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2020 (1) TMI 442
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....also registered with Software Technology Parks of India (STPI). The assessee derives business from following segments: - a) Corporate and Professional services b) Financial Services c) Intellectual Property Research In the TP study report the assessee has given following analysis of these 3 segments in the following manner: - "EVS India carries out IT enabled services inform of research activities according to the terms of the agreement with its AE. The research carried out by EVS India is driven by corporate and professional services, financial services and intellectual property research. Normally, the client executives (based in Bermuda, US, Europe and Asia- pacific) operating from overseas form the interface between the client and EVS India. The deliverable is typically in the form of a research report that is forwarded directly to the client(s) under the supervision and post a quality assurance by the AEs. The reports and research studies prepared by EVS India are owned by the client only. The operations of EVS India primarily comprise the following segments: a) Corporate and Professional services (CAPS): This segment caters to pr....
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.... to its AEs: d) Patent Assessment: This is concerned with evaluating whether a product can be patented or not. It involves finding out whether a patent exists for a similar product in the global market. e) Drafting of patent Applications: The AEs are responsible for end to end patent application filing through patent counsels in the relevant jurisdiction. EVS India prepares a draft and sends it either to the client or patent attorney associated with AEs, to be filed. Thereafter, lawyers, associated with the AE, vet the draft and file it. f) Intellectual Property Asset Management: EVS India offers Patent to product mapping, IP Research and analysis and Patent Consulting as part of Intellectual Property Research. It assists in maintain a relevant portfolio of patents, offers consulting in overlap and infringement, and helps in locating potential companies which would be interested in licensing a particular invention. Marketing and After Sales: EVS India does not undertake any marketing and sales efforts as it carries out offshore research activities on behalf of its, AE. The AE is responsible for the business development, marketing activit....
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.... reports, if any are held by the client only. The marketing intangible is owned by the associated Enterprise. EVS India does not own any non-routine intangibles and does not own trade secrets or undertake research and development activities on its account that would lead to the development of non-routine intangibles. Risk Analysis Risks are those business factors that may expose a company to the possibility of loss or damage. In other words, risk is the probability that a particular adverse event may occur during a stated period of time, or may result from a particular challenge. The following section discusses the risk borne by Company vis-a-vis Group Companies. Customer Credit Risk When a company provides services to a customer in advance of customer payment, the company runs the risk that the customer will fail to make payment. This risk is known as customer credit risk. Foreign Exchange Risk Exchange rate risk relates to the potential variability of profits that can arise because of changes in foreign exchange rates. Such risks arise when doing business in any market that is affected by international trade ....
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....sulted into profit margin of 18.94%. After carrying out various quantitative and qualitative analyses, assessee shortlisted listed 9 comparable companies with average profit margin of 10.75%. Accordingly, it was reported that assessee's international transaction are at Arm's Length Price. The TPO rejected assessee's comparable and also the filters and other parameters adopted by the assessee in the TP study report. The TPO then carried out his own search analysis and shortlisted 12 comparables which are as under: - S. No. Company Long Name OP/OC 1. Accentia Technologies Ltd. 11.09% 2. Eclerx Services Ltd. 59.92% 3. Informed Technologies India Ltd. 20.66% 4. Jindal Intellicom Ltd. 1.42% 5. TCS E-serve Ltd. 64.09% 6. Excel Infoways Ltd.(Seg.) (IT/BPO) 40.77% 7. R Systems International Ltd. (Seg.) (BPO) 0.19% 8. Infosys BPO Ltd. 36.92% 9. Acropetal Technologies Ltd. (seg.) 17.79% 10. BNR Udyog Limited 48.60% 11. e4e Healthcare Business Services P. Ltd. 21.40% 12. Microgenetics Systems Ltd. 8.07% Average 27.58% 5. Out of aforesaid 12 comparables, it ha....
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....d Marketing services, Eclerx provides online operations, web analytics, social media moderation and analytics, data reporting, CRM platform support, business intelligence, competitor benchmarking and pricing, business process consulting. These services are very different from the services rendered by the Assessee. Regarding extraordinary events, Ld. Counsel submitted that Eclerx has acquired the entire shareholding of Agilyst Inc. which is providing operations and data analysis support to the telecommunication companies. The acquisition added delivery capability of the company and added additional 1000 people into the company. Lastly, she submitted that the same very comparable has been rejected by the Tribunal in assessee's own case for A.Y. 2008-09 and also in the case of sister concern, E-valueserve.com Pvt. Ltd. SEZ whose functional profile is identical to the assessee. Tribunal has held that Eclerx not comparable. She also pointed out that the said Tribunal order in the case of E-valueserve.com Pvt. Ltd. SEZ passed in ITA No. 1467/Del/2015 & ITA No. 5147/Del/ 2017, have been upheld by the Hon'ble Delhi High Court in the appeal filed by the department vide judgment and order....
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....nalytics, data reporting, CRM platform support,, business process consulting, etc., which shows that it is providing high end KPO services in financial sector and also undertaking significant sales and marketing services and strategies. The functions carried out by Eclerx have been found to be incomparable with the assessee's function by the Tribunal in assessee's own case for the assessment year 2008- 09. Not only that, in the case of sister concern of the assessee Evalueserve SEZ Gurgaon having exactly similar functions, Eclerx has been rejected. We find that, Hon'ble Delhi High Court in the case of Rampgreen Solutions (supra) qua Eclerx has observed as under :- "37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) (P. ) Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services. pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue ....
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....fter observing as under :- "12. The next comparable by the assessee is that eClarx Services submitting that it is a Knowledge process outsourcing (KPO) unit and therefore cannot be compared with the ITES service provider like assessee. The assessee has relied on the decision of Hon'ble Delhi High Court of Ramgreen Solutions Pvt. Ltd Vs. CIT. 13. The Id DR submitted that the assessee is also a knowledge process outsourcing unit as it employs 616 personnel. He referred to page No. 6 of the order of the Id Transfer Pricing Officer for this. He submitted that assessee's case falls into all three horizontal segments of ITES industries such as call centre and technical support, payment supply chain and analytics. He therefore, stated that eClarx is the right comparable. 14. We have carefully considered the rival contentions and perused the annual report of the comparable for AY 2010-11 at page No. 734 to 83.7 of the paper book. The functions of the company are described at page No. 23 of its annual report under management discussion and analysis. It provides that eClerx supports its clients through its two business units- Capital markets and sales and marke....
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....PO services, against which the assessee does not have any intangibles. The Hon'ble jurisdictional High Court in Rampgreen Solutions (P.) Ltd. v. CIT [2015] 234 Taxman 573/60 taxmann.com 355 (Delhi), has held that e-Clerx Services Ltd., being engaged in KPO, cannot be treated as comparable of an assessee engaged in rendering BPO services. In view of the direct judgment of the Hon 'ble jurisdictional High Court on the point, we direct to eliminate e- Clerx from the list of comparables. As such, e-Clerx Services Ltd. cannot be considered as comparable." 7.4 The said judgment has also been confirmed by the Hon'ble High Court in the following manner: - "1. The Revenue challenges an order of the Income Tax Appellate Tribunal (ITAT) which accepted the assessee's contentions so far as comparison with six entities in the determination of Arm's Length Price (ALP) and Transfer Pricing adjustment under Section 93CA of the Income Tax Act, 1961 [hereafter "the 1961 Act''], was concerned. 2. The assessee is engaged in IT-enabled services (ITeS) such as research activities in terms of agreements with its Associated Enterprise (AE). It primarily concerns itself with bus....
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....e is aggrieved by the exclusion of Accentia from the TP analysis. The DRP had directed its deletion. We observe that the ITAT has noticed the unavailability of the segmental data so far as these comparables are concerned. Furthermore, the functionality of this entity was concerned, it is different from that of the assessee; Accentia was engaged in KPO services in the healthcare sector. 14. In view of the above findings, this Court is of the opinion that no substantial question of law arises. The appeals are dismissed.'' 6. The ITAT noted that M/s. Accentia Technologies Ltd. was mainly performing medical transcription services. It was of the opinion that its service was similar to the one that the assessee was engaged in. However, it also noted that there was no segmented data and, on that account, directed the exclusion of that entity from the list of comparables. Likewise, in the case of M/s. ICRA Techno Analysis Ltd., it was found that the said entity was engaged in business intelligence and analytics supplies, software development, consultancy services, engineering services, web development and hosting services. Besides functional dissimilarity, the IT....
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.... annual report states that it has only one segment. Thus, there is no segmental detail for various streams of revenue. She further submitted that this company is into medical transcription, coding and medical billing services and also software development services and also has developed its own products such as, IMTAS, IRTS, IAMS, IPMS. Apart from that, she submitted that there were extraordinary events in A.Y. 2012-13 in the form of amalgamation and acquisition, therefore, due to such extraordinary event this comparable cannot be included in this year. She further pointed out that in the assessment year 2008-09, the Tribunal in assessee's own case following the principle laid down by the Hon'ble Delhi High Court in the case of CIT vs. Ameriprise India (P) Ltd. in ITA No. 461/2016 has upheld the exclusion of the said comparable. Apart from that, the Tribunal in case of sister concern, i.e., Evalueserve.com SEZ which has a similar function profile has directed to exclude the said comparable; and this judgment of the Tribunal has been upheld by the Hon'ble Delhi High Court also. 8.2 On the other hand, Ld. CIT-DR strongly relied upon the order of authorities below and submitted tha....
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....MS, IPMS, which is used for various functions. Due to these factors and comparison of functional profiles, the Tribunal in assessee's own case for A.Y. 2008-09 has directed to exclude this company. Further, in this year there was acquisition of software development company namely, Medex Healthcare Global which is into development of software related to EMR and SAAS. 9.1 Other important fact is that the Tribunal in the case of sister concern, i.e. Evalue SEZ which is having identical functional profile has directed to exclude the said comparable after observing as under :- "11. We have carefully considered the rival contentions as well as perused the annual accounts of the comparables. At page No. 1172, we have perused schedule 10 of the notes on account wherein it has mentioned that w.e.f. 01.04.2008 a company which was engaged in the business of medical transcription and coding has been amalgamated with the comparable. It is further stated figures for this year are related to amalgamating company also. The profit and loss account of the comparable shows that sales and services of the company are according to Schedule No. 8. There is no change in the income segment of t....
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....nd such transactions are only with the enterprises having common management personnel. These transactions have no bearing on the medical transcription segment because transaction of Rs. 1.7 crores shown as related party transaction pertains to 2 enterprises, both of which are independent enterprises. Before us, the Ld. Counsel submitted that, firstly, it is dissimilar like Accentia Technologies Ltd. as it is providing medical transcription services and has no segmental details. 10.1 On the other hand, Ld. CIT-DR submitted that this company has two streams of revenue and has segmental results, one, business support and other medical transcription. Medical transcription is different from medical coding and therefore, it cannot be at par with Accentia Technologies. TPO has only taken segmental result of medical transcription segment which is nothing but ITeS. 11. After considering the aforesaid submissions, we find that, first of all, on perusal of the annual report it is seen that apart from medical transcription activities, it is also into medical billing and coding services. The functional profile of the medical transcription segment is almost akin to functions of Accentia Te....
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....51.24 55,991.57 47,539.99 41,355.78 22,895.57 Operating Profit 160,174.35 152,775.14 23,105.38 28,558.55 11,436.34 98.81 OP/OC (%) 364.14% 301.03% 41.27% 60.07% 22.65% 0.43% 12.2 On the other hand, Ld. CIT-DR relied order of the TPO, and submitted that from the perusal of the annual report it can be seen that this company has shown sale of infra activities under the head other sales; and it has declared purchase of stock in trade and when there is purchase and sale of stock, then there is no requirement of any employee cost to be allocated and further, information received u/s 133(6) cannot be doubted. Further the concept of diminishing revenue cannot be a factor for exclusion. 13. After considering aforesaid submissions, we find that apart from ITeS-BPO segment, this company is also carrying business of infrastructure facility which almost constitutes 49% of the revenue. There are no segmental details for these two activities. The profit margin on such activity of development of infrastructure facility cannot be identified and therefore, it cannot be held that such a huge margin reported by the said company is on account ....
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....n these comparability factors. Looking to the scale of operations and presence of high valuable assets both tangible and intangible, this company has consistently been held to be incomparable with captive service provider companies. Accordingly, we direct the exclusion of this comparable. vi) TCS E-Serve Ltd. 16. The TPO has included this comparable holding that it carries out the function of ITES and high turnover and brand value is not relevant factor and brand expenses is only Rs. 3.67 crores. 17. After hearing both the parties and perusal of material placed on record, we find that TCS E-serve Ltd. like Infosys BPO is a giant company which has high brand value and intangibles and in terms of risk profile, skill, nature of service, revenue etc. this comparable has been rejected in various judicial rulings. The turnover of TCS is more than Rs. 1578 crore and this company is having huge assets and is under taking high risk which have direct impact on turnover and in profitability. If a company is having huge asset base, brand value, goodwill and presence in global market with significant R & D, then it cannot be compared with a company which is purely captive service pr....
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..... The bigger companies have an established reputation in the segment, are well known and employ economies of scale to a telling end. On the other hand, these obvious - and apparent features should not blind the TPO from the obligation to carry out the transfer pricing exercise within the strict mandate of Section 92 C and Rules 10-A to 10-E. 31. Arm's length price determination, in respect of an international transaction has necessarily to confirm to the mandate of Rule 10B. In this case, the method followed for determining the arm's length price of the international transaction adopted by the assessee and the revenue is the TNMM. The comparability of an international transaction with an uncontrolled transaction has, in such cases, to be seen with reference to the functions performed, taking into account the assets employed or to be employed and the risks assumed by the respective parties to the transaction as per rule 10B(2)(b). The specific characteristics of the property transferred or services provided (contemplated by Rule 10B(2)(a)) in either transactions may be secondary, for judging comparability of an international transaction in the TNMM, because....
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....estion can be viewed independently from other activities- cannot be subject to a per se standard of loss making company or an "abnormal" profit making concern or huge or "mega" turnover company. As explained earlier, Rule 10B (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B(1), while judging comparability. Rule 10B (3) on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company - otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature - such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. 34. The Court is also aware of the factors mentioned in Rule 10B (2), i.e. characteristics of the service provided, functions performed taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;....
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.... regards the manner of using previous years' data, the assessee has taken the arithmetic mean of the comparables' profit margins for the assessment year in question and two previous years. This Court disagrees. The proviso to Rule 10B(4), read with the subrule, itself indicates that the purpose for which previous years data may be considered is - analysing the comparability of an uncontrolled transaction with an international transaction. It does not prescribe that once an uncontrolled transaction has been held to be a 'comparable' in order to obviate an apparent volatility in the data, the arithmetic mean of three years (the assessment year in question and two previous years) may be taken. That would amount to assigning equal weight to the data for each of the three years, which is against the mandate of Rule 10B(4). The use of the word "shall" in Rule 10B(4) and, noticeably, "may" in the proviso, implies that the relevant assessment year's data is of primary consideration, as opposed to previous years' data. 39. This Court proceeds on the basis that there is sufficient guidance and clarity in Rule 10B on the principles applicable for determination of ALP. These include t....
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....y would have a material bearing on the value and profitability of the entity. It is, therefore, obvious that the comparables selected and the tested party must be functionally similar for ascertaining a reliable ALP by TNMM. Rule 10B (2) of the Income Tax Rules, 1962 also clearly indicates that the comparability of controlled transactions would be judged with reference to the factors as indicated therein. Clause (a) and (b) of Rule 10B (2) expressly indicate that the specific characteristics of the services provided and the functions performed would be factors for considering the comparability of uncontrolled transactions with controlled transactions. ...... 30. As indicated above, in order to determine the ALP in relation to a controlled transaction, the analysis must include comparables which are similar in all aspects that have a material bearing on their profitability. Paragraph 1.36 of the "OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" published in 2010 (hereafter 'OECD Guidelines') indicates the "comparability factors" which are important while considering the comparability of uncontrolled transactions/entities with t....
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....hile upholding the exclusion of M/s.Wipro Ltd. from the list of comparables it was noted that the ITAT took into account the Related Party Transactions ('RPT').The filter adopted was to exclude comparables with unrelated party transactions equal to or in excess of 75% of their business. The ITAT did that on the basis that Wipro Ltd. had a significant brand presence in the market and could, therefore, not be deemed to be a comparable entity. This Court explained the RPT filter as under: "The RPT filter, is relevant and fits in with the overall scheme of a transfer pricing study which is premised primarily on comparing light entities having similar if not identical functions. Therefore, if a particular entity predominantly has transactions with its associate enterprise - in excess of a certain threshold percentage, its profit making capacity may resulted in a distorted picture, either way." 21. A reference may next be made to the decision in The Principal Commissioner of Income Tax-3 v. Evalueserve Sez (Gurgaon) Pvt. Ltd. (supra) where a reference is made to the earlier decision to the BC Management Services Pvt. Ltd. (supra). This decision dealt with the exclusion ....
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....s Court CIT v. Agnity India Technologies Private Limited (2013) 36 Taxmann.com 289. 26. The Court may also note that the Karnataka High Court has in PCIT v. Softbrands (2018) 406 ITR 513 (Kar) noted as under: "48. The Tribunal of course is expected to act fairly, reasonably and rationally and should scrupulously avoid perversity in their Orders. It should reflect due application of mind when they assign reasons for returning the particular findings. 49. For instance, while dealing with comparables of filters, if unequals like software giant Infosys or Wipro are compared to a newly established small size Company engaged in Software service, it would obviously be wrong and perverse. The very word "comparable" means that the Group of Entities should be in a homogeneous Group. They should not be wildly dissimilar or unlike or poles apart. Such wild comparisons may result in the best judgment assessment going haywire and directionless wild, which may land up the findings of the Tribunal in the realm of perversity attracting interference under section 260-A of the Act." 27. There is merit in the contention of the Assessee that the scale of ope....