DCIT 2(3), MUMBAI V. WILLIS PROCESSING SERVICES (INDIA) P.LTD, MUMBAI

ITA 2152/MUM/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8043 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Assessment Year: 2009-2010
• Appeal Filed On: 28-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S D SRIVASTAVA
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 92

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BE NCH, MUMBAI , !' # # # # , $ % & , !' ( BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ./I .T.A. NO. 2152/MUM/2014 ( ) ) ) ) / ASSESSMENT YEAR : 2009-10 THE DCIT-2(3), AAYAKAR BHAVAN, MUMBAI-400 020 / VS. M/S. WILLIS PROCESSING SERVICES (INDIA) PVT. LTD., (FORMERLY KNOWN AS M/S. TRINITY COMPUTER PROCESSING (I) PVT. LTD., PLANT NO. 6, GODREJ BOYCEE MFG. CO. COMPOUND, PIROSHA NAGAR, VIKROLI (W), MUMBAI-400 079 C.O. NO. 98/MUM/2014 ( ARISING OUT OF I.T.A. NO. 2152/MUM/2014 ( ) ) ) ) / ASSESSMENT YEAR : 2009-10 M/S. WILLIS PROCESSING SERVICES (INDIA) PVT. LTD., (FORMERLY KNOWN AS M/S. TRINITY COMPUTER PROCESSING (I) PVT. LTD., PLANT NO. 6, GODREJ BOYCEE MFG. CO. COMPOUND, VIKROLI (W), MUMBAI-400 079 / VS. THE DCIT-2(3), AAYAKAR BHAVAN, MUMBAI-400 020 '+ ./ ,- ./ PAN/GIR NO. : AAACT 1796R ( +. / APPELLANT ) .. ( /0+. / RESPONDENT ) +. 1 / REVENUE BY: SHRI S.D. SRIVASTAVA /0+. 2 1 / ASSESSEE BY: SHRI R.R. VORA SHRI NIKHIL TIWARI ITA NO. 2152/M/14 C.O. NO. 98/M/14 2 2 $3 / DATE OF HEARING : 30.09.2014 45) 2 $3 / DATE OF PRONOUNCEMENT :10.10.2014 !% / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE REVENUE AND THE CROSS OBJECTION BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE AO PASSED U/S . 143(3) R.W. SECTION 144C(13) OF THE ACT PURSUANT TO THE DIRECTION OF T HE DISPUTE RESOLUTION PANEL-II MUMBAI, DATE OF DIRECTION DT. 30.12.2013 A ND THE DATE OF ASSESSMENT ORDER IS 29.01.2014. 2. THE ASSESSEE IS AN INDIAN COMPANY INCORPORATED O N 12.5.1992 AND IS A 99.99% OWNED SUBSIDIARY OF WILLIS EUROPE BV, A COMPANY INCORPORATED IN NETHERLANDS. THE ASSESSEE IS PROVI DING INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) TO ITS VARIOUS G ROUP COMPANIES. THE ITES SERVICES PROVIDED BY THE ASSESSEE INCLUDES PROCESSING OF INSURANCE CLAIMS, PREMIUMS AND TREATIES, ACCOUNTING FOR INSURANCE UNDERWRITERS AND CLIENTS, INSURANCE ACCOUNTING SUPP ORT SERVICES AND DATA PROCESSING. 3. THE RETURN FOR THE YEAR WAS FILED DECLARING AN I NCOME OF RS. 1,73,56,555/- UNDER NORMAL PROVISIONS OF THE ACT AL ONGWITH AN ACCOUNTANTS REPORT IN FORM NO. 3CEB REPORTING THE PARTICULARS OF ITS INTERNATIONAL TRANSACTIONS WITH ITS AES. THE RETUR N WAS SELECTED FOR SCRUTINY ASSESSMENT. A REFERENCE WAS MADE BY THE A O U/S. 92 CA(I) OF THE ACT TO THE TRANSFER PRICING OFFICER FOR DETERMI NATION OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ENTERED BY T HE ASSESSEE