Appeal Details
Counselvise Citation
[2022] 105 COUNSELVISE.COM (IT) 7783 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 2 month(s) 17 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
27-02-2022
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
A
Assessment Year
2013-2014
Appeal Filed On
10-12-2017
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A No.2689/Bang/2017 Assessment Year : 2013-14 M/s. Acuity Knowledge Centre (India) Pvt. Ltd., (formerly known as Moody’s Analytics Knowledge Services (India)Private Limited), Elixir Chancery Building, 7 th Floor, Municipal Door #135/1-2, Residency Road, Bengaluru – 560 025. PAN : AAECA 9391 H Vs. DCIT, Circle – 4(1)(2), Bengaluru. ASSESSEERESPONDENT Assessee by :Shri.Chavali Narayan, CA Revenue by:Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru Date of hearing:24.02.2022 Date of Pronouncement:28.02.2022 O R D E R Per N V Vasudevan, Vice President This is an appeal by the assessee against the final Order of Assessment dated 10.10.2017 of DCIT, Circle – 1(1)(2), Bengaluru, passed under section 143(3) r.ws. 144C(13) of the Income Tax Act, 1961 (Act), in relation to Assessment Year 2013-14. 2. The only ground of appeal which was pressed for adjudication at the time of hearing of this appeal is the ground in so far as it relates to determination of Arm’s Length Price (ALP) in the Information Technology IT(TP)A No.2689/Bang/2017 Page 2 of 10 Enabled Services (ITeS) segment as set out in the modified ground No.8 which reads as follows: “Ground 8 - The learned AO/TPO has failed to appreciate the fact that the following companies are functionally not comparable to the Assessee and therefore, erred in law and in facts in considering them as comparable companies: Harton Communications Limited Capgemini Business Service (India) Limited Infosys BPO Limited The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.” 3. The assessee is a company and it is engaged in providing ITeS to its AE. The transaction of providing ITeS to the AE was an international transaction and income arising from the said international transaction had to be determined having regard to ALP as envisaged under section 92 of the Act. There is no dispute that TNMM was the MAM for determining ALP and that Profit Level Indicator (PLI) for the purpose of comparing assessee’s profit margin with comparable companies was OP/OC. The margins earned by the assessee was as follows: Particulars Amount (INR) Operating Income ("01") * 93,68,56,702 Operating Cost ("00") 81,46,58,013 Operating Profit ("OP") = (01-00) 1,21,98.689 Operating profit margin (OP/OC)15.00% 4. The TPO identified the following comparable companies and determined the addition to the total income on account of determination of ALP as follows: IT(TP)A No.2689/Bang/2017 Page 3 of 10 SI. No Company name Margin as per TPO's order 1.Acropetal Technologies Ltd (Seg) 24.16% 2.Microgenetic Systems Ltd 16.34% 3. Jindal Intellicom Ltd -3.01% 4.Hartron Communications Limited (Seg) 44.07% 8.62% 5. Microland Ltd 6. Capgemini Business Services (India) Pvt Ltd 26.78% 7. Tech Mahindra Ltd (Seg) 22.27% 8.e4e Healthcare Business Private Limited 17.26% 9.Infosys BPO Ltd 29.28% Arithmetic mean 20.64% Less: Working Capital Adjustment -0.04% 20.68% Adjusted Arithmetic mean 5. Against the draft order of the AO incorporating the directions of the TPO, assessee filed objections before the Dispute Resolution Panel (DRP). The DRP excluded certain comparable companies. The assessee is aggrieved by the non-exclusion of 3 comparable companies set out in ground No.8 referred to above. 6. We have heard the rival submissions on the exclusion of the aforesaid comparable companies. As far as exclusion of Harton Communications Ltd., is concerned, we find the following factual position: The relevant financial year, it was an exceptional year of operation According to Director's report and Management Discussion and Analysis report, during FY 2012-13 the company has recorded a steep increase in the revenue earned from BPO business to the tune of 483.72% over last year. IT(TP)A No.2689/Bang/2017 Page 4 of 10 Hence. Hartron cannot be considered as comparable. Further the BPO segment of Hartron of incurred loss for 4 years in a 5-year period of FY 2010-11 to FY 2014-15. BPO segment of Hartron has eared profits only during FY 2012-13. This segment has reported loss for all the other years. This company is also functionally different. Based on the review of the annual report of the company, it is observed that the company earns revenue from 3 segments — a) Rent Income, b) Office back up operations and c) Real Estate. It is evident that the company provides a bunch of varied services such as custom software development services, IP services which include patent search, patent protection, trademark services and IP management. etc. The income from all these services has been grouped under the 'office back up operations" segment in the annual report, which has been considered as comparable by the learned TPO. The break-up of revenue earned from software development and back office / BPO services is not provided in the financials In the absence of segmental details and break up of revenue from software development and BPO services, Hartron cannot be considered as comparable. This company was excluded as a comparable company in the following decisions rendered by ITAT in the case of companies engaged in rendering ITeS such as the Assessee, viz., (i) M/s ISG Novasoft Technologies Ltd. -AY 2013-14 [IT(TP)A No. 42/ Bang/2018] (ii) Infor (India) P Limited - AY 2013-14 & AY 2014-15 [ITA Nos. 161 and 2307/Hyd/2018] (iii) M/s S&P Capital 10 (India) Private Limited - AY 2013-14 [ITA No. 1878/Hyd/2017. The aforesaid company is therefore directed to be excluded from the list of comparable companies. 7. As far as the comparability of Capgemini India Ltd., is concerned, we find the factual position regarding this company is that as per IT(TP)A No.2689/Bang/2017 Page 5 of 10 information available in the annual report, the company earns revenue primarily from Business Process Management Services and Assurance and Compliance services. The same is also evident from the description of product or service category as given in the annual report. It is clear that company is engaged in providing high end specialized services and according to the auditors of the company comparable quotation of services provided by Capgemini are not available publically. Therefore, if other companies are not comparable to Capgemini due to the nature of its services, on similar lines Capgemini also cannot be considered as comparable for the assessee engaged in provision of low-end IT enabled services. This company was excluded as a comparable company in the following decisions rendered by ITAT in the case of companies engaged in rendering ITeS such as the assessee, viz.,(i) M/s ISG Novasoft Technologies Ltd. -AY 2013-14 [IT(TP)A No. 42/ Bang/2018](ii) M/s Micro Focus Software India Pvt Ltd. - AY 2013-14 [IT(TP)A No.2778/Bang/2017](iii) M/s S&P Capital IQ (India) Private Limited - AY 2013-14 [ITA No. 1878/Hyd/2017]. The aforesaid company is therefore directed to be excluded from the list of comparable companies. 8. As far as comparability of Infosys BPO Ltd., is concerned, we find factual position is that this company provides a gamut of services that includes sourcing and procurement, customer services, financial & accounting, legal process outsourcing, sales & fulfilment, analytics, business platform, business transformation services, human resources outsourcing, etc. Services such as analytics, human resource outsourcing, which are not comparable with the assessee. This company is a market leader. The company should be rejected as it an established player and also a market leader and operates as a full-fledged IT(TP)A No.2689/Bang/2017 Page 6 of 10 risk bearing entrepreneur. The company has a huge turnover of Rs.1861 crores and hence not comparable to the assessee. It has significant selling, marketing and brand building expenses, brand value. Infosys BPO is an industry giant and commands a very high brand value in the market and also bears all related risk and cannot be compared to the assessee which is a captive service provider. Further, since it commands a very high brand value it enjoys premium pricing. The aforesaid company is therefore directed to be excluded from the list of comparable companies. 9. In the light of the aforesaid discussion, we direct exclusion of the aforesaid 3 companies from the list of the comparable companies. The TPO is directed to compute the ALP in accordance with the directions in this order, after affording assessee opportunity of being heard. 10. The assessee has raised Corporate Tax issue in ground No.15 and 16 which reads as follows: 15. (a) The learned AO has erred, in law and in facts, in making an addition of INR 81,53,847 to the total income of the Appellant on account of re-allocation of certain common expenses: (b) The learned AO has erred, in law and in facts, by not accepting the re-allocation of certain common expenses between the units of the Appellant (viz., STPI unit, SEZ Unit — I and SEZ Unit - II) as determined by the Appellant; ( c) The learned AO has erred. in law and in facts, by re-allocating certain common expenses amongst the units of the Appellant mainly for the reason that in the absence of such reallocation the Appellant had offered lower taxable income: 16. Without prejudice to Ground no 15, the learned AO erred, in law and in facts. by denying additio deduction under Section 10AA IT(TP)A No.2689/Bang/2017 Page 7 of 10 of the Act in respect of SEZ unit-1 of the Appellant, by re-alloca . certain common expenses in certain manner between the STPI unit