Addl. CIT, New Delhi V. M/s. Axis Risk Consulting Services Pvt. Ltd., Delhi

ITA 74/DEL/2017

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1752 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 11 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 04-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: VISHAL KALRA MS REEMA MALIK
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.74/DEL./2017 (ASSESSMENT YEAR : 2011-12) ADDL.CIT, SPL. RANGE 1, VS. M/S. AXIS RISK CONSULT ING SERVICES NEW DELHI. PVT. LIMITED, DELHI INFORMATION TECHNOLOGY PARK, SHASTRI PARK, DELHI 110 053. (PAN : AAECA9833G) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VISHAL KALRA, ADVOCATE MS. REEMA MALIK, CA REVENUE BY : SHRI SANJAY I. BARA, CIT DR DATE OF HEARING : 20.11.2019 DATE OF ORDER : 10.12.2019 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER THE APPELLANT, ADDL. COMMISSIONER OF INCOME-TAX, S PECIAL RANGE 1, NEW DELHI (HEREINAFTER REFERRED TO AS THE REVENUE) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE I MPUGNED ORDER DATED 30.08.2015 PASSED BY THE COMMISSIONER OF INCO ME-TAX (APPEALS)-44, NEW DELHI IN AN APPEAL CHALLENGING TH E ORDERS PASSED BY THE LD. TPO/AO QUA THE ASSESSMENT YEAR 20 11-12 ON THE GROUNDS INTER ALIA THAT :- ITA NO.74/DEL/2017 2 1. LD. CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG TRANSFER PRICING OFFICER TO INCLUDE R. SYSTEM INTERNATIONAL LTD. IN COMPARABLE, SINCE THE DATA OF M/S R SYSTEM INTERNAT IONAL LTD. IS NOT AVAILABLE FOR FINICAL YEAR 2010-11 AND AUDITED RECASTING OF DATA MAY DISTORT THE PROFITABILITY. 2. LD. CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI ONS THE AO/TPO TO APPLY NIL RATE AS ARM'S LENGTH INTEREST R ATE ON OUTSTANDING RECEIVABLES FROM AE AS IN IDENTICAL FAC TS IN ASSESSEE'S OWN CASE FOR A.Y. 2010-11. THE DRP HAS U PHELD SUCH ADJUSTMENTS. 3. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. AXIS RISK CONSULTING SERVICES PVT. LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) WA S INCORPORATED AS A PRIVATE LIMITED COMPANY IN INDIA AND IS A WHOLLY OWNED SUBSIDIARY OF GENPACT INDIA HOLDING (MAURITIUS), WH ICH IN TURN ULTIMATELY HELD BY GENPACT LTD., BERMUDA. THE TAXP AYER OPERATES AS AN INFORMATION TECHNOLOGY ENABLED CONSULTANCY SO LUTIONS PROVIDER RENDERING INTEGRATED RISK AND TECHNOLOGY S OLUTIONS. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER ENTE RED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISE (AE) AS REPORTED IN FORM 3CEB ASUNDER :- DESCRIPTION OF THE TRANSACTIONS AMOUNT (RS.) PROVISION OF CONSULTANCY SERVICES 283,665,015 COST RECHARGE 9,602,346 REIMBURSEMENT OF EXPENSES 48,642,007 4. THE TAXPAYER IN ITS TP ANALYSIS APPLIED TRANSAC TIONAL NET MARGIN METHOD (TNMM) WITH OPERATING PROFIT/OPERATIN G COST (OP/OC) AS PROFIT LEVEL INDICATOR (PLI) AS MOST APP ROPRIATE ITA NO.74/DEL/2017 3 METHOD (MAM) FOR BENCHMARKING THE INTERNATIONAL TRA NSACTIONS QUA PROVISION OF CONSULTANCY SERVICES. LD. TPO, DU RING ITS TP ANALYSIS, NOTICED THAT THE TAXPAYER HAS REIMBURSED EXPENSES TO THE TUNE OF RS.4,86,42,007/- WITHOUT ANY MARK-UP NOR TH E SAME HAS BEEN ROUTED THROUGH PROFIT & LOSS ACCOUNT OF THE TA XPAYER. CONSEQUENTLY, TPO TREATED THE REIMBURSEMENT EXPENSE S AS PART OF THE TOTAL COST BASE AND PROCEEDED TO COMPUTE THE OP ERATING PROFIT MARGIN OF THE TAXPAYER AT 23.39% BY MAKING COMPUTAT ION AS UNDER:- PARTICULARS AMOUNT INCOME FROM CONSULTANCY SERVICES 401,960,248 REIMBURSEMENT RECEIVED 48,642,007 OPERATING INCOME 450,602,255 PERSONAL EXPENSES 227,535,858 OPERATING AND ADMINISTRATIVE EXPENSES 80,923,087 LESS FOREIGN EXCHANGE LOSS (NET) (498,709) BANK CHARGES (21,888) DEPRECIATION AND AMORTIZATION 8,612,748 REIMBURSEMENT RECEIVED 48,642,007 TOTAL COST (TC) 365,193,103 OPERATING PROFIT (OP) 85,409,152 OP/TC 23.39% ADD OTHER INCOME 771,957 LESS FOREIGN EXCHANGE LOSS (NET) 498,709 BANK CHARGES 21,888 FINANCE CHARGES 14,580,770 PROFIT BEFORE TAX AS PER PROFIT AND LOSS ACCOUNT 71,079,742 ITA NO.74/DEL/2017 4 5. TPO, AFTER APPLYING VARIOUS FILTERS, REJECTED TW O COMPARABLES OUT OF 11 COMPARABLES SELECTED BY THE TAXPAYER, INT RODUCED 6 NEW COMPARABLES TO BENCHMARK THE INTERNATIONAL TRANSACT IONS QUA PROVISION OF CONSULTANCY SERVICES. FINAL LIST OF C OMPARABLES SELECTED BY THE TPO WITH COMPUTATION OF AVERAGE PLI IS AS UNDER:- S.NO. COMPANY NAME OP/TC (%) 1 JINDAL INTELLICOM LTD. 13.70 2 ACCENTIA TECHNOLOGY LTD. 29.18 3 ACROPETAL TECH LTD. (SEG.) 14.36 4 E4E HEALTHCARE BUSINESS SERVICES PVT. LTD. 9.77 5 ECLERX SERVICES LTD. 56.82 6 ICRA TECHNO ANALYTICS LTD. 25.24 7 INFOSYS BPO LTD. 17.86 8 TCS E-SERVE LTD. 69/31 AVG 29.53% 6. CONSEQUENTLY, AO PROPOSED THE ADJUSTMENT QUA PRO VISION OF ITES AND RECEIVABLES AS UNDER :- 15. THE CUMULATIVE ADJUSTMENT MADE IN THIS CASE IS TABULATED BELOW :- S. NO. NATURE OF INTERNATIONAL TRANSACTION ALP DETERMINED ALP DETERMINED BY THE TPO (INR) ADJUSTMENT U/S 92CA (INR) 1. PROVISION OF IT ENABLED SERVICES 450602255 473034626 22432371 2 RECEIVABLES NIL 33,73,224 33,73,224 TOTAL 2,58,05,595 THE ASSESSING OFFICER WILL ACCORDINGLY ENHANCE THE INCOME OF THE TAXPAYER BY RS.2,58,05,595/-. THIS SHALL BE TREATE D AS THE CUMULATIVE ADJUSTMENT U/S 92CA. 7. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. C IT (A) BY WAY OF FILING APPEAL, WHO HAS DELETED THE ADDITION MADE BY THE TPO/AO ON ACCOUNT OF TP ADJUSTMENT BY PARTLY ALLOWI NG THE SAME. ITA NO.74/DEL/2017 5 FEELING AGGRIEVED, THE REVENUE HAS COME UP BEFORE T HE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUND NO.1 9. UNDISPUTEDLY, THE TPO AS WELL AS LD. CIT (A) HAV E ACCEPTED TNMM WITH OP/TC AS PLI AS MAM APPLIED BY THE TAXPAY ER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS QUA PROVIS ION OF CONSULTANCY SERVICE. NOW, THE REVENUE HAS CHALLENG ED THE ORDER PASSED BY THE LD. CIT (A) ONLY TO THE EXTENT THAT T HE LD. CIT (A) HAS ERRED IN LAW AND FACTS DIRECTING THE TPO TO INCLUDE M/S. R SYSTEM INTERNATIONAL LTD. AS A COMPARABLE TO BENCHMARK THE INTERNATIONAL TRANSACTIONS ON THE GROUND THAT THE DATA OF THIS CO MPANY IS NOT AVAILABLE FOR FY 2010-11 AND AUDITED RECASTING OF D ATA MAY DISTORT THE PROFITABILITY. 10. WHEN WE EXAMINE THE ORDER PASSED BY THE TPO HE HAS APPLIED DIFFERENT YEAR ENDING FILTER AS UNDER :- HENCE, WHEREVER A COMPANYS ACCOUNTING PERIOD IS N OT ENDED WITH 31.03.2011 AND THE DATA IS NOT AVAILABLE/SUBMI TTED FOR 12 MONTH PERIOD FROM 01.04.2010 TO 31.03.2011, THE COM PANY IS NOT CONSIDERED AS COMPARABLE AS THE INTERNATIONAL TRANS ACTIONS OF THE TAXPAYER HAVE BEEN ENTERED INTO DURING THE FY 2010- 11 COVERING THE PERIOD FROM 01.04.2010 TO 31.03.2011. ITA NO.74/DEL/2017 6 11. TPO BY APPLYING THE AFORESAID FILTER REJECTED M /S. R SYSTEM INTERNATIONAL LTD. AS COMPARABLE ON THE GROUND THAT THIS COMPANY IS HAVING DIFFERENT FINANCIAL YEAR ENDING I.E. DECEMBE R. LD. CIT (A) DEALT WITH THIS ISSUE AS TO REJECTION OF M/S. R SYS TEM INTERNATIONAL LTD. BY THE TPO BY RECASTING THE PERIOD OF 01.04.20 14 TO 31.03.2011 BY ADDING QUARTER ENDING 31.03.2011 AND DELETING THE QUARTER ENDING ON 31.03.2010 ON THE BASIS OF AUDITE D QUARTERLY RESULTS AND AUDITED FINANCIAL RESULTS AND ORDERED T O INCLUDE M/S. R SYSTEM INTERNATIONAL LTD. IN THE FINAL SET OF COMPA RABLES AND DIRECTED THE AO/TPO TO RECOMPUTE THE AVERAGE PLI BY RETURNING FOLLOWING FINDINGS :- 7 LD AR GAS FILED AUDITED FINANCIALS AND QUARTERL Y RESULTS WHICH SHOWS THAT THE FINANCIAL DATA OF R SYSTEMS PV T. LTD. HAS AVAILABLE IN PUBLIC DOMAIN. I RELY ON THE JUDGMENT OF HON'BLE DELHI TRIBUNAL IN THE CASE OF MERCER CONSULTING (IN DIA) PUT. LTD. VS. DCIT (ITA NO. 966/DEL/2014) TO INCLUDE R SYSTEM S INTERNATIONAL LTD. FOR IT SEGMENT. RESPECTFULLY, FO LLOWING THE DECISION OF HON'BLE TRIBUNAL IN THE CASE THAT MERCE R CONSULTING CITED SUPRA, I DIRECT THE AO /TPO TO INCLUDE R SYST EMS INTERNATIONAL LTD. (ITS SEGMENT), IN THE FINAL LIST OF COMPARABLES. AS THE LD AR HAS ARGUED THAT EVEN ONLY THIS COMPARABLE NAMELY R SYSTEMS LTD. INTERNATIONAL LTD. IS INCLUDED IN THE FINAL LIST, OPERATING MARGIN EARNED BY THE A PPELLANT WILL FALL WITHIN THE ARMS LENGTH, THERE IS NO NEED TO AD JUDICATE ALL OTHER COMPARABLES. LD AO /TPO AS DIRECTED TO RECOMP UTE AVERAGE PLI OF THE COMPARABLES AFTER INCLUDING R SY STEM INTERNATIONAL LTD. (ITS SEGMENT) 12. WHEN FINANCIAL RESULTS ARE AVAILABLE IN THE PUB LIC DOMAIN AND RESULT OF M/S. R. SYSTEMS INTERNATIONAL LTD. HAS BE EN RECASTED ON THE BASIS OF AUDITED QUARTERLY RESULT AND AUDITED F INANCIAL RESULTS, ITA NO.74/DEL/2017 7 WE ARE OF THE CONSIDERED VIEW THAT NO ERROR HAS BEE N COMMITTED BY THE LD. CIT (A). SO, WE FIND NO GROUND TO INTERFER E INTO THE FINDINGS RETURNED BY THE LD. CIT (A) ON THIS ISSUE, HENCE GROUND NO.1 IS DETERMINED AGAINST THE REVENUE. GROUND NO.2 13. TPO, AFTER REJECTING THE CONTENTIONS RAISED BY THE TAXPAYER IN ITS REPLY DATED 13.11.2014 THAT BENCHMARKING OF REC EIVABLES ON THE GROUND THAT RECEIVABLES WERE NOT SEPARATE INTERNATI ONAL TRANSACTIONS, RECHARACTERISATION WAS NOT PERMITTED, NON-APPLICATION OF SBI BASE RATE FOR BENCHMARKING ETC. AND HAS GIVE N INVOICE DETAILS OF RECEIVABLES ALONG WITH THEIR DURATION, P ROCEEDED TO APPLY THE INTEREST @ 11.69% TO BRING THE TRANSACTIONS QUA RECEIVABLES AT ARMS LENGTH BY DEEMING THE RECEIVABLES OUTSTANDING BEYOND THE PERIOD STIPULATED IN THE SERVICE AGREEMENT/INVOICE AS DEEMED LOAN ADVANCED. 14. UNDISPUTEDLY, DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER HAS ENTERED INTO TRANSACTIONS WITH AE AS W ELL AS NON-AE. LD. CIT (A) DELETED THE ADDITION MADE ON ACCOUNT OF ADJUSTMENT ON THE INTEREST OF RECEIVABLES BY RELYING UPON DECISIO N RENDERED BY THE TRIBUNAL IN CASE OF INDO AMERICAN JEWELLERY LTD. VS . DCIT (ITA NO.5872/MUM/2009), WHICH HAS BEEN UPHELD BY HONBLE HIGH COURT IN ITA NO.1053 OF 2012 . HOWEVER, LD. AR FOR THE TAXPAYER ITA NO.74/DEL/2017 8 CONTENDED THAT THIS ISSUE IS ENTIRELY COVERED BY TAXPAYERS OWN CASE IN ITA NO.3693/DEL/2014 FOR AY 2009-10 ORDER D ATED 22.02.2018 THEREBY IDENTICAL ADDITION MADE ON ACCOUNT OF DELA Y OF RECEIVABLES FOR THE SAME PERIOD HAS BEEN DELETED. 15. WE HAVE PERUSED THE ORDER PASSED BY THE COORDIN ATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2009-10 (SUPRA) WHICH HAS CONSIDERED THE PERIOD OF OUTSTANDING RECE IVABLES RANGING FROM 38 DAYS TO 1718 DAYS AND IN MOST OF THE INVOIC ES, AVERAGE DELAY IS MORE THAN 300 DAYS AND PROCEEDED TO HOLD T HAT NO INTEREST CAN BE IMPUTED ON RECEIVABLES WITH AE. OPERATIVE F INDINGS OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR READY PERUSAL A RE AS UNDER :- 8. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE RELEVANT FINDINGS AND MATERIAL PLACED ON RECORD , THE ONLY DISPUTE BEFORE US IS WITH REGARD TO THE ADJUSTMENT BY WAY OF IMPUTING INTEREST @ 17.22% BY THE TPO ON ACCOUNT OF RECEIVABLES FROM THE AE. HERE IN THIS CASE, IT IS A N UNDISPUTED FACT THAT THE ASSESSEE HAS ALSO RENDERED SIMILAR SE RVICES TO NON AES/UNRELATED PARTIES AND ON RECEIVABLES FROM THE N ON AES ALSO, THERE HAVE BEEN DELAYS ON RECEIVABLES ON WHICH NO I NTEREST HAS BEEN CHARGED BY THE ASSESSEE. BEFORE US, INVOICE WI SE DETAILS HAVE BEEN FURNISHED HIGHLIGHTING THE DETAILS OF AMOUNT O F THE INVOICE DATE; DATE OF RECEIPT AND THE NUMBER OF OUTSTANDING DAYS FOR THE PAYMENT HAS BEEN GIVEN. FROM SUCH DETAILS, IT IS SE EN THAT IN THE CASE OF UNRELATED PARTY TRANSACTION, THERE ARE HUGE DELAYS AND IN SOME CASES IT HAS GONE UP MORE THAN 1700 DAYS. THE PERIOD OF OUTSTANDING RECEIVABLES IS RANGING BETWEEN 38 DAYS TO 1718 DAYS AND IN MOST OF THE INVOICES, AVERAGE DELAY IS MORE THAT 300 DAYS. IF THERE ARE SIMILAR NATURE OF TRANSACTION WITH COM PARABLE UNCONTROLLED TRANSACTIONS AND ALSO WITH RELATED PAR TIES, THEN THERE IS AN INTERNAL CUP TO BENCH MARK THE CONTROLL ED TRANSACTION WITH COMPARABLE UNCONTROLLED TRANSACTIO N. UNDER CUP PRICE CHARGED OR PAID FOR THE SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION IS TAKEN INTO C ONSIDERATION AND IT IS THE ADJUSTED PRICE PAID FOR AVAILING SERV ICES WHICH CONSTITUTES THE BENCHMARK FOR COMPARISON WITH THE P RICE PAID FOR ITA NO.74/DEL/2017 9 AVAILING OF ANY SERVICES IN AN INTERNATIONAL TRANSA CTION. IF THERE ARE SIMILAR TRANSACTIONS OF SERVICES WITH RELATED P ARTIES AS WELL AS UNRELATED PARTIES AND THE PRICE CHARGED OR PAID ARE COMPARABLE, THEN IT IS TAKEN TO BE AT ARMS LENGTH PRICE. THUS, IF UNDER BOTH THE SCENARIOS, NO INTEREST HAS BEEN CHARGED ON SIMI LAR NATURE OF RECEIVABLES, THEN IT HAS TO BE RECKONED THAT THE TR ANSACTION WITH THE RELATED PARTY MEETS THE ARMS LENGTH REQUIREMEN T VIS--VIS, THE TRANSACTIONS WITH THE UNRELATED THIRD PARTIES. ACCORDINGLY, WE HOLD THAT NO INTEREST CAN BE IMPUTED ON RECEIVABLES WITH THE AE AND ACCORDINGLY, THE ADDITION MADE BY THE TPO IS DI RECTED TO BE DELETED. 16. FOLLOWING THE ORDER PASSED BY THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2009-10 (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT IN THE INSTANT CASE, THE PERIOD OF OUTSTANDING RECEIVABLES IS RANGING BETWEEN 25 DAYS TO 365 DAYS AND FACTS AND C IRCUMSTANCES ARE IDENTICAL, SO NO INTEREST CAN BE CHARGED ON THE RECEIVABLES WITH AES, HENCE LD. CIT (A) HAS RIGHTLY ORDERED TO DELET E THE ADDITION. CONSEQUENTLY, GROUND NO.2 IS DETERMINED AGAINST THE REVENUE. 17. RESULTANTLY, THE APPEAL FILED BY THE REVENUE IS DISMISSED. O RDER PRONOUNCED IN OPEN COURT ON THIS 10 TH DAY OF DECEMBER, 2019. SD/- SD/- (N.K. BILLAIYA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 10 TH DAY OF DECEMBER , 2019 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-44, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.