WITH ITS AES. THE TPO PASSED AN ORDER DT. 24.01.2013 MAKING AN AD JUSTMENT OF RS. ITA NO. 2152/M/14 C.O. NO. 98/M/14 3 10,40,48,562/- TO THE INTERNATIONAL TRANSACTION ENT ERED BY THE ASSESSEE WITH ITS AE TO ARRIVE AT ALP. SUBSEQUENTLY, THE AO PROPOSED TO COMPUTE THE TOTAL ASSESSED INCOME AT RS. 23,36,70,865/- WHI CH INCLUDED ADJUSTMENT OF RS. 10,40,48,562/- MADE BY THE TPO. THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE DURING THE YEAR ARE AS UNDER: NATURE OF INTERNATIONAL TRANSACTION AMOUNT (RS.) METHOD APPLIED PROVISION OF PROCESSING SERVICES 77,98,29,919 TRANSACTION NET MARGIN METHOD (TNMM) RECEIPT OF TECHNICAL SERVICES 4,67,15,623 PURCHASE OF OFFICE CHAIRS 4,93,391 COMPARABL E UNCONTROLLED PRICE METHOD (CUP) PURCHASE OF AUDIO/VIDEO CONFERENCE EQUIPMENT 6,11,103 CUP REIMBURSEMENT OF EXPENSES 53,87,353 NOT APPLICABLE RECOVERY OF EXPENSES 17,68,335 NOT APPLICABLE. 3.1. THE TPO HAS MADE ADJUSTMENT TO TWO INTERNATION AL TRANSACTIONS OF THE ASSESSEE WHICH ARE PROVISION OF PROCESSING SERV ICES AND PURCHASE OF OFFICE CHAIRS AND ACCEPTED THE OTHER INTERNATIONAL TRANSACTIONS TO BE AT ARMS LENGTH. I) PROVISION OF PROCESSING SERVICES AND RECEIPT OF TEC HNICAL SERVICES AS PER FAR ANALYSIS, THE ASSESSEE IS CATEGORIZED AS A RISK MITIGATED CAPTIVE SERVICE PROVIDER AND SELECTED A S THE TESTED PARTY. TRANSACTIONAL NET MARGIN METHOD (TNM M) WAS CONSIDERED AS THE MOST APPROPRIATE METHOD TO DE TERMINE THE ALP. THE ASSESSEE ADOPTED THE OPERATING ITA NO. 2152/M/14 C.O. NO. 98/M/14 4 PROFIT/OPERATING COST AS THE PROFIT LEVEL INDICATOR . THE ASSESSEE WORKED OUT THE PLI AT 17.65%. THE ARITHME TIC MEAN PLI OF THE COMPARABLE COMPANIES OUT OF SET OF 8 COMPARABLE COMPANIES WAS WORKED OUT TO 14.34%. SIN CE THE PLI SHOWN BY THE ASSESSEE WAS HIGHER THAN THE PLI OF COMPARABLE COMPANIES, THE INTERNATIONAL TRANSACTION S WERE CONCLUDED TO BE AT ARMS LENGTH. II) PURCHASE OF OFFICE CHAIRS CUP WAS CONSIDERED AS THE MOST APPROPRIATE METHOD T O DETERMINE THE ARMS LENGTH PRICE. 208 NOS OF USED CHAIRS WERE IMPORTED FROM ITS AE AT RS. 2538/- PER CHAIR. THE TPO ACCEPTED THE ANALYSIS CARRIED OUT BY THE AS SESSEE USING THE TNMM AS MOST APPROPRIATE METHOD FOR DETERMINATION OF THE ALP. THE TPO ALSO ACCEPTED TH E ADOPTION OF PLI OF OP/OC. THE TPO COMPUTED THE OPERATING MARGIN OF THE ASSESSEE AT 13.86% AS AGAIN ST THE MARGIN OF 17.65% REPORTED BY THE ASSESSEE IN ITS TP DOCUMENTATION. THE ASSESSEE WAS ASKED TO SUBMIT OP ERATING MARGINS OF THE COMPARABLES COMPANIES USING FINANCI AL DATA FOR THE RELEVANT YEAR ONLY. THE ASSESSEE SUBMITTED THE SAME ON A WITHOUT PREJUDICE BASIS WHICH RESULTED IN AN A RITHMETIC MEAN MARGIN OF 11.84% ON OPERATING COSTS USING 6 COMPARABLES. THE TPO REJECTED 4 OUT OF THE 6 COMPA RABLES AND ALSO UNDERTOOK A FRESH SEARCH FOR COMPARABLES, INTRODUCING 12 ADDITIONAL COMPARABLE. THE 4 COMPAN IES REJECTED BY THE TPO WERE FOR THE FOLLOWING REASONS: ITA NO. 2152/M/14 C.O. NO. 98/M/14 5 A) COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING. B) COMPANIES HAVING EXPORT REVENUE LESS THAN 75% OF TH E SALES AND C) COMPANIES INCURRED LOSSES DURING THE RELEVANT FIN ANCIAL YEAR 3.2. THE TPO DETERMINED THE FINAL SET OF 14 COMPARA BLES COMPANIES WHICH INCLUDED 2 COMPARABLE COMPANIES SELECTED BY T HE ASSESSEE. THE ARITHMETIC MEAN WAS COMPUTED AT 35.81%. WHILE DOI NG SO, THE TPO DID NOT ALLOW THE BENEFIT OF WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE ON THE BASIS THAT COMPARABLE FIGURES OF WORKING CAPITAL AD JUSTMENT HAVE NOT BEEN PROVIDED. THE TPO ALSO DID NOT GRANT ADJUSTME NT TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE ASSESSEE VIS --VIS THE COMPARABLE COMPANIES. THE TPO APPLIED THE PLI DIFFERENTIAL WH ICH WAS 35.81% - 13.86% = 21.95% AND ACCORDINGLY AN ADJUSTMENT OF RS . 10,36,24,658/- WAS MADE. 3.3. IN SO FAR AS PURCHASE OF OFFICE CHAIRS IS CONC ERNED, THE TPO CONDUCTED A SURVEY TO DETERMINE THE PRICE OF THE CH AIRS AND ARRIVED AT A COST OF RS. 500/- PER CHAIR AND MADE AN UPWARD ADJU STMENT OF RS. 4,23,904/-. 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE DISPU TE RESOLUTION PANEL RAISING OBJECTIONS. 5. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS AND THE OBJECTIONS OF THE ASSESSEE, THE DRP REJECTED 4 OUT OF 12 ADDIT IONAL COMPARABLE INTRODUCED BY THE TPO WHICH ARE ACCENTIA TECHNOLOGI ES LTD., CROSSDOMAIN SOLUTIONS LTD, EXCEL INFOWAYS LTD., AND GENPACT INDIA LTD. HOWEVER, THE DRP DID NOT ACCEPT ASSESSEES CONTENTI ON AS REGARDS THE INCLUSION OF 4 COMPARABLES SELECTED BY THE ASSESSEE WHICH ARE NAMELY: ITA NO. 2152/M/14 C.O. NO. 98/M/14 6 1. ADITYA BIRLA MINACS WORLDWIDE LTD. 2. ALLSEC TECHNOLOGIES LTD., 3. MAPLE ESOLUTIONS LTD. 4. R SYSTEMS INTERNATIONAL LTD. 5.1. THE DRP ALSO REJECTED THE CONTENTIONS AGAINST INCLUSION OF 3 ADDITIONAL COMPARABLES OUT OF 12 COMPARABLES NAMELY CORAL HUB LTD, ECLERX SERVICES LTD., AND INFOSYS BPO LTD WHICH WER E INTRODUCED BY THE TPO. THE DRP FURTHER REJECTED THE CLAIM OF RECTIFI CATION OF OPERATING MARGIN OF THE ASSESSEE WHICH IS 17.65% INSTEAD OF 13.86%. FURTHER, BENEFIT OF WORKING CAPITAL ADJUSTMENT TO ACCOUNTS F OR DIFFERENCES BETWEEN ASSESSEE VIS-A-VIS THE COMPARABLES WAS DENIED. THE BENEFIT OF RISK ADJUSTMENT WAS ALSO DENIED. IN SO FAR AS PURCHASE OF OFFICE CHAIRS IS CONCERNED, THE DRP DID NOT ACCEPT THE ALP COMPUTED BY THE ASSESSEE. 6. AGAINST THE DIRECTIONS OF THE DRP, THE REVENUE I S IN APPEAL AND THE ASSESSEE IS IN CROSS OBJECTION. 7. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY REL IED UPON THE FINDINGS OF THE TPO/AO. 8. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE STR ONGLY SUPPORTED THE DIRECTIONS OF THE DRP, IN SO FAR AS THEY RELATED TO THE REJECTION OF 4 OUT OF 12 COMPARABLES INTRODUCED BY THE TPO. 9. HAVING HEARD THE RIVAL SUBMISSIONS AND AFTER CAR EFULLY PERUSING THE ORDERS OF THE AUTHORITIES BELOW AND THE RELEVANT DO CUMENTARY EVIDENCES BROUGHT ON RECORD BEFORE US IN THE LIGHT OF THE JUD ICIAL DECISIONS RELIED UPON BY THE ASSESSEE, LET US CONSIDER THE COMPARABL ES REJECTED BY THE DRP WHICH ARE DISPUTED IN REVENUES APPEAL: ITA NO. 2152/M/14 C.O. NO. 98/M/14 7 1. GENPACT INDIA LTD. THE ASSESSEE HAS REJECTED THIS COMPARABLE WHICH HAS BEEN ACCEPTED BY THE DRP. THE TPO HAS INCLUDED THIS COMPARABLE ON T HE GROUND THAT THE COMPANY IS ENGAGED IN SIMILAR ACTIVITY. THE RE ASONS SUBMITTED BY THE ASSESSEE FOR REJECTION OF THIS COMPANY IS THAT THE COMPANY PROVIDES A HOST OF HIGH END BPO SERVICES WHICH INCL UDED FINANCE AND ACCOUNTING, INSURANCE, DATA MODELLING AND ANALYTIC SUPPORT WHEREAS THE ASSESSEE IS PROVIDING LOW END SUPPORT SERVICES FOLLOWING PRE- DEFINED PROCEDURE AND SET STANDARDS WHICH REQUIRE L ESS SKILL EMPLOYEES WHO ARE SIMPLY GRADUATES. FURTHER THE RATIO OF REL ATED PARTY TRANSACTION TO OPERATING INCOME FOR THE YEAR IS 98. 96% AND THEREFORE DOES NOT SATISFY THE TPOS OWN FILTER OF REJECTING COMPANIES HAVING MORE THAN 25% RPT. IT WAS ALSO POINTED OUT THAT TH E TURNOVER OF GENPACT INDIA IS RS. 2683.82 CRORES AS AGAINST ASSE SSEES TURNOVER OF RS. 80.4 CRORES. WE FIND THAT THE SERVICES RENDERE D BY GENPACT INDIA ARE HIGH END SERVICES AND EVEN THE TURNOVER FILTER DO NOT MATCH WITH THAT OF THE ASSESSEE. WE, THEREFORE, DO NOT FIND A NY ERROR IN THE DIRECTIONS OF THE DRP TO REJECT THIS COMPANY FROM T HE FINAL LIST OF COMPARABLES. 2. EXCEL INFOWAYS LTD. THIS COMPARABLE WAS REJECTED BY THE ASSESSEE THOUGH INCLUDED BY THE TPO ON THE GROUND THAT THE COMPANY IS ENGAGED IN SI MILAR ACTIVITY. WE FIND THAT THIS COMPANY HAS A SUPER NORMAL PROFIT AND SHOWING MARGIN OF 203.80%. WE ALSO FIND THAT THE TPO IN IT S ORDER U/S. 92CA(3) OF THE ACT VIDE ORDER DT. 23.1.2014 FOR A.Y . 2010-11 HAS HIMSELF REMOVED THIS COMPANY FROM THE FINAL LIST OF COMPARABLES ITA NO. 2152/M/14 C.O. NO. 98/M/14 8 GIVING REASONS EXTREME OUTLIER. CONSIDERING THE SUPER NORMAL PROFIT AND ALSO THE REJECTION BY THE TPO IN A.Y. 2010-11, WE DO NOT FIND ANY ERROR IN REJECTION OF THIS COMPANY. ANOTHER REASON FOR REJECTING THIS COMPANY IS THAT THE RATIO OF EMPLOYEE COST TO TURNO VER IS ONLY 10.02% AS AGAINST ASSESSEES EMPLOYEE COST OF 62.83%. 3. M/S. CROSSDOMAIN SOLUTIONS LTD THIS COMPANY HAS BEEN REJECTED BY THE DRP ON THE G ROUND THAT IT IS INDULGED IN HIGH SKILL IT SERVICES WHICH ARE NOT CO MPARABLE TO THE ROUTINE I.T. ENABLED SERVICES. THE TRIBUNAL HYDERA BAD BENCH IN THE CASE OF M/S. MARKET TOOLS RESEARCH PVT. LTD IN ITA NO. 1811/HYD/12 HAS HELD THAT THIS COMPANY IS PROVIDING SERVICES WH ICH ARE IN THE NATURE OF KPO. FURTHER, THE COMPANY IS ENGAGED IN PROVIDING NICHE SERVICES AS WELL AS DEVELOPED ITS OWN BRAND EXDION TO TARGET THE INSURANCE INDUSTRY IN US. THE TRIBUNAL FOLLOWED THE FINDINGS OF THE BANGALORE BENCH IN THE CASE OF M/S. SYMPHONY MARKE TING SOLUTIONS INDIA PVT. LTD. IN ITA NO. 1316/BANG/2012 WHILE REJ ECTING THE ISSUE OF THIS COMPANY IN THE FINAL SET OF COMPARABLES. R ESPECTFULLY FOLLOWING THE FINDINGS OF THE CO ORDINATE BENCH, WE UPHOLD THE DIRECTIONS OF THE DRP FOR THE REJECTION OF THIS COM PANY FROM THE FINAL LIST OF COMPARABLE. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 11. TO COMPLETE THE ADJUDICATION, WE FIND THAT THE TPO HAS CONSIDERED FOREIGN EXCHANGE GAIN/LOSS AS OPERATING IN NATURE FOR THE PURPOSE OF COMPUTING THE OPERATING MARGIN OF ALL THE COMPARABL ES. HOWEVER, WHILE COMPUTING THE OPERATING MARGIN OF THE ASSESSEE, THE TPO INCLUDED THE FOREIGN EXCHANGE LOSS OF RS. 2.48 CRORES AS PART OF OPERATING COST BUT HAS ITA NO. 2152/M/14 C.O. NO. 98/M/14 9 NOT CONSIDERED THE FOREIGN EXCHANGE GAIN OF RS. 1.0 9 CRORES AS PART OF THE OPERATING REVENUE. THIS AMOUNTS TO INCONSISTENT AP PROACH OF THE TPO. WE, ACCORDINGLY DIRECT THE TPO TO CONSIDER FOREIGN EXCHANGE GAIN AS PART OF THE OPERATING REVENUE WHILE DETERMINING THE OPER ATING MARGIN OF THE ASSESSEE. FURTHER, THE WORKING CAPITAL ADJUSTMENT HAS BEEN GRANTED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-0 7 IN ITA NO. 8772/M/2010 AND FOR A.Y. 2007-08 IN ITA NO. 4547/M/ 2012. RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO ORDIN ATE BENCHES, THE MATTER IS REMANDED BACK TO THE TPO FOR THE LIMITED PURPOSE OF VERIFYING THE COMPUTATION. C.O. NO. 98/M/2014 11. IN THIS CROSS OBJECTION, THE ASSESSEE HAS CHAL LENGED THE DIRECTIONS OF THE DRP FOR EXCLUDING THE COMPARABLES INCLUDED BY T HE ASSESSEE. 12. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASS ESSEE STATED THAT IF REVENUES APPEAL IS DISMISSED, THE CROSS OBJECTION OF THE ASSESSEE WILL BECOME OTIOSE. AS WE HAVE DISMISSED THE REVENUES APPEAL IN ITA NO. 2152/M/14, ON THE BASIS OF THE STATEMENT OF THE LD. COUNSEL, THE CROSS OBJECTION FILED BY THE ASSESSEE ARE TREATED AS OTIO SE. 13. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE CROSS OBJECTION FILED BY THE ASSESSEE TREATED AS OT IOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH OCTOBER, 2014 SD/- SD/- (AMIT SHUKLA ) (N.K. BILLAIYA) !' / JUDICIAL MEMBER !' / ACCOUNTANT MEMBER MUMBAI; 6! DATED : 10 TH OCTOBER, 2014 . . ./ RJ , SR. PS ITA NO. 2152/M/14 C.O. NO. 98/M/14 10 !% !% !% !% 2 22 2 /$ /$ /$ /$ 7)$ 7)$ 7)$ 7)$ / COPY OF THE ORDER FORWARDED TO : 1. +. / THE APPELLANT 2. /0+. / THE RESPONDENT. 3. 8 ( ) / THE CIT(A)- 4. 8 / CIT 5. 9: /$ , , / DR, ITAT, MUMBAI 6. :; < / GUARD FILE. !% !% !% !% / BY ORDER, 0$ /$ //TRUE COPY// = == = / > > > > , , , , (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI