ImedX Information Services Private Limited , Hyderabad V. DCIT, Circle-2(1), Hyderabad

ITA 1755/Hyd/2019

• Counselvise Citation: [2023] 102 COUNSELVISE.COM (IT) 8948 (ITAT-HYDERABAD)
• Duration Of Justice: 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2020
• Appeal Filed By: Assessee
• Order Result: AllowedPartlyAllowed
• Bench Allotted: DB-A
• Next Hearing Date: 25-04-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 01-12-2019

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘A’ Bench, Hyderabad (Through Video Conferencing) Before Smt. P. MADHAVI DEVI, Judicial Member AND Shri A. MOHAN ALANKAMONY, Accountant Member ITA-TP No. 1755/Hyd/2019 Assessment Year: 2015-16 M/s iMedX Information Services Private Limited 7-1-62/2, Dharam Karan Road (Ameerpet), P.O. Begumpet Hyderabad 500 016 PAN: AABC13550P Vs. DCIT, Circle 2(1) Hyderabad (Appellant) (Respondent) Appellant by: Sh. H. Srinivasulu, Adv. Respondent by : Sh. K. Ravi Kiran, D.R. Date of hearing: 05/11/2020 Date of pronouncement: 24/11/2020 ORDER Per Smt. P. Madhavi Devi, J.M. This is assessee’s appeal for the A.Y. 2015-16 against the final assessment order dated 31.10.2018 passed u/s 143(3) r.w.s. 144C(5) of the I.T. Act, 1961. This appeal was taken up for hearing on 05.11.2020 through Video Conferencing and both the parties were heard. ITA-TP No.1755/Hyd/2019 AY 2015-16 M/s iMedX Information Services Pvt. Ltd. Hyd. 2 2. Brief facts of the case are that the assessee company is providing I.T. Enabled Services to its Associated Enterprise (A.E.) The nature of transactions is medical transcription. Since the assessee had entered into international transactions with it’s A.E. during the year, the AO referred the determination of the Arm’s Length Price (ALP) of the transaction to the Transfer Pricing Officer (TPO). The assessee had adopted Comparable Un- controlled Price method (CUP method) for arriving at the ALP on the ground that the A.E. had entered into similar transactions with unrelated parties in India, and, therefore, the internal CUP method is applicable and should be adopted. The TPO however, rejected the CUP method adopted by the assessee and has adopted Transactional Net Margin Method (TNMM) as the most appropriate method (MAM). Thereafter, he proposed an adjustment towards ALP. Accordingly, draft assessment order was proposed by the AO against which assessee preferred its Objections before Dispute Resolution Panel (DRP). The DRP confirmed the method adopted by the TPO and accordingly the final assessment order has been passed, against which assessee is in appeal before us by raising the following grounds of appeal. Based on the facts and circumstances of the case, iMedX Information Services Private Limited (referred to as 'the Appellant') respectfully craves to prefer an appeal against the Assessment order passe under Section 143(3) read with Sections 92CA(3) of the Income-tax Act, 1961 ('the Act') by the Dy. Commissioner of Income-tax, Circle 2(1), Hyderabad (hereinafter referred to as the 'Ld. AO') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - I, Bengaluru (hereinafter referred to as the Hon'ble DRP) on the following grounds which are without prejudice to one another: General: 1. On the facts and circumstances of the case and in contrary to law, the Deputy Commissioner of Income-tax (Transfer Pricing Officer)-I, (hereinafter referred to as 'the Ld. TPO') and the Ld. AO under the directions issued by Hon'ble DRP, erred in making the following adjustment to ITA-TP No.1755/Hyd/2019 AY 2015-16 M/s iMedX Information Services Pvt. Ltd. Hyd. 3 the Appellant's income and thereby determining a total income of Rs. 9,78,45,650 and the said addition being wholly unjustified are liable to be deleted; • Transfer Pricing adjustment of Rs. 7,87,40,776; • Disallowance of depreciation on goodwill of Rs. 1,42,76,038 2. On the facts and circumstances of the case and in contrary to the law, the Ld. AO/Ld. TPO has erred in not excluding depreciation on goodwill from operating cost while computing the Profit Level indicator ('PU') of the Appellant, the order passed by the Ld. AO being not in conformity with the directions issued by the Hon'ble DRP under section 144C(5) of the Act, is bad in law and void. Transfer Pricing: A. Application of Comparable Uncontrolled Price ("CUP") Method 3. On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPO erred and the Hon'ble DRP further erred in upholding! confirming the action of Ld. AO/Ld. TPO in rejecting the Comparable Uncontrolled Price ('CUP') (in spite of availability of internal CUP) method for provision of information technology enabled services transaction and thereby applied Transactional Net Margin Method ('TNMM') as the most appropriate method for benchmarking the said transaction. 4. On the facts and in the circumstances of the case and in law Ld. AO/ Ld. TPO erred and the Hon'ble DRP further erred in not following the Hon'ble Tribunal's decision in the Appellant's own case wherein the Hon'ble Tribunal has clearly directed the Ld.TPO/AO to adopt CUP method for the medical transcription services. 5. Without prejudice to the above, on the facts and in the circumstances of the case and in law even if TNMM is accepted, companies engaged in medical transcription services or companies rendering medical transcription services to the AEs should only be considered for benchmarking the transaction. B. Software development services 6. On the facts and circumstances of the case and in contrary to law, the Ld.TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the Ld.TPO in accepting the following comparable companies, without appreciating that these companies were functionally dissimilar to the Appellant, engaged in product development, have presence of brand and intangibles, have peculiar economic circumstances, and huge turnover: ITA-TP No.1755/Hyd/2019 AY 2015-16 M/s iMedX Information Services Pvt. Ltd. Hyd. 4 • Tata Elxsi Limited (Segmental); • Rheal Software Private Limited; • Mindtree Limited; • Larsen & Toubro Infotech Limited; • R S Software (India) Limited; • Infobeans Technologies Limited; • Persistent Systems Limited; • Nihilent Technologies Limited; • Aspire Systems (India) Limited; • Inteq Software Private Limited; • Infosys Limited; • Thirdware Solutions Limited; • Cybage Software Private Limited. 7. On the facts and circumstances of the case and in contrary to law, the Ld.TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in rejecting the following companies engaged in software development services as a comparables, without appreciating that the said companies were functionally comparable to the Appellant: • SagarSoft (India) Limited • Akshay Software Technologies Limited • Evoke Technologies Private Limited • Harbinger Systems Private Limited • I2T2 India Limited • Infomile Technologies Limited • Kireeti Soft Technologies Limited 8. Without prejudice to the ground no. 2 and 3, on the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in incorrectly computing the margin of following comparable companies: • Tata Elxsi Limited; * Nihilent Technologies Limited; and • Sasken Communication Technologies Limited (Segmental); , ITA-TP No.1755/Hyd/2019 AY 2015-16 M/s iMedX Information Services Pvt. Ltd. Hyd. 5 C. Information Technology enabled Services ("ITeS") 9. Without prejudice to the ground no. 3 to 5 pertaining to application of CUP method, on the facts and circumstances of the case and in contrary to law, the Ld. TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the Ld.TPO in accepting the following comparable companies, without appreciating that these companies were functionally dissimilar to the Appellant, have presence of brand and intangibles and huge turnover: • Crossdomain Solutions Private Limited; • Tech Mahindra Business Services Limited; • Infosys BPO Limited; • S P I Technologies India Private Limited; • MPS Limited. 10. Without prejudice, on the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in rejecting the Informed Technologies Limited engaged in providing ITeS as a comparables, without appreciating that the said company were functionally comparable to the Appellant: 11 . Without prejudice to the ground no. 3 to 5 and 9, on the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in incorrectly computing the margin of following comparable companies: • Crossdomain Solutions Private Limited; • S P I Technologies Private Limited; • Microland Limited (Segmental); and • Suprawin Technologies Limited. D. Common Grounds for Software Development Services and ITeS Transaction 12. On the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in rejecting the transfer pricing analysis / study prepared by the Appellant, without appreciating that none of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied. ITA-TP No.1755/Hyd/2019 AY 2015-16 M/s iMedX Information Services Pvt. Ltd. Hyd. 6 13. On the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding I confirming the action of the Ld. TPO in considering . provision for bad and doubtful debts as a non-operating expenditure while computing the PLI of the Appellant as well as the comparable companies. _ 14. On the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not allowing working capital adjustment in accordance with the provisions of Rule 10 B of the Income-tax Rules, 1962 ('Rules') to account for differences between the international transactions undertaken by the Appellant, being a captive unit, and those undertaken by the alleged comparables. 15. On the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding/ confirming the action of the Ld. TPO in not allowing risk adjustment in accordance with the provisions of Rule 10 B of the Rules to account for differences between the international transactions undertaken by the Appellant, being a captive unit, and those undertaken by the alleged comparables. 16. On the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding/ confirming the action of the Ld. TPO by not applying the peculiar economic circumstances filter and accepted companies with peculiar economic circumstances. 17. Without prejudice to the ground no. 22, on the facts and circumstances of the case and in contrary to law, Ld. AO/ Ld.TPO erred in considering depreciation on goodwill as a part of the operating cost even though the same has been disallowed by the Ld. AO. E. Receivables 18. On the facts and circumstances of the case and in contrary to Jaw, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding I confirming the action of the Ld. TPO in treating outstanding receivables as a separate international transaction and proposed to levy interest on the same. ITA-TP No.1755/Hyd/2019 AY 2015-16 M/s iMedX Information Services Pvt. Ltd. Hyd. 7 19. On the facts and circumstances of the case and in contrary to law, Ld. TPO erred in and the Hon'ble DRP further erred in treating State Bank of India's ('SBI') term deposit rates as an appropriate CUP to benchmark the Assessee's delay in receipt of outstanding receivables. 20. On the facts and circumstances of the case and in contrary to law, Ld. TPO erred in and the Hon'ble DRP further erred in not considering the fact that the working capital adjustment evaluates the outstanding receivable in a controlled scenario vis-a-vis uncontrolled scenario and that differential impact of working capital of the Assessee vis-a-vis its com parables has already been factored in the pricing/profitability of the Assessee, and hence, proposing interest on receivables amounts to double adjustment 21. Without prejudice to the above grounds relating to receivables, the Ld. TPO/AO/DRP further erred in not appreciating that the receivables due from overseas AE's are in foreign currency and hence interest, if any, is to be benchmarked with the rates prevalent in the international market for foreign currency loans. (i.e. at USD "LIBOR plus"). Corporate Tax 22. On the facts and circumstances of the case and in contrary to law, Ld. AO erred in and the Hon'ble DRP further erred in upholding I confirming the action of the Ld. AO in denying the claim of depreciation on goodwill of Rs. 1,42,76,038 arising on account of merger and claimed as per provisions of section 32 of the Act. Consequential: 23. On the facts and in the circumstances of the case and in law, the Ld. AO erred in and the Hon'ble DRP further r erred in upholding / confirming the action of the Ld. AO in levying interest and the said levy of interest being wholly unjustified, ought to be deleted. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, to enable the Hon'ble Members to decide this appeal according to law. 3. At the time of hearing, the Ld.Counsel for the assessee submitted that the assessee has been carrying on the very same activities for the past several years and for the A.Y. 2011-12 and 2012-13, the issue of the most appropriate ITA-TP No.1755/Hyd/2019 AY 2015-16 M/s iMedX Information Services Pvt. Ltd. Hyd. 8 method (MAM) for determining the ALP in the case of medical transcription had come up before the Tribunal and the Tribunal had directed the TPO to adopt Comparable Uncontrolled Price (CUP) method as the MAM and to determine the ALP accordingly. He submitted that the department has accepted the said decision of ITAT and consequential orders have also been passed by the TPO. He submitted that for the A.Y. before us also, the transactions are the same and therefore the TPO should be directed to adopt CUP method for determination of the ALP. 4. The Ld.CIT, DR, on the other hand, submitted that the transactions for relevant A.Y. are slightly different as the agreements between the assessee and the A.E. have been modified. Therefore, according to him, the CUP method is not the most appropriate method and the TNMM adopted by the TPO should be upheld. 5. Having regard to rival contentions and material placed on record, we find that there is no change in the nature of activity carried on by the assessee since A.Y. 2011-12 till the previous year relevant to the A.Y. before us. The modification of the agreements appears to be relating to the terms and conditions of payment. The Ld.Counsel for the assessee submitted that there is no change whatsoever with regard to transactions of the assessee with the A.E. and the transactions of the AE with other unrelated parties. If that is so, then, the CUP method has to be adopted. ITA-TP No.1755/Hyd/2019 AY 2015-16 M/s iMedX Information Services Pvt. Ltd. Hyd. 9 5.1. In view of the same, we deem it fit and proper to set aside the assessment order and direct the AO to refer the matter to the TPO with a direction to adopt CUP method if the nature of activity between the assessee and the A.E. and between the A.E. and the unrelated parties who are providing similar services to the A.E. is the same and if there is a difference in the nature of activity which would affect the determination of the ALP, then the TPO is free to examine and adopt the MAM in accordance with law after giving the ass a fair opportunity of hearing. 5.2. The only other issue which needs adjudication is the claim of depreciation on goodwill. Since the assessment has been set aside to the file of AO, this issue is also set aside to A.O. for reconsideration in accordance with law. 6. In the result, assessee’s appeal is treated as allowed for statistical purposes. Order pronounced on 24 th November, 2020. Sd/- Sd/- (A. MOHAN ALANNKAMONY) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER Hyderabad, dated 24 th November, 2020. *gmv Copy to: 1. M/s. iMedX Information Services Pvt. Ltd, 7-1-62/2, S.K.Road, |Dharam Karam Road, Ameerpet, Hyderabad 500 016 2. DCIT, Circle 2 (1), Signature Towers, Kondapur, Hyderabad 500 084 3. ACIT, Range 2, Hyderabad 4. Pr. CIT – 2, Hyderabad 5. The DR, ITAT Hyderabad 6 Guard File 7. DRP-I, Bengaluru