ACIT, Circle- 27(2), New Delhi V. WNS Business Consulting Services Pvt. Ltd., Mumbai

ITA 7439/DEL/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 4785 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I2
• Assessment Year: 2009-2010
• Appeal Filed On: 10-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M BARANWAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Rule 8D
• Section: 14A; 10B

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “I-2”: NEW DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND MS. ASTHA CHANDRA, JUDICIAL MEMBER ITA No. 7439/Del/2017 Asstt. Year : 2009-10 CO No. 40/Del/2018 Arising out of ITA 7439/Del/2017 Asstt. Year : 2009-10 ACIT, Circle-27(2) Room No. 194B, C.R. Building, I.P. Estate, New Delhi – 110002 Vs. WNS Business Consulting Services Pvt. Ltd. PL No. 10, Gate No. 4, Godrej & Boyce Complex, Pirojshanagar, LBS Marg, Vikhroli (West) Mumbai Maharashtra Pin 400 079 PAN AABCT8951H (Appellant) (Respondent) WNS Business Consulting Services Pvt. Ltd. Mantri Sterling, 2 nd Floor, Deep Bunglow Chowk, Model Colony, Shivaji Nagar, Pune, Maharashtra Pin 411004 PAN AABCT8951H Vs. ACIT, Circle-27(2) New Delhi (Appellant) (Respondent) Assessee by: Shri Tarandeep Singh, Advocate Department by : Shri M Baranwal, Sr. DR Date of Hearing 10.03.2022 Date of pronouncement 11.04.2022 ITA No. 7439/Del/2017 & CO No. 40/Del/2018 2 O R D E R PER ASTHA CHANDRA, JM The aforesaid appeal as well as cross objection (“CO”) has been filed by the Revenue and by the assessee against the order dated 26.07.2017 passed by the Ld. CIT(A)-38 Delhi (“CIT(A)”) pertaining to assessment year (“AY”) 2009-10. 2. The appeal of the Revenue is accompanied by an application for condonation of delay in filing the said appeal before the Tribunal. After considering the contents of the condonation application and facts narrated by the Ld. DR and in the absence of any objection raised by the Ld. AR, we condone the delay. 3. The only issue raised in the Revenue’s appeal as well as the CO is against the addition on account of transfer pricing adjustment in Information Technology enabled Services (ITeS) segment. 4. The assessee, WNS Business Consulting Services Pvt. Ltd. (formerly known as WNS Mortgage Services Pvt. Ltd.) is a wholly owned subsidiary of WNS North America Inc (“WNS NA”). The assessee is engaged in the business of provision of ITeS and development of computer software services to WNS NA. The assessee is a captive service provider and thus provides such services only to its Associated Enterprises (“AEs”). 4.1 During assessment year 2009-10, the assessee reported the following international transactions with its AEs:- Nature of transaction Total value of transaction (in Rs.) ITeS 4,36,63,774 ITA No. 7439/Del/2017 & CO No. 40/Del/2018 3 Software development services 7,28,522 As can be seen from the above table one of the international transactions reported by the assessee was the provision of ITeS with transaction value of Rs. 4,36,63,774/. The assessee applied the Transactional Net Margin Method (“TNMM”) as the most appropriate method to demonstrate that the international transaction of providing ITeS was at arm’s length price (“ALP”). As reported in the transfer pricing study the assessee used the Profit Level Indicator (“PLI”) of Operating Profit to Total Cost (OP/TC) and showed its operating profit margin under the ITeS Segment at 15%. The assessee chose 11 companies as comparable with their average of operating profit margin at 12.55% (Para 5.17.4 and 5.17.5 of the transfer pricing study report) and demonstrated that the international transaction of ITeS segment was at ALP required under the transfer pricing regulations. The assessee’s case was referred by the Ld. AO to the Ld. TPO for the determination of the ALP. 4.2 During the transfer pricing proceedings, the Ld. TPO after analysing the filters selected by the assessee, asked the assessee to conduct a fresh search for comparables pursuant to which the assessee arrived at the following set of 7 comparables which were not accepted by the Ld. TPO in toto. The list of these 7 comparable companies along with the TPO’s remarks is reproduced below :- Sl. No. Name of Companies TPO’s remarks 1. Aditya Birla Minacs Worldwide Ltd. This is an acceptable comparable 2. Cosmic Global Ltd. This is an acceptable comparable 3. Datamatics Software Solutions Ltd. Functionally different, persistent loss ITA No. 7439/Del/2017 & CO No. 40/Del/2018 4 4. Microgenetic Systems Ltd. This is an acceptable comparable 5. NSDL (ITES Seg.) Fails export filter 6. Spanco Ltd. (BPO seg.) This is not functionally comparable 7. In House Production Ltd.(Healthcare division segment) Fails export filter 4.3 Thereafter, the Ld. TPO proceeded to conduct a fresh search and arrived at the set of 16 comparable companies with average operating profit margin of 58.55%. After considering certain exclusions and inclusions based on various details furnished by the assessee, the Ld. TPO in Para 11 of his order concluded the final set of comparables comprising of 7 companies with their respective profit margins as under :- Sl. No. Comparables OP/OC 1. Accentia Technologies Ltd. 52.52% 2. Aditya Birla Minacs Worldwide Ltd. 11.95% 3. Cosmic Global Ltd. 50.70% 4. Crossdomain Solution Pvt. Ltd. 25.63% 5. Coral Hub 37.03% 6. Jeevan Softech 44.32% 7. Microgenetic Systems Ltd. (-) 0.18% AVERAGE 31.71% 4.3 In this way the Ld. TPO worked out average profit margin of the above 7 comparable companies at 31.71%. This resulted into the transfer pricing ITA No. 7439/Del/2017 & CO No. 40/Del/2018 5 adjustment of Rs. 1,78,63,746/- on transaction of provision of ITeS, for which equal amount of addition was made by the AO in his final order. 5. On appeal, before the CIT(A) the assessee objected to the inclusion of the following three companies amongst others as comparables :- (i) Accentia Technologies Ltd. (ii) Coral Hub Ltd. (iii) Cosmic Global Ltd. After considering the detailed submissions of the assessee and relying on various decisions of jurisdictional Delhi ITAT and Hon’ble Delhi High Court, the Ld. CIT(A) directed the Ld. AO to exclude the aforementioned three companies from the list of comparable companies. The other comparables included by the Ld. AO/TPO were not considered by the Ld. CIT(A) on the ground that if the above three comparables are excluded from the list of comparables (alongwith other contentions regarding erroneous margin computation of the assessee and claim for working capital adjustment), then the inclusions/exclusions in respect of other comparables becomes academic. 5. Aggrieved, the Revenue is before us challenging the exclusion of Accentia Technologies Ltd., Coral Hub Ltd. and Cosmic Global Ltd. by the Ld. CIT(A) from the list of comparable companies. 6. We will now proceed to examine each of these comparable companies. (i) Accentia Technologies Ltd. 6.1 The Ld. DR strongly relied upon the order of the Ld. TPO and drew our attention to the Ld. TPO’s comments for rejecting the objection raised by the assessee against inclusion of this company in the list of comparables. The objections of the assessee and the TPO’s remarks as recorded in para 8 page 24-25 of the TPO’s order is reproduced below :- ITA No. 7439/Del/2017 & CO No. 40/Del/2018 6 S. No. Name of the Company Objections of the assessee Remarks of this office 1. Accentia Technologies Ltd. The assessee’s arguments for rejection on the grounds that the company is not functionally comparable. The objection is not acceptable as the services offered by the company are ITES services may be to a different sector in comparison to that of the assessee, but in TNMM so much of minor difference can be tolerated as TNMM allows some degree of flexibility and tolerance in the matter of selection of comparables because, under this method, Net Margins are compared and some amount of functional dissimilarity can be tolerated at the net margin level, i.e., to a certain extent, functional dissimilarities are subsumed and taken care of at the net margin level. Therefore, it is an appropriate comparable. 6.2 The Ld. AR submitted that there were certain extraordinary events that took place in this company in the form of mergers and acquisitions in ITA No. 7439/Del/2017 & CO No. 40/Del/2018 7 the relevant financial year and hence this company should not be considered as a comparable company. He further placed reliance on the submissions made by the assessee before the Ld. CIT(A) which are recorded by him in para 6.1.1.1 of his order and pleaded for exclusion of this company on the ground of functional dissimilarity and high turnover of this company as compared to that of the assessee. He submitted that the case of the assessee is squarely covered by several decisions of the jurisdictional Delhi ITAT and Hon’ble Delhi High Court for AY 2009-10 itself wherein this company has been held to be a non-comparable company. 6.3 We have heard the Ld. Representative of the parties and perused the material on record as well as the orders of the Ld. TPO/AO/CIT(A). In the light of the detailed submissions of the assessee and various judicial precedents in support of its contention, the Ld. CIT(A) directed the Ld. AO/TPO to exclude this company from the list of comparable companies by recording the following finding :- “6.1.1.2. I have perused the submission of appellant and the Annual Report of the Company for FY 2008-09. It is observed that Accentia is engaged in several mergers and acquisitions during the said year. Besides, the company is functionally different vis-a-vis the Appellant, being engaged in software services and products and KPO services (which are not comparable to IT- enabled Services rendered by the Appellant). This viewpoint has also been upheld in several rulings for AY 2009-10, including Delhi ITAT rulings in the case of Sun Life India, Xchanging Technology and Macquarie Global. Accordingly, the AO/TPO is directed to exclude this company from the list of comparable companies.” 6.4 The case of the assessee is supported by several decisions of the Jurisdictional ITAT and Hon’ble Delhi High Court wherein it has consistently been held that a company cannot be considered as comparable because of exceptional financial results due to mergers, demergers etc, one ITA No. 7439/Del/2017 & CO No. 40/Del/2018 8 of such comparable companies considered by the authorities/ courts being Accentia Technologies Ltd. The Delhi High Court in the case of PCIT vs. Ameriprise India Pvt. Ltd. (ITA 461/2016) has upheld the finding of the Tribunal that M/s. Accentia Technologies Ltd. be excluded from the list of comparables on the ground that certain events had occurred during the previous periods which distorted the profitability thereby increasing the margin. The Ld. TPO in his order has made a remark that certain amount of functional dissimilarity is subsumed in TNMM at net margin level and hence this company is an appropriate comparable. We are unable to subscribe to this view of the Ld. TPO. In our opinion, this indicates that the Ld. TPO himself is somewhere convinced that functions performed by this company are different than that of the assessee. The Ld. CIT(A) has categorically recorded the finding that this company is functionally different than that of the assessee after looking at the annual report of this company and the information available in public domain submitted by the assessee before him. We notice that the Ld. CIT(A) directed to exclude this company as a comparable after recording cogent reasons backed with precedents. We, therefore do not find any reason to interfere with the findings of the Ld. CIT(A) and uphold his view. (ii) Coral Hub Limited 7.1 The Ld. DR strongly relied upon the order of the Ld. TPO and drew our attention to the Ld. TPO’s comments for rejecting the objection raised by the assessee against inclusion of this company in the list of comparables. The objections of the assessee and the TPO’s remarks as recorded in para 8 page 25-26 of the TPO’s order is reproduced below :- Sl. No. Name of the Company Objections of the assessee Remarks of this office 4. Coral Hubs Ltd. (Also known as Vishal The assessee’s arguments for From the annual report it is gathered that the company ITA No. 7439/Del/2017 & CO No. 40/Del/2018 9 Information Technologies Ltd.) rejection relate to different business model, low employee cost, functionality difference etc. is actually outsourcing some of its services. The payment to vendors is very much part of the expenses. Recently, ITAT, Hyderabad in the case of Deolitte Consultant Pvt. Ltd. has upheld the inclusion of this company. In that case also exactly similar plea was taken by the taxpayer. Rejecting the taxpayer’s objection the ITAT held as under : “It appears that the VITL has outsourced the manpower and the cost of outsourcing appears to have been included in the other heads of the expenditure instead of wages-employee cost. Moreover, the intangibles will not materially affect the price or profit earning. By outsourcing the manpower, the VITL would have incurred more cost compared to the assessee company, thus resulting in lesser operating profit. But, ITA No. 7439/Del/2017 & CO No. 40/Del/2018 10 In support of the Ld. TPO’s remarks extracted above, the Ld. DR argued that even if this company is outsourcing its services to third parties, it is still having considering the findings of the TPO, we find that the intangibles or outsourcing the manpower will not materially affect the price or profit margin. In our considered opinion, no two comparable companies can be replicas of each other. The application of Rule 10B should be carried out and judged not with technical rigor, but on a broader prospective. In this view of the matter, we find no infirmity in the order of the CIT(A) in confirming the action of the TPO by selecting the VITL as comparable company.” Minor functionality differences, if any, are tolerated in TNMM as already discussed above. Hence the company is retained as a comparable. ITA No. 7439/Del/2017 & CO No. 40/Del/2018 11 incurring personnel costs forming part of the other expenses of the company. 7.2 The Ld. AR argued that this company is not comparable as unlike the assessee this company is outsourcing its services to third parties thereby resulting in low employee cost as compared to that of the assessee. In support of its contention the Ld. AR relied on the judgment of the Hon’ble Delhi High Court in Rampgreen Solutions (P.) Ltd. vs. CIT [2015] 377 ITR 533 (Delhi). The Ld. AR further submitted that this company should not be included on account of significant intangibles owned by this company. 7.3 We have heard the Ld. Representative of the parties and perused the material on record as well as the orders of the Ld. TPO/AO/CIT(A). The Ld. CIT(A) after considering the detailed submissions made by the assessee in respect of exclusion of this company and various judicial pronouncements relied upon by the assessee in support thereof, directed the Ld. AO/TPO to exclude this company from the list of comparable companies by recording the following finding :- “6.1.2.2. I have perused the submission of appellant and the Annual Report of the Company for FY 2008-09. It is observed that Coral Hub is engaged in outsourcing of business operations. It is also noted that the Appellant does not outsource any part of its operations to any third-party whatsoever. This viewpoint has also been upheld in several rulings for AY 2009-10, including Delhi ITAT and Hon’ble High Court rulings in the cases of Sun Lift India, Macquarie Global and Xchanging Technology. Thus, the Appellant’s claim in respect of this company is allowed and the AO/TPO is directed to exclude this company from the list of comparable companies.” 7.4 It is apparently evident from the above that the Ld. CIT(A) directed for exclusion of this company after recording cogent reason backed with precedents. We, therefore, do not find any infirmity in the finding of the Ld. ITA No. 7439/Del/2017 & CO No. 40/Del/2018 12 CIT(A). As rightly pointed out by the Ld. AR, the case of the assessee also finds support by the judgment of the Jurisdictional High Court in Rampgreen Solutions (P.) Ltd. (supra) wherein the Hon’ble Court held as under :- “38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity. 39. It is also relevant to note that in the case of Maersk Global Centers (India) (P.) Ltd. (supra), the DRP itself had accepted the objection of the Assessee and had excluded Vishal as a comparable for the reason as quoted below:— "... that it had a very low employment cost and very high cost on account of venture payment, which suggested that its business model was that of an outsourcing company and in view of this functional difference, Vishal Ltd. could not be considered as a comparable." Based on the above, we uphold the order of the Ld. CIT(A) and direct the Ld TPO/ AO to exclude Coral Hub Ltd. from the list of comparable companies. (iii) Cosmic Global Ltd. ITA No. 7439/Del/2017 & CO No. 40/Del/2018 13 8.1 The Ld. DR argued that this company was chosen by the assessee itself as comparable and that no objection before the Ld. TPO was taken by the assesee against its inclusion during the transfer pricing proceedings. The assessee challenged the inclusion of this company as comparable for the first time before the Ld. CIT(A). Therefore the claim of the assessee for the exclusion of this company being incomparable for the various reasons cited before the Ld. CIT(A), is not sustainable in law. 8.2 The Ld. AR argued that this company was wrongly chosen by the assessee and that there can be no estoppel against the provisions of the Act. In support, the Ld. AR relied on the decision of the Special Bench of the Tribunal in Dy. CIT vs. Quark System (P.) Ltd. (2010) 38 SOT 307. So far as the comparability of this company viz-a-viz the assessee is concerned, the Ld. AR relied on the submissions of the assessee made before the Ld. CIT(A) for excluding this company as comparable and the findings of the Ld. CIT(A) in respect thereof. 8.3 We have heard the Ld. Representative of the parties and perused the material on record as well as the orders of the Ld. TPO/AO/CIT(A). The very first contention of the Ld. AR is that even if the assessee did not take up the issue of considering this company as comparable during the transfer pricing proceedings, the assessee cannot be prohibited from adopting a different stand later before the appellate authorities. We agree with the contention of the Ld. AR in view of the decision of the Special Bench of the Tribunal in the case of Quark Systems (P.) Ltd. (supra) wherein the Hon’ble Bench held the company which was included by the assessee and also by the Ld. TPO in the list of comparables at the time of computing arm’s length price can be excluded by the Tribunal, if the assessee proves that the same was wrongly included. ITA No. 7439/Del/2017 & CO No. 40/Del/2018 14 8.4 From the perusal of the Ld CIT(A)’s order, we notice that before the Ld. CIT(A) the assessee has submitted that this company is functionally different from that of the assessee and outsources major part of its work and that this company had an exceptional performance, high turnover, abnormal profits in the relevant assessment year. Hence, this company should not be considered as comparable to that of the assessee. The Ld. CIT(A) after considering the detailed submissions made by the assessee in respect of exclusion of this company and various judicial pronouncements relied upon by the assessee in support thereof, directed the Ld. AO/TPO to exclude this company from the list of comparable companies by recording the following finding :- “6.1.3.2 I have perused the submission of appellant and the Annual Report of the Company for FY 2008-09 and it is observed that Cosmic Global is engaged in outsourcing of business operations. It is also noted that the Appellant does not outsource any part of its operations to any third-party whatsoever. This point has also been upheld in several rulings for AY 2009- 10, including Delhi ITAT and High Court rulings in the cases of Sun Life India and Xchanging Technology. Accordingly, the Appellant’s claim in respect of this company is allowed and the AO/TPO is directed to exclude this company from the list of comparable companies.” The Ld. CIT(A) arrived at his final conclusion to exclude this company by recording cogent reasons supported by precedents based on aforementioned submissions of the assessee and material on record. Hence, we endorse the findings of the Ld. CIT(A) and accordingly hold that this company be excluded from the list of comparable companies. 9. Accordingly, we conclude that there is no merit in the appeal of the Revenue as we have endorsed the findings of the Ld. CIT(A) in the matter of exclusion of the aforementioned three companies from the list of comparable companies. The Ld. AO / TPO is, therefore directed to determine the ALP of ITA No. 7439/Del/2017 & CO No. 40/Del/2018 15 the international transaction of “provision of ITeS” afresh in consonance with our above directions. 10. In the result, the appeal of the Revenue is dismissed. CO No. 40/Del/2018 11. The assessee has filed Cross Objection (“CO”) in the above appeal ITA No. 7349/Del/2017 of the Revenueon the following grounds :- “On the facts and in the circumstances of the case, the learned Transfer Pricing Officer–II(6) / Assistant Commissioner of Income Tax-27(2) [‘Assessing Officer’] have - 1. erred in alleging that the operating margin earned by the Respondent for its IT enabled services transaction is not at arm’s length; 2. erred in not appreciating that the Respondent is an information technology enabled services provider engaged in provision of Business Process Outsourcing, whereas Accentia Technologies Limited is engaged in provision of software services and Knowledge Process Outsourcing and is accordingly functionally different from the Respondent; 3. erred in not appreciating that events such as mergers and acquisition have an impact on the profitability of Accentia Technologies Limited and in view of such events hence render the same non-comparable; 4. erred in objecting to the exclusion of Accentia Technologies Limited from the set of companies considered to be comparable to the Respondent, basis various decisions of the Hon’ble Income tax Appellate Tribunal (‘ITAT’), by the Hon’ble Commissioner of Income Tax Appeals – 38 (‘CIT- A’); 5. erred in appreciating that Coral Hub Limited outsources its business operations is accordingly functionally different from the Respondent; ITA No. 7439/Del/2017 & CO No. 40/Del/2018 16 6. erred in objecting to the exclusion of Coral Hub Limited from the set of companies considered to be comparable to the Respondent, basis various decisions of the Hon’ble ITAT, by the Hon’ble CIT-A; 7. erred in not appreciating that Cosmic Global Limited outsources its business operations is accordingly functionally different from the Respondent; 8. erred in objecting to the exclusion of Cosmic Global Limited from the set of complies considered to be comparable to the Respondent, basis various decisions of the Hon'ble ITAT, by the Hon’ble CIT-A; 9. erred in disallowing an amount of INR 433,604 under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 while computing the income chargeable to tax for the subject assessment year without applying surplus own funds. The learned AO has failed to appreciate the fact that the Appellant has suo moto offered an amount of INR 300,000 to tax in its return of income as expenditure incurred towards earning income which is exempt from tax under the Act. 10. Notwithstanding ground no. 9, even where any disallowance is sought to be made in terms of Section 14A of the Act, the Appellant is duly entitled to claim benefits under Section 10A of the Act on the same.” 12. The Ld. AR submitted before us that the cross-objections raised in Ground No. 1 to 8 are in support of the order of the Ld. CIT(A) and therefore need not be adjudicated upon. 13. Ground 9 and 10 relate to disallowance under section 14A read with rule 8D on account of exemption claimed on dividend income. We note from the Ld. CIT(A)’s order that the assessee has suo moto offered Rs. 3 lakhs to tax as expenditure incurred towards earning exempt income. Thus, the grievance of the assessee is restricted to Rs. 1,33,608/- (which is difference between the actual disallowance by the Ld. AO of Rs. 4,33,604/- and the amount that has already been offered to tax by the assessee i.e. Rs. 3,00,000/-). The Ld. AR did not press this ground due to the smallness of ITA No. 7439/Del/2017 & CO No. 40/Del/2018 17 the amount involved and therefore we have not adjudicated upon the same. Having said that, we clarify that this ground of cross-objection be not treated as decided against the assessee. The assessee reserves its right to argue this ground in succeeding years. 14. In the result, CO of the assessee is allowed for statistical purposes. Order pronounced in the open court on 11 th April, 2022. sd/- sd/- (R.K. PANDA) (ASTHA CHANDRA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 11/04/2022 Veena Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order ITA No. 7439/Del/2017 & CO No. 40/Del/2018 18 Date of dispatch of the Order