Matter remanded as TP adjustment could not be at ‘NIL’ as determined by TPO

American Express Banking Corp Vs ADIT (ITAT Delhi)

Conclusion: Transfer Pricing Officer ( TPO ) had erred in setting the Arm’s Length Price ( ALP ) for Intra Group Services at NIL for assessee as he failed to determine ALP by applying applicable transfer pricing mechanism as per Income Tax Rules and determine the TP Adjustment hence, he was directed to reconsider the ALP by evaluating all the evidence afresh.

Held: Assessee was a non resident company incorporated under the laws of USA and engaged in the banking business. During the assessment proceedings, on perusal of Form No. 3CEB filed by assessee, it was noticed that assessee had entered into International Transactions with its Associated Enterprises (‘AE’) amounting to Rs. 3.20 billions. A reference u/s 92CA(3) was made to TPO. TPO made transfer pricing adjustment amounting to Rs. 24,30,24,147/-. The final assessment order came to be passed u/s 143(3)/144C on 15/05/2023 by making addition of Rs. 24,30,24,147/-. Aggrieved by the order, assessee preferred an Appeal before CIT(A). CIT(A) directed the TPO to grant 50% of the adjustment claimed by assessee on account of Intra Group Services availed by assessee. Assessee claimed to have receiving services in the fields of technology, Services, Risk Information Management, Head quarter, Technology Services/back office support services/treasury/regional headquarter services etc. On going through the reply filed by assessee, it was found by TPO. that assessee had failed to furnish any evidence which could establish receipt/rendering of service, though the assessee submitted description of services, but had not submitted any evidence. TPO observed that assessee had submitted “Performance score card” which showed evaluation of services, but failed to establish its authenticity and neither submitted any evidence regarding the details, how such services were received. It was held that considering the profile of assessee and the business structure of assessee, it was found that TPO was not correct in arriving the ALP at NIL on the ground that assessee had not produced the evidence for the receipt/rendering of service. TPO should have looked into all the evidences submitted by assessee and give finding after adjudicating the same. It was an accepted fact that the transaction between assessee and AE would always subjective in nature, it was fact that assessee American Express being a running and established foreign entity and they had established the business in India. Thus, there was a considerable advantage engaged by Indian entity, hence there was a greater chance of Intra Group Services transferred to Indian entity which had to be verified by the TPO by applying applicable transfer pricing mechanism as per Income Tax Rules and determine the TP Adjustment. Once again reiterate that the TP Adjustment cannot be at ‘NIL’ as determined by the TPO. Accordingly, the matter was remanded to the file of TPO for determining the ALP afresh.

FULL TEXT OF THE ORDER OF ITAT DELHI

The above mentioned Appeals are filed by the assessee and the Revenue for Assessment Year 2009-10 passed by the order of the Ld. Commissioner of Income Tax (Appeals), Delhi-38 (“Ld. CIT (A)” for short), dated 31.07.2017.

2. The Grounds of Appeal by the assessee are as under:-

ITA No.6253/Del/2017

“1. Grounds of Appeal

1. On the facts and in circumstances of the case and in law, the order passed by Commissioner of Income Tax (Appeals) -38, New Delhi (“Learned CIT(A)”), Assistant Director of Income Tax, Circle 1(1), International Taxation, New Delhi (“Learned AO”) and Additional Director of Income Tax (Transfer Pricing Officer-1(1), New Delhi (“Learned TPO”).

2. The Learned CIT (A)/ Learned AO/ Learned TPO have erred in law and in facts, in not discharging the statutory onus to establish that an Appellant’s case is covered under any of (a) to (d) clause of Section 92C(3) of the Act, has not been discharged by the learned TPO is bad in law and void ab-initio. 2.

3. The Learned CIT (A)/ Learned AO/ Learned TPO have erred in not appreciating that the Appellant had prepared the detailed contemporaneous Transfer Pricing documentation bona fide and in compliance with the Act and Income Tax Rules, 1962 (“the Rules”) and selected uncontrolled comparable companies based on a detailed Functional Asset and Risk analysis following a methodical benchmarking process.

4. The Learned CIT (A)/ Learned AO/ Learned TPO have grossly erred by passing an order with a preoccupied mind to make an adjustment that is contrary to the facts and prejudicial to the interest of the Appellant.

5. The Learned CIT (A) has erred in determining the arm’s length price (“ALP”) of the international transactions to be 50 percent of the amount paid by the Appellant to its associated enterprises (“AEs”) for receipt of intra group services from its AEs.

6. The Learned CIT(A)/ Learned AO/ Learned TPO have erred in not conducting the analysis of selecting the Most Appropriate Method (MAM) as prescribed under Rule 10C of the Rules and accordingly not documented the same as prescribed under Rule 10D of the Rules.

7. The Learned CIT(A)/ Learned AO/ Learned TPO have erred in law by upholding the determination of the ALP of the international transaction using Comparable Uncontrolled Price (CUP) method without following the manner of applying the CUP method prescribed under Rule 108(1)(a) of the Rules

8. The Learned CIT(A)/ Learned AO/ Learned TPO have erred by upholding the adoption of CUP method as the most appropriate method for determining the arm’s length price in respect of the intra group services without identifying any comparable uncontrolled transaction(s) for the computation of the ALP as prescribed in Section 92F(ii) of the Act

9. The Learned CIT (A)/ Learned AO/ Learned TPO have erred in passing an order that is perverse in law ignoring the relevant submissions, information and documents provided by the Appellant to substantiate the receipt of intra group services.

10. The Learned CIT (A)/ Learned AO/ Learned TPO have erred in questioning the commercial rationale of the legitimate business expenses incurred by the taxpayer and not restricting the scope of assessment under section 92CA to determining the arm’s length price of the international transaction by adopting one of the prescribed methods only.

11. The Learned CIT (A)/ Learned AO/Learned TPO have erred, on facts and circumstances of the case and in law, in contending that an independent service recipient would be willing to pay for a service only upon receipt of certain tangible benefit.

12. The Learned CIT (A)/ Learned AO/ Learned TPO have erred by determining ALP of the international transactions entered into by the Appellant with its AEs using single year data of financial Year 2008-09 for the purpose of comparability analysis which was not available to the Appellant at the time complying with the Transfer Pricing (TP) documentation requirement under the Act. The Ld. AO/TPO/CIT (A) ought to have used multiple year data which would have captured normal market cycles and reduced the variability/distortions in the financial results arising out of single year data

13. The Learned CIT (A)/ Learned AO/ Learned TPO have erred by rejecting company namely C G-VAK Software and Exports Limited, identified by the Appellant using turnover of less than INR 5 Crores as a comparability criterion to sieve non comparable companies with respect to provision of back office support services.

14. The Learned CIT (A)/ Learned AO/ Learned TPO have erred by rejecting certain companies identified by the Appellant in its TP documentation, having different accounting year than the Appellant (ie. companies having accounting year other than March 31 2009 or data of the company does not fall within 12 month period i.e. 01-04­2008 and 31-03-2009).

15. The Learned CIT (A)/ Learned AO/ Learned TPO have erred by rejecting certain comparable companies identified by the Appellant on account of export revenues being less than 75% of the operating revenues with respect to provision of back office support services.

16. The Learned CIT (A)/ Learned AO/ Learned TPO have erred by erroneously rejecting certain comparables and adding certain companies to the final set of alleged comparables for the impugned transaction on an ad-hoc basis, thereby resorting to cherry picking of comparables for benchmarking the provision of back office support services.

17. The Learned CIT (A)/ Learned AO/ Learned TPO have erred by ignoring the business/ commercial reality that since the Appellant undertakes minimal business risks as against comparable companies which are full risk bearing entrepreneur(s), and in not allowing adjustments like risk adjustment to the Appellant.

18. The Learned CIT (A)/ Learned AO/ Learned TPO has erred by not following the “Rule of Consistency while making an upward adjustment to the income of the Appellant.

19. The Learned AO has erred on facts and in law in proposing to levy interest under section 234A, 2348, 234C and 234D of the Act.

20. The Learned AO has erred, in facts and in law, by initiating penalty proceedings under section 271(1)(c) of Act in relation to transfer pricing adjustment and without recording any adequate reasons for such initiation.

The above grounds of appeal are mutually exclusive & without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute, withdraw any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.

The Appellant prays for appropriate relief based on the above grounds of appeal and the facts and circumstances of the case.”

ITA No.6455/Del/2017

“1.1 That in the facts and circumstances of the case, and in law, the Ld. CIT(A) erred in allowing relief on the transfer pricing adjustments made.

1.2 That in the facts and circumstances of the case, and in law, the Ld. CIT(A) erred in directing inclusion of Cepha Imaging Pvt. Ltd. as a comparable if it passes the export earning filter, without considering the TPO’s finding of functional dissimilarity.

1.3 That in the facts and circumstances of the case, and in law, the Ld. CIT(A) erred in directing the inclusion of R Systems International Ltd. as a comparable, without considering Rule 10B(4), and without considering that the amounts of operating profit or operating cost etc. for the year are not directly available without any apportionment or truncation, in terms of the decision of the Hon’ble ITAT in Tech Books Electronics Services Pvt. Ltd. (TS-772-ITAT-2016(DEL)-TP).

1.4 That in the facts and circumstances of the case, and in law, the Ld. CIT(A) erred in directing the exclusion of Coral Hub Ltd. and Cosmic Global Ltd. from the comparables, merely relying upon the decision in Mercer Consulting Ltd., and without considering how the facts are similar, and without considering CBDT circular SO 890 (E) dated 26.09.2000 listing products or services which could be claimed under ITES.

1.5 That in the facts and circumstances of the case, and in law, the Ld. CIT(A) erred in directing exclusion of E-clerx Services Ltd. and ICRA Online Ltd. from the comparables, without considering the functional profile of the assessee and these comparables.

2.1 That in the facts and circumstances of the case, and in law, the Ld. CIT (A) erred in allowing relief on the transfer pricing adjustment towards intra group services.

2.2 That in the facts and circumstances of the case, and in law, the Ld. CIT (A) erred in allowing relief on the transfer pricing adjustment towards intra group services, erroneously observing that recharacterization of the transaction and questioning expediency is not permissible, without considering that in this case, the arm’s length price has been determined at nil after examining the facts.

2.3 That in the facts and circumstances of the case, and in law, the Ld. CIT](A) erred in allowing relief on the transfer pricing adjustment towards intra group services without considering the detailed facts and reasons given in the TPO’s order.

3. The appellant craves leave to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.”

3. The assessee is a non resident company incorporated under the laws of USA and engaged in the banking business. The Indian Branch was set up during Financial Year 2007-08 after obtaining the requisite license from Reserve Bank of India to carry on following activities:-

(1) Credit Card Business

(2) Service in relation to sale of TCs and

(3) Acceptance of institutional deposits as defined by RBI

4. The assessee filed its return of income for Assessment Year 2009-10 declaring income at Rs. 52,74,06,080/-. The case of the assessee was selected for scrutiny and notice u/s 143(2) of the Income Tax, 1961 (‘Act’ for short) was issued. The assessee participated in the assessment proceedings. During the assessment proceedings, on perusal of Form No. 3CEB filed by the assessee, it was noticed that the assessee had entered into International Transactions with its Associated Enterprises (‘AE’) amounting to Rs. 3.20 billions. A reference u/s 92CA(3) of the Act was made to the Transfer Pricing Officer (‘TPO’). The TPO vide order dated 23/01/2013 passed u/s 92CA(3) of the Act made transfer pricing adjustment amounting to Rs. 24,30,24,147/-. The cumulative adjustment made by the TPO are as under:-

5. The final assessment order came to be passed u/s 143(3)/144C of the Act on 15/05/2023 by making addition of Rs. 24,30,24,147/-. Aggrieved by the order dated 15/05/2013, the assessee preferred an Appeal before the CIT(A). The Ld. CIT(A) vide order dated 31/07/2017 directed the TPO to grant 50% of the adjustment claimed by the assessee on account of Intra Group Services availed by the assessee.

6. Further, the Ld. CIT(A) while making the TP adjustment on account of ITEs made following exclusions in the comparable Companies.

