DCIT CIR 3(1), MUMBAI V. ABN AMRO CENTRAL ENTERPRISES SERVICES P. LTD, MUMBAI

ITA 2554/MUM/2010

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 5430 (ITAT-DELHI)
• Duration Of Justice: 12 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-07-2022
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: I
• Assessment Year: 2005-2006
• Appeal Filed On: 31-03-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MAHESH SHAH
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Set aside
• Section: 92C; 92D; 80HHC; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘I’ : NEW DELHI) SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER and MS. ASTHA CHANDRA, JUDICIAL MEMBER ITA No.2554/MUM/2010 (ASSESSMENT YEAR : 2005-06) DCIT, Circle 3 (1), vs. M/s. RBS Services India Pvt. Ltd., Gurgaon. (Earlier known as ABN Amro Central Enterprises Services Pvt. Ltd., after that Known as M/s. RBS Business Services Pvt. Ltd.) Building No.7B, DLF Cyber City, Phase-III, Gurgaon – 120 002. (PAN : AADCA1780D) CO No.206/MUM/2010 (in ITA No.2554/MUM/2010) (ASSESSMENT YEAR : 2005-06) M/s. RBS Services India Pvt. Ltd., vs. DCIT, Circle 3 (1), (Earlier known as ABN Amro Central Gurgaon. Enterprises Services Pvt. Ltd., after that Known as M/s. RBS Business Services Pvt. Ltd.) Building No.7B, DLF Cyber City, Phase-III, Gurgaon – 120 002. (PAN : AADCA1780D) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Atul Jain, AR Shri S.K. Aggarwal, CA REVENUE BY : Shri Mahesh Shah, CIT DR Date of Hearing : 16.06.2022 Date of Order : 20.07.2022 ORDER ITA No.2554/Mum/2010 CO No.206/Mum/2010 2 PER SHAMIM YAHYA, ACCOUNTANT MEMBER : This appeal by the Revenue and cross objections by the assessee is directed against the order of the ld. CIT (A)-15, Mumbai dated 15.01.2010 pertaining to assessment year 2005-06. 2. The grounds of appeal raised by the Revenue read as under :- “1. "On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in the deleting addition of Rs.19,74,00,000/- made by the TPO in respect of value of international transactions entered into by the assessee company, by taking combine set of com parables. Without prejudice to the above, the Ld.CIT(A) erred by not appreciating that the correct difference between the NCP of 16.53% and 11.27% is more than 5% as specified in section 92C(2) of the LT. Act while making decision that NCP of 11.27% should be applied for Benchmarking analysis as against 16.53%." 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that unbilled revenue amounting to Rs.88,29,098/- should not be excluded from the eligible profits while calculating the amount of profits of the undertaking for the purpose of deduction u/s 10A of the Income Tax Act." 3. "The appellant prays that the order of CIT (A) on the above ground be set aside and that of the Assessing Officer be restored." 3. The assessee has taken the following grounds in the cross objections :- “A. Transfer Pricing Grounds 1. The learned Commissioner of Income-tax (Appeals) - XV, Mumbai ['CIT (A)'] erred on facts and in law in upholding ITA No.2554/Mum/2010 CO No.206/Mum/2010 3 the action of the TPO/AO of disregarding the benchmarking analysis and comparable companies selected by the Respondent based on the contemporaneous data in the transfer pricing study report maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules), 2. The learned CIT -A erred on facts and in law in upholding the action of the TPO/ AO of conducting a fresh benchmarking analysis and further adopting the TPO's comparables in benchmarking the international transaction in relation to back office support services undertaken by the Respondent. The Respondent prays that the fresh benchmarking analysis conducted by the learned TPO/AO is liable to be quashed. 3. The learned CIT -A erred on facts in upholding the action of the Assessing Officer of not recording any reasons to show that the conditions mentioned in clause (a) to (d) of section 92C (3) of the Act were satisfied, either before initiating the transfer pricing assessment or before the completion of the assessment proceedings and further erred in holding that there is nothing in Section 92CA(3) to suggest that the these clauses are mandatory in nature. 4. The learned CIT -A erred on facts and in law in not adjudicating on the ground that appropriate adjustments have not been granted by the TPO/AO as required by Rule 10B(1)(e)(iii) of the Rules. 5. The learned CIT-A erred on facts and in law in not adjudicating on the ground that the TPO/AO disregarded Para 55.5 of Circular 14/2001 which clarifies that the basic intention under transfer pricing regulations is to prevent shifting out of profit by manipulating prices charged or paid in international transactions thereby eroding the country's tax base. B. Unbilled Revenue Based on the facts of the case and in law, the learned ClT(A) erred in confirming the action of the AO in including the un billed revenue of Rs.88,29,098 to the total turnover of the Appellant for the purpose of calculating deduction under ITA No.2554/Mum/2010 CO No.206/Mum/2010 4 section 10A of the Act while excluding the same from the export turnover. Without prejudice to the above, where the amount of unbilled revenue is included in the total turnover, then to maintain parity, the unbilled revenue should also be included in the export turnover. C. Claim of Education Cess Based on the facts and circumstances of the case and in law, the Appellant placing reliance on the decision of Bombay High Court in the case of Sesa Goa Limited v. JCIT (Appeal) No.17 of 2013) and Rajasthan High Court in case of Chambal Fertilizers and Chemicals Limited (D.B. Income Tax Appeal No.52/2018 dated 31.07.2018) prays that it be granted deduction for secondary and higher education cess. The Appellant prays that the assessing officer be directed to allow deduction for education cess of Rs.203,780 while computing the taxable income of the Appellant.” 4. Brief facts of the case are that assessee is engaged in the business of providing back office support services and software services to various entities in ABN Amro group. During the year, the company had following international transactions :- Sr.No. Description of services provided/availed Amount (Rs.) 1 Provision of back office support services 1,045,511,329 2 Provision of software services 296,792,612 3 Payment of deputed staff cost 116,628,962 4 Allocation of global insurance cover charges 30,302,112 5 Allocation of global cost charges 11,085,760 6 Interest paid on Long Term Loan 38,267,831 7 Interest paid on Current Account-Overdraft 196,915 8 Bank Charges paid 175,075 9 Recovery of expenses (received/ receivable) 258,780,992 Total 752,230,259 ITA No.2554/Mum/2010 CO No.206/Mum/2010 5 5. The Arm’s Length Price (ALP) was determined by using Transactional Net Margin Method (TNMM) by using the Net Cost plus Mark-up (NCPM) as Profit Level Indicator (PLI). The TPO in his order referred to the reply of assessee to his various queries and made following order :- “This office has considered the above submissions and has determined all the international transactions except Provision of back office support services to be at arm's length. As regards the back office support segment, this office accepts the Net cost plus mark-up of 25.62 percent as computed by the assessee based on annual report. Using the said NCPM, the margins of the assessee fall outside the +/- five percent range as allowed by law. Accordingly, an adjustment is warranted in the aforesaid segment. The adjustments for the back-office support services segment are as tabulated hereunder: Particulars Year ended 31-Mar-05 Service income 12,905 Total income (A) 12,905 Expenses (excluding interest) 11,597 Total expenses before interest (B) 11,597 Net profit as per transfer pricing study (C) 1,307 NCP per cent (D) 11.3% Net Profit @ 25.62% (BX25.62%)(E) 2,971 Arm’s Length Price (B+E) (F) 14,568 Minus 5 percent as per section 92C(2) (H) 13,840 Since (H) is more than (A), an adjustment is warranted to total income for the BPO segment Amount of adjustment to total income (I) (F-A) 1,663 ITA No.2554/Mum/2010 CO No.206/Mum/2010 6 XIV. Accordingly, the adjustment worked out for the back office support services is Rs.16,63.00.000/.-. The arm's length price of the transactions, by considering net cost plus margin of 25.62% is worked out at Rs.145,68,00,000/-, as against transactional value of Rs.129,05,00,000/-. XV. Considering the provisions of Section 92C( 4) of the I.T. Act, 1961, no deduction u/s.10A or 10B or Chapter VIA of the LT. Act, are to be allowed to the assessee on such enhanced income. The Arm's Length Price of the remaining international transactions be taken at transaction value recorded in the books of account. This order is in response to specific reference u/s, 92CA(1) received and will apply to the case of the assessee for A.Y.2005-06 only.” 6. Upon assessee’s appeal, ld. CIT (A) summarized the action of TPO by observing as under :- “2.4 During the course of the assessment, the TPO requested the Appellant to update the NCP markups of the comparables using only the single year latest data. The Appellant challenged the action of the TPO in asking the Appellant to update the margins of the independent comparable companies accepted by the Appellant in the Transfer Pricing report. 2.5 Without prejudice to the above, the Appellant submitted the updated margins of the comparables for the financial year ('FY') 2004-05 based on the latest available data at the time of the assessment: • The NCP of single year margin for the comparables based on the latest data available worked out to 10.26 percent; and • The NCP earned by the Appellant was 11.27 percent. 2.6. Based on the above, the Appellant submitted to the TPO that the international transaction in relation to provision of back ITA No.2554/Mum/2010 CO No.206/Mum/2010 7 office services is at arm's length even if the updated single year margins are taken into consideration. 2.7 The TPO then requested the Appellant to undertake a fresh search based on the latest updated data available in the Prowess database. The Appellant filed a detailed submission stating that such an approach is erroneous as it violates the principle of contemporaneous data as stipulated in law and that the TPO cannot disregard the economic analysis as has been elaborately explained in the Transfer Pricing Report unless he has sufficient reason to do so. Without prejudice to the above, the Appellant made a detailed submission based on the fresh search undertaken using TNMM as the most appropriate method. In this regard, the Appellant submitted that: • NCP of the single year margin for comparables, calculated based on fresh search, worked out to 13.73 percent; and • NCP earned by the Appellant was 11.27 percent. 2.8. Based on the + / - 5 percent variation as provided under law, the Appellant's margin for back office support services was within the + /- 5 percent range and accordingly the aforesaid transactions were considered to be at arm's length. 2.9 The TPO thereafter directed the Appellant to provide calculation of margins of comparables using 'Return on Total Assets employed' (ROA) as PLI vis-a-vis with calculation of margins of the Appellant using 'Return on Total Assets employed' as PLI. In this regard, the Appellant submitted that NCP was the appropriate PLI to for the purpose of benchmarking the back office support service transactions of the Appellant. However, without prejudice to the above, the Appellant submitted the PLI using ROA as requested by the TPO : • ROA of the comparables in the back office support services segment was 8.94 percent; and • ROA earned by the Appellant was 13.31 percent. 2.10 Based on the above, the Appellant submitted to the TPO that the international transaction in relation to provision of back ITA No.2554/Mum/2010 CO No.206/Mum/2010 8 office services is at arm's length even if the alternate PLI is taken into consideration. 2.11 The TPO then issued a show cause notice dated 24 October 2008 to the Appellant stating as to why the NCP of 28.31 per cent earned by the 10 companies under back office support services selected in the fresh search conducted by the TPO should not be used to benchmark the international transactions of the Appellant. 2.12 In response to the show cause notice, the Appellant, inter alia, made detailed submission stating that the companies selected by the Appellant in the TP report should be used for the purpose of benchmarking back office support services rendered by the Appellant. Further, the appellant, submitted various reasons that indicated that the approach of the TPO was bad in law and an analysis of comparables selected by the TPO as to why they were not functionally comparable to the Appellant. Separately, the Appellant recomputed the NCP of com parables identified by the TPO based on data available from Annual Reports. Accordingly, the NCP of the comparables worked out to 25.62 percent as against 28.21 percent as determined by the TPO. The Appellant also made a without prejudice submission that even in a case where the TPO proposed to use the comparables mentioned in the show cause notice, he should consider the