Future First Info Services Pvt. Ltd. Vs ACIT (ITAT Delhi)
Issue- AO/DRP/TPO have erred in arbitrarily characterizing the Appellant as a High – end Knowledge Process Outsourcing (“KPO”) entity, relying on the Safe Harbour Rules.
Ld. AR submitted that the functional profile of the assessee has been accepted by the TPO and no case was ever made out by the TPO that the assessee is a KPO. This is evident from Para 4 of TPO’s order (page 2) where the TPO has recorded “….The main international transactions of the assessee is the provisions of IT Enables services. The TP report has described the functions of the assesses ad its AE and the functions of the assessee as submitted in the TP report are found to be in order.” The functional profile of the assessee was accepted by the TPO in similar terms in A.Y. 2010-11, which was noted by the Tribunal in assessee’s own case. The functions performed by the assessee reveal that it is engaged in providing IT enabled support functions. The Ld. AR further submitted that the Hon’ble Delhi High Court in case of Rampgreen Solutions Pvt. Ltd. vs. CIT (ITA No. 102/2015) held that KPO services require high level of skills and knowledge and domain expertise. The Ld. AR submitted that in contrast, the assessee company provides back office support services to AEs with the help of tools, infrastructure and training provided by the AEs. The assessee hires young graduates with no or minimal work experience, trains them with basic computer skills with the help of AEs so that its employees can follow the parameters, guidelines and criteria determined by AEs to input buy-sell figures to support AE. Therefore, the Ld. AR submitted that the findings of the DRP to categorize the assessee as a high-end KPO are misplaced. The Ld. AR further submitted that Rule 10B(2) categorically provides that comparability shall be judged, inter alia, with reference to specific characteristics of the services provided. Therefore, where the services provided by the assessee and that of comparables, are materially different, the comparable has to be ignored. The Ld. AR further submitted that the reliance on Safe Harbour rules by the DRP/TPO is misplaced. In fact, the DRP has itself admitted that Safe Harbour Rules are not applicable for the subject assessment year, yet reliance has been placed to justify assessee’s classification as KPO. The Ld. AR relied upon the decision of Delval Flow Controls Private Limited v DCIT in ITA 640/PUN/2017, order dated 20.01.2021 and Dana India Private Limited v. DCIT in ITA No. 473/PUN/2018.
It is pertinent to note that the Revenue at no point of time disputed the functions of the assessee company. The assessee company provides back office support services to AEs with the help of tools, infrastructure and training provided by the AEs which is different than the functions of the KPO. Besides this, the DRP has admitted that the Safe Harbour Rule will not be applicable in assessee company’s case. Thus, classification of the assessee as a KPO by applying safe harbor Rules is totally out of context and does not get any support from the evidences before us. Therefore, the directions of the DRP as well as the observations made by the TPO and thereafter comparing the assessee company with that of high end KPO for benchmarking ALP determination of the comparables is not correct.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeals is filed by the assessee against the order dated 31/08/2016 order passed by 144C(1)(3) read with Section 143 (3) of the Income Tax Act, 1961 for Assessment Year 2012-13.
2. The grounds of appeal are as under:-
Appeal under section 253(1) of the Income-tax Act, 1961 (“the Act”) against the order dated August 31, 2016 (received on September 1, 2016) passed under section 143(3) of the Act read with 144C of the-Act by the Assistant Commissioner of Income Tax, Circle 9 (2), Delhi (“AO”) for the assessment year 2012-13, pursuant to the directions of Dispute Resolution Panel (“DRP”) under section 144C(5) of the Act
GROUNDS OF APPEAL
1. That on the facts and circumstances of the case and in law, the assessment order dated August 31, 2016 under section 143(3) of the Act, pursuant to the directions of the DRP, assessing the total income of the Appellant at Rs. 34,84,50,690, as against returned income of Rs. 23,32,06,570, is bad in law.
2. That on the facts and circumstances of the case and in law, the AO/ Transfer Pricing Officer (“TPO”)/ DRP erred in making an upward transfer pricing adjustment of Rs 11,52,44,123 in respect of the international transaction pertaining to provision of Information Technology enabled Support Services (“ITeS”), alleging the same to be not at arm’s length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules, 1962 (“the Rules”).
3. That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in arbitrarily modifying/rejecting the economic analysis and quantitative/qualitative search filters, which has resulted in selection of final comparables, which are not comparable with the Appellant, having regard to its functional, asset and risk profile, for the purpose of benchmarking its international transaction of provision of ITeS.
4. That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in arbitrarily characterizing the Appellant as a High – end Knowledge Process Outsourcing (“KPO”) entity, relying on the Safe Harbour Rules which were not applicable for the year under consideration.
5. That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in arbitrarily selecting comparable companies based on incorrect appreciation of functional, asset and risk profile of the Appellant. In doing so, the AO/DRP/TPO have also erred in rejecting the claim of the Appellant that the companies with high turnover and/or abnormal high margins ought not be selected as comparable for the purpose of benchmarking the international transaction of provisions of ITeS.
6. That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in arbitrarily rejecting certain functionally comparable companies selected by the Appellant.
7. That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in incorrectly computing the operating margins of the Appellant as well of the comparable companies, by excluding the forex fluctuation gains/loss from the operating revenue/expenditure, following the Safe Harbour Rules, which were not applicable for year under consideration.
8. That on facts and circumstances of the case and in law, the AO/DRP/TPO have erred in ignoring the provisions of Rule 10B(4) of the Rules and judicial pronouncement which advocate usage of multiple year data of comparable companies for the purpose of determination of the arm’s length price.
9. That on the facts and circumstances of the case and in law, the AO has erred in charging interest under section 234B of the Act.
3. The assessee company is subsidiary of GHF Holdings Limited, Mauritius.
It is engaged in IT Enabled support services functions with relation to primary activity of its Associated Enterprises (“AEs”) which is trading in derivatives in Europe and US exchanges. The support functions are provided as per specified guidelines, training and rules laid down by the AEs. Summary of International Transaction and benchmarking approach adopted by the assessee is as follows:
