Crisil Limited Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that the expenses excluded from the export turnover have to be excluded from the total turnover as well while computing deduction u/s 10A of the Income Tax Act.
Facts- Assessee has two business divisions namely (i) Ratings and (ii) Research. Under the Ratings segment, the Assessee is engaged in rendering back-end support for data analysis services to its associated enterprises through the Global Analytical Centre ( GAC ) which is the transaction under dispute. The Assessee had undertaken, inter-alia, international transactions of provision of back-end support for data analysis services from the GAC to its associated enterprises for ₹.53,33,43,789/. The Assessee adopted the Transactional Net Margin Method (TNMM) to determine the arm’s length of the said international transactions. In relation to this transaction, CRISIL had entered into a Master Services Agreement, with its associated enterprise, Standard & Poor (S&P), whereby S&P would outsource services to CRISIL in accordance with the Statement of Work (SOW). These services are provided by CRISIL based on inputs from S&P.
It was submitted that depend upon the terms of each assignment agreed upon as per the SOW, CRISIL assigns their employees to provide services to S&P. These employees process the data and put them in appropriate structures/ form as required by CRISIL’s AE i.e., S&P. These services are akin to back-office data support services.
The case of the Assessee was selected for scrutiny and a reference was made to the Transfer Pricing Officer to determine the Arm’s Length Price of the international transactions. TPO rejected the characterisation of routine service provider / back-office service provider (BPO) and observed that the Assessee is engaged in providing high-end Knowledge process outsourcing (KPO) services. Consequently, rejected the study submitted by the assessee and he conducted a fresh search for comparables and proposed a final set of 6 companies which are engaged in provision of KPO Services like engineering and design services, financial analytical services etc. computing an arm’s length margin at 49.73% . Thus, the TPO made a TP adjustment amounting to ₹9,03,88,556/- in relation to the international transaction of provision of back-end support for data analysis services.
DRP upheld the order of the Transfer Pricing Officer and affirmed the Transfer Pricing addition. Being aggrieved, the present appeal is filed.
Revenue has also preferred an appeal contesting that whether Hon’ble DRP was correct in directing AO to exclude expenses incurred in foreign currency from total turnover as well, for the purpose of deduction u/s 10A.
Conclusion- Coordinate Bench in the case of Copal Research India Pvt. Ltd. v. ITO in ITA No. 1713/Del/2014 also has held that Eclerx is not comparable as it provides complete business solutions as compared to the assessee which provides raw data.
Held that we are inclined to allow the grounds raised by the assessee and direct the TPO to eliminate the comparables, Eclerx Services Ltd., and Accentia Technologies Ltd., from the final list comparables for this assessment year.
Held that the expenses excluded from the export turnover have to be excluded from the total turnover as well while computing deduction u/s 10A of the Act.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. The appeals relating to A.Y. 2008-09 and 2012-13 are filed by assessee against final Assessment Order and directions of the Learned Dispute Resolution Panel – 1, Mumbai [hereinafter in short “Ld.DRP”] dated 26.09.2012 and 25.11.2016 for the A.Y.2008-09 and 2012-13 respectively, passed u/s. 144C(5) of Income-tax Act, 1961 (in short “Act”).
2. Assessee and revenue have filed cross appeals for the A.Y. 2009-10, 2010-11, 2011-12 challenging the Final Assessment order and directions of the Ld. DRP.
3. Since the issues raised in all these appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order. We are taking Appeal relating to Assessment Year 2008-09 as a lead appeal.
ASSESSMENT YEAR 2008-09
ITA. No. 7603/MUM/2012 (A.Y. 2008-09) (ASSESSEE APPEAL)
4. Aggrieved with the Final Assessment order and directions of the Ld.DRP, assessee filed appeal before us raising following grounds in its appeal: –
“1. determining the arm’s length price of the Appellant’s international transaction of provision of back end support for data analysis at Rs. 62,37,32,345 instead of Rs. 53,33,43,789 determined by the Appellant;
2. disregarding the appellant’s Transfer Pricing documentation and conducting his own comparability analysis (and in this regard, obtaining the financial data of certain potential comparables using his powers under Section 133(6) of the Act) which is not in accordance with the contemporaneous documentation requirement of the Indian TP regulations;
3. requiring financial data of only the current year (FY 2007-08) of the comparable companies to be used for benchmarking the Appellant’s international transactions;
4. not granting a risk adjustment to the Appellant to account for the differences in the risk profile of the comparables vis-a vis the Appellant;
5. arbitrarily restricting the working capital adjustment to 2.00% to account for the differences in the working capital position of the comparables vis-a vis the Appellant;
6. the learned AO be directed to grant (+/-) 5% benefit as available under proviso to Section 92C(2) of the Act.
7. Reducing expenses incurred in foreign currency, not being expenses in providing technical services or in the nature of freight, telecommunication charges or insurance attributable to delivery of article or things or computer software, from “export turnover” and “Total turnover” while computing deduction under section 10A of the Act
8. Not giving credit in full for the amount of tax deducted at source of Rs. 16,08,00,850 claimed in the revised return of income filed under section 139(5) of the Act.
9. Not considering advance tax payments of Rs. 25,000 and Rs. 3,75,00,000 paid on 14th June 2007 and 14th March 2008 respectively and dividend distribution tax of Rs. 1,70,54,108 while calculating the total tax liability.
10. Considering the date of credit of the advance tax to the government treasury as the date of payment instead of the date of tendering of the cheque of advance tax while calculating the interest u/s 234C of the Act. ”
5. Further, assessee has raised additional ground, which is reproduced below: –
“On the facts and circumstances of the case and in law, the draft assessment order dated 28 December 2011 passed by the Additional Commissioner of Income Tax under section 144C(1) read with section 143(3) of the Act is illegal, bad in law and without jurisdiction as he failed to establish that he possessed the legal and valid powers of performing functions of an Assessing Officer to pass the assessment order and therefore be quashed.”
6. At the time of hearing, Ld.AR of the assessee submitted that additional ground relating to technical issue are not pressed at this stage. Accordingly, the additional ground is dismissed as not pressed.
7. Therefore, proceeded to dispose of this appeal on merits. Brief background of the case are, Assessee has two business divisions namely (i) Ratings and (ii) Research. Under the Ratings segment, the Assessee is engaged in rendering back-end support for data analysis services to its associated enterprises through the Global Analytical Centre (GAC) which is the transaction under dispute. The Assessee had undertaken, inter-alia, international transactions of provision of back-end support for data analysis services from the GAC to its associated enterprises for ₹.53,33,43,789/-. The Assessee adopted the Transactional Net Margin Method (TNMM’) to determine the arm’s length of the said international transactions. It earned a margin of operating profit to total cost (hereinafter referred to as ‘margin’) of 28.03% (OP/TC). In relation to this transaction, CRISIL had entered into a Master Services Agreement, dated 30 June 2004 with its associated enterprise, Standard & Poor (S&P), whereby S&P would outsource services to CRISIL in accordance with the Statement of Work (SOW). These services are provided by CRISIL based on inputs from S&P.
The sample copies of SOW entered into with S&P (copies placed at Page No. 245 to 288 of the Paper book and a brief snapshot of SOWs attached at Annexure 1) which demonstrates that the services provided by CRISIL to S&P are broadly in the nature of back-end data support services. CRISIL’s data analysis team works together to make data and information efficiently available for analytical activities to S&P. The various services broadly provided by CRISIL are as under:
