TaxTMI 
TaxTMI 
2020 (10) TMI 1148
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....12 and ITA No.2745/Del/2018 is preferred by the assessee against order dated 31.01.2018 passed by the Ld. CIT (A)- 44, New Delhi for Assessment Year: 2012-13. The three appeals and the Cross Objection were heard together and they are being disposed through this common order for the sake of convenience. 2.0 The brief facts of the case are that the assessee is an Indian Company and during the two years under consideration it was a wholly owned subsidiary of Smart Analyst Inc., USA ("SA Inc."). As per the records, the assessee is back end captive-service provider to Smart Analyst Inc. and renders back office research support services for the client engagements owned by Smart Analyst Inc. The services provided are in the nature of ITES/BPO services and include services such as organizing the data into a convenient and navigational format, distilling and synthesis of information into user friendly formats, developing briefs from online databases and public domain internet, and related support services to Smart Analyst Inc. The services also include addressing queries raised by Smart Analyst Inc., analyzing data and statistics, review of key players, comparison of business and product s....
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....ed that the transaction of provision of ITeS/BPO services to Smart Analyst Inc. was at arms' length. The following chart depicts comparables selected by the assessee, their margins and the margin earned by the assessee: S. No. Name of the Company Unadjusted 3 years Average (OP/OC) 1. Datamatics Financial Services Ltd. -2.61% 2. Caliber Point Business Solution Ltd. 21.65% 3. Cosmic Global Ltd. 24.79 4. Informed Technologies India Limited 19.87% 5. E4E Healthcare Business Services Pvt. Ltd. 9.14% 6. R Systems International Limited -6.61% Average [Arithmetic Mean] 6.65% OP/OC Margin Earned by assessee 14.81% 2.3 As per the transfer pricing study (TP Study) of the assessee, the assessee was performing low end back office research support services for Smart Analyst Inc. and it bore very limited risk in connection with the same. However, the TPO was of the opinion that the assessee was engaged in providing services that were not merely routine services but also provided a whole range of IT Enabled Services to carry out the main work of its Associated Enterprises (AE). The TPO proceeded to reject 5 out of 6 comparables and retained only E4E Health Care Business S....
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....A) was justified to direct the TPO for exclusion of M/s ICRA Techno Analytics Ltd. as comparable when the assessee and M/s ICRA Techno Analytics Ltd. both are in same ITES segment?" 4. "Whether Ld. CIT(A) was justified on the facts and in law by excluding Infosys Ltd. from the final list of comparables by wrongly relying on other cases, when the facts and circumstances are totally different?" 5. "The appellant craves leave to add, alter or amend any of the ground(s) of appeal before or during the course of hearing of the appeal." 2.7 The assesse has also filed Cross Objections bearing C.O. No.181/Del/2017 and the grounds raised in the memorandum of cross objections are as under: "Based on the facts and circumstances of the case, the respondent company respectfully craves to prefer a memorandum of cross-objections before your lordships against the appeal by the appellant on the following grounds. Correct inclusion of certain companies as comparable 1. That on facts and circumstances of the case, the learned CIT (Appeals) was justified by correctly including 'Aeropetal Technology Limited' as comparable, in the final set of comparables. Correct exclusion of certai....
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....AO/TPO by including 'Accentia Technologies Limited7, in the final set of comparables. 5. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by including 'Mastiff Tech Private Limited7, in the final set of comparables. 6. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by including 7TCS e-Serve Limited7, in the final set of comparables. Erroneous exclusion of certain companies as comparable 7. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by not including 'Caliber Point Business Solution Limited7, in the final set of comparables. 8. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by not including 'Cosmic Global Limited7, in the final set of comparables. 9. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by not including 'Informed Technologies India Limited7, in the final set of comparables. Not Granting of Risk Adjustment 10. The learned CIT (Appeals) has erred both on facts and in law in upholding....
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....is company was functionally dissimilar to the assessee as it rendered KPO services in the healthcare sector by way of offering software as a service ("SaaS") and is also engaged in development and sale of software products. It was further submitted that on the other hand the assessee is engaged in providing low-end routine ITeS Services whereas the Accentia offered complete healthcare documentation as well as receivables management services including installation and maintenance of all software, hardware and bandwidth infrastructure, which were in the nature of software support services and not ITeS. It is also engaged in development and sale of software products. It was also submitted that segmental information was not available in respect of 4 streams of revenue of this company viz. Medical Transportation, Billing & Collection, coding and fixed Deposits. It was also highlighted that this company had acquired 16% stake in software development company, Strategic Tangent Corporation but the Ld. CIT (A) had rejected the assessee's arguments and had included this company on the ground that 16% stake acquisition was not an extraordinary event but in subsequent Assessment Year: 2012-13,....