combined margins of comparables selected by the TPO and the comparables identified by the Appellant in its TP Study report as the TPO had not provided any reasons for rejecting the search methodology or the comparable companies accepted by the Appellant in its transfer pricing report. In such a case the margins earned by the Appellant from its transaction pertaining to provision of back office support services were at arm's length having regard to the provisions of the proviso to Section 92C(2) of the Act. 2.13 The TPO, however, disregarded the analysis and submissions made by the Appellant and proceeded to apply a NCP margin of 28.31 percent earned by the 10 comparable companies mentioned in the show cause notice without providing any basis for the same or providing the Appellant any opportunity to be beard. Further, the TPO rejected the claim of ITA No.2554/Mum/2010 CO No.206/Mum/2010 9 the Appellant to allow the adjustment on account of difference in the risk profile between the Appellant and the alleged comparable companies as per Rule 10B(1)(e)(iii). 2.14. Accordingly, the TPO proceeded to make an adjustment of Rs.197,400,000 for the back office support services rendered by the Appellant to its associated enterprise. On receipt of the order passed by the TPO under Section 92CA(3) of the Act, the AO vide his order went ahead with the adjustment proposed by the TPO.” 7. On the issue of TPO’s rejection of assessee’s benchmark analysis, ld. CIT (A) noted following submissions of the assessee :- “4.12. During the course of proceedings before this office, the Appellant again submitted that in a case where the TPO's comparables arc considered as comparable, then the comparables accepted by the Appellant in the transfer pricing report should also be considered as comparable as the TPO has not provided any reasons either in the show-cause notice or in his order for disregarding them. In this regard, the Appellant submitted a table which included the combined set, made up of companies selected by the Appellant in his transfer pricing report and also included companies identified by the TPO as comparables. The result of the combined set is as reproduced below: Sr. No. Name of the Company Source Net cost plus margin % 1 Allsec Technologies Limited TPO & TP study 30.49 2 Tulsyan Technologies Limited (Cosmic Global Limited) TPO 19.08 3 Saffron Global Limited TPO 24.89 4 Wipro BPO Solutions Limited TPO 27.60 5 Vishal Information Technologies Ltd. TPO 45.65 6 Ace Software Exports Ltd. TPO 15.46 7 Nucleus Netsoft & GIS India Ltd. TPO 40.60 8 Asian Cerc Information Technology Ltd. TPO & 37.40 ITA No.2554/Mum/2010 CO No.206/Mum/2010 10 (Seg.) TP study 9. Airline Financial Support Services (I) Ltd TPO 26.54 10 Goldstone Teleservices Ltd. (Seg.) TPO 15.95 11 Ask Me Info Hubs Ltd. TP study -14.23 12 C S Software Enterprise Ltd. TP study 9.90 13 CMC Ltd. TP study 1.44 14 M C S Ltd. TP study 3.36 15 Mphasis BFL Ltd. TP study 13.71 16 Northgate B P O Services Ltd. TP study 18.88 17 Online Media Solutions Ltd. TP study -10.10 18 Progeon Ltd. TP study -6.04 19 Spanco Telesystems and Solutions Ltd. TP study 13.24 20 Tata Share Registry Ltd. TP study 15.16 21 H C L Technologies Ltd. TP study 18.11 22 Allsec Technologies Limited TPO & TP study 30.49 Arithmetic Mean 16.53 4.13 Accordingly, the Net Cost Plus of comparable companies works out to 16.53 percent. It may be reiterated that the Appellant has earned a Net Cost Plus of 11.27 percent. Based on the provisions of proviso to Section 92C(2) of the Act, the Net Cost Plus of the Appellant fits within the +/- 5 percent variation from the arm’s length price as allowed under the Act.” 8. Thereafter, ld. CIT (A) by an order in which he did not dwell much on the merits and demerits of comparables but held as under :- “However, without dwelling into the nitty-gitty of each and every comparable selected by the TPO on the one hand and that by the appellant on the other hand, it is considered appropriate and fair to consider the combined set of comparables (TPO as well as appellant). A fresh exercise was undertaken based on above and the net cost mark up of the combined set comes to 16.53 % as against the net cost plus mark up of 11.27 shown by the appellant. This is within the + /- 5% as per the section 92C (2) of the I.T.Act. 5.4. Since the margin earned by the Appellant is within 5% of the arm's length operating margin, the appellant is considered to have earned an arm's length operating margin. Accordingly, the above grounds are allowed in favour of the Appellant and the ITA No.2554/Mum/2010 CO No.206/Mum/2010 11 additions amounting to Rs.19,74,00,000 made by the TPO to the value of the international transactions of the Appellant stand deleted. It also deserve to be mentioned that the appellant is availing the benefit of exemption u/s.10A and accordingly the part of the. profit earned from provision of back office support services are not taxable in India while the overseas AE suffers tax in its jurisdiction. As such this is a low risk case from the transfer pricing point of view. 5.5 Therefore, the other grounds relating to transfer pricing (namely grounds 2c, 2e, 2f, 3a and 4a) raised by the Appellant on the transfer pricing issue do not require adjudication. For statistical purposes, these grounds shall be treated as dismissed.” 9. Against the above, Revenue has filed appeal and assessee has filed cross objection. 10. After hearing both the parties and perusing the records, we find that ld. CIT (A) has passed a strange order. He has not dealt with the comparables selected by the TPO nor by the assessee. He has even mentioned that he would not go into the details. He supported the comparables selected by the assessee as well as by the TPO and combined the same, found an average and accordingly, deleted the transfer pricing adjustment. 11. The assessee has also filed cross objection that the ld. CIT (A) has not dealt with the various issues raised in this regard before ld. CIT (A). 12. Furthermore, the order of TPO also contains various shortcomings. He has only referred to response to his queries and passed an order which is rather non-speaking. Ld. CIT (A) in his order has observed general ITA No.2554/Mum/2010 CO No.206/Mum/2010 12 shortcomings that TPO in his order has not commented adversely on assessee’s search process or comparables. 13. Accordingly, in our considered opinion, on the facts and circumstances of the case, the issue needs to be remitted to the file of TPO. The APO shall consider the issue afresh and pass an appropriate order as per law. We order accordingly. Needless to add, the assessee should be granted adequate opportunity of being heard. 14. On the issue of inclusion of unbilled revenue amounting to Rs.88,29,098/- in the total turnover and exclusion from the same from the profit of the undertaking while computing deduction u/s 10A, ld. CIT (A) noted following submissions of the assessee :- “ The Appellant has not excluded unbilled revenue from the 'eligible profits of the unit since the same does not have any impact on the profits of the unit. The appellant submits that the unbilled revenue represents costs incurred by them during the year and these costs have already been debited to the Profit & Loss Account and reduced to arrive at the eligible profits of the Appellant. Thus, the net impact on account of this unbilled revenue on the profits of the Appellant is Nil. In other words) the unbilled revenue represents the quantum of work in progress which would be billed to the client only when the same is completed and duly exported. As such, the nature of unbilled revenue is quite akin to the nature of closing stock/work in progress which appears on the credit side of the Profit and Loss account but which by no means can be included in the turnover of the business. Moreover, since the Appellant has not billed its group entitles to the extent of 'unbilled revenue» it cannot be considered as (turnover) for the purpose of claiming deduction ITA No.2554/Mum/2010 CO No.206/Mum/2010 13 under section 10A of the Act. Also) the fact that there is no profit element included in the said amount would further point to the appropriateness of not including the same in the (turnover). Thus) unbilled revenue has not been included in both the ‘total turnover’ and ‘export turnover’. In connection with the above, the Appellant relied on the decision of CIT vs. Sudarshan Chemicals Industries Limited (245 ITR 769), CIT vs. Chloride India (256 ITR 625(Cal)) and CIT vs. Wolkem India Ltd. (178 CTR 301 (Raj)).” 