ITO, New Delhi V. M/s Actis Global Services Pvt. Ltd., New Delhi

ITA 6710/DEL/2015

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4568 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 21-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 115JB; 154; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1, NEW DELHI BEFORE SHRI N.K. SAINI, VICE PRESIDENT AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 6710/DEL/2015 ASSESSMENT YEAR: 2011-12 INCOME TAX OFFICER, VS. M/S ACTIS GLOBAL SER VICES PVT. LTD., WARD 1(3), MIRA, THE CORPORATE SUITES, NEW DELHI. BLOCK D, GROUND FLO OR, 1 & 2, ISHWAR NAGAR, NEW DELHI.-110025 (PAN: AAMFA2371E) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI KUMAR PRANAV, SR. DR RESPONDENT BY : SHRI NAGESH BEHL, CA DATE OF HEARING: 14.08.2018 DATE OF PRONOUNCEMENT: 30.10.2018 ORDER PER SUDHANSHU SRIVASTAVA, J.M. THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE FINAL ASSESSMENT ORDER PASSED SUBSEQUENT TO THE DIRECTION S OF THE LD. DISPUTE RESOLUTION PANEL (DRP) -1, NEW DELHI FOR AS SESSMENT YEAR 2011-12. 2.0 BRIEF FACTS OF THE CASE ARE THAT AS PER THE INF ORMATION CULLED OUT FROM THE ORDERS OF THE LOWER AUTHORITIES, THE A SSESSEE IS ENGAGED IN PROVIDING INFORMATION TECHNOLOGY ENABLES SERVICES ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 2 (ITES) SUCH AS BACK OFFICE, FINANCIAL AND FUND ACCO UNTING SERVICES TO ITS AE. THE ASSESSEE FURTHER LEVERAGES ON IPR AN D OTHER COMMERCIAL OR GRANTING INTANGIBLES OWNED BY THE GRO UP AND THEREFORE, IT IS CHARACTERIZED AS ROUTINE IT ENABLE D SERVICE PROVIDER WHICH IS EXPOSED TO LESS THAN NORMAL RISK IN THE BUSINESS SINCE IT DOES NOT OWN ANY INTEREST FOR THE INTANGIBLES. 2.1 THE ASSESSEE FILED ITS RETURN OF INCOME ON 29.1 1.2011 SHOWING AN INCOME OF RS.23,19,782/- WHICH WAS SUBSE QUENTLY REVISED ON 27.04.2012 TO RS.24,72,931/-DURING THE C OURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION S WITH ITS ASSOCIATE ENTERPRISE (AE) FOR PROVISION OF BACK OFF ICE SUPPORT SERVICES/IT ENABLED SERVICES (ITES) AMOUNTING TO RS . 17,02,10,918/- AND REIMBURSEMENT OF EXPENSES OF RS. 1,28,706/- AND THEREFORE, REFERENCE U/S. 92CA OF THE INCOME TA X ACT, 1961 (HEREINAFTER CALLED THE ACT) WAS MADE BY THE ASS ESSING OFFICER FOR DETERMINATION OF ARM'S LENGTH PRICE (ALP) FOR T HE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. 2.2 THE ASSESSEE, IN ITS TRANSFER PRICING DOCUMENTA TION, I.E., T.P. STUDY REPORT HAS USED TRANSACTION NET MARGIN M ETHOD (TNMM) AS THE MOST APPROPRIATE METHOD AND HAD USED OPERATING ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 3 PROFIT (OP)/TOTAL COST (TC) AS THE PROFIT LEVEL IND ICATOR (PLI). THE ASSESSEE HAS USED 12 COMPARABLES WITH AN AVERAGE MA RGIN OF 12.37% USING MULTIPLE YEAR DATA AND HAD COMPARED IT WITH THE MARGIN OF THE ASSESSEE AT 12.01% AND HAD SUBMITTED THAT ITS INTERNATIONAL TRANSACTIONS WERE AT ARM'S