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.... to be included as a comparable on the ground that this company had single segment of high end ITES/BPO Services and was functionally comparable to the assessee which was factually incorrect. The Ld. AR also pointed out that although the Ld. CIT (A) had held that the assessee provided high end services, he had rejected E-clerx which also provided high end services and hence was not comparable to the assessee. The Ld. AR also submitted that the segmental data between ITES/Software Development Services was not available with respect to the company TCS e-Services Ltd. It was submitted that the presence of brand value of the Tata brand in the case of TCS e-Serve Limited influenced the pricing policy directly impacting the margins earned by TCS which provided support in terms of large scale operations and clientele. It was submitted that this company was taken over by TCS Ltd in this year and, thus, there was an abnormal profitability trend post acquisition. The Ld. AR placed reliance on numerous judicial precedents from the ITAT wherein TCS e-Serve Ltd. had been directed to be excluded from the final set of comparables. 3.4 With respect of ground No.7 challenging the exclusion of Cali....
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....iding of Risk Adjustment, the Ld. AR submitted that this ground was not being pressed. 3.8 With respect to ground Nos.1 & 11, the Ld. AR submitted that they were general in nature and did not require any specific argument or adjudication. 4.0 In response to the extensive arguments of the Ld. AR, the Ld. Sr. Departmental Representative (DR) placed extensive reliance on the orders of the Ld. CIT (A) and the TPO. She read out from the relevant paragraphs of the assessment order, the Transfer Pricing Order and the order of the Ld. CIT (A) and submitted that there was no error in orders of the authorities below in respect of inclusion/exclusion of the comparables as well as in application of filters and not in considering the foreign exchange loss/gain as operational. 5.0 With respect to the Department's appeal bearing ITA No.3779/Del/2017, the Ld. DR submitted that the Department's appeal challenged the action of the Ld. CIT (A) in directing the TPO for including the company Acropetal Technologies Ltd. ("Acropetal") as a comparable with only the 'healthcare segment'. It was also submitted that the Department was also challenging the action of the Ld. CIT (A) in directing the TPO for....
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....submitted that this company was engaged in data analytics and process outsourcing, computer-aided design, etc. and as per its annual report it was providing high-end KPO services. It was also submitted that there were extraordinary profits earned by this company from acquisitions in F.Y.2007-08, 2008-09, 2009-10 & 2010-11 which was also a reason for exclusion. The Ld. AR also highlighted that this company had been rejected in Asst. Year: 2012-13 by the Ld. CIT (A) and the Department had not preferred any appeal against such exclusion. The Ld. AR placed reliance on numerous judicial precedents in support of his contention that this company had been correctly excluded. 6.2 With respect to ground No.3 in the Department's appeal challenging the exclusion of company M/s ICRA Techno Analytics Ltd. ("ICRA"), the Ld. AR submitted that this company had been erroneously included by the TPO by holding that this company was functionally similar to the assessee ignoring the assessee's contention that this was engaged in software development services. The Ld. AR submitted that this company cannot be taken as a comparable because this was engaged in software development as well as in consultanc....
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....tional transaction Value (Rs.in crores) Method Arm's length result (as per transfer pricing documentation) Provision of Back Office Research Support Service 13.09 Transactional Net Margin Method ("TNMM") -Net Profit Margin based on costs ("NCP"), being OP/OC for 6 comparables: 11.78% -PLI of asessee:15.40% Recovery of cost incurred towards maintaining extra floor area 0.39 cost-to-cost N.A Reimbursement of expenses (Received/receivable) 0.008 cost-to-cost N.A 8.2 The final set of comparables of the assessee had six comparables as under: S. No. Name of the Company Unadjusted 3 years average margin (OP/OC Current Year (OP/OC updated margins vide submission dated 21.12.2015 before TPO 1. Informed Technologies India Limited 14.14% 6.59% 2. Jeevan Scientific Technology Ltd 14.75% 14.64% 3. Jindal Intellicom Limited 13.19% 1.72% 4. Cosmic Global Ltd. 11.52% 10.50% 5. Caliber Point Business Solution Ltd. (Segmental) 16.10% -4.29% 6. R Systems International Limited (Segmental) -6.61% 41.53% Average [Arithmetic Mean] 10.51% 11.78% OP/OC Margin Earned by SAIPL 15.40% 8.3 The TPO rejected 4 out of 6 comparables and included certain add....
