMENT BY : SHRI JUDY JAMES, STANDING COUNSEL DATE OF HEARING : 24.04.2015 DATE OF PRONOUNCEMENT : 24.04.2015 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ORDER PASSED BY THE ASSESSING OFFICER ON 18.3.2013 U/S 14 3(3) READ WITH ITA NO.1897/DEL/2014 2 SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFT ER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2009-10. 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN INFORMATI ON TECHNOLOGY ENABLED SERVICES (ITES) SEGMENT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A SUBSIDIARY OF XCHANGING RESOURCING SERVICES LTD., U K. IT IS ENGAGED IN RENDERING CONTRACTED SOFTWARE DEVELOPMENT SERVICES AND ALSO INFORMATIONTECHNOLOGY-ENABLED SERVICES TO XCHANGING GROUP COMPANIES. ONE OF THE INTERNATIONAL TRANSACTIONS R EPORTED BY THE ASSESSEE WAS THE `PROVISION OF ITES WITH TRANSACTE D VALUE OF RS.43,64,55,419/-. THE ASSESSEE APPLIED THE TRANSA CTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD TO DEM ONSTRATE THAT THE INTERNATIONAL TRANSACTION OF PROVIDING ITES WAS AT ALP. THE PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO TOTAL COST (OP/TC) WAS USED. IN THIS WAY, THE ASSESSEE SHOWED ITS OPERATI NG PROFIT MARGIN UNDER THIS SEGMENT AT 14.98%. 14 COMPANIES WERE CHOSEN A S COMPARABLE WITH ITA NO.1897/DEL/2014 3 THEIR AVERAGE OF OPERATING PROFIT MARGIN AT 11.19%. THAT IS HOW, THE ASSESSEE TRIED TO DEMONSTRATE THAT THIS INTERNATION AL TRANSACTION WAS AT ARMS LENGTH PRICE (ALP). THE ASSESSING OFFICER (AO ) REFERRED THE DETERMINATION OF ARMS LENGTH PRICE (ALP) TO THE TR ANSFER PRICING OFFICER (TPO). THE TPO DID NOT AGREE WITH THE COM PARABLES CHOSEN BY THE ASSESSEE. AFTER MAKING CERTAIN EXCLUSIONS AND INCLUSIONS, THE TPO FINALIZED THE FOLLOWING SIX COMPANIES AS COMPARABLE WITH THEIR RESPECTIVE PROFIT MARGINS AS UNDER:- SL.NO. COMPARABLES OP/OC (%) 1. COSMIC GLOBAL LTD. 50.70 2. CROSSDOMAIN SOLUTION PVT. LTD. 25.63 3. INFOSYS BPO LTD. 24.28 4. CORAL HUB LTD. 37.03 5. ACCENTIA TECHNOLOGIES LTD. 52.52 6. ADITYA BIRLA MINACS WORLDWIDE LTD. 11.95 AVERAGE 33.68 4. IN THIS WAY, THE TPO WORKED OUT AVERAGE PROFIT MARGIN OF THE ABOVE SIX COMPARABLE COMPANIES AT 33.68%. THIS RES ULTED INTO THE ITA NO.1897/DEL/2014 4 TRANSFER PRICING ADJUSTMENT OF RS.6,23,11,494/- ON THIS TRANSACTION, FOR WHICH EQUAL AMOUNT OF ADDITION WAS MADE BY THE AO I N HIS FINAL ORDER. THE ASSESSEE IS AGGRIEVED AGAINST THE ABOVE ADDITIO N. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE TPO HAS NOT DISPUTED THE A PPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF THE `PROVISION OF ITES . EVEN THE PLI OF OP/TC HAS NOT BEEN DISPUTED. THE ASSESSEE IS AGGRI EVED AGAINST THE INCLUSION OF COSMIC GLOBAL LTD. AND ACCENTIA TECHNO LOGIES LTD. APART FROM THAT, THE ASSESSEE SEEKS THE INCLUSION OF MICR OLAND LTD. 6. BEFORE CONSIDERING THE ABOVE THREE COMPANIES FROM THE ANGLE OF THEIR COMPARABILITY, IT IS ESSENTIAL TO NOTE THE NA TURE OF ACTIVITY CARRIED OUT BY THE ASSESSEE UNDER THIS SEGMENT. IT CAN BE SEEN FROM THE TPOS ORDER AS WELL AS THE TRANSFER PRICING STUDY THAT TH E ASSESSEE PROVIDED THE FOLLOWING SERVICES TO ITS DIFFERENT ASSOCIATED ENTE RPRISES AS UNDER:- A) XCHANGING PROCUREMENT SERVICES (XPS ): THE END CLIENT UNDER THIS CONTRACT IS A LONDON-BASED RETAIL CHAIN. ITA NO.1897/DEL/2014 5 THE SERVICES PROVIDED UNDER THE PROJECT INVOLVED BA CK OFFICE PROCUREMENT PROCESSING SERVICES LIKE INVOICING, QUE RY MANAGEMENT, ETC. B) XCHANGING INS SURE SERVICES : THE PROJECT INVOLVES THE PROVISION OF INSURANCE-RELATED SERVICES LIKE PR EMIUM BOOKING AND ALLOCATION PROCESSES, ETC. C) XCHANGING UK LIMITED : THE PROJECT INVOLVES THE PROVISION OF ACCOUNTING-BASED SERVICES LIKE PAYROLL PROCESSING, ACCOUNT RECONCILIATION, AR & AP, ETC. D) XCHANGING GLOBAL INSURANCE SOLUTIONS LTD .: THE SERVICES PROVIDED INCLUDED HELPDESK SUPPORT SERVICE S. E) XCHANGING TRANSACTION BANK GMBH, GERMANY : THE SERVICES PROVIDED INCLUDED SECURITY PROCESSING BANKING RELATED PROCESSES. ITA NO.1897/DEL/2014 6 F) XCHANGING HR SERVICES LIMITED, UNITED KINGDOM : THE SERVICES PROVIDED INCLUDED THE HR RELATED BACK OFFICE PROCESSES. G) XCHANGING CLAIM SERVICES, UNITED KINGDOM : THE SERVICES PROVIDED INCLUDED INSURANCE-RELATED BACK O FFICE PROCESSES LIKE CLAIM PROCESSING. 7. A CAREFUL PERUSAL OF THE SERVICES RENDERED BY TH E ASSESSEE TO ITS AES BRINGS OUT THE NATURE OF SUCH SERVICES, BEING, BACK OFFICE SERVICES LIKE INVOICING, ETC., PROVISION OF INSURANCE RELATE D SERVICES, PROVISION OF ACCOUNTING BASED SERVICES, HELPDESK SUPPORT SERVICE S, SECURITY PROCESSING, BANKING RELATED SERVICES, CLAIMS PROCES SING AND HR RELATED BACK OFFICE PROCESSES. NOW, WE WILL EXAMINE THE AB OVE COMPANIES, ONE BY ONE, FROM THE ANGLE OF THEIR COMPARABILITY. COSMIC GLOBAL LTD . 8. THE TPO CONSIDERED COSMIC GLOBAL LTD. AS COMPARA BLE WITH THE ASSESSEE COMPANY ON ENTITY LEVEL. WE HAVE EXAMINED THE ANNUAL REPORT OF THIS COMPANY FOR THE YEAR IN QUESTION, WHICH IS AVAILABLE IN THE PAPER ITA NO.1897/DEL/2014 7 BOOK. IT CAN BE NOTICED THAT ITS REVENUE FROM OPER ATIONS STANDS AT RS.7,37,02,584/-, WHICH CONSISTS OF THREE AMOUNTS, NAMELY, MEDICAL TRANSCRIPTION AND CONSULTANCY SERVICE CHARGES AMOUN TING TO RS.9,90,737/-; TRANSLATION CHARGES AMOUNTING TO RS. 6,99,35,756/-; AND ACCOUNTS BPO CHARGES AMOUNTING TO RS.27,76,090/-. THIS COMPANY OUTSOURCED THE ACTIVITY OF TRANSLATION. 57.31% OF TOTAL OPERATING EXPENSES INCURRED BY THIS COMPANY ARE OUTSOURCING C HARGES. ADMITTEDLY, OUTSOURCING IS CONFINED TO TRANSLATION, FOR WHICH IT PAID CHARGES AT RS.3.00 CRORE. IN OUR CONSIDERED OPINION , THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE COMPA NY FOR THE REASON OF ITS MAJOR ACTIVITY, NAMELY, TRANSLATION, WITH RE VENUE OF RS.6.99 CRORE (OUT OF TOTAL REVENUE OF RS.7.35 CRORE), BEING DISS IMILAR WITH THE ASSESSEES ACTIVITIES UNDER THIS SEGMENT. THE SECO ND REASON FOR CONSIDERING THIS COMPANY AS INCOMPARABLE ON ENTITY LEVEL IS THE BUSINESS MODEL ADOPTED BY IT. IT CAN BE SEEN THAT THIS COMP ANY HAS OUTSOURCED MAJOR ACTIVITIES IN COMPARISON WITH THE ASSESSEE DO ING ITS BUSINESS IN- HOUSE. IT GOES WITHOUT SAYING THAT THESE TWO BUSIN ESS MODELS, NAMELY, OUTSOURCING SERVICES AND PROVIDING IN-HOUSE SERVIC ES, CANNOT BE ITA NO.1897/DEL/2014 8 COMPARED WITH EACH OTHER BECAUSE OF THEIR INHERENT DIFFERENCES. SINCE THE TPO HAS CONSIDERED THIS COMPANY AS COMPARABLE O N ENTITY LEVEL, WE HOLD THAT THE SAME CANNOT BE SO TREATED. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF UNITED HEALTH GROUP INF ORMATION SERVICES PVT. LTD. VS. ACIT (ITA NO.6312/DEL/2012) VIDE ITS ORDER DATED 28.8.2014. RESPECTFULLY FOLLOWING THE PRECEDENT, W E DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARAB LES. ACCENTIA TECHNOLOGIES LTD. 9.1. THE TPO CONSIDERED THIS COMPANY WITH PROFIT MA RGIN OF 52.52% AS COMPARABLE. THE ASSESSEES OBJECTION FOR NOT TRE ATING IT AS COMPARABLE WAS JETTISONED BOTH BY THE TPO AS WELL AS THE DRP. THE ASSESSEE IS AGGRIEVED AGAINST THE INCLUSION OF THIS COMPANY IN THE FINAL TALLY OF COMPARABLES. 