TaxTMI 
TaxTMI 
2021 (2) TMI 575
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....y INR 13,30,04,676/- by re-computing the arm's length price ("ALP") of international transactions under section 92 of the Income-Tax Act, 1961 ("the Act"). 2. That on the facts and in the circumstances of the case and in law, the reference made by the AO suffers from jurisdictional error as the AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was "necessary and expedient" to refer the matter to the TPO for computation of the arm's length price, as is required under section 92CA(1) of the Act. 3. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 4. That on the facts and in the circumstances of the case and in law, DRP/AO/TPO erred in holding the functions performed by the Appellant to be in the nature of knowledge process outsourcing ("KPO") company without appreciating the facts on record and thereby accepting certain companies which were performing high end and different services as compared to the Appellant. 5. That on the fac....
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....dings under section 274 read with 271 of the Act." 3. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. CPA Global Support Services India Pvt. Ltd., the taxpayer, incorporated in September 2003 is into rendering Information Technology Enabled Services (ITES) related to IP administration/renewal and data management services to its group companies including renewal support services, proof reading support, customer support services etc.. The taxpayer functions as a captive off-shore centre in India and supports its Associated Enterprises (AEs) in servicing customer contracts. During the year under assessment, the taxpayer entered into international transactions with is AEs: S. No. Type of International Transaction Method Selected Total value of transaction (Rs.) MAM PLI 1 Provision of IT Enabled Services TNMM OP/OC 871,922,767 2 Reimbursement of Expense to AEs TNMM OP/OC 12,304,322 3 Payment of interest on ECB CUP ....
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....vices Ltd. 62.04% 3. Informed Technologies India Ltd. 22.78% 4. Jindal Intellicom Ltd. 3.54% 5. T C S E-Serve Ltd. 66.21% 6. Excel Inforways Ltd. (Seg)(IT/BVPO) 42.89% 7. R Systems International Ltd.(Seg./BPO) 2.31% 8. Infosys BPO Limited 39.04% 9. Acropetal Technologies Ltd. (segment) 19.91% 10. B N R Udyog Limited 50.72% 11. e4e Healthcare Business Services Pvt.Ltd. 23.52% 12. Microgenetics Systems Ltd. 10.19% Average 29.70% 9. Ld. TPO also computed the margin of taxpayer at 12.53% as against 17.20% computed by the taxpayer by considering foreign exchange as non-operating as under:- Particulars IT Enabled Services Operating revenues 871,922,767 Operating costs 774,809,131 Operating profit 97,113,636 OP/OC 12.53% 10. Since the method of benchmarking the international transactions is not in dispute, ld. AR for the taxpayer in order to compress the controversy at hand contended that the taxpayer is aggrieved with inclusion of 4 comparables out ....
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....ol and execute ongoing functions. It is also providing consulting, business analysis and solution testing services which provides a broad suite of services that allows its clients to operate on day-to-day basis including trade processing, reference data, accounting & finance and expense management activities. Similarly, under sales and marketing services segment, as has been described at page 767 of the annual report paper book, Eclerx provides web content management & merchandising execution, web analytics, social media moderation and analytics, search engine analytics & support, CRM platform support, lead generation, supply chain and channel analytics, price & catalogue competitive intelligence etc. 16. Coordinate Bench of the Tribunal in case of Ameriprise India Pvt. Ltd. in ITA No. 2010/Del/2014 held that Eclerx is having significant intangibles to provide KPO services whereas the taxpayer on the other hand is a captive ITES service provider on cost plus mark-up model with minimal risk. Operative part of the order of the coordinate Bench of the Tribunal is as under:- "14.2. After considering the rival submissions and perusing the relevant material on record, we find....
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....Revenue of subsidiaries included under Consolidated Financial Statements - eClerx Limited 245.79 Page 872 - eClerx LLC 355.48 - eClerx Investments Ltd. - - Igentica Travel Solutions Ltd. - - eClerx Private Limited 63.47 Total Subsidiaries Turnover 664.75 20. So, the financials of Eclerx available in the public domain, referred to above, are not reliable rather include turnover of its subsidiary companies. 21. Eclerx has been found to be not suitable comparable vis-à-vis captive service provider by the coordinate Bench of the Tribunal in Ariba India Pvt. Ltd. vs. DCIT ITA No. 5201/Del/2012. 22. So, in view of what has been discussed above, we are of the considered view that Eclerx is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. TCS E-SERVE LIMITED (TCS E-SERVE) 23. The taxpayer south ....
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....kept in view. TCS E-Serve has a turnover of Rs. 1359 crores and has no segmental revenue whereas the Assessee's entire segmental revenue is a mere 24 crores. As observed by this Court in its decision dated 5th August 2016 in ITA 417/2016(PCIT v. Actis Global Services Private Limited) "Size and Scale of TCS's operation makes it an inapposite comparable vis-à-vis the Petitioner." As already pointed out earlier there is a closer comparison of TCS E-Serve Limited with Infosys BPO Limited with each of them employing 13,342 and 17,934 employees respectively and making Rs. 37 crores and Rs. 19 crores as contribution towards brand equity. When Rule 10(B) (2) is applied i.e. the FAR analysis, namely, functions performed, assets owned and risks assumed is deployed then brand and high economic upscale would fall within the domain of "assets" and this also would make both these companies as unsuitable comparables. 28. The Director's report of TCS E-Serve Limited bears out the contention of the Assessee that both entities have been leveraging TCSs scale and large client base to increase their business in a significant way. The submission that the two comparables offe....
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....ot a suitable comparable vis-à-vis the taxpayer who is a BPO/ITES service provider, hence ordered to be excluded. EXCEL INFOWAYS LTD. (EXCEL) 31. The taxpayer sought exclusion of Excel on the grounds inter alia that it fails employee cost filter applied by the ld. TPO; it faced extra ordinary circumstances due to steep reduction in the profit; segmental financials are not available. However, ld. DR for the Revenue relied upon the findings returned by the ld. DRP. 32. Perusal of para 5 of the TP order shows that TPO has himself applied a filter to reject the companies having employee cost less than 25% of the sales. 33. When we examine financials of Excel, available at page 1015 of the paper book, it shows that employee cost/net sales is 13.50% explained in the table below: Employee cost (amount in 000) Net Sales (amount in 000) Employee cost/ Net Sales INR 20,215.30 INR 154,921.03 13.05% 34. Furthermore, when we examine financials of Excel no doubt it is engaged in IT & BPO but segmental details of the same are not available as is evident from page 1029 of the paper book. When we examine page 1029 & 1025 of the paper book Excel is sh....
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....s revenue. Following table explained the super normal profit/growth as under:- Particulars Revenue Related Parties Transactions Turnover 90,94,848 3,43,43,644 3,42,60,146 1,70,35,029 Growth (%) 277.62% PBT 3,26,196 98,19,993 Growth (%) 2910.46% 40. Furthermore, when we examine functional profile of BNR at page 723 of the paper book shows that it is engaged in medical transcription and medical coding which is different from the taxpayer who is a routine ITES service provider working on cost plus mark-up business model. So, we are of the considered view that since BNR fails RPT filter of 25% applied by the TPO himself, having super normal growth, having functional dissimilarity vis-à-vis taxpayer is not a suitable comparable, hence ordered to be excluded. GROUND NO. 8 41. Ld. DRP/TPO/AO erred in treating foreign exchange loss as a non-operating item. Undisputedly, the taxpayer invoices its AEs for its services in US Dolla....