Watanmal (India) Pvt. Ltd., CHENNAI V. DCIT Corporate Circle 3(2), CHENNAI

ITTPA 4/CHNY/2018

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 2801 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 6 month(s) 21 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 15-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 04-09-2022
• Assessment Year: 2006-2007
• Appeal Filed On: 25-02-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; Set aside
• Section: 148; 143(3); 143(1); 13

Judgement Text

आयकर अपीलीय अिधकरण, ’डी’ Ɋायपीठ, चेɄई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ŵी वी दुगाŊ राव Ɋाियक सद˟ एवं ŵी जी. मंजुनाथा, लेखा सद˟ के समƗ Before Shri V. Durga Rao, Judicial Member & Shri G. Manjunatha, Accountant Member आयकर अपील सं./I.T(TP).A. No. 4/Chny/2018 & I.T.A. No. 2407/Chny/2017 िनधाŊरण वषŊ/Assessment Years:2006-07 and 2008-09 Watanmal (India) Pvt. Ltd., Old No. 12, New No. 14, Ground Floor, Sripuram Second Street, Royapettah, Chennai 600 014. [PAN:AAACW6624B] Vs. The Deputy Commissioner of Income Tax, Corporate Circle 3(2), Chennai. (अपीलाथŎ/Appellant) (ŮȑथŎ/Respondent) अपीलाथŎ की ओर से / Appellant by : Shri T. Banusekar, C.A. ŮȑथŎ की ओर से/Respondent by : Dr. S. Palanikumar, CIT सुनवाई की तारीख/ Date of hearing : 05.09.2022 घोषणा की तारीख /Date of Pronouncement : 16.09.2022 आदेश /O R D E R PER V. DURGA RAO,, JUDICIAL MEMBER: The appeal filed by the assessee for the assessment year 2006- 07 is directed against the order passed by the ld. Dispute Resolution Panel -2, Bengaluru under section 143(3) r.w.s. 147 r.w.s. 92CA(3) r.w.s. 144C(5) r.w.s. 254 r.w.s. 144C(5) of the Income Tax Act, 1961 [“Act” in short] dated 27.12.2017. The appeal filed by the assessee for the assessment year 2008-09 is directed against the order of the Assessing Officer under section 143(3) r.w.s. 147 r.w.s. 92CA(3) r.w.s. I.T(TP).A. No.4/Chny/18 & ITA No. 2407/Chny/17 2 144C(5) dated 12.07.2017. Since both the appeals are filed by the same assessee, heard together and are being disposed of by this common order for the sake of brevity. I.T(TP).A. No. 4/Chny/2018 [Assessment Year 2006-07]: 2. Facts are, in brief, that the assessee company is engaged in the business of providing logistics and business support services to its group companies. It is a second round of litigation. The assessee filed its return of income for the assessment year 2006-07 by declaring total income of 15,86,130/-. The return filed by the assessee was processed under section 143(1) of the Act. Subsequently, a survey under section 133A of the Act was conducted at the business premises of the assessee on 14.03.2013. Subsequently, a notice under section 148 of the Act dated 30.03.2013 was issued to the assessee and the case was reopened under section 147 of the Act. The case was referred to the Transfer Pricing Officer (TPO under section 92CA(1) and order under section 92CA(3) of the Act was passed on 07.05.2014 proposing an adjustment of ₹.30,59,033/-. Draft assessment order was passed on 26.02.2015 incorporating the order of the TPO, consequently making an adjustment of ₹.30,59,033/- and making a disallowance of I.T(TP).A. No.4/Chny/18 & ITA No. 2407/Chny/17 3 depreciation on lease hold property to the tune of ₹.1,08,825/-, thereby, the total income of the assessee has been assessed at ₹.47,53,988/-. 3. The assessee has chosen TNMM as the Most Appropriate Method for determining the Arm’s Length Price of the international transactions. Operating Margin upon Operating Cost has been chosen as the PLI. The assessee conducted a search by applying a set of criteria and the following three companies were chosen by the assessee as comparables: i. Cameo Corporate Services Ltd. ii. Cyber Media Research Ltd. iii. ICRA Management Consulting Ltd. The average PLI of comparables has been arrived at by the assessee at 12.68%. The TPO as well as the Assessing Officer accepted the comparables selected by the assessee. However, the TPO and the Assessing Officer has chosen three more comparables in addition to the comparables selected by the assessee and they are:  Adecco Peopleone India Pvt. Ltd.  Alliance Comnet Ltd.  Genius India TPA Ltd. Thereby, the average PLI of the comparables has been determined by the TPO at 21.94%. The assessee has objected for adding three more I.T(TP).A. No.4/Chny/18 & ITA No. 2407/Chny/17 4 comparables. However, the TPO as well as the Assessing Officer rejected the request of the assessee and ultimately, the ld. DRP also rejected by its order dated 23.12.2015. The relevant portion of the order is extracted as under: The objections raised by the assessee are discussed ground-wise as under: 1. Comparables selected by Transfer Pricing Officer not acceptable For that the Transfer Pricing Officer and hence the Assessing Officer erred in choosing three additional corn parables for determining the Arm's Length Price. 1.1 It was submitted that the Assessing Officer accepted TNMM adopted by the applicant as the Most Appropriate Method and Operating Margin upon Operating Cost as the PLI. While the Assessing Officer accepted the search criteria applied by the applicant and the resultant three comparable companies chosen by the applicant, he proceeded to choose three more companies from the accept reject matrix of the applicant. The three additional comparables chosen by the Assessing Officer are: • Adecco Peopleone India Pvt Ltd • Alliance Comnet Ltd • Genius India TPA Ltd The average PLI of the comparables thereby was revised to 21.94%. The Assessing Officer determined the PLI of the applicant at 7.63% as against the PLI of 12.88% as determined the applicant. 1.2 The submission of the assessee objecting the action of TPO to select three additional comparables has been considered. The assessee has selected three comparables which have been accepted by the TPO. Further, TPO carried out search and from accept / reject matrix selected three more comparables which are appropriate considering the business of the assessee as under: i. Adecco Peopleone lndia Pvt Ltd ii. Alliance Comnet Ltd iii. Genius India TPA Ltd The assessee's objection that the above three additional comparables are not functionally similar to the assessee has been considered by the TPO and the detailed functional analysis for these comparables has been done. The I.T(TP).A. No.4/Chny/18 & ITA No. 2407/Chny/17 5 functional analysis of all 6 comparables are given in Page 12 & 13 of the TP order. It is found that the functions performed by the comparables selected by the assessee and that selected by the TPO are not much different. Considering that the comparability study is being done with TNMM as MAM, the assessee cannot really object on this ground in face of no apparent functional dissimilarities. During the course of hearing, the AR of the assessee was confronted with this position and the same could not be controverted. In view of above, the action of the TPO does not call for any interference and the objection of the assessee is rejected. 4. On appeal before the ITAT, the assessee has submitted that so far as 3 rd comparable Genius India TPA Ltd. has not pressed. Therefore, vide order dated 15.07.2016 in I.T.A. NO. 540/Mds/2016 for AY 2006-07, the ITAT has directed the DRP/TPO/Assessing Officer to examine exclusion of two comparables viz., Adecco Peopleone India Pvt. Ltd. and Alliance Comnet Ltd. and the relevant portion of the order is extracted as under: “9. We have heard both the parties and perused the orders of the Revenue Authorities ie Assessing Officer/TPO/DRP and the final assessment order dated 12.1.2016. We have also gone through the paper book and the extract from the Economic Times placed before us. On considering the Ld Counsel for the assessee's concession given in connection with Genins, the third comparable included by the TPO, we find, the said comparable should be considered as a good comparable. We order accordingly. 10. That remains to consider the other two comparables ie Adecco and Alliance included by the TPO, whether they constitute functionally good comparables to that of the assessee. To start with, we have perused the papers placed before us with regard to the functions of Adecco. Although the said company was considered as an end to end HR Solutions Company with focus on executive search; recruitment; training & learning and temporary staffing services to client organizations, the list of services offered by the said Adecco at page 5 of the paper book include following ie Recruitment support; seamless migration; structured on-boarding; associate training; payroll management; compliance; Adecco support centre; Customised solutions; payroll management services; compliance management services; equity / sales / stock / MIS management; employee assessment; associate skill enhancement / training etc. it is the submission of the Ld Counsel for the assessee that these services are nowhere connected to that of the I.T(TP).A. No.4/Chny/18 & ITA No. 2407/Chny/17 6 services rendered by the assessee to its AEs, and therefore, the said comparable could not be included as good comparable. 11. On the other hand, the case of-the Revenue is that Adecco, in principle, was also engaged i n meeting the logistics of the clients and providing solutions to various organizations as assessee is rendering such services to its group concerns in Hong Kong and British Virgin Islands. Further, Ld DR submitted that the order of the DRP has gone into the analysis of these functions and their comparabilities before they are ignoring the differences as 'not much difference' (para 1.2 of the DRP's directions extracted above). In connection with the second comparable ie Alliance, counting to the arguments of the Ld Counsel for the assessee, Ld DR submitted that the said news item in the print media (Economic Times) does not give any conclusive functional status of the company as it is a stray report in connection with some default qua the petition before the Consumer Court. 12. On considering both the points of view, we find the order of the DRP with regard to the correctness of the inclusion of these two comparables is not to be considered as a speaking order as there is no reference to the details of the functions of these two companies in the said para 1.2 of the DRP's directions. None of the parties have filed annual reports, TP study reports, financials even before us, for us to study give a finding of fact on the functions of the comparables and their comparability to the functions of the assessee. Considering the· above, in all fairness and in the interest of justice, we are of the opinion the matter should be remanded to the file of the DRP / AO for fresh adjudication in the matter. We order accordingly, DRP is required to examine the functions of the said two comparables (Adecco and Alliance) and compare the same with that of the assessee-company. Further, the AO is directed to examine the annual reports and their financials and provide a reasonable opportunity of being heard to the assessee as per the set principles of natural justice. AO is also directed to provide argument wise rebuttals before the said comparables are considered in the set aside proceedings. Accordingly, the issues raised by the assessee in connection with the inclusion of the two comparables viz., Adecco and Alliance as good comparable is partly allowed for statistical purposes.” 5. In pursuance to the order passed by the ITAT, vide order dated 27.12.2017, the ld. DRP has rejected the objections raised by the assessee in respect of Adecco and Alliance by giving following reasons: 1. Adecco Peopleone India Pvt Ltd. As seen from the information on record this company is a leading end-to-end HR solutions company which includes talent search, recruitment, training and staffing services to client organizations. These aspects of the I.T(TP).A. No.4/Chny/18 & ITA No. 2407/Chny/17 7 company's functions are captured in the ITAT order at para-10. The other functions noted at paper book -5 includes "i.e. Recruitment support; seamless migration, structured on-boarding, associate training, payroll management, compliance, Adecco support centre, Customised solution, payroll management services compliance management services, equity/sales/stock/MIS management, employee assessment, associate skill enhancement/training etc.” As seen from the details submitted these functions are part of HR and only details of the same are provided. The assessee's functional domain including business of providing logistics and business support services to it is group companies. They includes sourcing assistance, logistics support, sales support for oil goods and accounting support. It is the contention of the assessee that it is functions are not comparable with that of Adecco. In this regard it is seen that assessee itself selected three comparable namely. 1. Cameo Corp. Services Ltd 2. Cyber media Research Ltd 3. ICRA Management Consulting Ltd The above comparables identified by the assessee are into BPO services. Document management, Medical transcription, advisory services, IT, ITES, Telecom, Management consultancy, Research & Analytics, Transaction advisory etc. Though they encompass very diverse functions, both assessee and TPO both agreed on the broader pedestal that they are comparable. Drawing similar line of comparability Adecco functions in HR staffing is similar to the logistic and business support services where the services of people are primarily engaged. Hence, this Panel is of the view that Adecco is rightly included by the TPO and there is not enough justification presented by the assessee for it is exclusion. Ground rejected. 2. Alliance Comnet Ltd: The assessee failed to provide information justifying the exclusion. The TPO has agreed that this company is engaged in BPO services and also into document management. Medical transcription, Data conversion, Registry and Share transfer. In fact the functions of this company are exactly matching with Cameo Corporate Services Ltd, the one selected and accepted by assessee. Hence, assessee cannot accept one company and reject another where both have exact functional domain. Even otherwise as observed above, in TNMM broader similarity is sufficient and this comparable is appropriate for inclusion and sufficient evidence is not presented for exclusion. Accordingly Panel is of the considered view that this company should be included. Ground rejected. The directions of this Panel, as per the discussions above, are hereby I.T(TP).A. No.4/Chny/18 & ITA No. 2407/Chny/17 8 communicated to the assessee and the departmental authorities concerned as per the provisions of section 144C(5) of Income Tax Act. 6. On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that so far as first comparable is concerned, he has pointed from paper book page No. 70 – Directors’ report to the Members of Adecco Peopleone India Limited, the business mode of Adecco is HR recruitment and placement of various customers across the country, which is not at all related to the assessee’s business at all. Therefore, it cannot be considered as comparable and the same may be deleted. He further pointed from paper book page 55 that the Adecco is a leading end-to- end HR solutions company with a focus on Executive Search, Recruitment, Training & Learning and Temporary Staffing services to client organizations and Adecco is the largest HR solutions company in India. 7. Further, the ld. Counsel pointed out from paper book page 118 - Directors report of Alliance Comnet Ltd. that the company is 100% export oriented unit dealing in Information Technology enabled services, which is not at all a comparable with the assessee company and therefore, the same may be deleted. I.T(TP).A. No.4/Chny/18 & ITA No. 2407/Chny/17 9 8. We have gone through the orders of the ld. DRP/TPO and Assessing Officer and find that the two comparables selected by the TPO and confirmed by the DRP, without there being any suitable reason and therefore, the two comparables selected by the TPO are not accepted. Accordingly, the Assessing Officer is directed to exclude the above two comparables for arriving the average PLI of the comparables already selected and accepted by the TPO and the Assessing Officer along with Genius India TPA Ltd. for the purpose of determining the Arm’s Length Price. I.T.A. No. 2407/Chny/2017 [Assessment Year 2008-09]: 9. So far as assessment year 2008-09 is concerned, the only issue involved in this appeal is in respect of elimination of one of the comparables selected by the TPO i.e., M/s. Killick Agencies & Marketing Ltd. The case of the assessee before the TPO/Assessing Officer is that M/s. Killick Agencies & Marketing Ltd., one of the comparables chose by the TPO is not functionally comparable and submitted that the same may be eliminated from the comparables selected by the TPO. However, the TPO as well as ld. DRP have rejected. The observations of the ld.DRP are as under: “3.2 The submissions of the assessee have duly been considered. The Financials of Killick Agencies and Marketing Ltd. mentions that the company receives I.T(TP).A. No.4/Chny/18 & ITA No. 2407/Chny/17 10 commission income from overseas parties in relation to sales of dredging equipments, maritime and aviation lighting, acoustic communication equipments, etc. The company also provides after sale services. The assessee company is engaged in providing sourcing assistance, logistic support, sales support services and accounting services to its parent company. As per the TP document of the assessee company, it also provided quality inspection, HR functions and IT support services. Thus, it can be seen that nature of services provided by the assessee as well as the comparable are similar as basically the services rendered are support services. It, actually, does not matter as to what kind of products are dealt with. Further, under TNMM, there is no requirement of a strict product to product comparison. Only broad functional similarity is needed. As TNMM has been adopted as MAM by the TPO, any small variation in functionality is not fatal to the validity of the benchmarking analysis. Considering the above, objection of the assessee cannot be accepted.” 10. It is the submission of the ld. Counsel for the assessee that the very DRP was of the considered opinion that the comparable selected by the TPO of M/s. Killick Agencies & Marketing Ltd. in the assessment year 2009-10 was not functionally comparable. Therefore, the ld. Counsel has submitted that for the assessment year 2008-09 also, the very same comparable may be eliminated from the comparables selected by the TPO. 11. We have gone through the orders of the ld. DRP for the assessment year 2008-09 dated 22.05.2017 and also for the assessment year 2009-10 dated 29.05.2018. In the assessment year 2009-10, the ld. DRP has held that the comparable selected by the TPO viz., M/s. Killick Agencies & Marketing Ltd. cannot be functionally comparable for the reason that the assessee is a captive unit I.T(TP).A. No.4/Chny/18 & ITA No. 2407/Chny/17 11 rendering sourcing assistance, majestic support, sale support for oil goods and accounting services to its parent company. These services are not rendered by the comparable company. The comparable company M/s. Killick Agencies & Marketing Ltd. is engaged into marine industry related products and services, whereas, the assessee company is a captive unit rendering services to its group companies that are into trading of branded food products in West and Central Africa. Therefore, the companies are into completely different industries. Hence, we direct the TPO/Assessing Officer to eliminate the comparable M/s. Killick Agencies & Marketing Ltd. selected by the TPO. 12. In the result, both the appeals filed by the assessee are allowed. Order pronounced on the 16 th September, 2022 in Chennai. Sd/- Sd/- (G. MANJUNATHA) ACCOUNTANT MEMBER (V. DURGA RAO) JUDICIAL MEMBER Chennai, Dated, 16.09.2022 Vm/- आदेश की Ůितिलिप अŤेिषत/Copy to: 1. अपीलाथŎ/Appellant, 2.ŮȑथŎ/ Respondent, 3. आयकर आयुƅ (अपील)/CIT(A), 4. आयकर आयुƅ/CIT, 5. िवभागीय Ůितिनिध/DR & 6. गाडŊ फाईल/GF.