15. AO’s finding was summarized by the ld. CIT (A) as under :- “The AO did not agree with the submission of the Appellant. According to him, as per the method of accounting followed by the Appellant, the Appellant is recognizing revenue in the Profit & Loss account on the unbilled portion also. Merely because the bills were not raised, the same is not a valid reason for excluding the amount of the unbilled revenue form the turnover. Hence, the AO excluded the unbilled revenue from the profits of the undertaking and included the same in the total turnover of the undertaking while computing the deduction under section 10A of the Act.” 16. Ld. CIT (A) held as under :- “5.9. I have duly considered the submissions of the Appellant and find that this issue was decided against it for the earlier year by the CIT(A). As such I held that the AO is justified in including the unbilled revenue in the total turnover of the undertaking as this has accrued to the assessee, even though bills have not been raised so far. However, I also agree with the Appellant that while calculating the amount of the profits of the undertaking the amount of unbilled revenue should not be excluded from the eligible profits.” 17. Against the above order, Revenue and assessee are in appeal before us. ITA No.2554/Mum/2010 CO No.206/Mum/2010 14 18. As regards the issue of exclusion of unbilled revenue from eligible profits for the purposes of computing deduction u/s 10A, ld. counsel of the assessee firstly accepted that this issue raised in Revenue’s appeal is covered against the assessee. However, he submitted as under :- “Without prejudice to the above, if unbilled revenue is included in the total turnover, then the same should also be included in the export turnover, on the principle of parity . i. The Hon’ble Bombay High Court in the case of Commissioner of Income Tax vs, Gem Plus Jewellery India Ltd. 120111 233 CTR 248 (Bom) held that the export turnover constitutes the numerator in the formula and also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. Further. it has been held that the export turnover, in the numerator must have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator otherwise the statutory provision will lead to absurdity. ii. Similar view was also taken by the Karnataka High Court in the case of CIT vs Dell International Services India Private Limited and others and CIT vs Tara Elxsi Ltd. and others iii. The Supreme Court in HCL Technologies Ltd (Civil appeal nos. 8489-8490 of 20 13) has held that when the object of the formula is to arrive at the profit from export business. expenses excluded from export turnover have to be excluded from total turnover also. Otherwise. any other interpretation makes the formula unworkable and absurd. iv. The following judicial precedents though rendered in the context of 80HHC have upheld the principle of parity while dealing with the definition of Export Turnover and Total Turnover: • CIT v Sudarshan Chemicals Industries Limited 12.t5 ITR 7691 (Bombay HC) • CIT v Chloride India 1256 ITR 6251 (Cal); and • CIT v Wolkern India Ltd. 1178 CTR 3011 (Raj.)” ITA No.2554/Mum/2010 CO No.206/Mum/2010 15 19. Having heard both the parties and perused the records, we note that the ld. counsel of the assessee submits that the issue raised by the Revenue is covered against the assessee. However, without prejudice, assessee has submitted an alternative argument that if unbilled revenue is included in the total turnover then the same should also be included in the export turnover. In support of the proposition, case laws referred above has been cited. We note that this issue has not been dealt with by the TPO. Since we have already remanded the TP adjustment issue to the file of TPO, it will be appropriate to remit this alternative ground also to the file of TPO. The TPO shall consider it afresh and pass a speaking order as per law. Needless to add, assessee should be granted adequate opportunity of being heard. 20. As regards the ground raised in the cross objection regarding claim of educational cess, the assessee vide letter dated 07.06.2022 has withdrawn the said claim. Hence this ground is dismissed. 21. In the result, the Revenue’s appeal and assessee’s cross objections are partly allowed for statistical purposes. Order pronounced in the open court on this 20 th day of July, 2022. Sd/- sd/- (ASTHA CHANDRA) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated the 20 th day of July, 2022 TS ITA No.2554/Mum/2010 CO No.206/Mum/2010 16 Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-15, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.