1. E Clerx Services Ltd.

2. ICRA Online Ltd.

3. Coral Hub Ltd.

4. Cosmic Global Ltd.

And directed to include of following comparableies:

1. R System International Ltd.

2 Cepha Imaging Pvt. Ltd.

Aggrieved by the order of the Ld. CIT(A) both the assessee as well as the Revenue filed the present Appeal on the grounds mentioned above.

7. Ground No. 1 to 5 of the Assessee’s Appeals are argumentative and general in nature which requires no adjudication.

INTRA GROUP SERVICES (IGS)

8. Ground No. 5 to 11 of the Assessee are directed against order of the Ld. CIT(A) in determining the Arm’s Length Price of international transaction to be 50% of the amount paid by the Assessee to its AE for receipt of Intra Group Services from its AE’s and the Ground No. 2.1 to 2.3 of the Revenue are against the granting of 50% relief to the assessee on ad-hoc manner. Therefore, the above Grounds of the assessee and the Revenue are adjudicated as under:-

9. The assessee company paid an amount of Rs. 22,65,40,886/-to its AE as payment for receipt of Intra Group Services (IGS). To enquire about the said transaction, for determination of ALP, the TPO issued show cause notice on 28/12/2012 to the assessee company calling the assessee to furnish the details and documents. The relevant portion of the show cause notice is reproduced as under:-

“Intra Group Services from other overseas entities:

In Please furnish all the arrangements entered into by the assessee company, related to the Intro Group Services obtained by the assessee Company from the AEs during the year.

2. Please Identify each of the services actually received by the assessee company.

3. Please specify the amount of payment made for each of such services.

4. Please submit the contemporaneous documentary evidence to show that these services have actually been received the assessee company.

5. Please justify the need for the receipt of such services for which payment has been made.

6. Please state with documentary evidences as to when and how these services were requisitioned from the AEs.

7. Please state as to how the rate or payment for IGS has been determined at the time of entering in to the agreement? Please also furnish the basis thereof.

8. Please state as to whether any cost benefit analysis was done while entering into the agreement and while requisitioning the services for payment of IGS?

a. if so the details of such cost benefit analysis should be furnished. The cost benefit analysis should include the expected benefit from the IGS vis-a-vis the payment made for the same.

b. Please specifically state as to whether any benchmarking analysis was done at the time of entering into the agreement so as to compare the payment of IGS to the AE vis-a-vis an independent party under similar circumstances. If so, the details thereof.

9. Please show with evidence as to what tangible and direct benefit has been derived by the assessee company from the use of such IGS.

10. Whether the services availed from AEs, have also been performed by the assessee company itself or also availed from independent parties? If yes,

a. The details of such expenditure for each of the services should be furnished. b. Please state as to why a separate payment has been made for such services to the AE.

11. Please furnish details and documentary evidence of cost incurred by the AE for rendering each type of services purportedly received by the assessee company and the mark up applied, if any by the AE. Please also state as to whether the cast incurred by the AE is audited.

12. Whether AE is rendering such services to any other AEs/independent parties also. if yes the details thereof including the rates/amount charged from such AEs along with mark up if any.

13. If the AB has rendered services to more than one entity including the assessee company, then the basis of allocation amongst various entities may be furnished. Please also furnish the basis of choosing a particular allocation key.

14. If the above information is not furnished, complete in all respects, along with contemporaneous documentary evidences, the arm’s length payment for these intra group services would be treated as Nil by applying CUP method.

If the above information is not furnished along with contemporaneous documentary evidences and separate benchmarking for these transactions is not done, the payment for these intra group services would be treated as Rs. Nil by applying CUP method.”

