Vildirect: IncomeTax-caselaws-2019-VIL-986-ITAT-DEL

2019-VIL-986-ITAT-DEL

Income Tax Appellate Tribunal DELHI

I. T. A. No. 519 /Delhi/2016 and S. A. No. 218 /Delhi/2016

Date: 30.08.2019

AVAYA INDIA PVT. LTD.

DEPUTY COMMISSIONER OF INCOME-TAX

For The Assessee : Shashwat Bajpai , Sharad Aggarwal and Ms. Swati Rana , Advocates
For the Department : Sandeep Kr. Mishra , Senior Departmental representative

BENCH

Pramod Kumar Vice-President And K. Narsimha Chary Judicial Member

JUDGMENT

K. Narsimha Chary (Judicial Member).-

1. This is an appeal by M/s. Avaya India Pvt. Ltd. (the assessee), being aggrieved by the assessment order November 27, 2015 pursuant to the directions dated October 9, 2015 of the Dispute Resolution Panel-I, New Delhi (for short hereinafter called "Ld. DRP"). Pending disposal of the appeal, the assessee sought stay of the matter. However, today when the matter has come up for consideration, it is submitted by the assessee that the stay petition has become infructuous and may be dismissed. The same is recorded.

2. The assessee, a professional services organisation ("PSO") that functions primarily as a software programming and applications developer, providing services on behalf of and to the Avaya group entities, is a subsidiary of Avaya International LLC. They also provides marketing support services to its associated enterprises ("AEs") which includes management, assistance in advertising and promotion of the products sold by the Avaya group. Apart from this, the assessee provides back office support services to its associated enterprises and these services includes provision of services relating to indirect billing, fixed assets, accounts payable, accounts receivable, etc.

3. During the financial year 2010-11, the assessee provided software development services ; information technology enabled services and marketing support services to its associated enterprises on cost plus mark-up basis and availed of the management support services in the nature of legal, finance, human resource, information technology support and other support services from Avaya Singapore.

4. They have filed their return of income for the assessment year 2011-12 on November 21, 2011. The learned Assessing Officer, in the scrutiny proceedings found that during the relevant assessment year 2011-12, the assessee undertook the following international transactions with its associated enterprises :

Sl. No.	International transaction	Value
1.	Purchase of fixed assets and miscellaneous items	107,312,990
2.	Provision of software development services (IT)	3,090,827,199
3.	Provision of back office support services (ITES)	294,778,120
4.	Provision of marketing support services (MSS)	699,700,910
5.	Availing of management support services	32,355,870
6.	Reimbursement of expenses	9,072,712

5. The appellant had conducted an economic analysis, as part of its transfer pricing documentation for the assessment year 2011-12 to establish the arm's length nature of international transactions with its associated enterprises. For the purpose of comparability analysis, the appellant has benchmarked the information technology, information technology enabled services and marketing support services segments by using the transactional net margin method ("TNMM") as the most appropriate method.

6. In respect of the information technology segment, the assessee had selected 14 comparables with the 13.35 per cent. of margin whereas the learned Transfer Pricing Officer selected 19 comparables with 23.64 per cent. of margin ; that in respect of information technology enabled services, the assessee had selected seven comparables with a margin of 14.02 percent. whereas the comparables selected by the learned Transfer Pricing Officer were with the 31.74 per cent. and that in respect of market support services, the assessee selected eight comparables with the 11.18 per cent. whereas the learned Transfer Pricing Officer selected six comparables with 15.83 per cent. Since the OP/TC of the assessee worked out at 16 per cent., 18 per cent. and 6.5 per cent. in respect of the information technology, information technology enabled services and market support service segments, the learned Transfer Pricing Officer proposed adjustments to the international transactions pertaining to provision of information technology, information technology enabled services and marketing support services segment and vide his order dated December 18, 2014 proposed an adjustment amounting to Rs. 299,156,015 on the assessee's international transactions pertaining to provision of software development services, information technology enabled services and marketing support services. Pursuant to the order passed by the learned Transfer Pricing Officer, the learned Assessing Officer issued a draft order dated February 12, 2015 under section 144C of the Act wherein he proposed to assess the total income of the assessee in conformity with the arm's length price determined by the learned Transfer Pricing Officer vide his order.

7. Aggrieved with the draft assessment order, the assessee filed its objections before the hon'ble Dispute Resolution Panel ("DRP") as provided in section 144C of the Act. The learned Dispute Resolution Panel provided working capital adjustment to the assessee on the comparables selected by the learned Transfer Pricing Officer.

8. Thereafter, in tune with the directions issued by the hon'ble Dispute Resolution Panel, the learned Assessing Officer made an adjustment of Rs. 20,46,63,746 vide its assessment order dated November 23, 2015 in the assessee's case, thereby assessing the total income of the assessee at Rs. 91,96,36,031 as against an income of Rs. 71,49,72,285 disclosed by the assessee in its Income-tax return.

9. Pursuant to the final assessment order passed by the learned Assessing Officer, the appellant filed a rectification application for the mistake on the record, wherein the appellant submitted that the learned Transfer Pricing Officer has erred in not allowing the benefit of ± five per cent. of the range allowed under the Act. The same was allowed by the learned Transfer Pricing Officer and appeal effect given by the learned Assessing Officer on May 31, 2019, getting the transfer pricing adjustment of ITeS and marketing support services segment to nil.

10. Only issue, therefore, that falls for our consideration relates to the marketing sales and support services (MSS segment) involving four comparables, namely, HCCA Business Services Private Limited, HSCC (India) Ltd. and Empire Industries Ltd. in respect of which the assessee is disputing the inclusion and also in respect of Kestone Integrated Marketing Services Private Limited which the assessee seeking to be excluded. Now, we shall deal with these entities one by one.

11. In so far as HCCA Business P. Ltd. is concerned, while adverting to CI 2.14 of notes to accounting the annual report of this company, it is the argument on behalf of the assessee that this company is functionally dissimilar and is engaged in the business of payroll processing and compensation restructuring, it is further submitted that in the assessee's own case for the assessment year 2010-11, in I. T. A. No 1904/Delhi/2015, order dated December 3, 2018 Avaya India P. Ltd. v. Asst. CIT reported in [2019] 74 ITR (Trib) 612 (Delhi) ; [2019] 101 taxmann.com 331 (Delhi-Trib.), it was held that this company is not a suitable comparable because of the functional dissimilarity.

12. The learned Departmental representative submitted that there is no res judicata in tax adjudication and earlier year finding does not be a binding precedent for this year. He submitted that facts have to be verified for each year separately.

13. There is, however, no dispute that the functions of both the assessee and the HCCA Business P. Ltd. remained the same for these years. In such situation, nothing warrants to disturb the factual finding of this Tribunal in the assessee's own case for the earlier year. We, therefore, while following the view taken on facts by this Tribunal for the earlier year, hold that his company is not a good comparable to benchmark the international transaction.

14. As against the inclusion of HSCC (India) Limited, objection of the assessee is that HSCC (India) Limited is engaged in multiple business activities, rendering the services in the fields of healthcare facility design, engineering and design, conceptual studies, project management, and installations, procurement and purchase ; whereas the assessee is involved in various services under the heads payroll arrangements, pension, insurance for the crew and also recruits engineers. It is further submitted that as could be seen from the annual report of this company, HSCC (India) Limited has no segmental accounts. According to the assessee, this company is functionally dissimilar and is engaged in the business of HSCC is rendering comprehensive range of high-end professional consultancy services in the areas of healthcare and abroad.

15. Further argument to say that this entity is not a suitable comparable, is that it is a wholly owned Government enterprise and a Government backed entity, providing majority of its services in Government projects like upgradation and development of Government Medical College, upgradation of healthcare facilities, etc., the learned authorised representative submitted that these companies secure key contracts through backing of the Government by virtue of their parental relationship with the Government, and, therefore, most of the projects are for Government/Government run institutions, i. e., such undertakings derive the benefit of preferential treatment in obtaining contracts which is in stark contrast to the free market scenario with competitive environment where private players operate entirely on commercial and economic considerations. The sum and stance of his argument against the inclusion of this entity is that the Government owned undertakings have the backing of Government which help in securing business contracts; that the primary motive of creating such undertakings is public welfare and generating employment opportunities and income in the economy which is not how a rational business person/entrepreneur in economy would operate ; that such undertakings get preferential treatment due to their relationship with Government which is quite different from the functional/risk profile of the entities operating in uncontrolled environment ; and that the operating model of such undertakings is not similar to how an independent party would operate in uncontrolled environment.

16. He placed reliance on the decision of the hon'ble Bombay High Court in the case of CIT v. Thyssen Krupp Industries India P. Ltd. [2016] 385 ITR 612 (Bom), and the decision of the hon'ble jurisdictional High Court in the case of Pr. CIT v. International SOS Services India P. Ltd. (I. T. A. No. 454 of 2016), the special leave petition against which was dismissed by the hon'ble Supreme Court in Pr. CIT v. International SOS Service India P. Ltd. (Special Leave Petition (Civil) Diary No(s). 18255 of 2018) ; [2018] 405 ITR (St.) 26 (SC).

17. In Pr. CIT v. International SOS Services India P. Ltd. (supra), it was held the wholly owned Government enterprises are not to be taken as comparables to non-Government companies because of the fact that the contracts between public sector undertakings are not driven by profit motive alone but other consideration also weigh in such as discharge of social obligations, etc., and the Government undertakings can even operate on losses in furtherance of social objectives of the Government.

18. The decision in the case of the Tribunal in the case of Avaya India P. Ltd. v. Asst. CIT [2012] 15 ITR (Trib) 237 (Delhi) in I. T. A. No. 5150/Delhi/ 2010, the hon'ble Bombay High Court in the case of Thyssen Krupp Industries India P. Ltd. (supra) have been followed by the co-ordinate Benches of this Tribunal in a number of cases, namely, in the case of Bechtel India Pvt. Ltd. v. Dy CIT (I. T. A. Nos. 1476 and 1477/Delhi/2015), Dy. CIT v. Terex India (P.) Ltd. [2019] 71 ITR (Trib) 259 (Delhi) ; [2019] 104 taxmann.com 281 (Delhi-Trib.) for the assessment year 2011-12, Granite Services International (P.) Ltd. v. Asst. CIT [2017] 87 taxmann.com 24 (DelhiTrib.) the assessment year 2011-12, etc., and HSCC (India) Ltd. is held to be a bad comparable with the companies like the assessee and it was excluded from the list of comparables.

19. From the above, it is clear that a consistent view has been taken by the co-ordinate Benches of this Tribunal in view of the decisions of the hon'ble High Court of Bombay in the case of Thyssen Krupp Industries India (P.) Ltd. (supra) and the High Court of Delhi in the case of Pr. CIT v. International SOS Services India P. Ltd. (supra), that because of the absence of the profit motive and discharge of the social obligations, the Government companies stand on a different pedestal and are not good comparable to the entities like the assessee.

20. The Revenue could not bring any reasons before us not to follow this consistent view taken by the hon'ble High Court and the co-ordinate Benches of this Tribunal, in the absence of which we do not think it just and proper to take a different view. We are, therefore, while respectfully following the same hold that this HSCC (India) Ltd. is not a good comparable to the assessee and the same has to be deleted from the list of comparables.

21. Turning to Empire Industries Limited, while referring to the annual report of this company, the contention of the assessee is that this company is functionally dissimilar to the assessee inasmuch as Empire Industries Ltd. is engaged in the business of manufacturing and distribution of hightech machines and pharmaceuticals. It also has been engaged in trading of goods, apart from which they receive commission on trading and indenting business. He submitted that this aspect has been covered by the decisions of Philip Morris Services India SA (India Branch) v. ADIT [2016] 73 taxmann.com 264 (Delhi-Trib)

22. The learned Departmental representative heavily placed reliance on the orders of the authorities below.

23. We have gone through the record. In the director's report, in respect of operations it is mentioned that-

"Operation :

The division manufacturers amber glass bottles of international quality for the pharmaceutical industry. Over 11.80 lakhs bottles are manufactured even-day on four fully automatic production lines.

During the year under review demand for pharma bottles was good and the division achieved 9.16 per cent. higher turnover at Rs. 8361.14 lakhs. Over 20 per cent. of the bottles produced were exported."

24. In the case of Philip Morris Services India (supra), a co-ordinate Bench of this Tribunal found that Empire Industries Ltd. is engaged in the distribution and sale support of highly technical machines and pharmaceuticals, besides trading and day indenting of the industrial and medical equipment and machine tools, arid therefore, cannot be said as a comparables to the company rendering market support services.

25. There is no dispute that the Empire Industries Ltd. is sought to be compared with the assessee in its marketing support services and the functional profile of this two companies do not match. A company primarily deriving its income from manufacturing/trading and indenting services cannot be a good comparable to a company rendering market support services. We, therefore, directed the deletion of this company from the list of comparables.

26. Now coming to the last entity, namely, Kestone Integrated Marketing Services Private Limited, which the assessee seeks to include, the learned authorised representative fairly conceded that the assessee is requesting remand in so far as this comparable since the Transfer Pricing Officer has excluded this comparable, without giving an opportunity to the assessee to dispute its exclusion. It is also submitted that the exclusion of this entity is not sufficiently canvassed before the learned Dispute Resolution Panel (DRP). The learned Departmental representative submits no objection. Recording the same, we deem it just and proper to accept the request of the assessee and accordingly, we remit the issue back to the file of the learned Transfer Pricing Officer/learned Assessing Officer for considering the inclusion/exclusion of this comparable after giving sufficient opportunity to the assessee to put forth their objections.

27. In the result, the stay application filed by the assessee is dismissed and the appeal filed by the assessee is allowed in part for statistical purpose.

28. Pronounced in the open court on 30th of August 2019.

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