Calibrated Healthcare Systems India Pvt. Ltd., New Delhi V. ACIT (OSD), New Delhi

ITA 5271/DEL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82165 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 03-12-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 12-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: I : NEW DELHI BEFORE SH. R. S. SYAL, AM AND SH. A. T. VARKEY , JM ITA NO. 5271/DEL/2012 : ASSTT. YEAR : 2007 - 08 CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD., SPACE NO. 309, AGGARWAL PLAZA, PLOT NO. 11, SECTOR - 10, DWARKA, NEW DELHI - 110075 VS ACIT (OSD) , CIT - I, NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AA CCC3110C ASSESSEE BY : SH. PANKAJ GUPTA, CA REVENUE BY : SH. PEEYUSH JAIN, CIT DR DT. OF HEARING : 03. 12.2014 DT. OF PRONOUNCEMENT : 04. 12.2014 ORDER PER R. S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A) ON 13.08.2012 IN RELATION TO THE ASSESSMENT YEAR 2007 - 08. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF CALIBRATED HEALTHCARE SYSTEMS LLC, USA AND IS ENGAGED IN PROVIDING I.T ENABLED SERVICES TO ITS FOREIGN ENTITY. ITS ACTIV ITIES PRIMARILY COMPRISE OF PROCESSING OF INSURANCE ITA NO.5271/DEL/2012 CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. 2 CLAIMS, DATA ENTRY AND OTHER SUPPORT SERVICES IN THE HEALTHCARE SECTOR. AN INTERNATIONAL TRANSACTION S OF EXPORT OF I.T ENABLED SERVICES AMOUNTING TO ` 2,42,55,000/ - WAS REPORTED. THE ASSESSEE CH O SE TEN CO MPANIES AS COMPARABLE TO DEMONSTRATE THAT THE INTERNATIONAL TRANSACTION WAS AT ARM S LENGTH PRICES (ALP). THE T RANSFER P RICING O FFICER (TPO) DISCARDED THE CHOICE OF COMPARABLE S MADE BY THE ASSESSEE WITH REASONS . HE CH O SE TWENTY FIVE FRESH COMPARABLE C OMPANIES AND APPLIED TRANSACTIONAL NE T MARGIN METHOD (TNMM) TO BENCH MARK THIS INTERNATIONAL TRANSACTION. THAT IS HOW , HE DETERMINED ARM S LENGTH MARGIN OF THE COMPARABLES AT 26.11% OF OPERATING COST. APPLYING THE SAME TO THE ASSESSEE S INTERNATIONAL TRANSA CTION, THE T RANSFER P RICING A DJUSTMENT OF ` 23,85,223/ - WAS PROPOSED. THE LD. CIT(A) DIRECTED TO EXCLUDE TWO COMPANIES FROM THE LIST OF COMPARABLES THEREBY RETAINING TWENTY THREE COMPANIES CH OSEN BY THE TPO AS COMPARABLE. THE ASSESSEE IN THE INSTANT APPEAL IS AGGRIEVED ONLY AGAINST THE INCLUSION OF FOLLOWING SIX COMPANIES IN THE FINAL LIST OF COMPARABLES: I) INFOSYS BPO LTD. II) WIPRO LTD. (SEG.) ITA NO.5271/DEL/2012 CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. 3 III) HCL COMNET SYSTEMS & SERVICES LTD. (SEG.) IV) ECLERX SERVICES LTD. V) MAPLE ESOLUTIONS LTD. VI) TRITON CORP. LTD. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE S H ORT CONTROVERSY TAKEN UP BEFORE US IS ONLY REGARDING THE INCLUSION OF SIX COMPANIES BY THE TPO , WHICH THE ASSESSEE URGES FOR EXCLUSION. THERE IS NO OBJECTION TO ANY OTHER FACET OF THE COMPUTATION OF THE ALP OF THIS TRANSACTION. WE WILL DEAL WITH THESE SIX COMPANIES , ONE BY ONE , TO DETERMINE THEIR COMPARABILITY . I) INFOSYS BPO LTD. 4. THE LD. AR CONTENDED THAT T HERE IS A VAST DIFFERENCE NOT ONLY IN THE SIZE BUT ALSO THE FUNCTIONAL PROFILE, ASSETS EMPLOYED AND RISKS UNDERTAKEN BY INFOSYS VIS - A - VIS THE ASSESSEE. PER CONTRA, T HE LD. DR SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES. ITA NO.5271/DEL/2012 CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. 4 5. WE FIND THAT WHEREAS THE ASSESSEE IS A CAPTIVE UNIT PROVIDING BACK OFFICE SUPPORT SERVICES TO ITS AE ALONE, WHICH ARE BASICALLY IN THE NATURE OF PROCESSING OF INSURANCE CLAIM S AND THE DATA ENTRY , IT CAN HAVE NO VALID COMPARISON WITH INFOSYS LTD . , AS THE LA TTER IS A FULL - FLEDGED RISK TAKING ENTREPRENEUR WITH DIVERSIFIED BUSINESS INCLUDING SOFTWARE PRODUCT, CONSULTING APPLICATION, DESIGN DEVELOPMENT, RE - ENGINEERING AND MAINTENANCE ETC. INFOSYS LTD. HAS DEVELOPED/OWNS PROPRIETARY PRODUCTS LIKE F INACLE , WHEREA S THE ASSESSEE, BEING A CAPTIVE UNIT , DOES NOT OWN ANY SUCH PROPRIETARY PRODUCT. UNLIKE INFOSYS , THE ASSESSEE DOES NOT HAVE ANY SUBSTANTIAL INTANGIBLE ASSETS. SIMILARLY, INFOSYS HAS SPENT A LOT ON RE SEARCH AND DEVELOPMENT, WHEREAS THE ASSESSEE HAS NOT UND ERTAKEN ANY SUCH ACTIVITY IN RENDERING SERV ICES TO ITS AE. APART FROM THE ABOVE, THERE ARE SEVERAL OTHER FACTORS WHICH MAKE INFOSYS AS INCOMPARABLE WITH THE ASSESSEE. THE HON BLE DELHI HIGH COURT IN CIT VS AGNITY INDIA TECHNOLOGIES PVT. LTD. (2013) 219 TAX MAN 26 (DELHI) HAS DIRECTED THE EXCLUSION OF INFOSYS TECHNOLOGIES FROM THE LIST OF COMPARABLES OF AGNITY INDIA, FACTS OF WHICH COMPANY ARE MORE OR LESS SIMILAR TO THAT OF THE ASSESSEE AS BOTH ARE CAPTIVE UNITS PROVIDING BROADLY SIMILAR SERVICES . ITA NO.5271/DEL/2012 CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. 5 RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT OF THE HON BLE J URISDICTIONAL HIGH COURT , WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. II) WIPRO LTD. (SEG.) 6 . AFTER HEARING BOTH THE SIDES, H ERE AGAIN WE FIND THAT THE FACTS AND CIRCUMSTAN CES OF THIS COMPANY NOWHERE MATCH WITH THE ASSESSEE COMPANY. THIS COMPANY IS ALSO A GIANT ENTITY IN COMPARISON WITH THE ASSESSEE COMPANY WITH MARKED DIFFERENCE S AS REGARDS RISK PROFILE, NATURE OF SERVICES, OWNERSHIP OF IP RIGHTS, EXPENDITURE ON R & D ETC. DRAWING THE STRENGTH FROM THE JUDGMENT OF AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA) , WE HOLD THIS COMPANY TO BE INCOMPARABLE WITH THE ASSESSEE . THE SAME IS , ERGO, DIRECTED TO BE NOT TREATED AS COMPARABLE. III) HCL COMNET SYSTEMS & SERVICES LTD. (SEG. ) 7 . AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT T HE TPO INCLUDED THE RELEVANT SEGMENT OF THIS COMPANY IN THE LIST OF COMPARABLES . THE ITA NO.5271/DEL/2012 CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. 6 LD. AR WAS FAIR ENOUGH TO ACCEPT THAT THERE IS NO DIFFERENCE IN THE FUNCTIONAL PROFILE OF THIS COMPANY WITH THE ASSESSEE COMPANY. HE, HOWEVER, SOUGHT THE EXCLUSION OF THIS COMPANY ON THE BASIS OF HIGH TURNOVER. WE DO NOT APPROVE THE VIEW CANVASSED BY THE LD. AR IN THIS REGARD. WHEN A COMPANY IS FUNCTIONALLY SIMILAR TO THAT OF THE ASSESSEE COMPANY, THE SAME CANNOT BE EXCLUDED MERELY BECAUSE OF ITS TURNOVER AT A HIGHER OR LOWER LEVEL. HERE IT IS IMPORTANT TO MENTION THAT SEC. 92C(1) OF THE INCOME - TAX ACT, 1961 PROVIDES FOR THE COMPUTATION OF ARM S LENGTH PRICES BY ONE OF THE METHODS PRESCRIBED THEREIN. FIRST PROVISO TO SEC. 92C(2) CLEARLY PROVIDES THAT WHEN MORE THAN ONE PRICE ARE DETERMINED BY THE MOST APPROPRIATE METHOD, THEN THE ARM S LENGTH PRICES SHALL BE T AKEN TO BE THE ARITHMETIC MEAN OF SUCH PRICES. IT DOES NOT TALK OF EXCLUDING THE COMPANIES WITH HIGH OR LOW TURNOVER OR HIGH OR LOW PROFIT RATE. RECENTLY THE DELHI TRIBUNAL IN NOKIA INDIA PVT. LTD. VS DCIT (ITA NO. 242/D/2010 ETC.) , VIDE ITS ORDER DATED 3 1.10.2014 , HAS HELD TH AT A POTENTIALLY COMPARABLE CASE CANNOT BE EXCLUDED FOR THE REASON OF HIGH OR LOW TURNOVER OR HIGH OR LOW PROFIT MARGIN. IN REACHING THIS CONCLUSION , THE DELHI BENCH ALSO CONSIDERED A SPECIAL BENCH ORDER PASSED IN THE CASE OF MAERSK GLOBAL CENTRES ITA NO.5271/DEL/2012 CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. 7 (INDIA) (P.) LTD. VS ACIT (2014) 147 ITD 83 (BOM.) (SB). IN VIEW OF THE FACT THAT THE ASSESSEE HAS ADMITTED THE FUNCTIONAL COMPARABILITY OF THE RELEVANT SEGMENT OF THIS COMPANY AND THE ONLY DIFFERENCE POINTED OUT IS ABOUT ITS HIGHER TURNOVER , WE ARE SATISFIED THAT THIS CASE CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLE. THE IMPUGNED ORDER IS UPHELD ON THIS SCORE. IV) ECLERX SERVICE LTD. 8 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ANNUAL REPORT OF THIS COMPANY FOR THE FINANCI AL Y EAR 2006 - 07 DOES NOT THROW ANY LIGHT ON THE NATURE OF BUSINESS CARRIED ON BY IT. HOWEVER, THE ANNUAL REPORT FOR THE FINANCIAL Y EAR 2007 - 08, A COPY OF WHICH IS AVAILABLE ON THE PAPER BOOK , DIVULGES THE NA TURE OF BUSINESS CARRIED ON BY IT. IT IS SEEN THAT THIS COMPANY IS A KNOWLEDGE PROCESS OUTSOURCING (KPO) COMPANY PROVIDING DATA ANALYTICS AND DATA PROCESS ING SOLUTION TO ITS CLIENTS. IT IS A RECOGNIZED EXP E RT IN F INANCIAL SERVICES AND R ETAIL AND M ANUFACTURE. IT PROVIDES CONSULTING SERVICES AND ALSO PROCESS OUTSOURCING. THE ABOVE DETAILS HAVE BEEN POINTED OUT BY THE LD. AR FROM THE A NNUAL ACCOUNTS OF THIS COMPANY FOR THE FINANCIAL ITA NO.5271/DEL/2012 CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. 8 Y EAR 2007 - 08 . NOTHING HAS BEEN BROUGHT ON RECORD BY THE LD. DR TO SHO W THAT THE FUNCTIONS PERFORMED BY THIS COMPANY IN THE RELEVANT YEAR WERE ANY DIFFERENT. WHEN WE CONSIDER THE NATURE OF ASSESSEE S BUSINESS , WHICH IS PRIMARILY THAT OF PROCESSING INSURANCE CLAIM AND DATA ENTRY, IT BECOMES VIVID THAT ECLERX SERVICE LTD. CANN OT BE CONSIDERED AS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE COMPANY. THE SAME IS THEREFORE, DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. V) & VI) MAPLE ESOLUTIONS LTD. AND TRITON CORP. LTD. 9 . WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD. BOTH THESE COMPANIES ARE INTER - RELATED ENTITIES . DURING THE YEAR UNDER CONSIDERATION , THERE WAS ACQUISITION OF 100% SHARES OF MAPLE ESOLUTIONS LTD. BY TRITON CORP. LTD. AND THUS, MAPLE ESOLUTIONS LTD. BECAME A WHOLLY OWNED SUBSIDIARY OF TRITON CORP. LTD. W.E.F 01.01.2007. IT CAN BE SEEN THAT THIS MERGER/ACQUISITION HAS TAKEN PLACE DURING THE YEAR UNDER CONSIDERATION , THEREBY SHATTER ING THE IR COM PARABILITY . ITA NO.5271/DEL/2012 CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. 9 10 . THE LD. AR ALSO POINTED OUT THAT BOTH THESE COMPANIES ARE OWNED BY RASTOGI GROUP AND THE REPUTATION OF THE DIRECTORS OF THES E COMPANIES WAS HAVING QUESTION - MARK IN EARLIER YEARS. IN SUPPORT OF TH E CONTENTION FOR THE EXCLUSION OF THESE C OMPANIES, THE LD. AR RELIED ON AN ORDER PASSED BY DELHI BENCH OF TH E TRIBUNAL IN THE CASE OF ITO VS CRM SERVICES INDIA (P) LTD. (ITA NO. 4068/D/2009) , COPY PLACED ON PAGES 141 ONWARDS OF THE PAPER BOOK , I N WHICH MAPLE ESOLUTIONS LTD. AND TRITON CORP. LTD. WERE DIRECTED TO BE EXCLUDED BY THE TRIBUNAL ON THIS SCORE . THE LD. DR, ON THE OTHER HAND, OPPOSED THIS CONTENTION. 1 1 . W E FIND THAT THERE IS A DIRECT ORDER BY THE DELHI BENCHES OF THE TRIBUNAL IN WHICH THESE TWO COMPANIES HAVE BEEN EXCLUDED BECAUSE OF FINANCIAL IRREGULARITIES C OMMITTED BY THEIR D IRECTORS. IN THE ABSENCE OF ANY CONTRARY ORDER BROUGHT ON RECORD BY THE LD. DR PER MITTING THE INCLUSION OF COMPANIES UNDER CLOUD , IN THE LIST OF COMPARABLES , R ESPECTFULLY FOLLOWING THE PRECEDENT WE DIRECT THE EXCLUSION OF THESE TWO COMPANIES FROM THE LIST OF COMPARABLES. ITA NO.5271/DEL/2012 CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. 10 1 2 . THE IMPUGNED ORDER IS THEREFORE, SET ASIDE AND THE MATTER IS SENT BACK TO AO/TPO FOR A FRESH DETERMINATION OF ALP O F THE INTERNATIONAL TRANSACTION IN CONFORMITY WITH OUR ABOVE DIRECTIONS. 1 3 . IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONO UNCED IN THE OPEN COURT ON 0 4 /12/2014. S D / - S D / - (A.T. VARKEY ) (R. S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 4 /12/2014 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR DATE INITIAL 1. DRAFT DICTATED ON 03 . 12.2014 PS 2. DRAFT PLACED BEFORE AUTHOR 03 .1 2.2014 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. *