LENGTH. TH E TPO REJECTED THE TRANSFER PRICING DOCUMENTATION OF THE ASSESSEE AND APPLYING HIS OWN FILTER, SELECTED NINE COMPARABLES WITH AN A VERAGE PLI OF 28.30% AND TAKING INTO CONSIDERATION THE PLI OF OP/ OC, I.E., OPERATING PROFIT/OPERATING COST, DETERMINED THE ALP OF INTERNATIONAL TRANSACTION OF RS.18,72,10,918 AT RS.21,44,45,184/- AND PROPOSED AN ADJUSTMENT OF RS.2,72,34,266/-. FURTHER, IN VIEW OF THE ASSESSEE S SUBMISSION THAT THE TERMS OF PAYMENT WAS 60 DAYS, THE TPO FURT HER COMPUTED THE INTEREST ON OUTSTANDING PERIOD EXCEEDI NG 60 DAYS AND APPLYING THE INTEREST RATE OF 10.84%, MADE AN A DJUSTMENT ON ACCOUNT OF RECEIVABLES AMOUNTING TO RS.18,61,066/-, MAKING TOTAL ADJUSTMENT OF RS.2,90,95,332/-. THE TRANSFER PRICI NG OFFICER (TPO) PASSED THE ORDER U/S 92CA(3) OF THE ACT VIDE ORDER DATED 07.01.2015 PROPOSING AN ADJUSTMENT ON ACCOUNT OF IT ES AMOUNTING TO RS. 2,72,34,266/- AND ON ACCOUNT OF RE CEIVABLES AMOUNTING TO RS.18,61,066/- TOTALING TO RS. 2,90,95 ,332/-. ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 4 BASED ON THIS, THE ASSESSING OFFICER PASSED THE DRA FT ASSESSMENT ORDER ON 02.02.2015 WHEREIN IN THE NORMAL COMPUTATI ON OF INCOME, ADDITION OF RS.2,90,95,332/- WAS PROPOSED A ND THE TAXABLE INCOME WAS DETERMINED AT RS.3,15,68,262/- A ND FURTHER, ON THE BOOK PROFIT DECLARED BY THE ASSESSEE U/S 115 JB OF THE ACT, COMPUTED BY THE ASSESSEE AT RS.2,05,21,759/-, AN AD JUSTMENT ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF RS.2,90,9 5,332/- WAS MADE AND THE TAXABLE BOOK PROFIT U/S. 115JB OF THE ACT OF WAS DETERMINED AT RS.4,96,17,091/-. SUBSEQUENTLY, THE I NCOME WAS ASSESSED AT RS.3,15,68,262/-. 2.3 THE ASSESSEE FILED ITS OBJECTIONS AGAINST THE T RANSFER PRICING ADJUSTMENT PROPOSED IN THE DRAFT ASSESSMENT ORDER B EFORE THE LD. DRP AND THE LD. DRP, VIDE ITS DIRECTIONS DATED 31.0 8.2015, DISPOSED OF THE OBJECTIONS OF THE ASSESSEE. AFTER O BJECTIONS BEFORE THE LD. DRP, EIGHT COMPARABLES REMAINED. THE COMPAR ABLE EXCLUDED BY THE LD. DRP WAS ACCENTIA TECHNOLOGY LTD . THE ARITHMETIC MEAN OF PLI TAKING OP/TC WAS CALCULATED AT 25.51% AND THE FINAL ADJUSTMENT OF RS.2,33,48,693/- WAS AP PROVED. 2.4 CONSEQUENTLY, IN THE FINAL ASSESSMENT ORDER, T RANSFER PRICING ADJUSTMENTS WERE MADE AMOUNTING TO RS.2,33, 48,693/- IN THE NORMAL COMPUTATION OF TOTAL INCOME ASSESSING TH E TOTAL ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 5 INCOME OF THE ASSESSEE AT RS.2,58,21,623/-. FURTHER , THE BOOK PROFIT WAS INCREASED BY THE TRANSFER PRICING ADJUST MENT OF RS.2,33,48,693/- AGAINST THE BOOK PROFIT OF RS.2,05 ,21,759/- DECLARED BY THE ASSESSEE, ASSESSING THE BOOK PROFIT AT RS.4,38,70,452/-. THE ASSESSEE APPROACHED THE ITAT CHALLENGING THE DIRECTIONS OF THE LD. DRP AND THIS APPEAL BEFOR E THE ITAT, IN ITA NO 6175/DEL/2015, WAS PARTLY ALLOWED BY THE ITA T VIDE ORDER DATED 29.07.2016. AGAINST THE ORDER OF THE ITAT, TH E REVENUE FILED AN APPEAL BEFORE THE HONBLE DELHI HIGH COURT AND V IDE ORDER DATED 5.8.2016, THE HONBLE DELHI HIGH COURT DISMIS SED THE APPEAL OF THE REVENUE IN ITA 417/2016. 2.5 FURTHER, THE ASSESSEE ALSO FILED A RECTIFICATIO N APPLICATION BEFORE THE LD. DRP ON SOME ISSUES IN WHICH THERE WA S APPARENTLY SOME MISTAKE ON THE FACE OF THE RECORD. 2.6 SUBSEQUENTLY, THE TPO, VIDE ORDER DATED 5.1.201 7 PASSED U/S 92CA(5) R/W SECTION 254 OF THE ACT, RECOMPUTED THE TRANSFER PRICING ADJUSTMENTS AS UNDER:- I) IT ENABLED SERVICES RS. 14,163,639/- II) RECEIVABLES NIL 2.7 THE TPO ALSO PASSED AN ORDER U/S 154 OF THE ACT VIDE ORDER DATED 7.3.2017 WHEREIN THE TP ADJUSTMENTS, BOTH IN RESPECT OF ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 6 ITES AS WELL AS RECEIVABLES WAS RECOMPUTED AT NIL. THE FINAL LIST OF COMPARABLES ALONG WITH MARGINS AS CALCULATED BY THE TPO IN ORDER PASSED U/S 154 WAS AS UNDER:- S.NO. COMPARABLES NCPM AS PER LATEST ORDER OF AO AFTER ITAT ORDER (%) 1 JINDAL INTELLICOM LTD. 13.70 2 E4E HEALTHCARE BUSINESS SERVICES PRIVATE LIMITED 9.77 3 MICROLAND LTD. (12.94) 4 ICRA TECHNO ANALYTICS LTD 25.24 5 MASTIFF TECH PVT LTD 24.34 6 ECLERX LIMITED EXCLUDED AS PER THE DIRECTIONS OF ITAT 7 INFOSVS LIMITED EXCLUDED AS PER THE DIRECTIONS OF ITAT 8 TCS E - SERVE LIMITED EXCLUDED AS PER THE DIRECTIONS OF ITAT 9 R SYSTEMS INTERNATINAL LTD (4.10) 10 TECHPROCESS SOLUTIONS LIMITED 4.80 ARITHMETIC MEAN 8.69 2.8 THE PROPOSED ADJUSTMENT AS PER THE ORDER U/S 15 4 OF THE ACT WAS AS UNDER:- OPERATIONAL COST RS. 16 7,143,557/- ALP AT A MARGIN OF 8.69% RS. 181,66 3,557/- PRICE RECEIVED RS. 187,210,918/- PROPOSED ADJUSTMENT NIL ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 7 2.9 THIS APPEAL OF THE DEPARTMENT IS AGAINST THE DI RECTION OF THE LD. DRP IN DIRECTING THE TPO TO RE-COMPUTE THE ADDI TION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT BY EXCLUDING M/S ACCENTIA TECHNOLOGY LIMITED FROM THE FINAL LIST OF COMPARABL ES. THE GROUNDS RAISED BY THE DEPARTMENT ARE AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. DRP HAS ERRED IN DIRECTING THE TPO TO RECOM PUTE THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTM ENTS BY EXCLUDING/COMPARABLE OF M/S ACCENTIA TECHNOLOGY LIM ITED WITHOUT APPRECIATING THE FACT THAT THE ACTIVITY OF THE SAID COMPANY IS SIMILAR TO THE ACTIVITY OF ASSESSEE . 3.0 THE LD. SR. DR VEHEMENTLY ARGUED THAT THE LD. D RP HAD ERRED IN DIRECTING THE TPO TO RE-COMPUTE THE ADDITI ON ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT BY EXCLUDING THE COM PARABLE OF M/S ACCENTIA TECHNOLOGY LIMITED WITHOUT APPRECIATIN G THE FACT THAT THERE WAS FUNCTIONAL SIMILARITY BETWEEN THE AS SESSEE AND THE SAID COMPANY. THE LD. SR. DR REFERRING, TO THE ORD ER OF THE TRANSFER PRICING OFFICER, SUBMITTED THAT THIS COMPA NY HAD BEEN IMPROPERLY EXCLUDED BY THE LD. DRP AND THE SAME SHO ULD BE DIRECTED TO BE INCLUDED. 