ACIT 10(3), MUMBAI V. PRUDENTIAL PROCESS MANAGEMENT SERVICES INIDA P.LTD, MUMBAI

ITA 6857/MUM/2010

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 5741 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 10 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Assessment Year: 2005-2006
• Appeal Filed On: 01-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER IT A NO. 6857/MUM./2010 ( ASSESSMENT YEAR : 20 05 06 ) ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 10(3), MUMBAI . APP ELL ANT V/S PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. PRUDENTIAL HOUSE, CENTRAL AVENUE HIRANANDANI BUSINESS PARK POWAI, MUMBAI 400 706 PAN AACCP7204Q . RESPONDENT CROSS OBJECTION NO.197/MUM./2010 ARISING OUT OF IT A NO. 6857/MUM./2010 ( ASSESSMENT YEAR : 20 05 06 ) PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. PRUDENTIAL HOUSE, CENTRAL AVENUE HIRANANDANI BUSINESS PARK POWAI, MUMBAI 400 706 PAN AACCP7204Q . APP ELL ANT V/S ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 10(3), MUMBAI . RESPONDENT REVENUE BY : SMT. NILUJAGGI ASSESSEE BY : SHRI DHANESH BAFNAA/W SHRI ARPIT AGGARWAL DATE OF HEARING 25 .0 7 .2019 DATE OF ORDER 07.08.2019 2 PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. O R D E R PER BE N CH CAPTIONED APPEAL BY THE REVENUE AND CROSS OBJECTION BY THE ASSESSEE ARISE OUT OF THE ORDER DATED 9 TH JULY 2010, PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 15, MUMBAI, FOR THE ASSESSMENT YEAR 2005 06. 2 . T HE MAJOR ISSUE RAISED BY BOTH THE PARTIES IS WITH REGARD TO ACCEPTANCE/REJECTION OF CERTAIN COMPARABLES BY LEARNED COMMISSIONER (APPEALS). 3 . SHRI DHANESH BAFNA, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED , IF TWO OF THE COMPARABLES REJECTED BY LEARNED C OMMISSIONER (APPEALS) AND CONTESTED BY THE REVENUE ARE EXCLUDED, ASSESSEES MARGIN WOULD FALL WITHIN 5% OF REST OF THE COMPARABLES . H ENCE, ACCEPTABILITY OR OTHERWISE OF THE OTHER COMPARABLES DISPUTED BY BOTH THE REVENUE AND THE ASSESSEE WOULD BECOME REDUNDANT. 4 . SMT. NILU JAGGI, THE LEARNED DEPARTMENTAL REPRESENTATIVE AGREED WITH THE AFORESAID SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE. 5 . IN VIEW OF THE AFORESAID, AT THE OUTSET, WE PROCEED TO DEAL WITH THE ACCEPTABILITY OR OTHERWISE OF THE FOLLO WING TWO COMPARAB LES, (I) VISHAL INFORMATION TECHNOLOGIES LTD. AND (II) CEPHA IMAGING PVT. LTD. 3 PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. 6 . BEFORE WE PROCEED TO DEAL WITH THE COMPARABILITY OF THE AFORESAID TWO COMPANIES, IT IS NECESSARY TO NARRATE THE RELEVANT FACTS BRIEFLY . 7 . THE ASSESSEE, AS STATE D BY THE TRANSFER PRICING OFFICER, IS AN INDIAN COMPANY PROVIDING INFORMATION TECHNOLOGY ENABLED SERVICES (IT E S) TO ITS OVERSEAS ASSOCIATED ENTERPRISE (AE) VIZ. PRUDENTIAL U.K. SERVICES LTD. THE SERVICES RENDERED BY THE ASSESSEE ARE OF CALL CENTRE AND OTHE R BACK OFFICE SERVICES. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE RECEIVED AN AMOUNT OF ` 78,14,49,071, FROM THE PROVISION OF IT E S TO THE AE. IN THE TRANSFER PRICING STUDY REPORT, THE ASSESSEE BENCHMARKED THE AFORESAID TRANSACTION BY APPLYING TRANS ACTION AL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT/TOTAL COST (OP/TC) AS THE PROFIT LEVEL INDICATOR (PLI). BY UNDERTAKING A SEARCH PROCESS, THE ASSESSEE SELECTED 22 COMPANIES AS COMPARABLE S . SINCE , THE PLI OF THE COMPARA BLES SELECTED WAS WITHIN 5% OF THE MARGIN SHOWN BY THE ASSESSEE @ 13.09%, THE TRANSACTION WITH THE AE WAS CLAIMED TO BE AT ARM'S LENGTH. THE TRANSFER PRICING OFFICER, HOWEVER, DID NOT ACCEPT THE BENCHMARKING OF THE ASSESSEE , THOUGH , HE AGREED THAT TNMM IS THE MOST APPROPRIATE METHOD. HE REJECTED 16 OUT OF 22 COMPARABLES SELECTED BY THE ASSESSEE. HAVING DONE SO, THE TRANSFER PRICING OFFICER PROCEEDED TO SELECT FRESH COMPARABLES AND ULTIMATELY SHORT LISTED 11 COMPANIES AS COMPARABLES WITH AVERAGE PLI OF 26.88%. ACCORDINGLY, 4 PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. HE MADE AN ADJUSTMENT OF ` 9,52,82,885, TO THE ARM'S LENGTH PRICE OF THE TRANSACTION WITH THE AE. ON THE BASIS OF ADJUSTMENT PROPOSED BY THE TRANSFER PRICING OFFICER, THE ASSESSING OFFICER MADE THE ADDITION WHILE FR AMING THE ASSESSMENT ORDER. BEING AGGRIEVED WITH THE ADDITION MADE, THE ASSESSEE PREFERRED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN THE CONTEXT OF THE FACTS AND MATERIAL ON RECORD, LEARNED COMMISSION ER (APPEALS) ACCEPTED FORTUNE INFOTECH LTD., INFOTECH ENTERPRISES LTD. AND C.S. SOFTWARE LTD. , PROPOSED BY THE ASSESSEE AS COMPARABLES. FURTHER, ACCEPTING ASSESSEES CONTENTION, HE REJECTED VISHAL INFORMATION TECHNOLOGIES LTD. AND CEPHA IMAGING PVT. LTD. A S COMPARABLE. HOWEVER, HE DID NOT ACCEPT ASSESSEES CONTENTION IN RESPECT OF SOME OTHER COMPARABLES DISPUTED BEFORE HIM. BEING AGGRIEVED WITH THE DECISION OF LEARNED COMMISSIONER (APPEALS), THE REVENUE HAS FILED THE PRESENT APPEAL CHALLENGING THE INCLUSION OF FORTUNE INFOTECH LTD., INFOTECH ENTERPRISES LTD. AND C.S. SOFTWARE LTD. FURTHER, THE REVENUE HAS ALSO CHALLENGED THE DECISION OF LEARNED COMMISSIONER (APPEALS) IN EXCLUDING VISHAL INFORMATION TECHNOLOGIES LTD. AND CEPHA IMAGING PVT. LTD. AS COMPARABLE. WHEREAS, IN THE CROSS OBJECTION, THE ASSESSEE HAS CHALLENGED THE DECISION OF LEARNED COMMISSIONER (APPEALS) IN UPHOLDING REJECTION OF CERTAIN COMPARABLES SELECTED BY IT. FURTHER, THE ASSESSEE HAS RAISED AN ADDITIONAL GROUND IN THE SUPPORTING THE DECISION OF LEARNED COMMISSIONER (APPEALS) WITH 5 PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. REGARD