IN INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI [BEFORE SHRI N.R.S. GANESAN JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE ACCOUNTANT MEMBER] . I.T.A.No.1034 Mds 2014 Assessment year : 2009-10 M s ICON Clinical Research India Vs. Dy. Commissioner of Pvt. Ltd Income Tax RMZ Millenia Business Park Company Circle II(3) Building 3A 2nd Floor Chennai No.143 Dr. MGR Road Kandanchavady Chennai 600 034 [PAN AAABCI 2834 E] ( Appellant) ( Respondent) Appellant by : Shri Sriram Seshadri CA Respondent by : Dr. Milind Madhukar Bhusari CIT Date of Hearing : 08-09-2016 Date of Pronouncement : 21-09-2016 O R D E R PER ABRAHAM P. GEORGE ACCOUNTANT MEMBER In this appeal filed by assessee which is directed against order dated 26.2.2014 of Deputy Commissioner of Income-tax Company Circle II(3) Chennai passed u s 143(3) of Income-tax Act 1961(in short Act ) pursuant to direction given by Dispute Resolution Panel u s 144C(13) of Act it has :- 2 -: ITA No. 1034 14 altogether raised nine grounds of which Ground No.9 is general in nature needing no specific adjudication. 2. Ld. AR at outset submitted that he was not pressing Ground Nos. 4 5 & 8 of appeal. Accordingly Ground Nos. 4 5 & 8 are dismissed as not pressed. 3. Ground Nos. 1 to 3 of appeal assail transfer pricing adjustment of ` 3 37 17 672 - made in relation to its data management services in so far as TPO did not exclude two comparables viz. M s Cosmic Global Ltd and M s E4E Healthcare Business Services Pvt. Ltd. from list of comparables he considered for benchmarking value of international transactions undertaken by assessee. 4. Facts apropos are that assessee wholly owned subsidiary of M s ICON Plc. was providing clinical trial services and data management services to ICON Clinical Research Ltd Ireland. international transactions undertaken by assessee during relevant previous year were as under: Sr. Nature of transaction Amount (`) Method No. 1 Provision of clinical 150 079 985 research services 2 Provision of data 248 728 450 management services :- 3 -: ITA No. 1034 14 3 Reimbursement of Pass 157 740 539 TNMM through costs 4 Total 55 65 48 794 5. data management services for which assessee earned `24 87 28 450 - from its AE was considered under IT enabled segment (ITES). Assessee had selected TNM method as most appropriate method for bench marking such international transactions. 14 comparables were selected by assessee and it calculated weighted PLI of 10.6% for these 14 companies. comparables selected by assessee were from prowess and capital line plus database. Assessee had worked out its net margin at 14.5% and thus as per assessee there was no requirement for any adjustment on pricing of its international transactions with AEs. 6. When matter was referred to TPO for various reasons mentioned in TPO s order he rejected ten companies considered by assessee. TPO reached final set of comparables of four and arrived at arithmetical mean of PLI of such comparables as under: Sr.No. Name of company OP TC)% 1. Cosmic Global Ltd 48.10 2. E4E-Health Solutions Ltd [formerly 33.31 known as Nittany Outsourcing Services Pvt. Ltd] 3. R Systems International Ltd.(seg) 14.09 4. Informed Technologies India Ltd 23.29 Arithmetic mean 29.69 :- 4 -: ITA No. 1034 14 7. Applying PLI of 29.69% TPO recommended upward adjustment of `3 37 17 672 -. 8. When draft order on above lines was issued to assessee it chose to move DRP. DRP however rejected contentions of assessee and held that ALP done by TPO was absolutely in order . Thereafter assessment was completed by making addition of `3 37 17 672 - as recommended by TPO. 9. Now before us ld. AR submitted that lower authorities erred in considering M s Cosmic Global Ltd and M s E4E Healthcare Business Services Pvt. Ltd. as proper comparables. As per ld. AR though these two companies appeared in original comparables selected by assessee in its TP study before TPO it had sought exclusion thereof. Relying on para 6.8 of order of TPO ld. AR submitted that assessee had sought exclusion of M s Cosmic Global Ltd. citing functional difference between said company and that of assessee. Further as per ld. AR translation services rendered by said company alone fell within ITE segment and outsourcing came to 41% of sales. As per ld. AR assessee was not engaged in any outsourcing work. Ld. AR submitted that similar objections were raised before DRP also by assessee. However DRP also rejected its contentions. Ld. AR :- 5 -: ITA No. 1034 14 submitted that both TPO as well as DRP had brushed aside contentions of assessee against selection of M s Cosmic Global Ltd for singular reason that said company formed part of assessee s own TP study. Relying on decision of Special Bench in case of DCIT vs Quartz Systems (P) Ltd [2010] 42 DTR 414 ld. AR submitted that assessee could not be stopped from seeking exclusion of comparable just for reason that it was part of its own TP study if it could show that it was functionally dissimilar. 10. Insofar as M s E4E Healthcare Business Services Pvt. Ltd. was concerned ld. AR submitted that current year data of said company was not available in public domain. As per ld. AR assessee was not aware from where TPO had extracted financial results of said company for relevant previous year for arriving at its PLI. This aspect as per ld. AR was brought to specific notice of DRP in its objection filed before DRP. However DRP for very same reason as it took for M s Cosmic Global Ltd rejected contention of assessee. 11. In support of his pleading for exclusion of M s Comic Global Ltd reliance was placed by ld. AR on decision of Pune Bench of this Tribunal in case of Schlumberger Global Support Centre Ltd vs Dy. DIT(Intl. Taxn-II) in I.T.A.No.86 PN 2013 dated 30.10.2015. :- 6 -: ITA No. 1034 14 Ld. AR submitted that said decision was also for very same assessment year(2009-10) and also on ITE segment. In support of his ground for exclusion of M s E4E Healthcare Business Services Pvt. Ltd. ld. AR placed reliance on decision of Delhi Bench of Tribunal in case of Bechtel India Pvt. Ltd vs DCIT in I.T.A.No. 1478 Del 2015 dated 21.12.2015. 12. Per contra ld. DR submitted that assessee having selected two companies by itself in its TP study should not be allowed to turn down and argue that these were functionally different. Further according to him reasons mentioned by assessee for exclusion of these companies were never addressed by authorities below. 13. We have considered rival contentions and perused orders of authorities below. It is not disputed that both M s Cosmic Global Ltd and M s E4E Healthcare Business Services Pvt. Ltd. appeared in list of comparables selected by assessee in its TP study for benchmarking value of international transactions with its AEs. Assessee however had objected to inclusion of above two companies before TPO and DRP. DRP as well as TPO had not considered merits of claim of assessee seeking exclusion of these comparables for sole reason that these two companies :- 7 -: ITA No. 1034 14 were part of TP study of assessee. pleading of assessee now before us is that M s Cosmic Global Ltd was in medical transcription and translation services and was outsourcing its work. Hence according to ld. AR it could not be considered as proper comparable. Reliance has been placed on decision of Pune Bench of Tribunal in case of Schlumberger Global Support Ltd (supra). Vis- -vis M s E4E Healthcare Business Services Pvt. Ltd. claim of assessee was that its data for relevant previous year was not available in public domain. Support has been sought from decision of Delhi Bench of Tribunal in case of Bechtel India Pvt. Ltd (supra). Be that as it may what we find is that DRP had not adjudicated correctness of claim of assessee solely for reason that these companies were part of list of TP study of assessment. By virtue of decision of Special Bench in case of Quartz Systems(P) Ltd(supra) we are of opinion that assessee can seek exclusion of company though it appeared in list of comparables if it could show before authorities below that it was functionally different from it. Further P&H High Court in case of CIT vs Quartz Systems (P) Ltd[2011] 62 DTR 182 had upheld decision of Special Bench cited supra for single reason that comparability of companies for which exclusions were sought were remitted to lower authorities by Tribunal. Accordingly :- 8 -: ITA No. 1034 14 here also we are of opinion that whether M s Cosmic Global Ltd and M s E4E Healthcare Business Services Pvt. Ltd. could be considered as good comparables have to be looked afresh by Assessing Officer TPO. We therefore set aside orders of authorities below and remit issue regarding comparability of M s Cosmic Global Ltd and M s E4E Healthcare Business Services Pvt. Ltd. back to file of Assessing Officer TPO for consideration afresh in accordance with law. Assessee is free to raise all its objections against inclusion of above companies before Assessing Officer TPO and these have to be considered by Assessing Officer TPO while passing orders. 14. Vide its Ground Nos. 6 & 7 grievance raised by assessee is that computation of PLI of comparable companies selected was not properly done. 15. Ld. AR submitted that assessee was charging depreciation at rate much higher than what was prescribed by Schedule XIV of Companies Act 1956. As per ld. AR out of four comparables considered by TPO M s Cosmic Global Ltd M s Informed Technologies India Ltd and M s R Systems International Ltd. had charged depreciation as per Schedule XIV rates. Reliance was placed on pages 175 185 and 202 of paper book. As against this ld. AR submitted that assessee had higher rate of depreciation than :- 9 -: ITA No. 1034 14 what was stipulated in Schedule XIV. Relying on Revised Edition of Guidance Note on Report u s 92E of Act (Transfer Pricing) issued by Institute of Chartered Accountants of India ld. AR submitted comparative margin to operating profits when considered as PLI should be one before depreciation when different depreciation rates have been adopted by selected comparables. Reliance was placed on decision of Panaji Bench of Tribunal in case of M s Pentair Water India P. Ltd in I.T.A.No.03 PNJ 2013 and 06 PNJ 2013 dated 23.5.2014. 16. Per contra ld. DR supported orders of authorities below. 17. We have considered rival contentions and perused orders of authorities below. It is not disputed that three of comparables selected by TPO viz. M s Cosmic Global Ltd M s Informed Technologies India Ltd and M s R Systems International Ltd. had applied depreciation rate prescribed in Schedule XIV of Companies Act while arriving its net margin. Pleading of assessee was that it had applied higher rate of depreciation while arriving at net profit. Guidance note issued by ICAI (August 2013) specifically mentions at 6.30 (c)as under: :- 10 -: ITA No. 1034 14 (c) Assets employed There may be difference in assets employed and method of providing depreciation. In order that such difference does not impact net profit operating margin on operating cost before depreciation is taken as profit level indicator. 18. One of primary requisite of comparative study is that margin arrived at for comparables as well as that of assessee shall always be adjusted for dissimilarities in treatment of various expenditure including notional expenditure like depreciation when such dissimilarities can be measured and quantified. Otherwise it could erode comparability. Panaji Bench of Tribunal in case of M s Pentair Water India Pvt. Ltd (supra) had held as under: common contention in respect of computation of TNMM i.e. operating profit taken by ld. AR in respect of comparables is that while computing profit ratio profit prior to depreciation should be computed as it will give true and fair profit ratio without being affected by depreciation charged by each of companies. We noted that different companies have adopted different method of depreciation. In fact for charging depreciation to Profit& Loss account there are different prevalent recognized methods of depreciation. Some Assessee opt for Straight Line method some opt for Written Down method and some opt for Sum of Digit method or even Replacement Cost method. Selection of each method will affect rate and quantum of depreciation even if nature of asset is same and ultimately net profit derived by company will vary. For determining fair and true profit in our opinion it is appropriate that effect of depreciation must be excluded out of operating profit for determining operating profit ratio. Therefore best way of computing operating profit in our opinion will be to compute profit before depreciation in respect of each of company. This will take out inconformity or variation in profit level of comparables arising due to adoption of different method of charging :- 11 -: ITA No. 1034 14 depreciation. We have gone through order of Bombay Bench of this Tribunal in case of DCIT vs. Reuters India 24 ITR (Trib) 231 (Mum) as has been relied on by ld. AR. We noted that Tribunal in this case has adopted cash profit operating cost as correct profit level indicator under TNMM method. 19. We are therefore of opinion that profit level indicator considering margins prior to depreciation would give better results in comparable analysis and benchmarking of transactions of assessee in given facts and circumstances. We direct Assessing Officer TPO to rework PLI of comparables after excluding depreciation cost and benchmark PLI of assessee also excluding depreciation cost. Ordered accordingly. Ground Nos. 6 and 7 of assessee are allowed for statistical purposes. 20. In result appeal of assessee is partly allowed for statistical purposes. Order pronounced in open court on 21st September 2016 at Chennai. Sd - Sd - ( . . . )) ( . ) (N.R.S. GANESAN) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai Dated: 21st September 2016 RD :- 12 -: ITA No. 1034 14 Copy to: 1. Appellant 4. CIT 2. Respondent 5. DR 3. ( ) CIT(A) 6. GF M/s ICON Clinical Research India Pvt. Ltd. v. Dy. Commissioner of Income-tax, Company Circle II(3), Chennai