4.0 IN RESPONSE, THE LD. AR SUBMITTED THAT ACCENTIA TECHNOLOGY WAS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE COM PANY BECAUSE ACCENTIA TECHNOLOGY WAS ENGAGED IN PROVIDIN G VARIED ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 8 SERVICES IN THE NATURE OF MEDICAL TRANSCRIPTION SER VICES, MEDICAL BILLING, PRACTICE MANAGEMENT CONSULTING SERVICES, M EDICAL CODING, CLAIMS PROCESSING AND SOFTWARE DEVELOPMENT INCLUDIN G SAAS AND IMPLEMENTATION SERVICES. IT WAS ALSO SUBMITTED THA T ACCENTIA HAS A LARGE PORTFOLIO OF PRODUCTS SUCH INSTAKARE, INSTA PMS, INSTA EMR, INSTA WEB, INSTADRT, INASTASCRIBE, INSTAVIEW E TC. WHICH MADE IT A PRODUCT-BASED COMPANY RATHER THAN A SERVI CES COMPANY AS WAS IN THE CASE OF THE ASSESSEE. RELIAN CE WAS ALSO PLACED ON THE DIRECTION OF THE LD. DRP IN THIS REGA RD AND IT WAS SUBMITTED THAT THIS COMPANY HAD BEEN RIGHTLY EXCLUD ED BY THE LD. DRP. THE LD. AR ALSO SUBMITTED THAT EVEN IF ACCENT IA TECHNOLOGY LIMITED WAS INCLUDED IN THE FINAL LIST OF COMPARABL ES, ITS MARGIN BEING 29.8%, THE ARITHMETIC MEAN WILL COME TO 11.25 % WHICH WILL AGAIN BE WITHIN 5% OF THE ASSESSEES MARGIN AND, THEREFORE, EVEN ON THAT ACCOUNT, NO ADJUSTMENT WILL BE REQUIRE D. 5.0 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD. DRP HAS GIVE N A DETAILED FINDING WITH RESPECT TO THIS COMPANY WHILE DIRECTIN G THIS COMPANY TO BE EXCLUDED. THE RELEVANT OBSERVATIONS OF THE L D. DRP ARE CONTAINED IN PARA 3.6.4 OF THE DIRECTIONS OF THE DR P AND THE SAME ARE BEING REPRODUCED HERE IN UNDER FOR A READY REFE RENCE:- ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 9 ACCENTIA TECHNOLOGY IS ENGAGED IN PROVIDING VARIED SERVICES IN THE NATURE OF MEDICAL TRANSCRIPTION SER VICES, MEDICAL BILLING, PRACTICE MANAGEMENT CONSULTING SER VICES, MEDICAL CODING, CLAIMS PROCESSING AND SOFTWARE DEVELOPMENT INCLUDING SAAS AND IMPLEMENTATION SERVI CES. ACCENTIA IT IS EVIDENT HAS A LARGE PORTFOLIO OF PRO DUCTS SUCH AS INSTAKARE A EMR SOFTWARE DEVELOPED BY ACCENTIA T HAT ENABLES PROVIDERS USING IT RECEIVE EMR INCENTIVES F ROM FEDERAL AND STATE AGENCIES, INSTA PMS A WEB BASED P RACTICE MANAGEMENT SOLUTION, INSTA EMR, INSTA WEB, INSTABIL L, INSTADRT, INSTASCRIBE INSTAVIEW,- MAKING IT A PRODU CT COMPANY MORE THAN A SERVICES COMPANY EVEN THOUGH IT IS REPORTING ONLY ONE SEGMENT IE ITES. THOUGH TPO HAS STATED THAT MORE THAN 84.76% RECEIPT IS FROM HEALTHCARE RECEIVABLES AND ONLY 15.24% SALE OF SOFTWARE, THE O FFERING OF SOFTWARE AS A SERVICE (SAAS) MAKES IT FUNCTIONAL LY DIFFERENT FROM THE TAXPAYER. SEGMENTAL INFORMATION IS ALSO NOT AVAILABLE SINCE TAXPAYER IS REPORTING ONLY ONE ITES SEGMENT. THE FOLLOWING EXTRACT FROM ITS ANNUAL REPO RT IS EXPLANATORY: EVEN THOUGH THE MANAGEMENT REALISED THAT THESE DRASTIC CHANGES IN ACCENTIA'S CORE AREA OF OPERATIO N WOULD AFFECT THE NORMAL OPERATIONS AND WOULD HAVE AN IMPACT ON THE REVENUE AND PROFITABILITY OF THE COMPANY IN THE SHORT RUN, WE WERE QUICK TO UNDERSTAND THAT THERE IS A HUGE OPPORTUNITY THAT WA S WAITING TO BE EXPLOITED IF WE CAN CHANGE OUR FUNCTIONING TO ADAPT TO THE NEW REQUIREMENTS IN THE HEALTHCARE INDUSTRY IN THE US. ACCORDINGLY WE ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 10 DECIDED TO GO ALL OUT ON A WAR FOOTING BASIS TO DEVELOP OUT OWN EMR SOFTWARE RATHER THAN DEPEND ON THIRD PARTY OFFERINGS; GET THE SOFTWARE CERTIFIE D AT THE EARLIEST AND MARKET THE SAME AIL OVER THE US. FURTHER, WE REALISED THAT THE ADOPTION OF EMR BASED CLINICAL PRACTISE IS OPENING UP AVENUES FOR AN INTEGRATED END-TO-END SAAS MODEL (SOFTWARE AS A SERVICE) OF SERVICE DELIVERY; HENCE, WE QUICKLY VENTURED INTO THAT TOO. ACCENTIA'S SEAMLESSLY INTEGRATED SAAS DELIVERY MODEL WILL FUNCTION AS A O NE STOP SHOP FOR A CLINICAL PROVIDER THAT WILL MANAGE ALL THEIR HEALTHCARE DOCUMENTATION NEEDS, RECEIVABLES MANAGEMENT NEEDS, PERFORMANCE TRACKING AND REPORTING'. THERE APPEARS TO BE MERIT ALSO IN THE TAXPAYERS ASSERTIONS THAT IT FAILS TPO'S FILTER OF PECULIAR E CONOMIC CIRCUMSTANCES INVOLVED IN THAT THERE WAS A STRATEGI C ACQUISITION OF COMPANIES AND INVESTMENTS IN COMPANI ES WITH EXPERTISE IN SOFTWARE DEVELOPMENT (PAGE 76-78 OF ANNEXURE A OF THE PAPER BOOK) DURING THE FY TO OWN EMR SOFTWARE RATHER THAN DEPEND ON THIRD PARTY OFFERINGS. THUS ACCENTIA WITH A BUSINESS MODEL OF PROVIDING BOTH SERVICES AND PRODUCTS WHILE REPORTIN G ONLY ONE SEGMENTAL, IS NOT FUNCTIONALLY SIMILAR, AN D HAS A SIGNIFICANTLY DIFFERENT ASSET AND RISK PROFILE (G OODWILL BRANDS/IPR CONSTITUTE 41.24% OF ITS TOTAL FIXED ASS ETS) DURING THE FY 2010-11. ALSO THIS WAS NOT SELECTED B Y TPO LAST YEAR AND DURING THE YEAR EXCEPT A GREATER EMPHASIS ON PRODUCTS AND SAAS, THERE IS NO CHANGE I N FAR. THE CHANGES IN BUSINESS MODEL ONLY RENDER IT ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 11 FUNCTIONALLY MORE DIFFERENT FROM TAXPAYER AND IT CA NNOT SERVE AS A VALID COMPARABLE FOR THE ITES SEGMENT IN THE CASE OF TAXPAYER. TPO IS THUS DIRECTED TO EXCLUDE ACCENTIA FROM THE LIST OF COMPARABLES. 5.1 ALTHOUGH THE LD. SR. DR HAS ARGUED VEHEMENTLY A GAINST THE DIRECTIONS OF THE LD. DRP FOR EXCLUSION OF ACCENTIA TECHNOLOGY LIMITED, HE WAS UNABLE TO POINT OUT ANY INFIRMITY I N THE DIRECTIONS OF THE LD. DRP. HE COULD ALSO NOT POINT OUT ANY JU DICIAL PRECEDENT WHEREIN ACCENTIA TECHNOLOGY LIMITED WAS R ETAINED AS A COMPARABLE IN CASE OF A SERVICE COMPANY. ACCORDING LY, WE FIND NO REASON TO INTERFERE AND WE DISMISS THE GROUNDS RAIS ED BY THE DEPARTMENT. 6.0 IN THE RESULT, THE APPEAL OF THE DEPARTMENT STA NDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH OCTOBER, 2018. SD/- SD/- (N.K. SAINI) (SUDHANSHU SRIVASTAVA) VICE PRESIDENT JUDICIAL MEM BER DATED: 30 TH OCTOBER , 2018 GS ITA NO. 6710/DEL/2015 ASSESSMENT YEAR 2011-12 12 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT BY ORDER ASSTT. REGISTRAR