Data Core (India) Private Limited [merged with DCG Data-Core Systems (India) Private Limited], Kolkata V. ACIT, Circle - 2(1), Kolkata , Kolkata

ITA 2396/KOL/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 2782 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 29-11-2017

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA C BENCH, KOLKATA (BEFORE SRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER & SRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER) I.T.A. NO. 2396/KOL/2017 ASSESSMENT YEAR: 2013-14 DATA CORE (INDIA) PRIVATE LIMITED...APPELLANT (MERGED WITH DCG DATA-CORE SYSTEMS (INDIA) PVT. LTD. DEVELOPMENT CONSULTANT HOUSE BLOCK-DG PLOT-4 SECTOR-II SALT LAKE CITY KOLKATA 700 091 [PAN : AAFCD 4828 F] VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(1), KOLKATA.....RESPONDENT APPEARANCES BY: SHRI ADITYA HANS, C.A. & ARVIND AGARWAL, C.A. & CHETAN MEHTA, C.A., APPEARED ON BEHALF OF THE ASSESSEE. DR. P.K. SRIHARI, ADDL. CIT, D/R APPEARING ON BEHALF OF THE REVENUE. DATE OF CONCLUDING THE HEARING : JULY 30 TH , 2019 DATE OF PRONOUNCING THE ORDER : AUGUST 30 TH , 2019 ORDER PER J. SUDHAKAR REDDY, AM :- THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER U/S 144C/143(3) OF THE ACT, DT. 24/10/2017, FOR THE ASSESSMENT YEAR 2013-14. 2. THE ASSESSEE IS A SUBSIDIARY OF DEVELOPMENT CONSULTANTS PRIVATE LIMITED WHICH HELD 99.99% STAKE IN THE COMPANY. THE ASSESSEE PROVIDES SOFTWARE DEVELOPMENT SERVICES AND BACK OFFICE PROCESSING (BPO) SERVICES TO DATA CORE SYSTEMS, INC. (DATA CORE US) FOR ENABLING IT TO SERVICE ITS CLIENTS UNDER A COMMON SERVICE AGREEMENT. THE ASSESSEE FILED ITS RETURN OF INCOME ON 23/10/2012, DISCLOSING TOTAL INCOME AT RS.1,60,12,050/-. LATER THE RETURN WAS SELECTED FOR SCRUTINY THROUGH CASS. NOTICES U/S. 143(2) AND 142(1) OF THE ACT, WERE ISSUED. THE ASSESSING OFFICER COMPLETED THE ASSESSMENT U/S 144C/143(3) OF THE ACT ON 24/10/2017, DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS.2,29,78,879/- INTERALIA MAKING UPWARD ADJUSTMENTS OF ARMS LENGTH PRICE RELATED WITH COST OF SERVICES. 2 I.T.A. NO. 2396/KOL/2017 ASSESSMENT YEAR: 2013-14 DATA CORE (INDIA) PRIVATE LIMITED 3. THE TPO AND THE ASSESSING OFFICER HAD PROPOSED CERTAIN ADJUSTMENTS TO THE INCOME OF THE ASSESSEE COMPANY WITH RESPECT TO INTERNATIONAL TRANSACTIONS PERTAINING TO RENDERING OF I.T. ENABLED SERVICES INVOLVING BACK OFFICE PROCESSING (BPO) AND ROUTINE SOFTWARE DEVELOPMENT SERVICES. THE DRP ISSUED CERTAIN DIRECTIONS U/S 144C(5) OF THE ACT ON 23/08/2017. IN PURSUANCE OF THESE DIRECTIONS, THE ASSESSING OFFICER MADE AN UPWARD ADJUSTMENT OF RS.69,66,829/- OF ARMS LENGTH PRICE (ALP) RELATED WITH COST OF SERVICE. 4. AGGRIEVED THE ASSESSEE IS BEFORE US. 5. WE HAVE HEARD SHRI ADITYA HANS, LD. COUNSEL ON BEHALF OF THE ASSESSEE AND DR. P.K. SRIHARI, LD. CIT D/R ON BEHALF OF THE REVENUE. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, PERUSAL OF THE PAPERS ON RECORD, ORDERS OF THE AUTHORITIES BELOW AS WELL AS CASE LAW CITED, WE HOLD AS FOLLOWS:- 6. THE FUNCTIONAL PROFILE OF THE ASSESSEE WAS THE SUBJECT MATTER BEFORE THE ITAT IN THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEAR 2010-11 IN I.T.A. NO. 387/KOL/2015, ORDER DT. 06/12/2017, WHEREIN AT PARA 9.3., IT WAS HELD AS FOLLOWS:- THERE IS NO DISPUTE FOR THIS ASST YEAR 2011-12 THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT AND BPO SERVICES AND COMPOSITE CONSIDERATION HAS BEEN RECEIVED FROM ITS AE FOR THE SAME. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD CHOSEN THE MIXED SET OF COMPARABLES FROM BOTH IT AND ITES SEGMENTS. 6.1. THE TPOS FINDINGS FOR THIS ASSESSMENT YEAR IS THE SAME AS THAT OF THE ITAT EXTRACTED ABOVE. 7. THOUGH A NUMBER OF ARGUMENTS WERE RAISED AND WRITTEN SUBMISSIONS FILED, BOTH THE PARTIES SUBMITTED THAT, IF THE ISSUE OF COMPARABLE ARE ADJUDICATED ALL THE OTHER GROUNDS AND ARGUMENTS WOULD BECOME ACADEMIC IN NATURE. IN VIEW OF THE ABOVE SUBMISSION, WE CONSIDER THE ARGUMENTS OF BOTH THE PARTIES ON COMPARABLES. THE FOLLOWING THREE COMPARABLES WHICH WERE INCLUDED BY THE TPO BUT ARE DISPUTED BY THE ASSESSEE. 8. ECLERX SERVICES LIMITED IN THE CASE OF THIS COMPARABLE, WE FIND THAT THE HYDERABAD BENCH OF THE ITAT IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS VS. ACIT IN ITA NO. 124/HYD/2014, ORDER DT. 3 I.T.A. NO. 2396/KOL/2017 ASSESSMENT YEAR: 2013-14 DATA CORE (INDIA) PRIVATE LIMITED 31/07/2014, HAS CONSIDERED THIS ISSUE AND HAS COME TO A CONCLUSION THAT ECLERX SERVICES LIMITED IS A KPO. IT HELD AS FOLLOWS:- (3) ECLERX SERVICES LTD. 18. THE OBJECTION OF ASSESSEE TO THIS COMPARABLE IS THAT THIS COMPANY IS FUNCTIONALLY DISSIMILAR. IT IS IN THE BUSINESS OF CONSULTANCY AND ADVISORY SERVICE AND PROVIDES ONLY ANALYTICAL DATA. IT IS ALSO INVOLVED IN QUALITY MONITORING. IT IS THE STAND OF THE ASSESSEE THAT THIS COMPANY OFFERS SOLUTIONS THAT INCLUDE DATA ANALYTICS, OPERATIONS MANAGEMENT, AUDITS AND RECONCILIATION AND THEREFORE HAS TO BE CLASSIFIED AS HIGH END KPO. IN SUPPORT OF THE STAND OF THE ASSESSEE, EXTRACTS FROM THE ANNUAL REPORT OF THIS COMPANY HAVE BEEN POINTED OUT. THEREFORE, THE FUNCTIONS OF THE ABOVE COMPANY ARE DISSIMILAR TO ASSESSEE, WHICH IS A CAPTIVE SERVICE PROVIDER. ON THE PRINCIPLES LAID DOWN BY THE HON'BLE SPECIAL BENCH OF THE ITAT (MUMBAI) IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT. LTD. V/S. ACIT (ITA NO.7466/MUM/2012 FOR ASSESSMENT YEAR 2008-09 DATED 7.3.2014) AND THE PRINCIPLES LAID DOWN BY THE COORDINATE BENCH OF THE TRIBUNAL(DELHI) IN THE CASE OF M/S. MERCER CONSULTING (INDIA) PVT. LTD., (SUPRA), ASSESSEE SUBMITS THAT THIS COMPANY CANNOT BE SELECTED AS A COMPARABLE. 18.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEVER, SUBMITTED THAT HAVING ACCEPTED ADITYA BIRLA MINACS WORLDWIDE LTD., AS A COMPARABLE COMPANY, THIS COMPANY SHOULD ALSO BE INCLUDED, AS OTHERWISE, BOTH THE COMPANIES SHOULD BE EXCLUDED. 18.2 WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE ANNUAL REPORT AND THE OBJECTIONS OF ASSESSEE. AS SEEN FROM THE ANNUAL REPORT, THE ABOVE COMPANY IS INVOLVED IN DIVERSE NATURE OF SERVICES AND THERE WAS NO SEGMENTAL DATA FOR DIVERSIFIED SERVICE PORT FOLIO. MOREOVER THIS COMPANY CAN BE CONSIDERED AS KPO AND WE ARE OF THE OPINION THAT THIS COMPANY IS NOT COMPARABLE TO ASSESSEE'S SERVICES. WE THEREFORE, DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY. 8.1. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT. LTD. VS. ACIT IN ITA NO. 7466/MUM/2012, ORDER DT. 02/08/2013, HELD AS FOLLOWS:- KEEPING IN VIEW THE NATURE OF SERVICES RENDERED BY M/S ECLERX SERVICES PVT. LTD. AND ITS FUNCTIONAL PROFILE, WE ARE OF THE VIEW THAT THIS COMPANY IS ALSO MAINLY ENGAGED IN PROVIDING HIGH-END SERVICES INVOLVING SPECIALIZED KNOWLEDGE AND DOMAIN EXPERTISE IN THE FIELD AND THE SAME CANNOT BE COMPARED WITH THE ASSESSEE COMPANY WHICH IS MAINLY ENGAGED IN PROVIDING LOW-END SERVICES TO THE GROUP CONCERNS. 8.2. THE ASSESSEE FURTHER RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT IN ITA 102/2015, JUDGMENT DT. 10/08/2015, HELD AS FOLLOWS:- 37. APPLYING THE AFORESAID PRINCIPLES TO THE FACTS OF THE PRESENT CASE, IT IS ONCE AGAIN CLEAR THAT BOTH VISHAL AND ECLERX COULD NOT BE TAKEN AS COMPARABLES FOR DETERMINING THE ALP. VISHAL AND ECLERX, BOTH ARE INTO KPO SERVICES. IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA), THE 4 I.T.A. NO. 2396/KOL/2017 ASSESSMENT YEAR: 2013-14 DATA CORE (INDIA) PRIVATE LIMITED SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THAT ECLERX IS ENGAGED IN DATA ANALYTICS, DATA PROCESSING SERVICES, PRICING ANALYTICS, BUNDLING OPTIMIZATION, CONTENT OPERATION, SALES AND MARKETING SUPPORT, PRODUCT DATA MANAGEMENT, REVENUE MANAGEMENT. IN ADDITION, ECLERX ALSO OFFERED FINANCIAL SERVICES SUCH AS REAL-TIME CAPITAL MARKETS, MIDDLE AND BACK-OFFICE SUPPORT, PORTFOLIO RISK MANAGEMENT SERVICES AND VARIOUS CRITICAL DATA MANAGEMENT SERVICES. CLEARLY, THE AFORESAID SERVICES ARE NOT COMPARABLE WITH THE SERVICES RENDERED BY THE ASSESSEE. FURTHER, THE FUNCTIONS UNDERTAKEN (I.E. THE ACTIVITIES PERFORMED) ARE ALSO NOT COMPARABLE WITH THE ASSESSEE. IN OUR VIEW, THE TRIBUNAL ERRED IN HOLDING THAT THE FUNCTIONS PERFORMED BY THE ASSESSEE WERE BROADLY SIMILAR TO THAT OF ECLERX OR VISHAL. THE OPERATING MARGIN OF ECLERX, THUS, COULD NOT BE INCLUDED TO ARRIVE AT AN ALP OF CONTROLLED TRANSACTIONS, WHICH WERE MATERIALLY DIFFERENT IN ITS CONTENT AND VALUE. IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA), THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THE SAME AND HAD, THUS, EXCLUDED ECLERX AS A COMPARABLE. IT IS FURTHER OBSERVED THAT THE COMPARABILITY OF ECLERX HAD ALSO BEEN EXAMINED BY THE HYDERABAD BENCH OF THE TRIBUNAL IN M/S CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P.) LTD. V. ADDITIONAL COMMISSIONER OF INCOME-TAX (SUPRA), WHEREIN, THE TRIBUNAL DIRECTED THE EXCLUSION OF ECLERX AS A COMPARABLE FOR THE REASON THAT IT WAS ENGAGED IN PROVIDING KPO SERVICES AND FURTHER THAT IT HAD ALSO RETURNED SUPERNORMAL PROFITS. 9. APPLYING THE PROPOSITIONS OF LAW LAID DOWN IN THE ABOVE DECISIONS, TO THE FACTS OF THE CASE, WE DIRECT THE TPO/ASSESSING OFFICER TO EXCLUDE ECLERX SERVICES LIMITED AS A COMPARABLE FOR THE PURPOSE OF COMPUTING THE ALP IN THE CASE OF THE ASSESSEE AS THE FUNCTIONAL PROFILE OF ECLERX SERVICES LTD. IS A HIGH END K.P.O. AND WHEREAS THE FUNCTIONAL PROFILE OF THE ASSESSEE IS THAT OF A B.P.O AND SOFTWARE DEVELOPMENT. 10. TCS E-SERVE LIMITED THE ASSESSEE TURNOVER IS STATED TO BE RS. 17.71 CRORES IN BPO SCHEMES AND RS.4.07 CRORES IN SOFTWARE DEVELOPMENT AND SUPPORT. THE ISSUE IS WHETHER TCS E-SERVE LIMITED CAN BE TAKEN AS A COMPARABLE, IF, TURNOVER FILTER IS ADOPTED. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX REPORTED IN [2012] 20 TAXMANN.COM 715 (BANG.) HELD AS FOLLOWS:- THE ASSESSEE FURTHER SUBMITTED THAT AN APPROPRIATE TURNOVER RANGE SHOULD BE APPLIED IN SELECTING A COMPARABLE OF UNCONTROLLED COMPANIES. [PARA 8.2] ON THE OTHER HAND, THE REVENUE'S SUBMISSION WAS THAT THE ACT OR RULES DO NOT PROVIDE FOR THE TURNOVER FILTER. IT WAS SUBMITTED THAT IN THE CASE OF SERVICE SECTOR, THE SIZE OF THE COMPANY DOES NOT MATTER BECAUSE, THE INFRASTRUCTURE LAYOUT IS VERY LESS AND IT WILL NOT AFFECT THE PROFIT RATIO IN ANY WAY. [PARA 8.3] IT WAS NOTED FROM RECORDS THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER- END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, ONE IS UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. THE ASSESSEE RIGHTLY SUBMITS THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROADBASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE 5 I.T.A. NO. 2396/KOL/2017 ASSESSMENT YEAR: 2013-14 DATA CORE (INDIA) PRIVATE LIMITED THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, IT IS HELD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. [PARA 9] ANOTHER CONTENTION RAISED BY THE ASSESSEE WAS THAT THE DATA AVAILABLE SUBSEQUENTLY OR OBTAINED THROUGH NOTICE UNDER SECTION 133(6) SHOULD BE REJECTED WHILE DETERMINING ALP. [PARA 10] 11. APPLYING THE PROPOSITIONS OF LAW LAID DOWN THEREIN, TO THE FACTS OF THE CASE ON HAND, WE DIRECT THE ASSESSING OFFICER TO ELIMINATE TCS E-SERVE LIMITED, AS A COMPARABLE BY APPLYING THE TURNOVER FILTER AS THE TURNOVER OF TCS E-SERVE LIMITED, IS ABOVE RS.2 CRORES. 12. INFOSYS BPO LIMITED THE ISSUE INVOLVED IS WHETHER INFOSYS BPO LIMITED CAN BE TAKEN AS A COMPARABLE, IF, TURNOVER FILTER IS ADOPTED. AS THE ISSUE IS IDENTICAL TO THE ISSUE DEALT BY US WHILE DIRECTING EXCLUSION OF TCS E-SERVE LIMITED, AS A COMPARABLE COMPANY, WE FOLLOW THE DECISION OF BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD. (SUPRA) AND DIRECT THE ASSESSING OFFICER TO EXCLUDE INFOSYS BPO LIMITED AS A COMPARABLE BY APPLYING TURNOVER FILTER. 13. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ALP COMPUTED BY THE ASSESSEE WOULD BE FOUND TO BE IN ORDER, IF, THESE THREE COMPARABLES ARE EXCLUDED FOR THE PURPOSE OF COMPUTING THE ALP OF THE ASSESSEE. THE LD. D/R DID NOT DISPUTE THIS FACTUAL POSITION. UNDER THESE CIRCUMSTANCES, WE DO NOT ADJUDICATE ALL THE ISSUES RAISED BY THE ASSESSEE AND THE REVENUE, AS IT WOULD BE AN ACADEMIC EXERCISE. THUS, WE SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO EXCLUDE ECLERX SERVICES LIMITED, TCS E-SERVE LIMITED AND INFOSYS BPO LIMITED, FROM THE LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF COMPUTING ALP AND, IF, AS CLAIMED BY THE ASSESSEE, ON SUCH 6 I.T.A. NO. 2396/KOL/2017 ASSESSMENT YEAR: 2013-14 DATA CORE (INDIA) PRIVATE LIMITED AN EXERCISE, NO ADJUSTMENT IS CALLED FOR, THEN THE ALP AS DETERMINED BY THE ASSESSEE SHALL BE ACCEPTED. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. KOLKATA, THE 30 TH DAY OF AUGUST, 2019. SD/- SD/- [ S.S. VISWANETHRA RAVI ] [ J. SUDHAKAR REDDY ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30.08.2019 {SC SPS} COPY OF THE ORDER FORWARDED TO: 1. DATA CORE (INDIA) PRIVATE LIMITED (MERGED WITH DCG DATA-CORE SYSTEMS (INDIA) PVT. LTD. DEVELOPMENT CONSULTANT HOUSE BLOCK-DG PLOT-4 SECTOR-II SALT LAKE CITY KOLKATA 700 091 2. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(1), KOLKATA 3. CIT(A)- 4. CIT- , 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, KOLKATA BENCHES