INSTRUCTION

Direct Tax Dispute Resolution Scheme, 2016-sensitizing CIT (Appeals)-reg

CASE LAW

2016-TII-444-ITAT-MAD-TP

INAUTIX TECHNOLOGIES INDIA PVT LTD Vs DCIT: CHENNAI ITAT (Dated August 24, 2016)

Income Tax - Sections 92CA, 143(3) & 144C.

Keywords: AE - ITES - ALP - economic analysis - qualitative filters - selection of comparables - single year data - operating cost - back office support - manpower supply.

Whether when the operating margin of a company are materially different in its content and value with that of the assessee company, can the same be included in order to arrive at an ALP of controlled transactions - NO; ITAT

Whether when a business model where services are rendered by employing own employees, using one’s own infrastructure would have a different cost structure as compared to a business model where services are outsourced, can the two be considered in the list of comparables - NO: ITAT

Whether when the assessee company is being engaged in ITES, can the same be held as a valid comparable with that of a company engaged in the medical prescription services - NO: ITAT

Whether when there is no segregation of expenses available attributable to investment which exempts income, is it possible for the Revenue to grant assessee, an additional opportunity of being heard - YES: ITAT

The assessee is in the business of software development services, providing ITES, and manpower supply services to its AE. Assessee, in its Form No.3CEB, applied TNMM method as the most appropriate method to determine the ALP of its international transactions. The profit margins of the assessee shown under software development services, ITES, and manpower supply services (MSS) were 9.6%, 13.42% and 2.88% respectively. The arithmetic mean of the comparables selected by the assessee under these three segments was 11.33%, 7.37% and 1.51% respectively. Hence, the assessee in its TP report claimed that its international transactions with AEs were at arm’s length. However, he TPO in his order did not accepted the assessee’s claims. The TPO, after conducting fresh search and examining the various comparables, rejected some of the comparables selected by the assessee and also included some new comparables and determined the arithmetic mean of the software development services and information technology enabled services (ITES) segments at 24.55% and 31.49%, respectively. Hence, the TPO required the assessee to show cause as to why upward adjustments should not be made to the ALPs of the international transactions. The assessee filed its objections before the TPO. After considering the various objections raised by the assessee, the TPO re-determined the arithmetic mean of the comparables of the SDS segment at 18.63% and ITES segment at 21.37%. Thus, the arithmetic means of the profit level indicators of the comparables under SDS and ITES segments were 9.03% (18.63% - 9.60%) and 7.93% (21.37% - 13.42%) higher than the profit margins shown by the assessee. Hence, the TPO proposed upward adjustments of Rs. 14,83,73,071/- (being the additional profit margin computed at additional 9.03% of the total operating cost of Rs. 164,31,12,638/-) under SDS segment; and Rs. 2,82,84,751/- (being the additional profit margin computed at additional 7.95% of the total operating cost of Rs. 35,57,83,034/-) under ITES segment.

Having heard the matter, the Tribunal held that,

Selection of comparables - eClerx Ltd.

++ applying the aforesaid principles to facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd., the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In maersk Global Centers (India) Pvt. Ltd., the Special Bench of Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s. Capital Iq Information Systems (India) (P.) Ltd. V. Additional CIT, wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits;

Vishal Ltd.

++ in our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal’s expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The
DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability, Plainly, a business model where services are rendered by employing own employees and using one’s own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity.” In view of the above, in our opinion, Coral Hub Ltd. cannot be considered as comparable to the assessee’s case;

Jeevan Scientific Technologies Ltd.

++ assessee had submitted that this is a medical prescription company which is dedicated to providing reliable, cost-effective and technology-driven clinical research services and solutions to clients globally. The assessee’s service portfolio enables to provide integrated solution for the management of clinical research data right from inception to completion. The assessee’s world-class team of highly-qualified and experienced scientists, clinicians and multidisciplinary staff are committed to providing quality solutions across a wide range of therapeutic areas. The assessee’s commitment to quality and customer-focused approach, bundled with outstanding expertise distinguishes us from others. The assessee manages the projects based on the clients’ requirements and provide customized solutions. The assessee is having immense talent pool to reliably meet the needs of clients and deliver well within timelines. The services at Jeevan Scientific Technologies Ltd. include Medical Writing, Clinical Data Management, Biostatistics and other services including copy editing, proofreading, formatting, quality assurance, literature search, graphic design and submissions to journals and congresses. Further, the AR submitted that as the assessee is an IT company, Jeevan Scientific Technologies Ltd. cannot be considered as comparable to the assessee’s case. In our opinion, there is force in the argument of the AR. There is no dispute that Jeevan Scientific Technologies Ltd. is being ITES, it cannot be compared to the medical prescription company. Accordingly, we are inclined to direct the TPO to exclude Jeevan as comparable to the assessee’s case;

Disallowance u/s 14A

++ the the assessee filed documents before the DRP regarding the computation of disallowance u/s.14A r.w.r8D However, there is no discussion by the DRP in their order. He observed that there is no segregation of expenses attributable to investment which will exempt income. In our opinion, the documents furnished by the assessee to be looked into and thereafter the DRP has to give direction to the TPO. We direct the assessee to furnish the same documents what is furnished before the DRP on earlier occasion for their consideration and he DRP shall decide the issue in accordance with law after considering the same. In the result, the assessee’s appeal is partly allowed for statistical purposes.

Case remanded