M/s. Integreon (India) Private Limited, Mumbai V. ITO, New Delhi

ITA 2059/DEL/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0813 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 06-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 07-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: KETAN K VED
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 143(3); 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER ITA NO.2059/DEL/2014 ASSESSMENT YEAR : 2009-10 INTEGREON (INDIA) PRIVATE LTD., 402, BUILDING NO.4, INFINITY PARK, GEN. A.K. VAIDYA MARG, MALAD (E), MUMBAI. PAN: AACCG7235J VS. ITO, WARD-11(4), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NIRAJ D. SHETH & SHRI KETAN K. VED, DEPARTMENT BY : SHRI SANJAY I BARA, CIT, DR DATE OF HEARING : 13.09.2018 DATE OF PRONOUNCEMENT : 14.09.2018 ORDER PER R.S. SYAL, VP: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER U/ S 143(3) READ WITH ITA NO.2059/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 AMOUNTING TO RS.2,43 ,97,712/-. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE, AN INDIAN COMPANY, IS A WHOLLY OWNED SUBSIDIARY OF GRAIL RESE ARCH LTD., CYPRUS. THE ASSESSEE IS A RISK INSULATED CAPTIVE SERVICE PR OVIDER AND DURING THE YEAR UNDER CONSIDERATION WAS ENGAGED IN PROVIDING OUTSOU RCING BACK OFFICE SUPPORT SERVICES TO ITS ASSOCIATED ENTERPRISE (AE), GRAIL RESEARCH LLC, USA (GRAIL US). THE ASSESSEE FILED AUDIT REPORT IN FORM NO. 3CEB DECLARING AN INTERNATIONAL TRANSACTION OF PROVISIO N OF OUTSOURCING BACK OFFICE SUPPORT SERVICES TO GRAIL US. THE ASSESSIN G OFFICER (A.O.) REFERRED THE MATTER OF DETERMINATION OF THE ARMS LENGTH PRI CE (ALP) OF SUCH TRANSACTION TO THE TRANSFER PRICING OFFICER (TPO). THE ASSESSEE SHOWED A REVENUE OF RS.23,79,25,303/- FROM THE INTERNATIONAL TRANSACTION. IT EMPLOYED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH THE PROFIT LEVEL INDICATOR (PLI) OF OPERATING ITA NO.2059/DEL/2014 3 PROFIT/TOTAL COST (OP/TC) FOR BENCHMARKING THE INTE RNATIONAL TRANSACTION. 24 COMPANIES WERE CHOSEN AS COMPARABLE WITH THEIR W EIGHTED AVERAGE MARGIN OF 10.77% ON THE BASIS OF MULTIPLE YEAR DATA . THE ASSESSEE DECLARED ITS OWN PLI OF 15.11% IN THE REVISED FORM NO.3CEB. THAT IS HOW, IT WAS CLAIMED THAT THE INTERNATIONAL TRANSACTION WAS AT A LP. THE TPO DID NOT DISPUTE THE APPLICATION OF TNMM AS THE MOST APPROPR IATE METHOD NOR THE PLI OF OP/TC. AFTER CERTAIN EXCLUSIONS/INCLUSIONS MADE FROM/IN THE LIST OF COMPARABLES DRAWN BY THE ASSESSEE, THE TPO SHORTLI STED FIVE COMPANIES AS COMPARABLE WITH THEIR MEAN MARGIN AT 24.30%. ON TH IS BASIS, TRANSFER PRICING ADJUSTMENT OF RS.2,66,74,000/- WAS PROPOSED , WHICH WAS INCORPORATED BY THE ASSESSING OFFICER IN THE DRAFT ORDER. THE ASSESSEE CHALLENGED SUCH ADJUSTMENT BEFORE THE DISPUTE RESOL UTION PANEL (DRP). SOME OF THE ASSESSEES CONTENTIONS WERE ACCEPTED. ON GIVING EFFECT TO THE DIRECTION OF THE DRP, THE ASSESSING OFFICER FINALLY COMPUTED ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AT RS.2,43,9 7,712/-, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBU NAL. 4. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE APPLICATION OF THE MOST APPROPRIATE ITA NO.2059/DEL/2014 4 METHOD OR THE PLI. THE ENTIRE CONTROVERSY ROTATES AROUND THE SELECTION OF COMPARABLES. IN FACT, THE LD. AR REQUESTED ONLY FO R THE EXCLUSION OF COSMIC GLOBAL LTD. FROM THE LIST OF COMPARABLES. BU T FOR THAT, NO OTHER ASPECT OF DETERMINATION OF ALP IS IN ASSAIL BEFORE US. 5. BEFORE ANALYZING THE COMPARABILITY OR OTHERWISE OF THIS COMPANY, IT IS SINE QUA NON TO COMPREHEND THE FUNCTIONAL PROFILE OF THE ASSESSE E UNDER THE INTERNATIONAL TRANSACTION. THE ASSESSEE HAS ONLY O NE INTERNATIONAL TRANSACTION, WHICH HAS BEEN DESCRIBED AS PROVISION OF OUTSOURCING BACK OFFICE SUPPORT SERVICES TO GRAIL US. THE TPO HAS R ECORDED IN PARA 3.1 OF HIS ORDER THAT THE SERVICES RENDERED BY THE ASSESSE E: ARE IN THE NATURE OF OUTSOURCING BACK OFFICE SUPPORT SERVICES TO ASSIST AE TO PERFORM ITS CORE ACTIVITIES. THUS, IT IS EVIDENT THAT THERE IS NO D ISPUTE ON THE FUNCTIONAL PROFILE OF THE ASSESSEE, BEING, RENDERING OF BACK OFFICE SUPPORT SERVICES. 6. WITH THE ABOVE UNDERSTANDING OF THE FUNCTI ONAL PROFILE OF THE ASSESSEE, WE NOW PROCEED TO EXAMINE IF COSMIC GLOBA L LTD. IS COMPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMP ANY ON THE BASIS OF FAILING OF EMPLOYEE COST FILTER, APPLIED BY THE TPO . THE TPO HAS SET OUT ITA NO.2059/DEL/2014 5 CERTAIN FILTERS FOR APPLICATION IN THE DETERMINATIO N OF THE ALP OF THE INTERNATIONAL TRANSACTION. ONE OF THEM, GIVEN ON P AGE 6 OF HIS ORDER, IS EXCLUSION OF COMPANIES WHOSE EMPLOYEE COST IS LESS THAN 25% OF THE REVENUES. THE TPO, ON PAGE 27 OF HIS ORDER DID NOT CONCUR WITH THE ASSESSEES OBJECTION OF FAILING OF EMPLOYEE COST FI LTER BY OPINING THAT NO SUCH FILTER ON ACCOUNT OF EMPLOYEE COST WAS TO BE A PPLIED. WE HAVE GONE THROUGH THE ASSESSEES PROFIT & LOSS ACCOUNT, A COP Y OF WHICH IS AVAILABLE ON PAGE 7 OF THE PAPER BOOK. IT IS EVIDENT FROM TH E PROFIT & LOSS ACCOUNT THAT THE ASSESSEE EARNED INCOME OF RS.23.04 CRORE. UNDER THE HEAD EXPENDITURE, THERE ARE TWO ITEMS, NAMELY, PERSON NEL EXPENSES AMOUNTING TO RS.12.73 CRORE AND ADMINISTRATIVE AND OTHER EXPENSES AT RS.7.95 CRORE. BREAK-UP OF `PERSONNEL EXPENSES IS AVAILABLE IN SCHEDULE 5, WHICH DIVULGES THAT IT CONSISTS OF ONLY `SALARIES AND `ALLOWANCES. THIS REVEALS THAT THE ASSESSEE IS RENDERING SERVICES EXC LUSIVELY IN-HOUSE AND THERE IS NO OUTSOURCING. FURTHER, THE RATIO OF ITS