Bertelsmann Marketing Services India Pvt. Ltd. Vs DCIT (ITAT Delhi)
The issue under consideration is whether overdue receivables from AEs is considered as an international transaction?
ITAT states that ground is with respect to treating the overdue receivable from associated enterprise as an international transactions however looking to the order of the learned transfer pricing officer after the direction of the learned Dispute Resolution Panel that working capital adjusted margin were considered with respect to all the comparables, therefore, ITAT do not find any reason to further sustain any adjustment on account of interest on outstanding receivables from its associated enterprise. As the outstanding of associated enterprise is shown as debtors and is covered in the working capital adjustment itself, it amounts to double addition. Had the working capital adjusted margin were not taken in case of comparable company, this addition/adjustment would have been worth considering. In view of this, ITAT direct the learned transfer pricing officer to delete the addition on account of interest on overdue receivable from associated enterprise. Accordingly ground of the appeal is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
1. This is an appeal filed by Bertelsmann Marketing Services India Private Limited (The Assessee/ Appellant) against the order of the ld Deputy Commissioner Of Income Tax, Circle 4 (2), New Delhi (the learned AO) dated 9/10/2015 passed u/s 143 (3) read with Section 144C of The Income Tax Act, 1961 (The Act)dated 09/10/2015 for the Assessment Year 2010-11 determining the total income of the assessee at Rs Nil against the returned income at a loss of ₹ 7,323,902/– as per return of income filed on 29/11/2011. The returned income has one adjustment of Rs 195,70,892/– on account of the order of the learned Asst Commissioner Of Income Tax, Transfer Pricing Officer –I (1) (1), New Delhi [ The Ld TPO] passed u/s 92CA of the act on 7/1/2015 where the total adjustment was proposed at ₹ 21,113,342/– comprising of arm’s-length price of the ITeS services of ₹ 21,053,389 and another adjustment on account of outstanding receivable of ₹ 59,953/– which was subject to the direction of the Dispute Resolution Panel – 1, New Delhi (the learned DRP) dated 9/9/2015 after which the ALP of provision of ITeS services of ₹ 141,969, 072/– was determined at ₹ 135,208,614/– which resulted into an adjustment of Rs 1 95,10,939/– and interest on outstanding receivable was retained at ₹ 59,953/–. Thereby, assessee is aggrieved and has preferred this appeal.
2. The assessee has raised the following ground of appeal:-
“1. That on facts and in the circumstances of the case and in law, the Learned Assessing Officer (AO)/Learned Transfer Pricing Officer (TPO)/Hon‘ble Dispute Resolution Panel (DRP) erred in making an addition to the returned income of the appellant by Rs. 1,95,70,892 by recomputing the arm‘s length price (ALP) of the international transactions under section 92 of the Income-tax Act, 1961 (the Act).
2. That on facts and in the circumstances of the case and in law, the reference made by the AO to the TPO suffers from jurisdictional error as the AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was „necessary or expedient‘ to refer the matter to the TPO for computation of ALP, as is required under section 92CA(1) of the Act.
3. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case.
4. The DRP/AO/TPO erred on facts and in the circumstances of the case and in law by rejecting the Assessee‘s claim of being an low end IT enabled service provider (“ITES”) and recharacterizing it as a Knowledge process outsourcing (“KPO”)
5. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in rejecting the Internal Transactional Net Margin Method (“TNMM”) applied by the Appellant on the ground that:
5.1. Services rendered by the Appellant to associated enterprises (AEs) and non-AEs are not similar;
5.2. Basis of allocation of costs in respect of AE and non-AE segments have not been furnished by the Appellant.
6. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in modifying the economic analysis conducted by the Appellant as a corroborative analysis i.e. External TNMM by:
6.1. Inappropriately applying the quantitative filters to arrive at a cherry-picked result;
6.2. Accepting companies which are functionally not comparable to the Appellant in terms of Functions, Assets and Risk profile; and
6.3. The DRP/AO/TPO erred in facts and circumstances of the case and in law by disregarding the multiple year data selected by the Appellant in the TP Documentation and in selecting the current year (i.e. financial year 2010-11) data for comparability. —
7. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in v7l treating the overdue receivables from AEs as an international transaction. Without prejudice, the DRP/AO/TPO erred on facts and in law by selecting incorrect methodology to compute the ALP of international transaction of receivables as on March 31, 2011.
8. That on the facts and circumstances of the case and in law the AO/TPO erred in initiating the penalty proceedings u/s 271 (1) (c) of the Act mechanically and without recording any adequate satisfaction for such initiation.”
3. Briefly stated the facts shows that assessee is a company engaged in the business of provision of IT enabled services which is resident, registered as an hundred percent export oriented unit Under the software technology Park scheme of the Ministry of information and technology, government of India. Assessee is also operating and managing the activities of BPO delivery centres, call centres and consumer services. It is a wholly-owned subsidiary of a German company and engaged in rendering back-office support services and back end information technology enabled support services. It renders services to both its associated enterprise and Non associated enterprise.
4. Assessee filed its return of income on 29/11/2011 declaring loss of ₹ 7,323,902/–. It has entered into 6 different type of international
transactions with its associated enterprise in the form of
a. provision of back-office support services of ₹ 132,304,149/–,
b. procurement of IT support services of ₹ 6,156,378/–,
c. training expenses paid of ₹ 628,119/–,
d. fees for management services of ₹ 291,375 /–,
e. interest on corporate guarantee charges of ₹ 3,322,441/– and
f. interest on external commercial borrowing of ₹ 1,579,463/–.
It benchmarked these international transactions adopting the Transactional Net Margin Method [TNMM] as the Most Appropriate Method [MAM] adopting the Profit Level Indicator [ PLI] of operating profit/total cost [OP/OC] . Assessee arrived at set of 11 comparable companies whose average mean margin was 5.63 percentage by using multiple year data and assessee’s own margin was worked out at 13.96%. Based on this the assessee concluded in its transfer pricing study report that its international transactions are at arm’s-length. The functional profile of the assessee was accepted by the TPO however he challenged the search process adopted by the assessee and use of multiple year data. Therefore he issued a show cause notice on 11/12/2014. In show cause notice he tested the 11 comparable selected by the assessee and retained only two comparables. He further introduced six new comparable companies which were rejected by the assessee stating in its acceptance/reject metrics that the functions are not comparable. However according to the learned TPO those comparable passes all filters also and are functionally comparable. Accordingly in the show cause notice he computed the average margin of these comparable adopting profit level indicator of Oprating profit/operating cost at 29.57% and applied same to the operational cost of the assessee at ₹ 118,649,984/-, against the price received of ₹ 135,208,640/– and computed the proposed adjustment of Rs 1 86,44,794/–. He further stated that payment on account of sales to associated enterprise is realized after a significant time, which according to him varies from advance payment to a gap of 364 days. Therefore he applied base rate of state bank of India at 7.84 percentage and added thereto 300 basis point for risk including Lake of security, processing fees, credit rating and loan tenure and proposed the interest on overdue at 10.84 percentage. The assessee submitted its reply on 24/12/2014 challenging the various filters as well as the comparable companies selected by the learned transfer pricing officer. The learned transfer pricing officer after considering the objection of the assessee retained eight comparable companies (2 selected by the assessee and further 6 introduced by TPO) computed that average margin of OP/OC at 31.70% and accordingly proposed an adjustment of ₹ 21,053,389 with respect to the ITeS services provided to the associated enterprise. With respect to the outstanding receivable by the assessee he computed such interest receivable of ₹ 59,953/–. Thereby total adjustment was proposed of ₹ 21,113,342/-.
5. The assessee submitted its objections before the learned DRP which passed on its direction on 9/9/2015 and based on that the learned TPO passed an order on 5/10/2015 giving effect to the directions and computed the working capital adjusted margin of the comparable companies selecting following seven comparables at 30.40 percentage.
