2018-VIL-1676-ITAT-DEL

Income Tax Appellate Tribunal DELHI

ITA No.6570/Del/2016 And ITA No.6928/Del/2017

Date: 15.02.2018

ORANGE BUSINESS SERVICES INDIA SOLUTIONS PVT. LTD.

Vs

DCIT, CIRCLE-3, GURGAON

For The Assessee : Shri Ravi Sharma, CA
For The Department : Shri Sanjay I Bara, CIT, DR

BENCH

SHRI R.S. SYAL, VICE PRESIDENT AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER

JUDGMENT

PER R.S. SYAL, VP:

These two appeals filed by the assessee relate to the assessment years 2013-14 and 2012-13. Since some of the issues raised in these appeals are common, we are, therefore, disposing them off by this consolidated order for the sake of convenience.

Assessment Year 2013-14

2. The assessee is in appeal against the final assessment order passed by the Assessing Officer (AO) on 31.10.2017 u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called ‘the Act’).

3. The first issue is against the addition on account of transfer pricing adjustment amounting to Rs. 16,91,05,424/- made in the international transaction of ‘Provision of ITES.’

4. Succinctly, the facts of the case are that Orange S.A. is a French multinational telecommunication Corporation. The group has more than 225 million customers in nearly 35 countries. Orange S.A. is a leading European wireless operator and broadband service provider with nearly 175 million mobile customers and more than 15 million broadband subscribers. Orange S.A. is a recognized leader in global, integrated and customized communication infrastructure solutions which enable key business processes of its customers. The Orange S.A. network consists of switches, routers, hosted servers and nods, leased and owned capacity to link switches and network intelligence and control to provide full resilience of each route. The assessee in question, an Indian entity and a part of the Orange group, is a subsidiary of EGN BV, Netherlands. It is engaged in providing Information Technology (IT) enabled network management/technical support and other back office support services to its group companies. It also undertakes Software development services for developing software applications which are used within the Orange group. The IT enabled network management/technical support and other back office support services performed by the assessee primarily include remote monitoring and maintenance of Orange’s global network platforms and services, co-ordination, remote configuration and implementation of quality customer networking solutions. Under the category of Software development services, the assessee is engaged in providing routine contract software development services relating to development and maintenance of applications used within the group like human resources and accounting etc. The assessee filed its return declaring three international transactions in Form No. 3CEB, including, ‘Provision of IT enabled services and Contract SDS’ with a transacted value of Rs. 241,63,07,817/-. The Assessing Officer referred the matter of determination of the arm’s length price of the international transactions to the Transfer Pricing Officer (TPO). The Transactional Net Margin method (TNMM) was applied with the Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC) to demonstrate that the international transaction of ‘Provision of IT enabled services and Contract SDS’ was at arm’s length price (ALP). As against the single reported international transaction of ‘Provision of IT enabled services and Contract SDS’, the assessee did its benchmarking in two segments, viz., Software development services (SDS) and IT enabled network management and technical and other back office support services (ITES). The TPO observed from the ‘Service Agreement’ entered into between the assessee and its AE that consideration for both the services viz., SDS and ITES was common and even the invoices were raised accordingly with narration ‘Service fees’ for the period from …. to ….. It was still further observed that annual accounts were also maintained in unison inasmuch as there were no segmental accounts of ITES or SDS, as was evident from its Profit & Loss Account which divulged the figure of gross revenue at Rs. 241,63,07,816/-, being a single source of revenue from operations. Even the expenses were also found to be common. On being called upon to explain as to why both the segments be not combined, the assessee claimed that it had details of revenue from both the segments separately, which were based on head-counts. The TPO observed that though the assessee gave different number of employees working in SDS and ITES, but, no evidence was given to substantiate the same. The TPO noticed that there was no verifiable quantum of revenue in respect of these segments. In this backdrop of the facts, the TPO vide para 9 of his order, proposed to consider the total amount of revenue as pertaining to ITES segment and benchmarked the transaction considering the comparables of such business segment. The TPO, in the ultimate analysis, selected 12 companies as comparables which have been listed on page 58 of his order. Average margin of these companies was computed at 23.94% as against the assessee’s margin at 17.30%. He worked out the amount of transfer pricing adjustment at Rs. 13,67,86,810/-. The assessee approached the Dispute Resolution Panel (DRP). After giving effect to the DRP’s order by the TPO, the Assessing Officer, in the final assessment order, made an addition of Rs. 16.91 crore from the international transaction designated by him as ‘Provision of ITeS Services’. The assessee is aggrieved against this addition.

5. We have heard the rival submissions and perused the relevant material on record. The primary issue raised before us is against the aggregation of both the SDS and ITES and, thereafter, treating the assessee as an ITES provider for the purposes of choosing comparables and benchmarking.

6. At the outset, the ld. AR contended that the Revenue in the past has benchmarked such international transaction in a segregated manner and hence, no deviation should be allowed in this year. To support the proposition, he relied on the principle of consistency as reiterated in Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC).