PERSONNEL COST TO SALES IS 55% AND ODD, WHICH DOES NOT PASS THE FILTER ADOPTED BY THE TPO AS DISCUSSED ABOVE. ITA NO.2059/DEL/2014 6 7. A COPY OF THE ANNUAL REPORT OF COSMIC GLOBAL LTD. IS ALSO AVAILABLE IN THE PAPER BOOK. PAGE NO.117 CARRIES PROFIT & LOSS ACCOUNT OF THIS COMPANY, WHICH SHOWS REVENUES FROM OPERATIONS AT RS.7.37 CRORE. UNDER THE HEAD EXPENDITURE, THERE IS AN ITEM OF SALARIES, WAGES & AMENITIES AT RS.1.57 CRORE AND ANOTHER ITEM IS TR ANSLATION CHARGES PAID AT RS.3.00 CRORE. IN THIS WAY, THE RATIO OF PERSONNEL COST TO SALES OF THIS COMPANY IS 21% AND ODD. THIS COMPANY IS SUBSTANTIA LLY OUTSOURCING ITS SERVICES TO OUTSIDERS, WHICH GETS REFLECTED FROM TH E RATIO OF `TRANSLATION CHARGES TO `SALES, WHICH IS AT 40% AND ODD. IT, THEREFORE, BECOMES GRAPHICALLY CLEAR THAT COSMIC GLOBAL LTD., THOUGH F UNCTIONALLY SIMILAR, IS CARRYING OUT ITS WORK BY RELYING MORE ON OUTSOURCIN G THAN THROUGH ITS OWN PERSONNEL. AS AGAINST THIS, THE ASSESSEE IS DOING ENTIRE WORK THROUGH ITS OWN EMPLOYEES. THIS ILLUSTRATES THAT THERE IS A DI FFERENCE IN THE BUSINESS MODEL ADOPTED BY THE ASSESSEE VIS--VIS COSMIC GLOBAL LTD. 8. THE DELHI BENCH OF THE TRIBUNAL IN XCHANGING TECHNOLOGY SERVICES INDIA (P) LTD. VS. DCIT (2015) 57 TAXMANN.COM 437 ( DEL)-(TRIB.), HAS DIRECTED THE EXCLUSION OF COSMIC GLOBAL LTD. ON ACC OUNT OF ADOPTING A DIFFERENT BUSINESS MODEL VIS--VIS THE ASSESSEE IN THAT CASE, WHICH, LIKE THE ITA NO.2059/DEL/2014 7 ASSESSEE IN THE INSTANT APPEAL, WAS PROVIDING IN-HO USE SERVICES. THE HON'BLE DELHI HIGH COURT IN PR. CIT VS. XCHANGING TECHNOLOGY SERVICES INDIA (P) LTD ., VIDE ITS JUDGMENT DATED 20.10.2015, HAS UPHELD T HE TRIBUNAL ORDER ON THIS SCORE. THE FACTS AND CIRCUMSTANCES O F THE INSTANT CASE ARE MUTATIS MUTANDIS SIMILAR TO THOSE OF XCHANGING TECHNOLOGY SERVICES INDIA (P) LTD.( SUPRA) , INASMUCH AS THE ASSESSEE IN QUESTION IS ALSO REND ERING IN- HOUSE SERVICES WITHOUT OUTSOURCING THEM, WHICH IS A BUSINESS MODEL QUITE DIFFERENT FROM THAT OF COSMIC GLOBAL LTD. FOLLOWING THE ABOVE PRECEDENT, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LI ST OF COMPARABLES. 9. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER ON TH E ISSUE OF TRANSFER PRICING ADDITION IN THE ABOVE REFERRED INTERNATIONA L TRANSACTION OF PROVISION OF OUTSOURCING BACK OFFICE SUPPORT SERVI CES AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR A FRESH DETERMINATION OF THE ALP IN CONSONANCE WITH OUR ABOVE VIEW. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. ITA NO.2059/DEL/2014 8 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 14.09.201 8. SD/- SD/- [K. NARASIMHA CHARY] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 14 TH SEPTEMBER, 2018. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.