ITAT HYDERABAD BENCH ‘A’
Capital IQ Information Systems (India) (P.) Ltd.
versus
Deputy Commissioner of Income-tax (International Taxation)
IT Appeal NO. 1961 (HYD.) of 2011
[ASSESSMENT YEAR 2007-08]
Date of Pronouncement- 23.11.2012
ORDER
Saktijit Dey, Judicial Member
This appeal by the assessee arises out of the assessment order dated 11.10.2011 passed under S.143(3) read with S.144C of the Act, on the directions of the Dispute Resolution Panel(DRP). The appeal pertains to the assessment year 2007-08.
2. The factual matrix as emanates from the record are the assessee is a wholly owned subsidiary of Capital IQ Inc., the Associated Enterprise (AE), being a company based in USA. The assessee is engaged in the business of providing IT-enabled Services(ITES) and business support services, such as financial reports/related documents, technical service for development of software and other similar services to its AE on a ‘cost plus mark up’ basis. For the impugned assessment year, the assessee filed a return of income declaring the total income at Rs.8,29,06,660. During the relevant financial year, the assessee had the following international transactions with its AE.
| (a) Provision of IT enabled services | Rs.56,32,13,579 |
| (b) Provision of business support services | Rs. 4,19,34,643 |
For computing the Arm’s Length Price (ALP) of the international transaction, the assessee adopted the Transactional Net Margin Method (TNMM). In the course of assessment proceedings under S.143(3), the Assessing Officer noticing that the assessee has received payment from international transactions undertaken with its AE made a reference to the transfer Pricing Officer(TPO) under S.92CA of the Act, to determine the ALP. On receiving the reference, the TPO issued a notice under S.92CA(2) calling upon the assessee to submit the documents maintained in terms of S.92B. After receiving the compliance of the assessee, the TPO issued another letter requiring the assessee’s compliance on various issues raised therein. The TPO noticed that though the assessee in its Transfer Pricing Document claimed the ITES and Business Support Services to be two separate segments, in the Profit & Loss Account receipt from both have been aggregated and shown as income from ‘IT Enabled and Business Support Services’. Expenditure with regard to both the services have also been aggregated. In response to the query made by the Assessing Officer, the assessee explained that services pertaining to provision of ITES and provision of Business Support Services are different. The Assessing Officer however, was of the view that the business support service rendered by the assessee is nothing but providing office space and other amenities for performance of business, which is incidental to the ITES rendered by the assessee to its AE. The TPO noticed that as per the Functions, Assets, Risks (FAR) Analysis done by the assessee, main function of the assessee with its AE is provision of ITES and provision of Business Support Services. During the relevant financial year, the AE purchased software licences in bulk for use by various group entities including the assessee. The cost pertaining to these licences was cross-charged by the AE to various group companies, including the assessee at cost. The assessee also deployed well qualified work-force in its business. The assessee also owns computers, server, etc. which re essential to the business of a company providing ITES. The assessee has claimed that being a captive contract service provider, it operates in a risk mitigated environment on a cost plus basis. On examining the TP Study Report submitted by the assessee, the TPO noted that the assessee has selected itself as the tested party and has adopted TNMM as the most appropriate method for arriving at the ALP. The assessee has selected uncontrolled comparables by using information as available on the Prowess Data Base till 10.8.2007 and Capitaline Plus Data Base updated till 3.8.2007. The assessee has considered the financial results of the selected comparables for the period ending between 1.4.2005 and 30.6.2007. Where data for the financial year 2005-06 are not available earlier year’s data was considered. While searching for the comparables, the assessee has applied the following filters.
“1. Companies for which sufficient financial information is not available to undertake analysis were excluded
2. Companies for which sufficient descriptive information is not available to perform analysis were excluded.
3. Companies that have ceased business operations or are currently inactive were excluded.
4. Companies that are undertaking different functions compared to the tax payer were excluded.
5. Companies that do not have significant (<25%) foreign exchange earnings.
6. Companies which have been making pertinent operating losses were excluded.
7. Companies that have substantial (>25%) transactions with related parties were excluded
8. Companies which have been in their first year of operations and have incurred operating losses and
9. Companies that are duplicated in the data base with different names or merged to form another company.”
4. On the basis of the search of data base, the assessee selected 15 comparables with an average profit margin of 21.15% on cost. Therefore, the margin earned by the assessee at 15.90% on operating cost was treated as at Arm’s Length as the margin is within plus/minus 5% range. After analyzing the TP study report of the assessee, the TPO found the following defects/deficiencies-
(a) The assessee has eliminated overwhelming number of companies by not applying the quantitative filters (such as, related party transactions, insignificant foreign exchange etc.), but by applying so called qualitative filters. Out of 800 companies in the data base, 420 companies have been eliminated by applying ‘functionally different’ filter. Such approach of the assessee raised doubts about the objective nature of the analysis as the comparables finally selected by the assessee were involved in domestic operations, substantial related party transactions. The assessee has not filed any details in the TP report as to what were the qualities which were compared and on what basis.
(b) There is disconnection between the search for comparable and the comparability analysis. The assessee has approached in a mechanical manner in selecting the comparables from the data base without examining the comparability factors contained in Rule 10B(2) of the I.T. Rules.
(c) The assessee has not used the data pertaining to financial year 2006-07. In case of all the fifteen comparables, which has led to use of incorrect data and also does not fulfill the condition of Rule 10B(4). Assessee’s approach in applying the related party transaction filter is selective. Though the assessee while applying the aforesaid filters has rejected comparable companies where related party transactions with its AE exceeded 25% of the operating Revenues, it has itself adopted the following comparables which exceeded 25% of the operating cost.