TO VISHAL INFORMATION TECHNOLOGIES LTD. , TH OUGH, ON A DIFFERENT REASONING . CONSIDERING THE COMMONALITY IN THE ISSUES RAISED BY BOTH THE ASSESSEE AND THE REVENUE, WE PROCEED TO DISPOSE OF THE PRESENT APPEAL AND THE CROSS OBJECTION TOGETHER. AS DISCUSSED EARLIER, BOTH THE PARTIES HAVE AGREED BEFORE US THAT ON EXCLUSION OF VISHAL INFORMATION TECHNOLOGIES LTD. AND CEPHA IMAGING PVT. LTD., THE MARGIN OF THE ASSESSEE COMPANY WOULD FALL WITHIN 5% OF THE REST OF THE CO MPARABLES. IN VIEW OF THE AFORESAID, WE PROCEED TO DEAL WITH THE COMPARABILITY OF THE AFORESAID TWO COMPANIES AT THE OUTSET. VISHAL INFORMATION TECHNOLOGIES LTD. 8 . THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED , THIS COMPANY WAS SELECTED BY THE ASSESSE E ITSELF IN THE TRANSFER PRICING STUDY REPORT DUE TO FUNCTIONAL SIMILARITY. THEREFORE, LEARNED COMMISSIONER (APPEALS) WAS NOT JUSTIFIED IN REJECTING IT AS A COMPARABLE. FURTHER, HE SUBMITTED , THE REASONING OF LEARNED COMMISSIONER (APPEALS) WHILE REJECTING THIS COMPANY IS UNACCEPTABLE , AS , THE BOX PLOT METHOD IS BASED ON THE INTER QUARTILE RANGE WHICH IS NOT RECOGNIZED IN THE STATUTE. THUS, SHE SUBMITTED , THE DECISION OF LEARNED COMMISSIONER (APPEALS) IS NOT CORRECT. 9 . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED , THOUGH , ON THE BASIS OF INSUFFICIENT DATA AVAILABLE IN THE PUBLIC DOMAIN, ASSESSEE HAS 6 PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. SELECTED THIS COMPANY AS COMPARABLE IN THE TRANSFER PRICING STUDY REPORT, HOWEVER, THE COMPANY IS NOT FUNCTIONALLY SIMILAR TO THE ASSESSEE. H E SUBMITTED , THE ANNUAL REPORT OF THE COMPANY CLEARLY REVEALS THAT A MAJOR PORTION OF THE WORK IS OUTSOURCED TO THIRD PARTIES WHICH IS EVIDENT FROM THE LOW EMPLOYEE COST OF THE COMPANY. WHEREAS, THE ASSESSEE DOES THE WORK ITSELF. THEREFORE, THE BUSINESS MODEL OF THE ASSESS EE AND THE AFORESAID COMPARABLE ARE TOTALLY DIFFERENT, HENCE, CANNOT BE TREATED AS COMPARABLE. IN SUPPORT OF SUCH CONTENTION, HE RELIED UPON THE FOLLOWING DECISIONS: I ) DBOI GLOBAL SERVICES PVT. LTD. V/S ACIT, [2016] 74 TAXMANN.COM 83 (MUM.) (TRIB.); II ) ACIT V/S HAPAG LLOYD GLOBAL SERVICES PVT. LTD., [2013] 34 TAXMANN.COM 241 (MUM.) (TRIB.) AND III ) ACIT V/S MAERSK GLOBAL SERVICES CENTRE INDIA PVT. LTD., [2011] 16 TAXMANN.COM 47 (MUM.) (TRIB.). 10 . HE SUBMITTED , THOUGH , LEARNED COMMISSIONER (APPEALS) HAS EXCLUDED THI S COMPANY BY APPLYING BOX PLOT METHOD, HOWEVER, ASSESSEE SEEKS EXCLUSION OF THE COMPANY DUE TO FUNCTIONAL DISSIMILARITY. HE SUBMITTED , FOR THIS REASON, THE ASSESSEE HAS RAISED ADDITIONAL GROUND NO.6, IN THE CROSS OBJECTION. 