Cvent India Pvt. Ltd., Gurgaon V. ITO, New Delhi

ITA 4085/DEL/2015

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 2426 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I
• Assessment Year: 2009-2010
• Appeal Filed On: 21-06-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Bad and doubtful debts
• Section: 92D; 244A; 234B; 274; 72

Judgement Text

Page | 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’, NEW DELHI Before Shri Saktijit Dey, Judicial Member Dr. B. R. R. Kumar, Accountant Member ITA No. 4085/Del/2015 : Asstt. Year : 2009-10 M/s. Cvent India Pvt. Ltd, 19 th Floor, Building No. 14, Tower-C, DLF Cyber City, Phase-II, Gurgaon-122002 Vs Income Tax Officer, Ward-3(4), New Delhi (APPELLANT) (RESPONDENT) PAN No. AACCC7670F Assessee by : Sh. Himanshu S. Sinha, Adv. Sh. Bhuwan Dhoopar, Adv. Sh. Vibhu Gupta, CA Revenue by : Sh. Mrinal Kumar Das, Sr. DR Date of Hearing: 20.07.2022 Date of Pronouncement: 27.09.2022 ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal has been filed by the assessee against the order of ld. CIT(A)-44, New Delhi dated 10.03.2015. 2. The Assessee has raised the following grounds of appeal: 1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer (“Ld. AO”) is bad in law and void ab-initio 2. That the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was “expedient and necessary” to refer the matter to the Ld. TPO for computation of the arm’s length price, as is required under section 92CA(1) Page | 2 3. The Ld. AO/ Ld. Transfer Pricing Officer (“TPO”)/ Ld. Commissioner of Income Tax - (Appeals) (“CIT-(A)”) erred on facts and circumstances of the case in determining the arm’s length adjustment to the Appellant’s international transactions from Associated Enterprises (“AEs”) and thereby resulting in the enhancement of returned income of the Appellant by Rs. 27,085,817. 4. The Ld. AO/ Ld. TPO/ Ld. CIT-(A) erred on facts and in law in the assessment of the arm’s length price of the Appellant’s international transactions from associated enterprises in the following manner. 4.1 The Ld. AO/ Ld. TPO/ Ld. CIT-(A) erred on facts and in law to modify, based on his subjective grounds and presumptions, the comparability analysis conducted by the Appellant for determining the arm’s length price in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’) as well as fresh search 4.2 The Ld. AO/ Ld. TPO/ Ld. CIT-(A) erred in rejecting the comparable companies set adopted by the Appellant on the basis of additional/ modified quantitative filters selected by the Ld. TPO and arbitrary statements that lacked valid and sufficient reasoning 4.3 The Ld. AO/ Ld. TPO/ Ld. CIT-(A) has erred by selecting/ rejecting certain companies which were not comparable by way of functions and assets in order to determine the arm’s length margin applicable to the Appellant 4.4 The Ld. AO/ Ld. TPO/ Ld. CIT-(A) has erred in incorrectly computing margins of comparable companies 4.5 The Ld. TPO erred in not allowing the working capital adjustment for all comparable companies 4.6 The Ld. TPO/ Ld. CIT(A) have erred in not taking cognizance of the rectification applications filed with them with regard to the computation of margins and allowance of working capital adjustment. Page | 3 4.7 The Ld. AO/ Ld. TPO/ Ld. CIT-(A) erred in arbitrarily rejecting the risk adjustment conducted by the Appellant in its transfer pricing submissions without taking cognizance of the fact that the Appellant does not bear significant business and operational risks while rendering services to its overseas affiliates 4.8 The Ld. AO/ Ld. TPO/ Ld. CIT-(A) erred in disregarding the multiple year data selected by the Appellant in the TP Documentation and in selecting the current year (i.e. financial year 2008-09) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for financial year 2008-09 was not available within the public domain 5. The Ld. AO/ Ld. TPO/ Ld. CIT-(A) erred on facts and in law in applying the amended provision as per the Finance Act 2009 instead of the provision regarding the arm’s length range applicable to the financial year 2008- 09. The TPO ought to appreciate that even a price which varies 5% in either direction of the arithmetic mean margins of the comparables may be considered as an arm’s length prices per the proviso to section 92C(2) 6. That the Ld. AO/ Ld. CIT-(A) erred in facts and in law in charging interest under section 234B and 234D of the Act 7. That the Ld. AO/Ld. CIT-(A) erred in facts and in law in withdrawing interest under section 244A of the Act. 8. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 274 read with section 271(1 )(c) of the Act, for disallowances made under section 92CA(3) without recording any adequate satisfaction for such initiation.” 3. The assessee is engaged in the business of rendering offshore BPO services in relation to online event management and other online support services. During FY 2008-09, the Appellant had provided BPO services to its AEs. It selected TNMM as the most appropriate method and benchmarked the international transaction using OP/OC as the PLI. The Appellant selected 9 comparable companies in its TP documentation and Page | 4 arrived at an arithmetic mean of 9.50%, whereas Cvent India earned an OP/OC margin of 10.6%. 4. In the Order dated 17 January 2013, the TPO arrived at a final set of 6 comparable companies with arithmetic mean of 30.04% and thereby made TP adjustment of Rs.2,70,85,817/-. The final set of 6 comparables adopted by the TPO Included 3 new comparables proposed by the TPO and 3 comparables as per Appellant’s TP documentation. On appeal, the ld. CIT(A) directed the TPO to exclude 2 new comparable companies selected by the TPO in TP order. However, request for inclusion of assessee’s comparables was rejected by ld. CIT(A). Pursuant to the ld. CIT(A) order, the TPO, vide its order dated 01 June 2015, sustained a set of 4 comparable companies (Infosys BPO Ltd, Cosmic Global Ltd., Axis IT&T Ltd., ICRA Online) with arithmetic mean at 21.04% and revised the TP adjustment to Rs.1,46,10,334/-. 