and SEZ units of the Appell wherein. a.The learned AO has erred, in law and in facts, by re-allocating certain common expel amongst the units of the Appellant without considering the Appellant's plea that if the said common expenses were to be re-allocated. there should be a corresponding revision in the revenue of such units of the Appellant taking into account the "cost plus mark-up billing model arrangement - of the Appellant. b.The learned AO has erred, in law and in facts, by not considering the Appellant's plea that as a consequence of the aforesaid revision in the revenue of the units. the Appellant would be eligible for additional deduction under section 10AA of the Act in respect of SEZ Unit — I of the Appellant: c.The learned AO has erred, in law and in facts. in denying additional deduction under section 10AA of the Act in respect of SEZ unit-1 of the Appellant, rely . :9g on Hon'ble Apex court's ruling in the case of M/s. Goetze (India) Limited vs. CIT [2046/ (204 CTR SC 182) and without considering the case laws relied upon by the Appellant, , " 11. As far as aforesaid ground No.15 is concerned, it was submitted that the assessee is engaged in the business of providing IT-enabled investment research support services through three units viz., SEZ Unit — I ("10AA unit"), STPI Unit and SEZ Unit — II ("non-10AA units"). The SEZ Unit — I is eligible fora deduction under section 10AA of the Act. No deduction under section 10A and 10AA of the Act has been claimed in respect of STPI unit and SEZ Unit — II, respectively. All these three units of the assessee operate under a "cost plus mark-up billing arrangement", whereby each unit's revenue is computed on the basis of 15% mark-up on its costs. IT(TP)A No.2689/Bang/2017 Page 8 of 10 12. The assessee had obtained a certificate from the Chartered Accountant in respect of the profits of SEZ Unit — I and the quantum of deduction claimed under section 10AA in Form 56F amounting to Rs. 2,55,38.843/-. The AO. apportioned identified common expenses among the units of the assessee. According to the AO as most of the common expenses have been booked only in the STPI Unit and SEZ Unit - II (non- 10AA units), it has resulted in skewed reporting of the individual unit's profits i.e., under-reporting of profits of the non-10AA units and escalated profits of the eligible unit (i.e., 10AA unit). The CIT(A) confirmed the action of the AO. 13. In this regard, it is seen that the assessee operates on a cost-plus mark-up arrangement where each unit's revenue is computed on a 'cost-plus' basis i.e.. the revenue of a unit (and the profit) increases as the cost base increases. It is imperative to mention here that even by charging the identified common expenses (namely key managerial remuneration, audit fee. bank charges etc) to the STPI Unit alone. the assessee has not reduced its taxable income. In fact, the same has resulted in increasing the taxable income of the assessee, keeping in view the operating model of the assessee. 14. Had the assessee apportioned the identified common expenses among all the units. it would have reduced the cost base of the STPI unit, thereby, resulting in reduced mark up and taxable profits for the STPI unit. In fact the ITAT for AY 2012-13 in the assessee's own case on same issue held as under: “...Considering the Revenue model of cost + mark up adopted by the assessee, as rightly pointed out by the assessee, it will not gain IT(TP)A No.2689/Bang/2017 Page 9 of 10 anything by under booking expenses in the exempt unit, since the under booking of expenses would result in corresponding reduction in revenue also. In any case, we noticed that the AO has asked the assessee to re-allocate the common expenses only by entertaining surmises and conjectures and not based on any creditable defect noticed by him. Hence, we are of the view that there is no reason to interfere with the order passed by the Ld CIT(A) on this issue" [Emphasis supplied]. 15. In view of the above, the reasons provided by the AO for making the adjustment does not stand correct in the present fact pattern of the assessee given its cost-plus markup operating model. The addition made by the learned AO on the basis that the assesseee has under-reported profits of the STPI Unit is erred in law and facts. Given the above, we direct AO to delete the disallowance made in this regard. 16. In view of the decision on ground No.15, ground No.16 becomes academic and is therefore not adjudicated. 17. In the result, appeal of the assessee is partly allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (B. R. BASKARAN) (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 28.02.2022. /NS/* IT(TP)A No.2689/Bang/2017 Page 10 of 10 Copy to: 1.Appellants2.Respondent 3.CIT4.CIT(A) 5.DR 6. Guard file By order Assistant Registrar, ITAT, Bangalore.
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