11 . WE HAVE CONSIDERED RIVAL SUBMIS SIONS AND PERUSED MATERIAL ON RECORD. AT THE OUTSET, WE MUST OBSERVE , THE ISSUE RAISED IN THE ADDITIONAL GROUND NO.6 OF THE CROSS OBJECTION SINCE CAN BE DECIDED ON 7 PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. THE BASIS OF FACTS AND MATERIAL ON RECORD AND ONLY SUPPORTS THE DECISION OF THE LEARNED COMM ISSIONER (APPEALS) , THOUGH , ON A DIFFERENT REASONING, WE ARE INCLINED TO ADMIT THE ADDITIONAL GROUND FOR ADJUDICATION. HAVING HELD SO, WE PROCEED TO DEAL WITH THE ISSUE ON MERITS. NO DOUBT, IN THE TRANSFER PRICING STUDY REPORT, THE ASSESSEE HAS SELECTED TH IS COMPANY AS A COMPARABLE. HOWEVER, AS STATED BY THE ASSESSEE, AT THAT JUNCTURE SUFFICIENT DATA RELATING TO THIS COMPANY WAS NOT AVAILABLE IN PUBLIC DOMAIN. IN OUR VIEW, THERE IS NO REASON TO DISBELIEVE THE AFORESAID CLAIM OF THE ASSESSEE. IT IS NOW FAIRL Y WELL SETTLED THAT THIS COMPANY CANNOT BE A COMPARABLE TO OTHER COMPANIES DUE TO ITS COMPLETELY DISTINCT BUSINESS MODEL. TIME AND AGAIN, IT HAS BEEN ESTABLISHED THAT THIS COMPANY DOES NOT UNDERTAKE IT ES ITSELF , BUT , GETS THE WORK DONE BY OUTSOURCING TO TH IRD PARTY VENDORS. THIS IS EVIDENT FROM THE LOW EMPLOYEE COST OF THE COMPANY, AS REVEALED FROM THE ANNUAL REPORT FOR THE RELEVANT PERIOD. THE CO ORDINATE BENCH IN DBOI GLOBAL SERVICES PVT. LTD. (SUPRA), NOTIC ING THAT THE EMPLOYEE COST OF THE COMPANY AS A P ERCENTAGE OF TOTAL COST WORKS OUT TO A MEAGER 1.36% WHICH PROVES THE OUTSOURCING OF WORK , EXCLUDED THE COMPANY AS A COMPARABLE. THE SAME VIEW HAS BEEN EXPRESSED BY THE TRIBUNAL IN OTHER DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE. CONSIDE RING THE FACT THAT THE AFORESAID DECISIONS ARE FOR THE VERY SAME ASSESSMENT YEAR AND WERE RENDERED ON THE BASIS OF MORE OR LESS COMMON FACTS, RESPECTFULLY FOLLOWING THE CITED DECISIONS OF THE 8 PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. TRIBUNAL, WE UPHOLD THE DECISION OF THE LEARNED COMMISSIONER (AP PEALS) IN EXCLUDING THIS COMPANY AS A COMPARABLE , THOUGH , ON THE BASIS OF OUR OWN REASONING. C EPHA IMAGING PVT. LTD. 12 . OBJECTING TO THE EXCLUSION OF THIS COMPANY, THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE OBSERVATIONS OF THE TRANSFER PRICING OFFICER. 13 . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED , THIS COMPANY CANNOT BE TREATED AS COMPARABLE, AS IT IS ENGAGED IN THE DEVELOPMENT IN SALE OF COMPUTER SOFTWARE. THUS, HE SUBMITTED , LEARNED COMMISSIONER (APPEALS) WAS CORRECT IN REJECTING THIS COMPA NY AS A COMPARABLE. IN SUPPORT, HE RELIED UPON THE FOLLOWING DECISIONS: I ) DBOI GLOBAL SERVICES PVT. LTD. V/S ACIT, [2016] 74 TAXMANN.COM 83 (MUM.) (TRIB.); II ) ACIT V/S HAPAG LLOYD GLOBAL SERVICES PVT. LTD., [2013] 34 TAXMANN.COM 241 (MUM.) (TRIB.) AND III ) ACIT V/S MAERSK GLOBAL SERVICES CENTRE INDIA PVT. LTD., [2011] 16 TAXMANN.COM 47 (MUM.) (TRIB.). 14 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. FROM THE FACTS AND MATERIALS PLACED ON RECORD INCLUDING THE ANNUAL REPORT OF THIS COMPARABLE, IT IS EVIDENT , THE COMPANY IS IN THE BUSINESS OF DEVELOPMENT AND SALE OF SOFTWARE. THAT BEING THE CASE, IT 9 PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AS THE ASSESSEE IS ADMITTEDLY AN IT ES PROVIDER. THE CO ORDINATE BENCH IN DBOI GLOBAL SERVICES PVT. LTD. (SUPRA) HAVING FOUND THAT THE COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICE , EXCLUDED IT AS A COMPARABLE. SIMILAR VIEW WAS EXPRESSED BY THE TRIBUNAL IN OTHER DECISIONS CITED BY THE LEARNED AUTHORISED REPRESENTATIVE. SINCE , THE AFORESAID DECISIONS ARE FOR THE VERY SAME ASSESSMENT YEAR AND THE FACTS ON THE BASIS OF WHICH THE COMPANY WAS EXCLUDED AS A COMPARABLE ARE MORE OR LESS COMMON, RESPECTFULLY FOLLOWING THE AFORESAID DECISION S OF THE TRIBUNAL, WE UPHOLD THE DECISION OF T HE LEARNED COMMISSIONER (APPEALS) ON THE ISSUE. 15 . IN COURSE OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE HAS FURNISHED A CHART BEFORE US COMPUTING THE MARGIN OF THE REST OF THE COMPARABLES AFTER EXCLUSION OF VISHAL INFORMATION TECHNOLOGIES LTD. AND CEPH A IMAGING PVT. LTD. A S PER THE SAID CHART , AFTER EXCLUSION OF THE AFORESAID TWO COMPANIES, THE AVERAGE MARGIN OF THE REST OF THE COMPARABLES WORKS OUT TO 18.53%. ACCORDING TO THE LEARNED AUTHORISED REPRESENTATIVE, THE MARGIN SHOWN BY THE ASSESSEE WOULD FAL L WITHIN 5% RANGE OF THE ARITHMETIC MEAN OF THE REST OF THE COMPARABLES @ 18.53% REQUIRING NO FURTHER ADJUSTMENT. IN VIEW OF THE AFORESAID, GROUNDS NO.4, 5 AND 6, OF REVENUES APPEAL ARE DISMISSED . G ROUNDS NO.1, 7 AND 8, OF REVENUES APPEAL BEING GENERAL 10 PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. IN NATURE DO NOT REQUIRE ADJUDICATION. GROUNDS NO.2 AND 3 OF REVENUES APPEAL HAVING BECOME ACADEMIC ARE DISMISSED. 16 . IN THE RESULT, REVENUES APPEAL IS DISMISSED. 17 . INSOFAR AS ASSESSEES CROSS OBJECTION IS CONCERNED, GROUNDS NO.1 TO 5 ARE DISMISSED AS INFRU CTUOUS AND GROUND NO.6 IS ALLOWED. 18 . IN THE RESULT, ASSESSEES CROSS OBJECTION IS PARTLY ALLOWED. 19 . BEFORE PARTING, WE MUST OBSERVE, ISSUES RELATING TO OTHER COMPARABLES DIS PUTED BEFORE US BUT NOT DECIDED DUE TO THE REASONS MENTIONED ABOVE, ARE LEFT OPEN FOR ADJUDICATION IF THEY ARISE IN ANY OTHER ASSESSMENT YEAR IN FUTURE. 20 . TO SUM UP, REVENUES APPEAL IS DISMISSED AND ASSESSEES CROSS OBJECTION IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN C OURT ON 07.08.2019 SD/ - MANOJ KUMAR AGGARWAL ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 07.08.2019 11 PRUDENTIAL PROCESS MANAGEMENT SERVICES INDIA PVT. LTD. COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (ASSISTANT REGISTRAR) ITAT, MUMBAI