TaxTMI 
TaxTMI 
2021 (6) TMI 1115
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....on'ble DRP erred in disregarding benchmarking analysis and comparable companies selected by the Assessee based on the contemporaneous data in the transfer pricing study report maintained as per Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'). 3. On the facts and circumstances of the case and in law, the directions issued by the Hon'ble DRP is bad in law as it is issued in violation of the provisions of section 144C of the Act, and accordingly the DRP directions and consequential final assessment order is liable to be quashed. 4. On the facts and circumstances of the case and in law, the directions issued by the Hon'ble DRP have: 1. Erred in incorrectly rejecting functionally comparable companies selected by the Appellant. 2. Erred in applying modified and additional filters without providing cogent reasons and arrived at a fresh set of companies as comparable to the Appellant. 3. Erred in cherry picking functionally non comparable companies. 4. Erred in selecting comparable companies earning high margins and rejecting low margin comparable companies. 5. Erred in not considering Informed Technologies India Limit....
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....e Ld. DRP has violated the provisions of Section 144C(8) of the Act and the consequential final assessment order needs to be quashed. 5. Thereafter, on analyzing the entire findings of the Ld. DRP, we observe that such directions of the Ld. DRP as contended by the assessee pertains to only the above referred two comparable companies i.e. (i) Insync Analytics (India) Private Limited (ii) Manipal Digital Systems Private Limited. But in respect of other directions of the Ld. DRP that still stands valid and had to be followed. The point of the assessee asking for quashing the entire final assessment order just because in respect of the two comparable companies, the directions of the Ld. DRP were not in accordance with Section 144C(8) of the Act, would not render the other findings as invalid or contrary to law and therefore, we observe that in this background, the prayer of the assessee on this legal grounds cannot be accepted and hence, dismissed. Thereafter, the assessee on merits submitted that he prayed for exclusion of four comparable companies viz. A. Manipal Digital Systems Pvt. Ltd. B. CES Ltd. C. MPS Limited D. Domex E-Data Pvt. Ltd. which have been selected by the TPO and al....
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....he Ld. DRP, objections have been raised by the assessee which are at running Page No. 34 of the appeal memo and therein, apart from reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions performed by the company. The Ld. DRP vide Para (c) of Page No. 67 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and included Manipal Digital Systems Private Limited in the final set of comparables companies. That again the prime observation of the Ld. DRP in this regard was that more than 90% of the total revenue of the operation of the company comes from ITes. 11. At the time of hearing, the Ld. Counsel for the assessee took us through the annual report of the company at Volume-II, Page 1279 onwards, Pag....
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....Technology for the delivery of their services, would, in our opinion, be erroneous. 32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider. 33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tri....
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....PO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. for rendering data processing not involving domain kno....
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....company in the final set of comparable companies with that of the assessee company. In the decision of the Hon'ble Delhi High Court (supra.), it is very much clear in the wide spectrum of ITes if two companies are to be comparable one has to look into the characteristic of service or business provided under ITes by them. This exercise was not done by the Department in this case. We also opine that as per Indian Council for Advertising, the online advertising has to be published on true and honest disclosure basis and therefore, when proper documentation of activities are not physically available, in such scenario, referring the website for information is correct option and the information therein cannot be doubted. These are all multi-national companies and certain amount of honesty has to be attributed to them since all are functioning as per relevant rules and laws. With these observations and respectfully, following the judgment of the Hon'ble Delhi High Court (supra.) we direct the AO/TPO to exclude this company i.e. Manipal Digital Systems Private Limited from the final set of comparables with that of the assessee company. B. CES Limited:- 15. The contention of the a....
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....that companies operations predominantly relate to providing IT services in two primary business segments viz. IT services and IT Enables Services (ITes). The company considered the business segment as the primary segment and Geographical segment based on the location of the customers as the secondary segment. 19. Having perused the relevant documents on record, analyzing the facts and circumstances, we find that the Revenue Authorities have not clearly stated regarding involvement of BPO/KPO ITes services as evident from Page 39 of the annual report of the company where principal business activities of the company has been given. Both the Revenue Authorities TPO as well as DRP have gone into the revenue generation aspect from ITes which is at around 79%. That however, they have not specifically given reasons why this company should be included in the final set of comparables. The inclusion of KPO along with BPO is also not disputed by the Department and in respect thereof, following the decision of the Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT, ITA No. 102/2015 dated 10.08.2015, it is an undisputed fact therefore that the assessee in the pre....
