Quest Global Engineering Services Private :limited, Belagavi V. Assistant Commissioner Of Income tax, Circle-2, Belagavi

ITA 279/BANG/2022

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The case involves M/s. QuEST Global Engineering Services Pvt. Ltd., which appealed against the order of the National Faceless Appeal Centre (NFAC), Delhi, concerning transfer pricing adjustments made by the Transfer Pricing Officer (TPO) for the assessment year 2017-18. The primary issues revolved around the adjustments made to the arm's length price of international transactions, the rejection of the assessee's transfer pricing documentation, and the selection of comparable companies. The TPO had made significant adjustments to the assessee's declared income, which were contested on grounds of improper application of filters in selecting comparables and incorrect calculations of segmental margins. The Tribunal's decision addressed these concerns by directing a recalibration of the comparables and the methodology used for determining the arm's length price.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 302905 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 02-01-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 18-04-2022
• Other Referred Cases: Maxopp Investments Ltd. Vs. CIT, Chryscapital Investment Advisors India Pvt. Ltd. Vs. DCIT, Dell International Services India (P) Ltd. Vs. DCIT, Huawei Technologies India (P) Ltd., Altimetrix India Pvt Ltd, Verifone India Technology Private Limited, ISG Novasoft Technologies Ltd, NTT Data, Societe Generale Global Solutions, LSI Technologies, Mobis India Ltd. v. Dy. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Earning of tax free income; Bad and doubtful debts; Competent authority; Notional interest; TDS; Rule 8D
• Section: 92C; 244A; 142(1); 234B; 14A; 115JB; 143(1); 195; 192; 13; 22; 92CA

Judgement Text

IT(TP)A No.279/Bang/2022 M/s. QuEST Global Engineering Services Pvt. Ltd., Belagavi IN THE INCOME TAX APPELLATE TRIBUNAL “A’’ BENCH: BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(TP)A No.279/Bang/2022 Assessment Year : 2017-18 QuEST Global Engineering Services Private Limited No.437/A, Plot No.2, AEQUS Special Economic Zone Hattargi Village Hukkeri Taluk Belagavi 591 245 PAN NO : AAACQ3563F Vs. ACIT Circle-2 Belagavi APPELLANT RESPONDENT Appellant by : Shri Ankur Pai, A.R. Respondent by : Shri Manjunath Karkihalli, D.R. Date of Hearing : 03.01.2023 Date of Pronouncement : 13.03.2023 O R D E R PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER: This appeal by the assessee is directed against the final order of the NFAC, Delhi dated 24.2.2022 DIN No.ITBA/AST/S/143(3)/2021-22/1040073593(1) on the following grounds of appeal:- “The grounds hereinafter taken by the Appellant are without prejudice to one another. “I. Transfer Pricing 1. The learned Assessing Officer ("learned AO"), learned Transfer Pricing Officer ("learned TPO")and the Honourable Dispute Resolution Panel ("Hon'ble DRP 1 ') grossly erred in making anadjustment of INR IT(TP)A No.279/Bang/2022 M/s. QuEST Global Engineering Services Pvt. Ltd., Belagavi Page 2 of 38 25,02,52,221/-which includes INR 22,45,36,880/- with respect "to Information Technology enabled services ("ITES") segment and INR 2,57,15,341/- with respect to interest on delayed receivables, under section 92CA of the Income- tax Act, 1961 ("the Act"). 2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the Act 3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transaction thereby following a non-transparent approach. Segmental Computation 4. The learned AO/ learned TPO/ Hon'ble DRP has erred in laws and on facts in computing the operating segmental margin of the Appellant by re- allocating the employee cost within the EDS segment on the basis of revenue. The Appellant submits that it has allocated/ apportioned the cost appropriately and hence, the segmental margin as computed in the documentation report is correct and ought to be accepted. Conceptual grounds and filters 5. The learned AO/ learned TPO/ Hon'ble DRP erred in applying certain filters while selecting the comparable companies for EDS and BSS segment as stated below: The core service income filter of 75% to sales instead of 50%. Export earning fitter of 75% of the total sales. Employee cost filter less than 25% of total sales. Different financial year ending filter by not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials. Not appropriately applying the persistent loss filter and has rejected companies which do not have losses in all three years. Erred in law and in facts in the computation of Related Party Transaction ("RPT") filter. 6. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting all the software development companies chosen by the Appellant. 7. The learned AO/ learned TPO/ Hon'ble DRP erred in selecting the companies only if the data pertaining to FY 2016-17 is available in the public databases. IT(TP)A No.279/Bang/2022 M/s. QuEST Global Engineering Services Pvt. Ltd., Belagavi Page 3 of 38 8. The learned AO/ learned TPO/ Hon'ble DRP erred in not appreciating the fact that since lower limit on the sales turnover has been universally accepted by both Appellant and the learned TPO, similar filter should also be applied on the upper limit on turnover "while carrying out the comparability analysis. 9. The learned AO/ learned TPO/ Hon'ble DRP erred in considering provision for bad and doubtful debts as non-operating in nature. 10. The learned AO/ learned TPO/ Hon'ble DRP erred in considering foreign exchange gain/loss as operating in nature. 11. The learned AO/ learned TPO/ Hon'ble DRP erred in not rejecting companies reporting abnormal margins/profits. 12. The learned AO/ learned TPO/ Hon'ble DRP erred in not rejecting companies with incomplete financial data. 13. The learned AO/ learned TPO/ Hon'ble DRP has erred in not allowing appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independent comparable companies. 14. The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis-a-vis the comparable companies. Contention on comparable companies ITES Segment 15. The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in not rejecting the following companies: a) Datamatics Business Solutions Ltd. b) Microland Ltd. c) Manipal Digital Systems Pvt. Ltd. d) Inteq BPO Services Pvt. Ltd. e) SPI Technologies India Pvt. Ltd. f) Vitae International Accounting Services Pvt. Ltd. g) Infosys BPO Ltd. h) CESLtd. 16. The learned AO/ learned TPO/Hon'ble DRP has erred in computing the margin of the following companies: a) Sundaram Business Services Ltd. b) Vitae International Accounting Services Pvt. Ltd. c) Manipal Digital Systems Pvt. Ltd. 17. The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in not accepting the following companies as comparables: IT(TP)A No.279/Bang/2022 M/s. QuEST Global Engineering Services Pvt. Ltd., Belagavi Page 4 of 38 a) BNRUdyogLtd. b) R Systems International Ltd. c) Allsec Technologies Ltd. d) Cosmic Global Ltd. e) Digicall Teleservices Pvt. Ltd. f) Bhilwara Infotechnology Ltd, g) iSN Global Solutions Pvt. Ltd. h) I Service India Pvt. Ltd. Interest on Outstanding Receivables 18. The learned TPO/ learned AO/ Hon'ble DRP has grossly erred in law and facts by considering it as a separate international transaction. 19. The learned TPO/ learned AO/ Hon'ble DRP has erred in considering the balances as "unsecured loan" advanced to the AEs, thereby charging notional interest amounting to INR 2,57,15,341 as per SBI short term deposit rate. a) Without prejudice to the above grounds 21 and 22, the learned TPO/ learned AO/ Hon'ble DRP has erred in considering a credit period of 30 days, instead of 120 days as specified in the intercompany agreements, for the purpose of computing the interest on delayed receivables. b) The learned TPO in its order has justified and agreed computing interest on delayed receivables on LIBOR plus basis on foreign currency loans. However, in actual, interest rate as applicable to domestic loan rate was applied. Interest has been computed on reimbursement transaction included in outstanding receivables. c) The learned TPO/ Hon'ble DRP did not appreciate the fact the Applicant has significant amount of outstanding receivables from the third party customers. As per the business policy, the Applicant does not charge any interest on such outstanding balances to third party customers. Corporate Tax 20. The Learned AO/Hon'ble DRP has erred in disallowing an amount of INR 1,51,32,000 under Sec. 14Aof the Act read with rule 8D of the Income-tax rules, 1962, towards expenses incurred to earned exempt dividend income from mutual funds; without appreciating the fact that investments in mutual funds were made out of internal accruals and not from borrowed funds of the Company. 21. The Learned AO/Hon'ble DRP has erred in not granting of TDS credits and advance tax credit amounting to INR 11,37,75,354 and INR 5,12,70,975 respectively; claimed for the entities merged with the Company w.e.f. 01 April 2016 vide NCLT order dated 17 October 2017. IT(TP)A No.279/Bang/2022 M/s. QuEST Global Engineering Services Pvt. Ltd., Belagavi Page 5 of 38 22. The Learned AO/Hon'ble DRP erred in levying interest under Sec. 234B (INR 4,53,57,312) &234C (INR 34,97,333). 23. The Learned AO erred in not giving interest under section 244A as the Applicant would be eligible for the same after giving credit of TDS and advance tax. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.” 2. Ground Nos.1 to 3 are general in nature, which do not require any adjudication. 3. Ground Nos.5 to 7 and ground No.20 are not pressed and dismissed as not pressed. 4. Ground Nos.22 & 23 are consequential in nature. 5. Brief facts of the case are that the assessee has filed its return of income on 30.11.2017 declaring total loss of Rs.11,89,93,421/-. Subsequently, on 30.3.2018, the return was revised declaring the very loss and the book profit u/s 115JB of the Income-tax Act,1961 ['the Act' for short] was declared at Rs.77,76,68,972/-. The return was processed u/s 143(1) of the Act and the case was selected under CASS for scrutiny and statutory notices were issued to the assessee. The assessee filed documents and from those documents, the AO observed that the case should be referred to the TPO as per the CBDT instruction No.3/2016 dated 10.3.2016. Therefore, the case was referred to the TPO after obtaining approval from the competent authority. 5.1 The Quest Global Engineering Services Pvt. Ltd. (“QGESPL”) is incorporated as a Private Limited company on 5.9.2014 under the Companies Act, 2013 and is engaged in rendering Engineering services, software development and maintenance services to leading IT(TP)A No.279/Bang/2022 M/s. QuEST Global Engineering Services Pvt. Ltd., Belagavi Page 6 of 38 multinational operations. The company is a subsidiary of the Quest Global Mauritius Holding Ltd., a company raised under the law of Mauritius. The company has 10 locations/units out of which 7 locations/units are registered as a STPI. The functions performed by the QGESPL is conceptualization of the services to be rendered, functional specification & requirement generation, project management and execution, customer relationship management and providing back-office support services to the AEs. As per form No.3C, the following international transactions with its AEs were undertaken:- INTERNATIONAL & SPECIFIED DOMESTIC TRANSACTIONS (AS PER 3CEB REPORT) 3.1 As per the Transfer Pricing (TP) document furnished for the A.Y.2017-18, the taxpayer company has entered into the following international transactions with its Associated Enterprises (AEs): International Transactions Particulars Receivables/Received Payables/Paid Method Provision of engineering services 30806,30,818 TNMM Provision of backoffice support services 7407,50,417 - TNMM Availing of engineering services 3845,35,501 TNMM Availing of back office support services 670,03,866 Other method Provision of engineering TNMM services 3388,27,329 Compulsorily convertible debentures 5179,22,552 CUP Purchase of .shares 28281,75,648 Other method \ IT(TP)A No.279/Bang/2022 M/s. QuEST Global Engineering Services Pvt. Ltd., Belagavi Page 7 of 38 Reimbursement paid 201,33,759 TNMM Reimbursement received 2204,46,872/- Other method Trade receivable 15389,94,045 TNMM Advances 1287,36,578 Other method Trade payable *'*^ ^:"