7. In our considered opinion, this contention is sans merit. The rule of consistency cannot be stretched so far as to jeopardize the entire benchmarking process envisaged under the Act. When the facts are so glaring, which do not permit adoption of the earlier year’s view, we cannot disapprove the correct approach adopted by the TPO in this year simply on the reason that in the preceding year, he approved the wrong approach of the assessee. The Hon’ble Supreme Court in CIT vs. Modipon Ltd. (2018) 400 ITR 1 (SC) has held that the issue should be independently examined notwithstanding consistency or tax neutrality when substantial question of law is involved or the issue impacts larger public interest or has potential of recurrence. This judgment has been rendered after considering its earlier decision in Radhasoami Satsang (supra). As the case at hand falls under the category of having ‘potential of recurrence’, we hold that it needs to be independently examined and evaluated.

8. In order to appreciate the rival contentions on merits in this regard, it would be apposite to consider the Agreement entered into by the assessee with its AE, whose copy is available on page 193 of the paper book. This Agreement has Appendix-A, which gives the ‘Scope of services’, as under:-

“APPENDIX A: SCOPE OF SERVICES

[Refer Sub-section 1.1 of Article 1 of Services Agreement] The Service Provider shall carry out any or all the following activities:

* Remote IT enables network management and other related back office support services including:

• Customer Network Implementation Management

• Customer Network Management

• Equipment Order processing

• Network Monitoring and Fault Management Services

* Contract Software development including design, coding and unit testing, system testing and on-going maintenance of applications.

* Any other related services as may be mutually agreed between the Parties.”

9. It is evident from the above nature of services set out in the Agreement that the assessee agreed to provide IT enabled services of network management and other related back office support services as well as contract software development services consisting of design, coding and unit testing, system testing and ongoing maintenance of applications. A copy of the assessee’s Transfer pricing study report is available on page 875 onwards of the paper book. Page 901 shows the functions performed by the assessee under ITES segment and page 904 of the paper book shows the functions performed by the assessee under the SDS. When we consider the Agreement in juxtaposition to the Transfer pricing study report, whose correctness has not been controverted by the Department, it becomes vivid that the assessee rendered both the ITES and SDS.

10. Now, the question arises about the aggregation of these two services. Whereas the assessee supplied separate figures for SDS and ITES, the TPO did not accept the same for the reasons discussed above and hence proceeded to determine the ALP by aggregating them. Under such circumstances, it becomes imperative to find out if the assessee had separate authenticated data in respect of ITES and SDS. The only evidence in support of the revenue from the two segments, which has been placed on record by the ld. AR is, some head-counts. The ld. AR claimed that whereas highly qualified persons were used for SDS, lowly qualified persons were used for rendering ITES. From such a chart of head-counts placed before us, it can be seen that two working locations have been shown, viz., Gurgaon and Mumbai. The ld. AR candidly admitted that the assessee was rendering both the SDS and ITES from both these locations. On a specific query, no record could be produced to indicate that the number of employees stated in the chart as rendering SDS and ITES were, in fact, providing the claimed services. Further, the assessee’s contention of the segregated revenues in respect of ITES and SDS is not substantiated with any evidence, such as, work-sheets or reports of work done. It is still further relevant to note that the invoices issued by the assessee are, again, common inasmuch as there is no separate mention of service fee for ITES or SDS. The TPO has reproduced a copy of invoice on page 5 of his order. The ld. AR fairly admitted that all the invoices were raised in the same way, showing no separate figures of revenue from ITES or SDS. Still, another factor which carries weight is that the assessee received total combined revenue of Rs. 241.63 crore from its AE through these invoices and the same has been also shown as one common item in its annual accounts. In such circumstances, the claim of the assessee for bifurcation of revenue from ITES and SDS, which is totally unsubstantiated, cannot be countenanced. Be that as it may, operating profit, which is numerator in the formula prescribed under the TNMM, can be ascertained only when the figures of revenue as well as costs are available. Despite giving sufficient time to the ld. AR, no basis for bifurcation of costs between ITES and SDS could be placed on record. The above discussion makes it palpable that the assessee did not have any authenticated figures of revenue and costs in respect of ITES and SDS separately. Once the position is such that neither the revenue from two segments can be ascertained nor its costs, we fail to appreciate as to how the benchmarking can be done for two separate transactions of ITES and SDS in a separate manner. Ergo, we approve the action of the authorities below in aggregating the ITES and SDS segments for the purpose of benchmarking.

11. The next issue is selection of the comparables. The TPO, after rejecting the assessee’s contention for aggregation of ITES and SDS: ‘proposed to consider the total amount of revenue pertaining to the ITES segment and benchmarked the transactions considering the comparables of that business segment.’ This manifests that the process of determination of the ALP, as has been accepted by both the sides as well, has been undertaken by the TPO by considering the comparables rendering ITES services alone. We have held above that the assessee is rendering both ITES and SDS as one unit. In such circumstances, selecting companies rendering only ITES renders the comparison incompatible due to the basic functional difference, thereby vitiating the entire exercise of benchmarking. What is required to be done is to select companies rendering both ITES and SDS. As this exercise can be properly done at the end of the TPO, we set aside the impugned order on this score and remit the matter to the file of TPO/Assessing Officer for determining the ALP of the assessee’s combined international transaction of ‘Provision of ITES and SDS’ afresh by considering such companies as comparable which are rendering both ITES and SDS. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such proceedings.

12. The only other issue raised in this appeal is against the addition on account of transfer pricing adjustment in the international transaction of ‘Interest on receivables’. The factual matrix of this ground is that the assessee reported an international transaction of ‘Interest on receivables’ with transacted value of Rs. 49,18,007/-. The TPO noticed that payment for the invoices was not realized for a long time and a large amount was outstanding as receivable. Since no time limit was given in the Agreement for realization of invoices, the TPO took a period of thirty days as reasonable for realization and worked out the outstanding amount liable for charge of interest. Chargeable interest rate of 12.87% per annum was determined with the SBI prime lending rate plus 300 basis points. Applying such interest rate on the amount of invoices outstanding for more than 30 days, he computed the amount of transfer pricing adjustment on account of interest on receivables at Rs. 8.05 crore. The DRP increased the reasonable number of days of realization from 30 to 60 days. While giving effect to the direction given by the DRP, the TPO, again, allowed credit for 30 days time for realization. It is a matter of record that the assessee filed rectification application for giving effect to the direction given by the DRP of taking 60 days period, which is stated to be still pending. That is how, addition of Rs. 8.05 crore and odd was made in the impugned order.

13. Relying on the judgment of the Hon’ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. (2017) 398 ITR 66 (Del), the ld. AR contended that no interest could have been charged as there was no international transaction on this score.

14. Sounding a contra note, the ld. DR submitted that the assessee had itself reported the international transaction of ‘Interest on receivables’ to the tune of Rs. 49.18 lac, which is in accordance with the provisions of the Act. To buttress the contention of rightly treating the interest on receivables as an international transaction, he submitted that the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 1.4.2002. It was submitted that sub-clause (c) of clause (i) of this Explanation provides that (i) the expression "international transaction" shall include-…… (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;….’ . He accentuated that the expression ‘debt arising during the course of business’ refers to trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business is an international transaction, he submitted that any delay in the realization of such debt is liable to be visited with the transfer pricing adjustment on account of interest income short charged or uncharged. It was argued that insertion of the Explanation with retrospective effect covers the assessment year under consideration and hence under/nonpayment of interest on the debt arising during the course of business also becomes international transactions, requiring the determination of its ALP. He referred to the decision of the Delhi Tribunal dated August, 2015 in Ameriprise India Pvt. Ltd. VS. ACIT (ITA No.2010/Del/2014) in which this issue has been thoroughly discussed and eventually interest on trade receivables has been held to be an international transaction. Referring to the discussion in the said order, he stated that the Delhi Bench in this case also noted a decision of the Hon’ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), which dealt with question of law : (c) ‘Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?’ It was pointed out that while answering the above question, the Hon’ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon’ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. It was thus argued that the non/under-charging of interest on the excess period of credit allowed to the AEs for the realization of invoices amounts to an international transaction and the ALP of such an international transaction has been rightly determined by the TPO. He, however, fairly agreed that the direction of the DRP for treating credit period of 60 days as reasonable has not been implemented by the TPO. In so far as the charging of the rate of interest is concerned, he relied on the decision of the Hon’ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that the currency in which the loan is to be re-paid determines the rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been rightly determined.

15. We have heard the rival submissions and perused the relevant material on record. It is seen that the assessee reported an international transaction of ‘Interest on receivables’ amounting to Rs. 49,18,007/-. It is further discernible from the Agreement that no credit period has been prescribed for realization of invoices. On a specific query, it was admitted that there were no trade transactions with non AEs. In such a scenario, it is difficult to make any comparative analysis of the time allowed for realization by the assessee to AEs vis-à-vis non-AEs.

16. No direct decision of the Hon’ble jurisdictional High Court has been brought to our notice by the ld. DR. The Hon’ble Delhi High Court in Pr. CIT VS. Kusum Health Care Pvt. Ltd. (supra) found that the entire focus of the AO was on just one assessment year and the figure of receivables in relation to that assessment year could hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond particular number of days constituted an international transaction by itself. It observed that there may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that visà- vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon’ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. VS. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the Assessee. Applying the decision in Kusum Health Care (supra), the Hon’ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions. In view of the above decision in Avenue Asia Advisors (supra), we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.

Assessment Year 2012-13

17. The only issue raised in this appeal is against the addition of Rs. 5,90,92,650/- on account of transfer pricing adjustment in respect of interest on receivables.

18. Both the sides are in consensus ad idem that the facts and circumstances of the instant transfer pricing addition are mutatis mutandis similar to those of the immediately succeeding year, for which detailed arguments were advanced by both the sides. Following the view taken hereinabove, we set aside the impugned order and send the matter back to the TPO/AO for deciding this issue in conformity with the discussion made by us in our above order for the A.Y. 2013-14. It is made clear that the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings.

19. In the result, both the appeals are allowed for statistical purposes.

The order pronounced in the open court on 15.02.2018.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.