TaxTMI 
TaxTMI 
2022 (7) TMI 1382
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....imate parent is Schlumberger Limited, Curacao). The assessee company is engaged in the business of designing, building and documenting systems to be deployed on production sites and provision of software development services. The assessee company filed its return of income on 30-11-2016, declaring total income of Rs. 17,34,52,853/- for A.Y. 2016-17. The case was selected for scrutiny through CASS and accordingly, notices us 143(2) and 142(1) of the Income-tax Act, 1961 (hereinafter referred as "the Act" for short) were issued and served upon the assessee by the A.O. Further the case was also referred to the T.P.O u/s 92CA of the Act to determine the Arm's Length Price of the international transactions entered by the assessee. The T.P.O/DCIT, TP-2(2), Pune, had passed the Transfer Pricing Order u/s 92CA(3) of the Act on 31-10-2019 wherein the TPO made total adjustment of Rs. 13,48,29,893/- to the international transaction of the assessee which included, Rs. 7,05,77,623/- related to Software Development Services (SDS) and Rs. 6,42,66,270/- related to Technical Support Services (ITES). Further, the A.O incorporated this adjustment in the assessment order u/s 143(3) r.w.s. 144C(3) of t....
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....at "Software Development Services (SDS) segment is 100% domestic. Therefore, this company was rightly removed as a comparable in the software development service segment by the ld. CIT(A). Ground No. 2 of the Revenue's appeal is dismissed. 5. In ground No. 3, the Revenue wants inclusion of Aspire Systems (India) Pvt. Ltd. in the final set of comparables for software development services segment. The ld. CIT(A) has directed exclusion of this company. This company has been selected as comparable by the T.P.O as per his order at para 11.9 at page 30. The ld. CIT(A) has dealt with this issue at page 64 in para 2.4.1 as follows: 2.4.1: ASPIRE SYSTEMS (INDIA) Pvt. Ltd. The appellant has raised objections that this comparable fails "Related Party Transactions (RPT) filter. The appellant has submitted the computations as well as in the final submissions extracted above in page 53. As per the computation the RPT is 37% and above the 25% threshold adopted in the TP order. This objection was taken before the ld. TPO and he has discussed this in para 11., page 30 of his TP order. It is seen that he has segregated "related party income" and "related party expenses" and taken their r....
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.... No. 4 is with regard to IT Enabled Services segment and the Revenue wants exclusion of Jindal Intellicom Ltd., from the final set of comparables in IT Enabled Services segment. This company has been selected by the assessee as a comparable which the T.P.O has rejected. The T.P.O at page 107 of his order has rejected this comparable due to foreign exchange less than 75%. The learned CIT(A) on the other hand has discussed this issue at para 2.5.2 of his order and has directed inclusion of this company as a comparable. It is the contention of the assessee before us that the learned T.P.O has not disputed the functional comparability of this company. The T.P.O has accepted as functionally comparable company for the A.Y. 2014-15. This company was also accepted as functionally comparable by the learned CIT(A) in the A.Y. 2013-14 and 2011-12. There has been no change in the business profile and therefore, this company should be considered as comparable. Considering the totality of the facts and circumstances and the order passed by the subordinate authority, we find that the view taken by the learned T.P.O is taken to reject this company from the list of comparable due to foreign exchang....
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.... FY 2015-16. The detailed submissions of the assessee are at running Page No.188 of the TPO‟s order and thereafter, the TPO has given his detailed findings running Page No.189 to 191 of his order. 21. The Ld. DRP while upholding the findings of the TPO at running Page 58 to 62 of its order and as per reasoning given therein had found the company to be functionally comparable with that of the assessee company. 22. The Ld. Counsel for the assessee at the time of hearing took us through the annual report of this company i.e. MPS Limited specifically at Page No.1134 of the paper book wherein products of the company has been enumerated and submitted that they are functionally different with that of the assessee company. This fact was not disputed by the Ld. DR. The Ld. Counsel for the assessee also submitted that the high end activities performed by MPS 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 r....
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....ot raise such an objection before the TPO. It is the TPO who has adopted this company as comparable. On such adoption, the assessee has every right to raise the objections as regards the functional differences between the assessee and comparable. It is the bounden duty of the TPO to consider the said objections in accordance with law. As brought out by the assessee, the assessee is in the TT enabled services, whereas the said company Apex Knowledge Salutation Pvt. Ltd., is in the business of E-publishing which cannot be said to be in the same line of business. The functional differences are likely to affect the profit marking capacity of both the companies. In view of the same, we are of the opinion that this company is also to be excluded from the list of comparables. 9.3. In view of the above, we hold that the comparable chosen by the ld. TPO, M/s. MPS Ltd., is functionally not comparable with that 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 enga....
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....ing and design services, therefore, the Tribunal held being a KPO, it cannot be compared with that of company which is into business of BPO. The revenue recognition note states that the company is deriving revenue from website design and development and website hosing which is not similar to ITes. Further, MPS Limited underwent typesetting, data digitization, content and product development for learner which as per Safe Harbour Rules issued by Central Board of Direct Taxes qualifies to be in the nature of KPO. In view of the above, respectfully following the decisions of the Tribunal as mentioned hereinabove, we are of the considered view, high end activities of the MPS Limited is akin to IT services and not ITes. The activities of the MPS Limited i.e. typesetting, data digitization, content development and product development are in the nature of "Knowledge Processing Outsourcing Services (KPOs) and not BPO. Accordingly, MPS Limited cannot 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 ....
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....ccepted by the TPO which is evident at running Page No.192 of the order and the main reason again is that the company earns most of the revenue from export of ITes. The TPO has however not dealt specifically with the objection of the assessee that Domex E-Data Pvt. Ltd. is primarily a KPO company. The Ld. DRP as per their observation at running Page No.66 on their order has given reasoning for upholding the findings of the TPO and making this company as comparable with that of the assessee company. Therein the Ld. DRP has emphasized again on the revenue earned from ITes services and regarding the objections of the assessee company i.e. Domex EData Pvt. Ltd. being KPO company, the Ld. DRP was of the opinion that since information was available in the website that cannot be relied on since the company has provided information in website which they intend to carry out but however at the present moment they may not be dealing with those activities. 27. Per contra, the Ld. Counsel for the assessee took us through the annual report, P & L account and reiterated the submissions placed before the Revenue Authorities. Here again as per facts placed on record, this company is primar....
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....is company, there are ITes activities which formed 79% of the revenue and therefore, it is functionally comparable with that of the assessee company and hence, it was retained. 17. The Ld. DRP while upholding the observation of the TPO at running Page 70 of its order observed that the company derives revenue mainly from provision of ITes which works out to 79.75% of its total operational revenue for the year. Therefore, this company is very much functionally comparable with that of the assessee company. In respect of the submissions of the assessee that ITes comprises two services i.e. BPO & KPO services, referring to the Director‟s report, the Ld. DRP observed that they have only made reference in the ITes segment only and whether it is BPO or KPO services has nowhere been referred to. That further, the Ld. DRP also observed that most of the information was gathered from website of the company which may not always be reliable and relevant. 18. The Ld. Counsel for the assessee at the time of hearing reiterated the submissions made in respect of exclusion of Manipal Digital Systems Private Limited, for this company also. He took us through the annual report o....
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....re of pre-press activities which is not comparable to the assessee. That further in the website of the company, it is engaged in the diversified set of activities which involves graphic solutions, packaging brand management, digital publishing and digital content solutions. Therefore, the assessee submits that this company should be rejected from the final set of comparables companies. 9. The TPO was of the opinion that in this company i.e. Manipal Digital Systems Private Limited, 90% of the revenue is earned from ITes which is similar to that of the assessee company. The TPO further observed that most of the information provided by the assessee was from website and it cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the contention of the assessee was rejected and the company was taken as comparable company. 10. That before the 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 b....
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....hat use Information Technology based delivery. Such service could include rendering highly technical services by qualified technical personnel involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITes would also include voice based call centers that render routine customer support for their clients. The relevant portion of the judgment is extracted as follows for the sake of completeness: ".............Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 32. It has been pointed out that whilst the Tr....
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....e of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services ....
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....any as comparable with that of the assessee company since the onus is on him to give reason for such inclusion. The logic was shown from the decision of the Pune Bench of the Tribunal in the case of M/s. Tasty Bite Eatables Limited Vs. ACIT, ITA No.1823/PUN/2018 for the assessment year 2014-15 dated 03.06.2021 wherein it was held that since the comparable chosen by the assessee, the onus is upon it to prove the functional comparability of this company. Extending the same logic, the Ld. Counsel submitted that it was also for the TPO to explain the reasons for inclusion of this company i.e. Manipal Digital Systems Private Limited since it was chosen as comparable by him. 14. We are of the considered view on going through the order of the TPO, findings of the Ld. DRP and the various judicial pronouncements placed on record, first of all the Revenue has selected Manipal Digital Systems Private Limited as comparable to that of the assessee company based on the earning 10 ITA No. 133/PUN/2021 A.Y.2016-17 of the company from ITes. However, there is no segmental specification provided neither by the TPO nor by the Ld. DRP for the reason of such inclusion of this company in the fin....
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....t M/s. One Touch Solutions is into providing entire spectrum of BPO services including inbound and outbound call centre services, staffing/outsourcing, documentation, asset management etc. 18. The ld. T.P.O did not accept the submissions of the assessee and held this company to be comparable with that of the assessee. The ld. CIT(A) has dealt with this issue at page 74 para 2.5.3.3 of his order by observing as under: "2.5.3.3 One Touch Solutions (India) Pvt. Ltd. The appellant has raised the objection that this company is engaged in entire spectrum of BPO services including inbound and outbound call centre services etc. and thus not functionally comparable to the appellant. This objection is frivolous as this comparable is into ITES activities as defined under rule 10TA(e) Accordingly the ld. TPO‟s inclusion of this comparable is confirmed." 19. It has been analysed by the ld. CIT(A) that this company is into ITES activity and therefore, it is included as comparable in the final set of comparables. Taking the totality of the facts and circumstances and the functional spectrum of the assessee, we are in conformity with the view taken by the ld. CIT(A) and we uph....