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....S Ltd. are akin to IT services and not ITes. 23. The Ld. Counsel for the assessee heavily relied on the decision of the Pune Bench of the Tribunal in the case of Symantec Software India Private Limited vs. DCIT, ITA No. 1824/PUN/2018 for the assessment year 2014-15 dated 17.02.2020 wherein the Tribunal in respect of MPS Limited has held and observed as follows: "20. We have perused the case records and heard the rival contentions. We find from the annual report of MPS Limited is engaged in high end activity i.e. type-setting, data digitization, content and product development for learners which is in the nature of "knowledge processing outsourcing services. From the various functions performed by MPS Limited, we find that the said comparable is predominantly in the business of digital publishing which cannot be treated at par with ITes which is in the name of the assessee in ITes segment. In this regard, we find in the case of Emerson Electric Company (India) Private Limited vs. ACIT (supra.) wherein the Co-ordinate Bench of the Tribunal, Mumbai held the MPS Limited as functionally not comparable by observing as follows: "9.3. From the perusal of the annual report for the year....
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....at of the assessee and accordingly, we direct the ld. TPO to exclude the same from the list of comparables." 21. We further observe in the case of United Health Group Information Services Pvt. Ltd. vs. ACIT (supra.) wherein with regard to Vishal Informatics which is engaged in e-publishing business like the company in the instant case i.e. MPS Limited, on same issue, the Coordinate Bench of the Tribunal, Delhi has held as follows: "Vishal Informatics 12.1. The TPO included this company in the list of comparables by noticing that it was engaged in providing BPO services. The assessee failed to convince him and the DRP that it was incomparable. 12.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it is mainly engaged in e-publishing business. It has more than 10,000 classic books to its credit which are also converted into large font titles for visually challenged. Apart from e-publishing, this company is also engaged in Documents scanning & Indexing. It can be seen from the financial results of this company that both the segments viz., e-publishing and Documents scanning etc. have been combi....
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....nnot be treated as comparable company and the AO/TPO is directed to exclude MPS Limited from final list of comparable companies with regard to its technical support service segment." 24. Having gone through the annual report of the company, findings of the Sub-ordinate Authorities and the submissions of the assessee placed on record along with judicial pronouncements, it is evident that MPS Limited is functionally different from that of the assessee company in more-so that high end activities of MPS Ltd. is akin to IT services and not ITes. Respectfully following the decision of the Co-ordinate Bench of the Tribunal (supra.) we direct the AO/TPO to exclude MPS Limited from final list of comparable companies. D. Domex E-Data Pvt. Ltd.:- 25. The assessee submits that as per the annual report of the company for FY 2015-16, Domex E-Data Pvt. Ltd. is engaged in the business of providing export of IT, KPO and BPO services (note (ii) of Annexure to Auditor's Report for FY 2014-15.). Further it has diverse range of activities without sufficient segmental details and earns super normal profits. Website of the company reveals that Domex E-Data Pvt. Ltd. is a KPO company. The Domex E-D....
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.... exercise was conducted neither by TPO nor by the Ld. DRP. Therefore, we are of the considered view that in the given set of facts, this company is functionally not comparable with that of the assessee company. We, therefore, direct the AO/TPO to exclude this company i.e. Domex E-Data Pvt. Ltd. from the final set of comparables. INCLUSION OF THE COMPARABLE COMPANIES E. e4e Healthcare Business Services Pvt. Ltd.:- 28. The TPO had rejected this company as comparable as it fails the RPT filter. The assessee had not objected to the application of the RPT filter by the TPO (as per which the companies in whose cases the related party transaction exceeded 25% are not to be included as comparable) as such. The assessee had applied the same filter for identification of comparable companies in its TP study report. The assessee further contended that RPT in the case of the company for the FYs 2013-14 and 2014-15 was 23.03 % and 1.45% respectively. The assessee placed strong reliance on the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd., ITA No. 101/2015 wherein it has been held that a miniscule difference cannot be re....