5. In the present ground of appeal, the assessee has challenged following actions of the TPO/ ld. CIT(A): “Erroneous inclusion of one comparable and erroneous exclusion of two comparables. The same is discussed in detail below: Erroneous inclusion of one comparable: (a) Cosmic Global a) Cosmic Global Limited It was argued that this comparable should be rejected for the following reasons: • Very low BPO revenue- The company, during the relevant year, has earned total revenue of Rs.7.37 crores out of which revenue of Rs.6.99 crores is from translation charges, Rs.9.90 lakhs from medical transcription and consultancy services and only a balance of Rs.27.76 lakhs is from BPQ services. Hence, it fails the Ld. TPO’s filter of revenue from Page | 5 ITES/BPO services of more than 75% of the total operating revenues. • Revenue from BPO services only from domestic operations- Export revenue from BPO is 0%, therefore it fails TPO’s own filter of atleast 75% export sales. • Different business model- Cosmic is engaged in vendor outsourcing (translation charges are paid which are 58% of operating cost). • Segmental details of ITES/BPO segment are not available in the annual report of the company. 6. We find that the comparable failed the export filter of 75% and hence cannot be considered. Exclusion of Comparables: Datamatics Financial Services Ltd. 7. This was rejected by ld. CIT(A) on the ground that functional profile is dissimilar. 8. The ld. AR argued that the comparable should be accepted for the following reasons: i. Company is engaged in provision of IT enabled services. ii. Processing and printing revenue are in the nature of ITES services itself. The nomenclature used in annual report of Datamatics refers to ITES services provided by it. 9. On going through the order of the TPO and the ld. CIT(A), we find that the comparable is functionally dissimilar and hence cannot be considered. Allsec Technologies Ltd. 10. This comparable was rejected on the ground that company fails export turnover filter and has diminishing sales for the past three years. Page | 6 11. The ld. AR argued that this comparable should be accepted since conclusions of the ld. CIT(A) are factually incorrect as below: i. Allsec has 76.75% of export sales and hence, clears the export sales filter. Total operating revenue is Rs.106.22 cr. and total export is Rs.81.53 cr. ii. Allsec’s operating revenue has increased in FY 2008-09 as compared to FY 2007-08 (to Rs. 106.22 cr. from Rs.98.27 cr.). Hence, the company does not have diminishing revenue. Even otherwise diminishing revenue cannot be a valid filter if functional profile of the company remains same and there are no exceptional circumstances. 12. We find that the TPO has considered the financial over the period of three years and hence rejected this as a comparable. We decline to interfere with the order of the ld. CIT(A) who affirm the order of the TPO. Ground No. 4.4 13. Erroneous computation of profit margin of two comparables: (a) ICRA Online Ltd. and (b) Axis IT &T Ltd. It was argued that, a) ICRA Online Ltd. (19.13%) TPO wrongly adopted margin of 19.13% in its order dated 01 June 2015 while giving effect to CIT(A) order. Corrected margin of 17.08% should be considered. The TPO has incorrectly treated Interest and Miscellaneous Income as operating income and loss on sale of assets as operating expense. In doing so, the TPO failed to appreciate that these are non-operating items and cannot be included. b) Axis-I T & T Ltd. (13.13%) Page | 7 TPO wrongly adopted margin of 13.13% in its order dated 01 June 2015 while giving effect to CIT(A) order. It is submitted that corrected margin should be computed after excluding non-operating income/expenses like dividend, interest, liabilities written back, provision for bad debts, prior period expenses. 14. The TPO shall re-compute the profit margins. Ground No. 4.5 and 4.6 15. The ld. CIT(A) granted the relief of working capital adjustment to the Appellant. (page 24-25 of ld. CIT(A)’s Order). The TPO in his appeal- effect TP order did not consider the working capital adjusted margins of 2 out of 4 comparable companies (viz. M/s ICRA Online Ltd. and M/s. Axis- IT & T Ltd.). 16. The AO/TPO shall follow the directions of the ld. CIT(A). Ground No. 4.7 17. The TPO and ld. CIT(A) denied risk adjustment to the Appellant. The ld. CIT(A) held that the risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparable had actually undertaken such risk and how the same materially affect the margins. The ld. CIT(A) relied on the revised OECD Guidelines 2010. The ld. CIT(A) held that mechanical adjustment cannot be made to the margins of the comparable without knowing which risk was taken by the entity concern and how its profitability was affected. The ld. CIT(A) held that probability of the risk and certainty of the risk are two different aspect and cannot be equated for the purpose of adjustment. 18. Having considered the issue, we direct that the assessee shall demonstrate the risk involved, encountered before the TPO and the TPO shall after examining the facts of the case and allow risk adjustment in accordance with the principles laid down in the following judgments: Page | 8  CIT vs. Visual Graphics Computing Services India (P.) Ltd.: [2020] 274 Taxman 481 (Madras)  Corning Technologies India (P.) Ltd. vs. DCIT: [2021] 132 taxmann.com 72 (Del ITAT)  Haldor Topsoe India (P.) Ltd. vs. DCIT: [2020] 116 taxmann.com 370 (Del ITAT)  Sony India (P) Ltd. vs. ACIT: ITA No.1189/Del/2005 (Del ITAT)  Motorola Solutions India (P.) Ltd vs. ACIT: [2015] 152 ITD 158 (Del ITAT) 19. In the result, the appeal of the assessee is partly allowed. Order Pronounced in the Open Court on 27/09/2022. Sd/- Sd/- (Saktijit Dey) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 27/09/2022 *Subodh Kumar, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR