TaxTMI 
TaxTMI 
2017 (12) TMI 1731
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....f Rs. 58,25,317/- made on account of arm's length price." 3. The Appellant, M/s. Everest Business Advisory India Pvt. Ltd. (hereinafter referred to as 'the taxpayer') by filing the present appeal being ITA No.1191/Del/2013 sought to set aside the impugned order dated 30.10.2012, passed by the CIT (Appeals)- XX, New Delhi qua the assessment year 2007-08 on the grounds inter alia that :- "That on the facts and circumstances of the case, and in law; 1. The Ld. CIT-A & AO erred in rejecting the benchmarking approach adopted by the appellant in the transfer pricing study and thereby making a transfer pricing adjustment of Rs. 42,17,582/- to the income of the appellant by holding that the international transaction of "Export of services" of the appellant does not satisfy the arm's length principle envisaged under the Income tax Act, 1961 (the Act). 2. The Ld. CIT-A has erred both in facts and in law in confirming the action of the Ld. Assessing Officer (" AO") as the reference made by the Ld. AO suffers from jurisdictional error. The Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was ....
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....f the turnover or abnormal margins , varied cost structures or in respect of controlled / uncontrolled transaction 3.9. by treating the assessee as a profit center and not considering the fact that the assessee is operating as a cost plus unit and thereby characterizing the appellant as a full risk bearing entrepreneur. 3.10. by including the segments of the companies despite knowing that margin calculations of such segments are subjective. 3.11. by using the power of under section 133(6) of the Income Tax Act,1961 for obtaining the information 3.12. violating the principles of natural justice by not providing the assessee a reasonable opportunity of being heard while rejecting / including certain companies; 3.13. denying a risk adjustment to the operating profit margins of the comparables, and in doing so have grossly erred in: 3.13.1. stating that detailed working or formula applied for calculation of risk adjustment has not been provided by the assessee while also failing to clarify what would constitute the I detailed working' for the purpose of undertaking a risk adjustment 3.13.2. reaching a conclusion that ri....
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.... 8.72% 6. The taxpayer selected itself as a tested party, applied Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for the purpose of search for uncontrolled comparables. The taxpayer taken 13 comparables with average profit margin of 12.06% on cost as against taxpayer's margin of 15% on operating cost and found its international transaction at arm's length. 7. TPO, after accepting all the filters or quantitative criteria applied by the taxpayer for benchmarking the international transaction applied additional filters viz. using financial information for FY 2006-07 and to exclude the companies having abnormal financials only after defining "abnormal variations", introduced some other filters like rejecting companies having turnover less than Rs. 1 crore; companies having ITES revenues of at least 75% of its revenue from ITES; rejecting companies having consistent losses/diminishing revenue filter; rejecting companies having export earnings of more than 25% of revenue etc. for benchmarking the international transaction. 8. Finally, TPO selected 25 comparables having average of 28.37% (30.07% less working capital adjustment of 1.70%) and consequent....
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....essary to consider that question in order to correctly assess the tax liability of an assessee." 14. The Tribunal has jurisdiction to examine the question of law which arises from facts. Moreover, the facts now sought to be brought on record by way of additional grounds were not before TPO due to inadvertence on the part of the taxpayer, the perversity of facts certainly turned to be a question of law. So, when question of law arises from factual perversity as in the case at hand, we are of the considered view that additional grounds are required to be allowed as it will go to the roots of the case. Consequently, application for additional evidence moved by the taxpayer is allowed. 15. So far as international transaction qua provision of advisory services to the tune of Rs. 2,70,97,470/- is concerned, TPO has accepted the profitability of this segment. However, TPO has disputed the back office research support services and has proposed the TP adjustment of Rs. 58,25,317/-. The TPO has accepted the TNMM as the most appropriate method applied by the taxpayer with operating profit / operating cost as Profit Level Indicator (PLI). TPO also accepted billing method of AE as cost pl....
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....fers collectively to all research, systems, methods, know-how, processes, specifications, forms, templates, operating procedures, patents, copyrights, trademarks, trade names, trade secrets, proprietary information, techniques, models, inventions, customer information, software programs, sourcing processes and procedures, methodologies, and trade secrets relating to the business of the IP Owner or its Affiliates, including, but not limited to, the items listed in Attachment B hereto all whether or not patented or copyrighted in any country. 3. DEVELOPMENT OF INTELLECTUAL PROPERTY. a. Development, IP Developer agrees that it will employ all personnel and make all efforts necessary for the continued development, maintenance expansion and/or enhancement of IP Owner's Intellectual Property in a timely manner, in accordance with IP Owner's specifications and with industry standards. b. Costs, in consideration of the services stated in subsection "a" above, IP Owner agrees that it will pay to IP Developer all Costs of Development incurred by IP Developer for the development, maintenance, expansion and/or enhancement of Intellectual Property by IP Developer, tog....
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....ronic marketing material, all software used in assisting clients with use and employment of its intellectual property, to use any and all factual information, examples, models samples, etc. allowed developer to access to the property data base and that IP developer shall pay IP owner fees calculated in accordance with the method for calculating fees for use of intellectual property set forth in Attachment A. Ld. DR contended that all these facts go to prove that the taxpayer is not a low end BPO. 21. However, when we examine MIP Agreement in totality, as contended by ld. AR for the taxpayer, it has become apparently clear that no doubt, the taxpayer has agreed to develop intellectual property for its AE with its own work force for which the entire know how has been undisputedly provided by the AE to the taxpayer including using the intellectual property owned by the AE for developing further intellectual property. Para 3a. is categoric enough that taxpayer will employ all personnel and make all efforts necessary for continued development, maintenance, expansion and/or enhancement of IP Owner's Intellectual Property in a timely manner in accordance with the IP owner's specificati....
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....dered is necessary for comparability and the entire material including TP report of taxpayer was there before him. 26. No doubt, Hon'ble Delhi High Court in Rampgreen Solutions (P.) Ltd. vs. CIT - (2015) 60 TAXMANN.COM 355 (Delhi) held that as far as possible comparables must be selected keeping in view the comparable factor and while applying TNMM broad functionality is not sufficient. However, perusal of para 34 of Rampgreen Solutions (P.) Ltd. (supra), available at page 300 of the case laws compilation, categorically defines BPO and KPO which is reproduced as under for ready perusal :- "34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPa' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is' used to indicate an 1TeS provider providing a completely different nature of service than any other BPO service provider. A....
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....ry and secondary sources from where data is to be gathered is also specified by Everest USA. 4. The examples, models, samples, referrals, studies, data and recommendations for development of content are also provided by Everest USA. 5. Everest USA, monitors the progress of works performed by Everest India through weekly calls, video conferencing and visits. 6. Everest USA is responsible for content and quality of the report to the end client. 7. Everest India is being remunerated at cost plus 15% for the functions of content development of reports being performed. 8. Everest India does not own any intangibles." 29. Hon'ble High Court on the basis of aforesaid categorization of KPO and BPO excluded Vishal and Eclerx which are into KPO in Rampgreen Solutions (P.) Ltd. (supra) case. 30. Hon'ble High Court in Rampgreen Solutions (P.) Ltd. (supra) has also held that the comparable transactions / entities must be selected on the basis of similarity with the controlled transaction / entity. Comparability of controlled and uncontrolled transaction has to be judged inter alia with reference to comparability factor as indicated under Rule 10....
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....the backdrop of the aforesaid findings, facts and circumstances of the case and arguments addressed, we would examine suitability of companies viz., (i) Accentia Technologies Ltd. (Seg.), (ii) Eclerx Services Ltd.; (iii) HCL Comnet Ltd. (Seg.); (iv) Vishal Information Technologies Ltd.; (v) Wipro Ltd. (Seg.); (vi) Infosys BPO Ltd.; (vii) Informed Technologies India Pvt. Ltd.; (viii) R Systems International; and (ix) Iservices India Pvt. Ltd. as comparables sought to be excluded by the ld. AR for benchmarking its international transaction qua ITES (Research) one by one as under. ITA NO.1191/DEL/2013 (ASSESSEE'S APPEAL) ACCENTIA TECHNOLOGY LTD (SEGMENT) 36. The ld. AR for the taxpayer sought to exclude Accentia from the final set of comparables for benchmarking the international transaction qua ITES segment on the grounds inter alia that it is functionally dissimilar; that Accentia has undergone merger and acquisitions leading to abnormal growth; that Accentia has more than 60% of the operating cost towards overseas expenses as against nil of the taxpayer; that Accentia incurs substantial marketing expenses to the extent of 28% (Rs. 8.14 crores of Rs. 28.7 crores of the sale....
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....inst almost nil of the taxpayer. For ready reference, financials of Accentia extracted by the ld. AR from annual report are reproduced as under :- Accentia Technologies Ltd. FY 05-06 FY 06-07 FY 07-08 Particulars Heavy mergers & acquisitions Heavy mergers acquisitions TOTAL OPERATING REVENUE 285,000 287,231,663 509,346,944 %age increase in revenue 1007% 77% TOTAL EXP. 2,603,757 215,411,684 349,332,496 OPERATING PROFIT (2,318,758) 71,819,979 155,450,748 % increase in profits 3197% 116% OP/OC -89.05% 33.34% 44.50% 40. The coordinate Bench of the Tribunal in Taluna India Pvt. Ltd. in ITA No.5645/Del/2011, available at page 183 of the case law compilation and Ciena India (P.) Ltd. vs. DCIT - (2015) 57 taxmann.com 329 (Delhi - Trib.) decided the issue of merger and demerger for the purpose of comparability and held that company cannot be considered as comparable because of financial results distorted due to mergers and demergers etc. 41. Coordinate Bench further ordered to exclude Accentia in ICC India Pvt. Ltd. vs. DCIT in ITA No.25/Del/2012, availab....
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....n Eclerx is considered as, "we win our fair share of accolades - we've been named as one of the "Top 20 Companies to Watch" by Business Today, "Best of Breed" by AT Kearney, "Pricing Experts" by the Yankee Group and "Leading KPO" by Nelson Hall. Industry associations have also recognized us for our contribution - we are Pricing Experts at the Professional Pricing Society and the only KPO on the rolls of the International Swaps and Derivatives Association." 47. Furthermore, as per annual report and information collected u/s 133 (6), available at pages 313 to 329 of the paper book, Eclerx is providing diverse nature of services having own segmental data for providing numerous such services to its clients. Moreover Eclerx has employed 1500 domain specialized to render services to its clients as against 20 employees of the taxpayer having turnover of Rs. 5 crores only. Moreover, the Eclerx is having huge intangibles to the tune of 13% of the gross total assets. 48. So, when we compare the profile of the Eclerx vis-à-vis the taxpayer which is a captive unit of Everest Group of companies providing ITES and also providing ITES research and analysis on the issue of outsourcing....
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....ee company deliver the IT infrastructure management services through the Operations Management Center ("OMC") in India. The OMC provides a comprehensive outsourcing solution for managing a multi-vendor or multi-technology environment with services customized to meet customer's unique requirements. Further, the company also renders Internet services to a whole host of customers." 52. Keeping in view the functional profile of the HCL Comnet which is into high end KPO services and by applying the principle laid down in Rampgreen Solutions (P) Ltd. (supra), it cannot be compared with taxpayer which is a captive ITES service provider. Moreover, HCL Comnet is having huge employee cost for Rs. 185.28 crores as against total turnover of the taxpayer to the tune of Rs. 5 crores. 53. HCL Comnet has been ordered to be excluded by the coordinate Bench of the Tribunal in ICC India Pvt. Ltd. (supra) on account of functional dissimilarity by following Rampgreen Solutions (P) Ltd. (supra). HCL Comnet is also operating 24x7 in three shifts whereas the taxpayer is operating with single shift only. Moreover, HCL Comnet is a risk bearing company whereas the taxpayer is a captive service prov....
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....trum of services; that the nature of Wipro is highly capital intensified having 24x7 operation; that the Wipro is having revenue of Rs. 940 crores and operating assets employed in BPO business is Rs. 781 crores; that Wipro incurred huge expenditure on research and development to the tune of 8.5% of the total revenue; having employee base of 17464; that Wipro is a giant in its area of business having huge brand value and goodwill and owns significant intangibles; that Wipro is having inorganic method of growth which it acquires from goodwill, brand value and presence in the global market. 59. Ld. DR for the Revenue contended that before TPO and CIT (A) the taxpayer have only argued high turnover and abnormal margin as the reason for its exclusion which cannot be a reason for exclusion as has been held by Hon'ble High Court in Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT - (2015) 56 taxmann.com 417 (Delhi). Ld. DR further contended that since the TPO did not have the opportunity to examine the argument now addressed before the Tribunal, it should be restored back for fresh decision. However, we are of the considered view that when the entire annual reports relied up....
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....rounds inter alia that Infosys BPO has been selected by the taxpayer as a comparable in AY 2009-10 accepted by the TPO and no appeal has been filed before the CIT (A) and ITAT. But we are of the considered view that any of the comparable cannot be excluded or included merely on the ground of acceptance or rejection of the taxpayer during the earlier years because there is no estoppel to argue afresh on any of the comparable on the basis of facts and case laws. 65. So, when we examine business profile of the Infosys BPO vis-à-vis the taxpayer, Infosys BPO is a full fledged risk bearing company having huge asset base, turnover of Rs. 649 crores and total asset base of Rs. 450 crores having employee base of 11226 as against 20 employee of the taxpayer and turnover of Rs. 5 crores only; Infosys BPO is into providing high end services; whereas the taxpayer is a small scale captive service provider to its AE for ITES services and does not own any intangibles or brand value and is working on cost plus basis. 66. The comparability of Infosys BPO has been examined by the coordinate Bench of the Tribunal in Rampgreen Solutions (P) Ltd., Agnity India Technologies Pvt. Ltd., Calib....
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....ty as it is into internet service and consulting services. When we examine the functional profile of Iservice from website provided by the taxpayer, the Iservice is into web hosting, email services, spam filtering, domain names and DNS hosting. 73. The ld. DR again opposed the Iservice on the ground that this argument is never addressed before the TPO and when the taxpayer has taken the entire vertical of ITES providing companies as comparable and now if strict functional comparable is insisted then this filter should be universally applied to all comparables. 74. When we examine the arguments addressed by the ld. AR for the taxpayer in the light of the Rampgreen Solutions (P.) Ltd. (supra) only functional comparability is the hallmark for benchmarking the international transaction. Business profile of Iservice shows that the same is into high end diversifying services vis-à-vis the taxpayer who is into divergent high end services like web hosting, email services, spam filtering, domain names and DNS hosting. web hosting, email services, spam filtering, domain names and DNS hosting is also providing web design services, domain management services and email management s....
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....y would have incurred certain expenditure on marketing services and also to safeguard the technical use by them. In such a case, the risk encountered by the assessee cannot be said to be the equivalent risks attached to the comparables. The risk attributed to the assessee by the TPO is an anticipated risk whereas the risk attributed by the assessee to the comparables is an existing risk. In such situation, the TPO ought to have given the risk adjustment to the net margin of the comparables for bringing them on par with the assessee company. The assessee's contention that the risk adjustment should be at 5.5% or at the difference of prime lending rate of the RBI and the banks is not acceptable to us. Therefore, we direct the TPO to consider all the contentions of the assessee and after taking into account all the relevant material decide the percentage of risk adjustment to be made in accordance with law. This ground is accordingly, allowed for statistical purposes." 77. Following the decision rendered by the coordinate Bench of the Tribunal, the TPO is directed to decide the issue afresh after considering the contentions raised by the taxpayer in the light of the Intellinet Tech....
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....en the view that extra ordinary profit in ITES segment reaching up to 113% for the year under assessment shows that the company has diverted its profit to evade taxes of its plastic division by showing losses to the ITES segment which is 100% exempted unit. So, the ld. CIT (A) has rightly excluded Moldtek Technologies Ltd. on ground of extra ordinary profit of 113% which needs no interference. 82. So far as the question of merger of Teck-men Tools Pvt. Ltd. and acquisition of Crossroads Inc. USA w.e.f. 01.10.2006 and 28.04.2007 respectively by the taxpayer is concerned, its financial results, available at page 245 of the paper book (Annual Report), shows that Moldtek Technologies Ltd.'s segmental sale have gone up by 35.17% from Rs. 70.87 crores to Rs. 85.80 crores largely fuelled by growth of 204% in IT (KPO) Division Billings from Rs. 375 lakhs in 2005-06 to Rs. 1140 lakhs in 2006-07. Moldtek Technologies Ltd. has also achieved a profit of Rs. 830.71 lakhs as against Rs. 394.97 lakhs in the previous year registering a growth of 134%. IT/KPO Division rose sharply from Rs. 1.60 crores to Rs. 5.75 crores registering a growth of 259.4%. It is also categorically referred in Directo....