9.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE ANNUAL REPORT OF THIS COMPANY FOR THE YEAR IN QUESTION, WHICH HAS BEEN P LACED IN THE PAPER BOOK. IT CAN BE NOTICED FROM PAGE 31 OF THE ANNUAL REPORT THAT DURING ITA NO.1897/DEL/2014 9 THE YEAR UNDER CONSIDERATION THIS COMPANY COMPLETED THE ACQUISITION OF 96% OF M/S OAK TECHNOLOGIES INC., A HEALTHCARE BACK -OFFICE PROCESSING COMPANY ENGAGED IN MEDICAL BILLING, CODING AND TRAN SCRIPTION ACTIVITIES AND HAVING SUBSTANTIAL GLOBAL WORK FORCE. THE MUMB AI BENCH OF THE TRIBUNAL IN PETRO ARALDITE (P) LTD. VS. DCIT (2013) 154 TTJ (MU M) 176, HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS CO MPARABLE BECAUSE OF EXCEPTIONAL FINANCIAL RESULTS DUE TO MER GERS/DEMERGERS. SIMILAR VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF T HE TRIBUNAL IN SEVERAL CASES INCLUDING CIENA INDIA PVT. LTD. VS. DCIT (ITA NO.3324/DEL/2013) VIDE ITS ORDER DATED 23.4.2015. IN VIEW OF THE FACT THAT THERE WAS MERGER OF SOME ENTITY WITH ACCENTIA TECHNOLOGIES LTD., WE HOLD THAT THIS COMPANY CANNOT BE CONSIDERED AS C OMPARABLE. ACCORDINGLY, THE SAME IS DIRECTED TO BE EXCLUDED FR OM THE FINAL LIST OF COMPARABLES. MICROLAND LTD. 10.1. BEFORE TAKING UP THE FUNCTIONAL PROFILE OF THIS COMPANY FOR EXAMINING ITS COMPARABILITY, IT IS NECESSARY TO MEN TION THAT THIS COMPANY ITA NO.1897/DEL/2014 10 WAS NOT ORIGINALLY SELECTED BY THE ASSESSEE AS COMP ARABLE IN ITS TP STUDY. NO CONTENTION WAS RAISED BEFORE THE TPO FOR CONSIDERING IT AS COMPARABLE. IT WAS ONLY FOR THE FIRST TIME THAT TH E ASSESSEE CAME UP WITH THE ARGUMENT FOR THE INCLUSION OF MICROLAND LTD., I N THE LIST OF COMPARABLES BEFORE THE DISPUTE RESOLUTION PANEL (DR P). WITHOUT COMMENTING ON THE COMPARABILITY OR OTHERWISE OF THI S COMPANY, THE DRP DID NOT CONSIDER THIS OBJECTION. 10.2. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS DISCERNIBLE THA T THE ASSESSEE DID NOT TAKE UP THE ISSUE OF CONSIDERING THIS COMPANY AS CO MPARABLE EITHER IN ITS TP STUDY REPORT OR BEFORE THE TPO. HOWEVER, CONTEN TION WAS RAISED BEFORE THE DRP. IN OUR CONSIDERED OPINION, THERE C AN BE NO REASON TO REJECT THE CONTENTION AT THE OUTSET WITHOUT EXAMINI NG THE ACTUAL COMPARABILITY OF A COMPANY. SINCE THE AUTHORITIES BELOW HAVE NOT PONDERED OVER THE COMPARABILITY OF THIS COMPANY, WE ARE OF THE CONSIDERED OPINION THAT THE ENDS OF JUSTICE WOULD M EET ADEQUATELY IF THE IMPUGNED ORDER ON THIS SCORE IS SET ASIDE AND THE M ATTER IS RESTORED TO THE ITA NO.1897/DEL/2014 11 FILE OF AO/TPO FOR EXAMINING THE COMPARABILITY OF T HIS COMPANY. WE ORDER ACCORDINGLY. 11. NO OTHER ASPECT OF THE TRANSFER PRICING ADJUST MENT HAS BEEN ASSAILED BEFORE US. WE, THEREFORE, SET ASIDE THE IMPUGNED OR DER TO THIS EXTENT AND DIRECT THE AO/TPO TO DETERMINE THE ALP OF THE INTER NATIONAL TRANSACTION OF `PROVISION OF ITES AFRESH IN CONSONANCE WITH OU R ABOVE DIRECTIONS. 12. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 24.04.201 5. SD/- SD/- [C.M. GARG] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 24 TH APRIL, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.