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....ate application of the 'export to turnover filter' by the AO/TPO; and consequently, certain companies viz. 'ICRA Online Limited' and 'Datamatics Financial Services Limited' have been incorrectly rejected in the final set of comparables. Erroneous inclusion of certain companies as comparable 4. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by including 'TCS e- Serve Limited', in the final set of comparable. Erroneous exclusion of certain companies as comparable 5. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by not including TCRA Online Limited', in the final set of comparables. 6. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by not including 'Datamatics Financial Services Limited', in the final set of comparables. 7. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by not including 'Ace BPO Services Limited', in the final set of comparables. General 8. The above grounds of appeal are without prejudice to each other and the appellant craves....
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....ial Services Ltd:- It was submitted that this company is engaged in Transaction Processing and back-office out sourcing offering customer care services. It was also submitted that it is the leading provider of business research transformational outsourcing of services and hence, functionally comparable and the TPO has not objected to the functional similarity but it was excluded because if failed the 75% export turnover filter. It was submitted that use of this turnover filter was not warranted and that this comparable deserved to be included. (iv) ACE BPO Services Limited- The Ld. AR submitted that the Ld. CIT (A) has erroneously excluded the company even though he accepted that this company is functionally comparable to the assessee. For this he drew our attention to page No.83 of the Ld. CIT (A)'s order. It was also submitted that this company is a health care focused ITES Provider promoted by healthcare and management professionals and since the company provided ITES, segmental information was not required. It was submitted that even the TPO has not objected to the functional comparability. It was prayed that this company be included in the final set of comparables. 10.0 In ....
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....at the operation of TCS e-Serve Ltd. broadly comprised of transaction processing and technology services including software testing, verification and validation for which no segmental bifurcation was available. The Co-ordinate Bench held that in absence of such vital information of the margins of the various segments, the company could not be considered a good comparable because of the difficulty in bench marking the correct profit margin. The Co-ordinate bench also noted that the presence of high brand value of the Tata brand also made TCS e- Serve Ltd. not a good comparable. The Relevant observations of the Tribunal are contained in paragraph -18 of the said order and the same are being reproduced herein under for a ready reference: "18. We have heard the rival submissions, perused the relevant finding giving in the impugned orders as well as the material placed on record. One of the main points of distinction which is quite ostensible is that the TCS E-Serve' is a subsidiary of Tata Consultancy Services Limited', which is one of the leading and giant company in the world and has an inherent element of very high brand value associated with it. Such a high brand value de....
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....ourse of business transactions on import/export and, therefore, the same should be taken as operating income/expenditure. It has also been brought to our notice that this issue was decided by a Co-ordinate Bench of the Tribunal in Assessment Year 2009-10 in assessee's own appeal in assessee's favour. We have gone through the order of the Tribunal in Assessment Year 2009-10 in assessee's own case in ITA No.410/Del/2014 vide order dated 20th Feb.,2015. We find that the contention of the Ld. Authorized Representative is correct in this regard in as much as the Co-ordinate Bench of the Tribunal, in paragraph 20 of the said order has held that foreign exchange fluctuation cannot be seen as independent of the operating income. Respectfully following the same, on identical set of facts, without the Department having pointed out any distinguishing factor on the facts, we direct that the foreign exchange/fluctuation (loss or gain) we treated as being operational in nature and PLI should be computed accordingly after giving effect to the treatment of foreign exchange/loss as operational. 11.4 Ground No.4 of the assessee's appeal challenges inclusion of Accentia Technologies Ltd. as a compa....
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....dingly, in our considered view the functional profile of the assessee being different from the functional profile of Accentia Technologies Pvt. Ltd., this company cannot be considered a good comparable. Accordingly, we direct the exclusion of this company from the final set of comparables. 11.5 Ground No.5 of the assessee's appeal challenges inclusion of the company Mastif Tech Pvt. Ltd. It is the submission of the assessee that this company is functionally dissimilar to the assessee company. It has also been contended by the Ld. Authorized Representative (AR) that the objections of the assessee against inclusion of this company in the final set of comparables has not been dealt with either by the TPO or by the Ld. CIT (A). In such a situation, it is our considered view that in the interest of substantial justice, the TPO should consider the objections of the assessee against the inclusion of this company and thereafter pass a speaking order after giving due opportunity to the assessee to present its case. Thus, Ground No.5 stands allowed for statistical purposes. 11.6 Ground No.7 of the asseseee's appeal challenges the TPO's action of exclusion of the comparable Caliber Point Bu....
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....7 Coming to Ground No.8 of assessee's appeal which challenges the exclusion of Cosmic Global Ltd., it is the submission of the Ld. Authorized Representative that the TPO has excluded this company on the ground that it fails the export turnover filter of 75% although the TPO has not raised any objection regarding functional similarity. It has also been submitted that in Assessment Year 2009-10, the TPO had applied an export turnover filter of 25% whereas in this year 75% export turnover filter has been applied. It has also been submitted that the ITAT had agreed with the assessee's contention in Assessment Year 2009-10 that export turn over filter of 25% was not an appropriate filter. We note that the TPO has excluded this company solely on the ground that it fails the export turn over filter of 75%. The TPO has, however, not commented on the functional aspect of this company. It is also a fact on record that the ITAT had rejected the export turn over filter of 25% in assessee's own case in Assessment Year 2009-10 by following the Tribunal's order in Bharti Airtel Ltd. vs. ACIT [2014]161 TTJ 428 (Del.) and had remanded the issue to the TPO for fresh examination. In this year under a....
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....eal stands dismissed as being not pressed. 11.10 Ground No.11 is general in nature not requiring any specific adjudication. 12.0 In the result, the assessee's appeal bearing ITA No.3989/Del/2017 for Assessment Year 2011-12 stands partly allowed. 13.0 Coming to the Department's appeal bearing ITA No.3779/Del/2017, the Department is contesting the direction of the Ld. CIT (A) for including the company Acropetal Technologies Ltd. as a comparable with only the financials of 'healthcare segment'. The Ld. Authorized Representative while supporting the order of the Ld. CIT (A) has argued that Acropetal Technologies Ltd. is engaged in 'software development' and 'Engineering Design Services' (EDS) and that the EDS segment of the company was not functionally comparable to the assessee because this segment involves Research and Development activities resulting in creation of intangibles. It is seen that the Delhi Bench of ITAT in the case of ITO vs. Omniglobe Information Technologies (India) Pvt. Ltd. in ITA No.1380/Del./2016, vide order dated 15.04.2019, relying on another order of Co-ordinate Bench in the case of Swiss Re Shared Services (India) Pvt. Ltd. observed that the engineering de....
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....ion, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s. Capital Iq Information Systems (India) (P.) Ltd. v. Additional Commissioner of Income-tax (supra), wherein, the Tribunal directed t....
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....l challenges action of the Ld. CIT (A) in directing the exclusion of the company Infosys BPO Ltd. on the ground that it was a giant in the area of software development. The Ld. CIT (A) also noted that this company had substantial intangibles in the form of goodwill and had a different functional and risk profile. We have perused the annual report of Infosys BPO for the year under consideration and note that this company has a sales turnover Rs. 1129 Crores i.e., more than 87 times of that the assessee company which was a mere 13.48 Crores. The Hon'ble Delhi High Court, while upholding the order of the Tribunal, in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856/Del/2010 vide order dated 10th July, 2013 has held that Infosys BPO Ltd. had been rightly excluded from the list of comparables for the reason that it was a giant company in the area of development of software and it assumed all risks leading to higher profits whereas the respondent assessee was a captive unit of the parent company and assumed only a limited risk. Apart from this, Infosys BPO Ltd. has also been excluded by the Bangalore Bench of ITAT in the case of e4e Business Solutions India Pvt. Ltd. [TS-13....
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....of 75%. It is the assessee's contention that this company is functionally comparable to the assessee's company and that the assessee had already applied foreign exchange filter while selecting comparables and, therefore, restricting export earnings to 75% was not warranted as the nature of services were identical. It has also been brought to our notice that the Tribunal in assessee's own case for Assessment Year 2009-10 had remitted the use of this filter to the TPO wherein in that year the export turnover filter of 25% had been applied. We note that in this year the export turnover filter has been enhanced to 75% by the TPO without assigning any reason and there is no finding by either of the Lower Authorities on the aspect of the functional similarity of the assessee company with this company. We also note that the ITAT in Assessment Year 2009-10, in assesse's own case, had remitted the issue of this filter to the TPO by following the order of the Co-ordinate Bench in the case of Bharti Airtel Ltd. vs. ACIT [2014] 101 ITR Tribunal 121. Accordingly, it will be in the fitness of things to restore this comparable to the file of the TPO for fresh adjudication after considering the a....