10. The assessee vide its letter dated 16/01/2013, furnished the reply which is reproduced as under:-

11. It is evident from the above reply that the assessee claimed to have receiving services in the fields of technology, Services, Risk Information Management, Head quarter, Technology Services/back office support services/treasury/regional headquarter services etc. On going through the reply filed by the assessee, it is found by the T.P.O. that the assessee has failed to furnish any evidence which could establish receipt/rendering of service, though the assessee submitted description of services, but has not submitted any evidence. The TPO observed that the assessee has submitted “Performance score card” which showed evaluation of services, but failed to establish its authenticity and neither submitted any evidence regarding the details, how such services were received. The observation of the TPO is reproduced as under:-

“18.2.2. As regards the submission of contemporaneous documentary evidence to show that these services have actually been received no documentary evidence was furnished. It merely submitted “performance score card” which basically showed the evaluation of the company on various parameters. Even for the performance score cards, no evidence was furnished regarding its authenticity. Even otherwise, this evaluation in no way reflected receipt of any of the above mentioned services. In the absence of such crucial information, the Assessees contention that specific services have been performed which were needed by the assessee and for which it did not have expertise or logistics in India does not seem tenable. Thus, the assessee has failed to substantiate that any service in this regard has actually been availed by it.”

12. TPO asked the assessee why the ALP of such services cannot be treated as NIL as the assessee has failed to establish receipt of such services. Further the contentions of the assessee has not been accepted by the TPO on following grounds:-

• “There is no evidence that the services have actually been provided. The assessee has failed miserably to demonstrate the need for these services as also the receipt of the same.
• Even if it is considered that some sort of services have been provided by the designated persons, there is no evidence that those persons have not provided any service to the AE. Those persons are in the payroll of AE and therefore, major portion of work must have been carried out by them for the AE and only ancillary services would have been provided to the assessee company and therefore, any charge in this regard is not justified in view of OECD TP guidelines paragraph 7.13 under chapter VII.
• So far as claim of revenue generation, the auditor of the assessee company has not mentioned anything about such arrangement in audited financials either in the Notes to accounts or anywhere else. Therefore, the claim of the assessee has no credible basis and cannot be accepted.
• Moreover, cost allocation is also not certified by any independent auditor and the basis of cost allocation is also not understandable.
• There is no basis / evidence for revenue claimed to have been generated from the alleged services.
• Cost allocation for the intra group services has no basis nor any such basis has been given for each segmental intra group services received. The assessee has further contended that analysis undertaken by the assessee cannot be rejected without an appropriate basis. in this regard it is to be pointed out that the assessee could not substantiate its claim that services claimed to be availed have actually been availed by it and an independent enterprise would be willing to pay such amount under such circumstances. Moreover, analysis is without any basis and is not credible. Therefore, such analysis is liable to be rejected. The assessee has also contended that for proposed analysis on CUP for determination of ALP for these transactions as NIL, no reason/ data has been given to the assessee. In this regard it is pointed out that the assessee has failed to substantiate itself by documentary evidence that such services have actually been rendered to the assessee and so it is natural corollary that ALP of such transaction will be nil where payment is made for no services. It can be said on the basis of discussion made above that this arrangement is nothing but a profit shifting device.
• The assessee has failed to establish any direct nexus, whatsoever, of any kind, which may help its case of having received the business from its AE as a result of services provided by the ΑΕ.
• The assessee has failed to establish that its associated enterprises have specifically dedicated service centers for the assessee. The AE was not prohibited from rendering services to third parties as well. It is apparent, as has been mentioned above, that services of such nature are being performed by the assessee itself during its normal course of business. Under arm’s length circumstances no independent enterprise would be willing to pay for services which are a part of its routine business performed by it and would not engage it to receive such incidental services for a payment, even at cost.

• Moreover, it is not disputed that the activities for which it is paying, are also performed by itself. Under the OECD guidelines, no intra-group service should be found for activities undertaken by one group member that merely duplicate a service that another group member is performing for itself, or that is being performed for such other group member by a third party. Moreover, even if it is presumed without conceding that business exigencies do permit third party involvement in spite of its own endeavor, in no case is there is scope for duplicity of services. Moreover, the cost of such services, if any, would need to be identified to prove that it has not overpaid its AE than what would have been paid under arm’s length circumstances.”

13. The Ld. TPO after taking into account of OECD guidelines and discussion of the case laws cited, came to conclusion and computed the ALP of Intra Group Services as ‘NIL’ on the ground that the assessee failed to submit any evidence to establish receipt of services.

14. In the Appeal filed by filed by the Assessee, the Ld. CIT(A) while directing the TPO to grant 50% of the adjustment claimed by the assessee on account of Intra Group Services availed by the assessee, failed to elaborate the details of materials which have been produced before him to come to a conclusion that ‘there is enough material on record to conclude that some services were availed by the Company’.

15. As per the Ld. CIT(A) there is enough material on record to conclude that some services were availed by the Company. Considering the profile of the Assessee and the business structure of the Assessee, we find that the T.P.O. is not correct in arriving the ALP at NIL on the ground that the Assessee has not produced theevidence for the receipt/rendering of service. The TPO should have looked into all the evidences submitted by the assessee and give finding after adjudicating the same. It is an accepted fact that the transaction between the Assessee and AE will be always subjective in nature, it is fact that the assessee American Express being a running and established foreign entity and they have established the business in India. Thus, there is a considerable advantage engaged by Indian entity, hence there is a greater chance of Intra Group Services transferred to Indian entity which has to be verified by the TPO by applying applicable transfer pricing mechanism as per Income Tax Rules and determine the TP Adjustment. We once again reiterate that the TP Adjustment cannot be at ‘NIL’ as determined by the TPO. Accordingly with the above observations, we remand the matter to the file of TPO for determining the ALP afresh. Thus, the Ground No. 5 to 11 of the assessee and Ground No. 2.1 to 2.3 of the Revenue are partly allowed for statistical purpose.

16. Grounds No. 12 to 18 of the assessee are against rejection of Company selected by the Assessee CG Vak Software and Exports Ltd. identified by the Assessee.

M/s CG VAK Software and Exports Ltd.,

17. M/s CG VAK Software and Exports Ltd., a comparable identified by the assessee using turnover filter of less than 5 crore. The Ld. TPO has excluded the said Company on the ground that the said Companies are failing turnover filter and are engaged in providing software development services thus the same are not comparables.

18. The Ld. Counsel for the Assessee submitted that this Company operates in three segments namely software service segment, training services segment and BPO services segment. For the purposes of benchmarking of international transaction, BPO service segment has been considered as comparable to Assessee and further submitted that quantum turnover can be no reason for exclusion of a company which is otherwise comparable and relied on the Judgment of Hon’ble High Court of Delhi in the case of Chrys Capital Investment Advisors (India) Pvt. Ltd. (376 ITR 183).

19. We have heard the parties perused the material available on record. The Ld. CIT(A) after verifying the record found that the turnover is ITeS segment is only about Rs. 86,00,000/- out of total turnover of Rs. 7.23 Crore (i.e. 6.37 crore pertain to software services and remaining Rs. 0.86 crore pertains to ITEs Segment), whereas the turnover of the assessee is more than Rs. 19.95 Crore in ITEs Segment. Therefore, the ratio laid down by the Hon’ble High Court of Delhi in the case of M/S Chrys Capital Investment Advisors (India) P. Ltd. (supra) relied by the Ld. Assessee’s Representative is not applicable to the present case.

20. Considering the above facts and circumstances, we find no error or infirmity in the findings and conclusion of the Ld. CIT(A) in excluding M/s CG VAK Software and Exports Ltd. from the final list of comparables accordingly, the Ground No. 12 to 18 of the Assessee are dismissed.

21. Ground No. 19 and 20 of the Assessee’s Appeal are being consequential, requires no adjudication.

22. In Ground No. 1.1 to 1.5, the Department of Revenue has challenged inclusion of comparables namely Cepha Imaging Pvt. Ltd., R System International Ltd. and exclusion of Coral Hub Ltd., Cosmic Global Ltd., E-Clerx Services Ltd. and ICRA Online Ltd.

Cepha Imaging Pvt. Ltd.

23. The Ld. Departmental Representative submitted that the Ld. CIT(A) erred in directing the inclusion of Cepha Imaging Pvt. Ltd, as comparable without considering the TPOs finding of functional dissimilarity.

24. Per contra, the Assessee’s Representative submitted that the TPO has erroneously rejected the said company on the ground that the said Company does not qualify export earning filter and the Ld. CIT(A) after verifying the Annual Report of Cepha Imaging Pvt. Ltd found that the export earning of the said Companies 100% during the year under consideration, accordingly, included the same in the final list which requires no interference.

