TaxTMI 
TaxTMI 
2020 (10) TMI 1148
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Objection pertains to Assessment Year: 2011-12 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 ke....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ince the margin earned by the assessee company was higher than the average margin of the six comparables, the assessee declared 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 I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ances of the case, the Ld. CIT (A) was justified to direct the TPO for exclusion of M/s Eclerx Services Ltd. as comparable when the assessee and M/s Eclerx Services Ltd. both are in same ITES segment?" 3. "Whether on the facts and circumstances of the case, the Ld. CIT (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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y considering 'exchange fluctuation' as operational 3. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of the AO/TPO by considering the 'exchange fluctuation loss/gain' as operational item. Erroneous exclusion 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 '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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e year were "Medical transcription', 'Billing' and 'coding' which were ITES/BPO activities. The Ld. AR submitted that this was an incorrect observation by the TPO. The Ld. AR also submitted that the TPO wrongly recorded in his order that this company was selected by the assessee as a comparable whereas this company had been rejected by the assessee on account of functional dissimilarity. The Ld. AR further submitted that it was evident from the annual report of Accentia Technology Ltd. that this 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 se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bearing on the margins. The Ld. AR submitted that TCS e-Serve Limited's turnover was more than 107 times of the assessee company. It was submitted that this company was not comparable to the assessee company because this company was functionally different as it was engaged in providing technical services which included software testing, verification and validation, data centre management activities, etc. in addition to ITES. It was also submitted that the Ld. CIT (A) had held that this company was 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e action of the TPO by erroneously applying a turnover filter of Rs. 5 Crores. It was submitted that that the TPO and the Ld. CIT (A) have not disputed that this company is otherwise comparable to the assessee company because this company is also operating as a back-end ITES provider in the BPO segment. The Ld. AR also submitted that in assessee's own case for Asst. Year 2009-10, the turnover filter of Rs. 5 Crores had been rejected by the ITAT. 3.7 With respect to ground No.10 challenging the non-providing 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 app....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ously included as a comparable by the TPO on the ground that once a service falls under the ITES, there cannot be any further differentiation based on KPO vs. BPO. It was submitted that this company has been correctly directed to be excluded as this company was not functionally comparable as it provided services through two business segments, Financial Services and Sales and marketing services. It was submitted that segmental data for financial services segment and marketing segment were not available. It was also 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ITA 2745/Del/2018: 8.0 This appeal has been preferred by the assessee's for Asst Year: 2012-13. 8.1 The brief facts for this year are that the return of income was filed declaring income at Rs. 1,20,55,020/-. The case was selected for scrutiny under CASS. Reference was made to the Transfer Pricing Officer as the assessee had entered into international transactions during the year under consideration. The following transactions, amongst others transactions, were entered into during the year under consideration: International 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a 1. The learned CIT (Appeals) has erred both on facts and in law in upholding the adjustment to the value of the international transaction made by AO/TPO without establishing that there was any intention of reducing tax incidence in India. Erroneous application of 'turnover filter' 2. The learned CIT (Appeals) has erred both on facts and in law in not applying the inappropriate application of the' turnover filter' by the AO/TPO; and consequently, the companies with huge turnover have been incorrectly accepted in the final set of comparables. Erroneous application of 'export to turnover filter' 3. The learned CIT(Appeals) has erred both on facts and in law in upholding the inappropriate 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h were not having any foreign exchange earnings and, therefore, limiting export earnings to 75% was not warranted by the Lower Authorities given that the nature of services rendered did not change. It was submitted that if at all there was a change between the comparable and the tested party it was on account of risk undertaken in respect of the services rendered. It was submitted that in the absence of detailed information on the geographical markets where exports were made, application by this filter was meaningless. It was also submitted that the ITAT in Asst. Year: 2009-10 in assessee's own case had remitted the use of this filter to the TPO but in that year the TPO had applied the filter of 25% to export turn over whereas in this year it was enhanced to 75% without any basis. (iii) Datamatics Financial 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 exc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tal data. We have gone through the annual report of the company TCS e-Serve Ltd. and as per the annual report this company is engaged in providing technology services including software testing, verification and validation, data center management activities etc. in addition to ITES. On the other hand the assessee company is engaged in providing ITES Service and is a back end captive service provider. We note that this company was excluded by the Delhi Bench of ITAT in the case of B. C. Management Service Pvt. Ltd. vs. DCIT for Assessment Year 2011- 12 reported in [2017] 83 Taxaman.com 346 (Delhi Trib.). While rejecting this company as a comparable in the case of B.C. Management Service Pvt. Ltd. which was providing IT and Financial Back Office Support Services to various entitities, the Co-ordinate Bench of the Tribunal held that 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 goo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t be held to be a good comparable for the purpose of bench marking the assessee's PLI and accordingly, we direct the Ld. AO/TPO to exclude TCS E-Serve from the comparability list." 11.2.1 Therefore, respectfully following the adjudication by the Co-ordinate Bench as above and on the facts of this case for the same Assessment Year, TCS e-Serve cannot be held to be a good comparable for the purposes of bench marking the assessee's PLI. Accordingly, we direct that this company be excluded from the final set of comparables. 11.3 Ground No.3 of the assessee's appeal challenges the action of the Ld. CIT (A) in considering the foreign exchange gain/loss as non-operational. The Ld. Authorized Representative has argued at length for the proposition that foreign exchange gain/loss in the assessee's case accrues directly from the normal course 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e managements needs, performance tracking and reporting etc. While enumerating the multifarious functions being carried out by Accentia Technologies Pvt. Ltd., the Tribunal held that these functions cannot be held to be similar with those of the functions carried out as part of back office support service by the assessee. The Tribunal also noted that merger by way of amalgamation was also a ground for exclusion of this company for the purposes of comparability analysis. A similar view was taken by the Delhi Bench of the ITAT in the OKS Span Take Pvt. Ltd. vs. DCIT in ITA No.1551/Del/2015 vide order dated 23.08.2018. A similar direction for exclusion of Accentia Technology Ltd. was given by the Delhi Bench of the ITAT in the case of Orange Business Service India Solutions Pvt. Ltd. vs. DCIT in ITA No.869/Del/2016 vide order dated 31.05.2016. Accordingly, 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 challe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ber Point Business Solution Ltd. is that it was having a different financial year ending. There is no comment by either of the Lower Authorities on the issue of functional similarity or otherwise. In such a situation, respectfully following the order of the Hon'ble Delhi High in the case of CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd., we direct the TPO to reconsider the inclusion of this comparable after duly considering as to whether the data for the financial year ending can be easily compiled and after duly considering and verifying whether Caliber Point Business Solution Ltd. can be considered functionally similar to the assessee company. The TPO shall given proper opportunity to the assessee before adjudicating this issue in accordance with law. Accordingly, Ground No.7 of the assessee's appeal stands allowed for statistical purposes. 11.7 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng and on identical facts, we also hold that the turnover filter of Rs. 5 Crores cannot be applied in the case of the assessee. What only remains to be seen is whether the company Informed Technologies India Limited is functionally comparable to the assessee or not. Accordingly, this comparable is restored to the file of the TPO for examining the assessee's claim of functional similarity with the company Informed Technologies India Ltd. The TPO shall give adequate opportunity to the assessee to present its arguments in favour of the inclusion of this company in the final set of comparables. Thus, Ground No.9 stands allowed for statistical purposes. 11.9 It has been submitted by the Ld. Authorized Representative that Ground No.10 challenging not providing the benefit of risk adjustment is not being pressed. Accordingly, Ground No.10 of the assessee's appeal 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 Depa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly, the assessee is providing low end back office services to its AE whereas E-Clerx Services Ltd. is providing KPO related services as has been held by the Hon'ble Delhi High Court in the case of Rampgreen Solution Pvt. Ltd. vs. CIT reported in 377 ITR 533 (Delhi). The relevant observations of the Hon'ble Delhi High Court are contained in paragraph 37 of the said order which is reproduced hereunder for a ready reference: "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) Pvt. 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 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 ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from the annual report. The Delhi Bench of ITAT in the case of CIT vs. B.C. Management Services Pvt. Ltd., [2018] 403 ITR 45 (Delhi) has held that this company was engaged in software development and consultancy, engineering services, web development and providing business process outsourcing services whereas B.C. Management Services Pvt. Ltd. was a company providing only back office services. The ITAT went on rule that on functional level itself this cannot be held to be a comparable. The Tribunal also noted that there was no segmental information and bifurcation between ITeS and Software Development Segments. For this reason, this company was directed to be excluded from the final set of comparables. On similar reasoning, we uphold exclusion of this company by the Ld. CIT (A). Thus, Ground No.3 of the Department's appeal stands dismissed. 13.3 Ground No.4 of the Department's appeal 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Services Ltd. in grounds No. 2 & 4, application of export turnover filter and exclusion of ICRA Online Ltd. and Datamatics Financial Services Ltd. in Ground Nos.3,5,6. The assessee is also challenging exclusion of ACE BPO Services Ltd. in Ground No.7. 17.1 Ground No.1 is general in nature not requiring any separate adjudication. 17.2 In Ground Nos. 2 & 4, the assessee has challenged the inclusion of the comparable TCS e-Service Ltd. We have already directed the exclusion of this company from the final set of comparables for Assessment Year 2010-11 in the preceding paragraphs of this order. On similar reasoning, for Assessment Year 2012-13 also, this company is directed to be excluded from the final set of comparables. 17.3 The assessee has challenged the exclusion of the comparable ICRA Online Ltd. It is seen that this company has been excluded by the TPO by applying export turnover filter 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 ....