25. We have heard both the parties and perused the material available on record. As per the annual report of the said Company, the export earning of the said company is 100% during the year under consideration which is extracted as under:-

26. From the above computation and the extract, it is found that the said Company meets the exports earning filter as adopted by the TPO. In our considered opinion, the Ld. CIT (A) has rightly directed the A.O/TPO to verify the export earning of the Company and to include the said in the final list of the Company if Company passes the export earning filter. Thus the said findings of the CIT(A) requires no interference, accordingly, we dismiss the Ground No. 1.1 to 1.2 of the Department’s Appeal.

R System International Ltd.

27. The Ld. CIT(A) directed the TPO to consider R System International Ltd. in final list of comparable if quarterly audited data provided by the assessee for computing the operating profit margin for the instant Assessment Year.

28. The Ld. Departmental Representative vehemently submitted that the Ld. CIT(A) erred in directing the inclusion of R System International Ltd. as comparable without considering Rule 10B(4) of the Rules and without considering the amounts of operating profit or operating cost etc.

29. Per contra, the Assessee’s Representative relying on the order of the CIT(A) sought for dismissal of the Ground No. 1.3 of the Department.

30. The Ld. TPO while excluding to consider R System International Ltd. from the comparables found that there are different Financial Year ending of December 2008 instead of March 2009, although the TPO found that functional profile of BPO segment of R System International Ltd. is similar to that of the Assessee and its satisfies all comparability criteria. In the Appeal, the Ld. CIT(A) observed that if quarterly audited data is provided by the assessee for computing the operating profit margin for the said Assessment Year, the TPO directed to include the Company in final list of comparables. The Hon’ble High Court of Delhi in the case of Commissioner Of Income Tax-II vs Mckinsey Knowledge Centre India Pvt. in ITA No. 217/2014 laid down the ratio that a functional comparable company cannot be rejected on the ground that data of entire financial year is not available in following manners:-

“14. The Revenue is in appeal before this Court questioning the admissibility of the above mentioned comparables while computing Arm’s Length Price regarding the IT Support services after the TPO and AO rejected the above mentioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT(A) after considering the Assessee’s submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by TPO because the company had different financial year ending on December, 2006, whereas Assessee’s financial year ended on March, 2006. There is nothing shown to the court that supports the revenue’s argument that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included in the list of comparables selected for benchmarking the international transaction. Therefore, the ITAT has held that if the comparable is functionally same as that of tested party then same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record, the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings.”

Considering the above facts and circumstances and relying on the Judgment of the Jurisdictional High Court in the case of Mckinsey Knowledge Centre, we find no error the action of the Ld. CIT(A) in directing the TPO to consider R System International Ltd. in final list of comparables if quarterly audited data is provided by the assessee for computing the operating profit margin for the instant Assessment Year. Finding no merit in Ground No. 1.3, we dismiss the Ground No. 1.3 of the Department.

CORAL HUB LTD. AND COSMIC GLOBAL LTD.

31. The Ld. CIT(A) by following relying on the order of the Tribunal in the case of Mercer Consulting directed to exclude Coral Hub Ltd. and Cosmic Global Ltd. from list of comparables.

32. The Ld. Departmental Representative submitted that the Ld. CIT(A) committed error in directing to exclude Coral Hub Ltd. and Cosmic Global Ltd. from the comparables merely by relying upon the decision in the case of Mercer Consultancy Ltd. without considering how the facts are similar and without considering the CBDT Circular SO 890(E)/26/09/2000 listing products or services which could be claimed under ITEs.

33. Per contra, the Assessee’s Representative submitted that the Ld. CIT(A) has relied on the order of the Tribunal in the case of Mercer Consultancy Pvt. Ltd. and both Cosmic Global and coral Hub were directed to be excluded as the major outsourcing activity being carried out by it, therefore, the order of the CIT(A) requires no interference at the hands of the Tribunal.

34. We have heard both the parties and perused the material available on record. The Ld. CIT(A) while directing the A.O/TPO to exclude the Coral Hub Ltd. and Cosmic Global Ltd. from the list of comparables, relied on the order of the Coordinate Bench of the Tribunal in the case of Mercer Consultancy (India) Pvt. Ltd. in ITA No. 966/Del/2014 in following manners:-

“The Ld. AR has argued that companies are working on a different business model. The outsourcing charges of these companies are significant, being 90.57% in the case of Coral Hub and 57.31% in the case of Cosmic Global. Ld. AR relied on the decision of Hon’ble ITAT in the case of Mercer Consulting cited supra where Coral Hub Ltd has been excluded in the final list of comparables and Cosmic Global Ltd. was also excluded. The relevant portion judgment is reproduced as under:-

“The facts of the appellant’s case are also similar to the findings by the Hon’ble ITAT in the case of Mercer Consulting (India) Private Limited ITA No.966/Del/2014) where the TPO was directed to exclude Coral Hub Limited and Cosmic Global relevant extract is pasted below for your kind reference:

12.3…….. The Mumbai Bench of the Tribunal in the case of Hapag Lloyd Global Services (supra) has held that Vishal Information Technologies Limited cannot be considered as comparable because of the overwhelming outsourcing activity carried out by it. This view was taken by relying on another order passed by the Mumbai Bench of the Tribunal in ACIT vs. Maersk Global Service Centre (India) Private Limited ITA No.3774/M/2011). In the later case also, the Tribunal held that the case of Vishal Information Technologies Limited or Coral Hub Limited was not includible in the list of comparables because of major outsourcing. Since the facts of the instant case are on all fours with these two cases, we are of the considered opinion that this case is required to be excluded from the list of comparables. We order accordingly.”

“13.3 However, we find this case to incomparable on the alternative argument advanced by the id. AR to the effect that total revenue of the Accounts BRO segment of Cosmic Global Limited is very low at Rs. 27. 76 lacs. We have discussed this aspect above in the context of CG- VAK’s case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs. 86.10 lacs. As the segmental revenue of BRO segment of Cosmic Global Limited at Rs. 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables.”

6.4.2 I have considered the arguments of the Ld AR and perused the decision of Hon’ble ITAT Delhi in the case of Mercer Consulting. Following the decision of Hon’ble ITAT, I direct the AO/TPO to exclude Coral Hub Ltd. and Cosmic Global Ltd. from the list of final comparables.”

35. The Ld. CIT(A) as directed to exclude the above two Comparables finding that the major outsourcing activities being carried out by it and also by relying on the order of the Tribunal in the case of Mercer (India) Pvt. Ltd. (Supra), since the Revenue has not brought anything on record to point out any change of circumstances in Assessee’s case, we find no reason to interfere with the finding of the Ld. CIT(A). Find no merit in Ground No. 1.4 of the Department, we dismiss the Ground No. 1.4 of the Department.

E-Clerx Services and ICRA Online

36. The Department of Revenue is aggrieved by exclusion of E-Clerx Services and ICRA Online in Ground No. 1.5. The Ld. Departmental Representative submitted that the Ld. CIT(A) has committed error in directing to exclude the above two Companies from the comparables without considering the functional profile of the assessee and those comparables.

37. Per contra, the Assessee’s Representative submitted that both the above Companies are engaged in providing KPO Services i.e. high ended ITEs whose nature of business is from different from that of the assessee. Therefore, the Ld. CIT(A) has rightly directed the TPO to exclude the Company from final set of comparables which requires no interference.

38. We have heard both the parties and perused the material available on record. The Ld. CIT(A) directing to exclude the above two Companies perused the annual report including the business over views and management discussion analysis in annual reports. The above Companies have claim to be leading knowledge process outsourcing Companies providing data analytic and data process out sources to some of the largest brand of the world and the said Companies are engaged in providing KPO Services i.e. high end ITEs. In our considered opinion the said findings and the conclusion of the Ld. CIT(A) requires no interference, finding no merit in Ground No. 1.5 of the Department’s Appeal, we dismiss the same.

39. In the result, the Appeal filed by the Assessee in ITA No. 6253/Del/2017 and Appeal filed by the Department in ITA No. 6455/Del/2017 are partly allowed for statistical purpose.

Order pronounced in open Court on 07^th August, 2024