TaxTMI 
TaxTMI 
2023 (3) TMI 1220
X X X X Extracts X X X X
X X X X Extracts X X X X
....sions of the Act read with the Income Tax Rules, 1962 ("Rules"), conducting a fresh economic analysis for the determination of the arm's length price ("ALP") in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length; 2. The learned TPO/ learned AO have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using the foreign earnings less than 75% of the Net sales as comparability criterion. 3. The learned TPO/ learned AO have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using the employee cost greater than 25% of the sales as comparability criterion. 4. The learned TPO/learned AO have erred, in law and in facts, by rejecting certain comparable companies identified by the appellant using the related party transactions more than 25% of the sales as a comparability criterion. 5. The learned TPO/ learned AO have erred, in law and in facts, by rejecting certain comparable companies using income from core services (i.e., SWD and ITeS) of less than 75% of the sales a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....imited • Inteq BP0 Services Private Limited • Tech Mahindra Business Services Limited 15. The learned TPO/ learned AO have erred, in law and in facts, by rejecting certain companies based on unreasonable comparability criteria listed below: Allsec Technologies Limited Cosmic Global Limited iii. Grounds specifically for Software Development Services Segment 16. The learned TPO/ learned AO have erred, in law and in facts, by accepting certain companies based on unreasonable comparability criteria listed below: • Larsen and Toubro Infotech Limited • Great Software Laboratory Private Limited • Persistent Systems Limited • Tata Elxsi Limited • Infobeans Technologies Limited • Aptus Software Labs Private Limited • Nihilent Limited • Cygnet Infotech Private Limited • Infosys Limited • Cybage Software Private Limited • Consilient Technlogies Private Limited • Threesixty Logica Testing Services Private Limited • OFS Technologies Limited • Min....
X X X X Extracts X X X X
X X X X Extracts X X X X
....R. further submitted that the turnover of assessee company from software development segment is Rs.79.56 crores and as such, the above 8 companies are to be excluded. 5. We have heard the rival submissions and perused the materials available on record. Admittedly, on turnover filter, we are consistently holding that companies having above Rs.200 Crores turnover from the specified segment cannot be considered as comparables to assessee whose turnover in the said segment is less than Rs.200 crores. In the present case, there is no dispute that the turnover of the above companies is above Rs.200 crores as against the turnover of assessee company from the said segment is Rs.64.71 crores. In similar circumstances, the Tribunal in the case of ACIT Vs. ACI Worldwide Solutions (P) Ltd. in IT(TP)A No.106/Bang/2022 dated 13.5.2022 for the AY 2017-18 held as under: "4.2 We have heard rival submissions and perused the material on record. Admittedly, the assessee's turnover in the software development segment is Rs.45.35 crore. The turnover of for Larsen & Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, Tata Elxsi Limited, Nihilent Limited, Infosys Limited and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place relia....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... rendering wide array of high-end services such as business research and analytics, content moderation solutions, registrar and transfer agent and other services. The key products and services it deals include (i) Business research and analytics (ii) content moderation solutions (iii) registrar and transfer agents (iv) market intelligence, innovation and technology intelligence. No segmental information - Aforementioned services do not fall within the ambit of ITES/BPO and the annual report does not provide either the segmental details or the broad classification of the income. 6.1 The CIT(A), NFAC observed that as per the Form No. MGT- 9 forming part of the annual report, the principal activity of the company is described as IT enabled Services and BPM Service providers deriving income around 87.29%. Therefore, the company is functionally similar to the assessee as it is being predominantly into ITES company. As regards, the export revenue as given in Note No. 18, the revenue is around Rs.50.43 crores as on 31.03.2017 as against total revenue of Rs.62.70 crores which comes to 80.43%. As the company is functionally similar and satisfies the filters adopted by the TPO including e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rporated USA. The assessee provides back office support functions to its associated enterprises. The transactions of IT Enabled Support Services to its associated enterprises and the arms length price computed by the assessee was accepted by the revenue in A.Y. 2005 - 06 and A.Y. 2006-07. The same was also upheld by the ITAT for assessment year 2007 - 08. For the current assessment year, the Transfer Pricing Officer characterized the assessee's functions as knowledge process outsourcing KPO. Thereafter, the Transfer Pricing officer made general comments on the selection systems adopted by the assessee. He proceeded to reject the same. He did not specify as to which of the comparables is being rejected for which specific reasons thereof. Thereafter, the transfer pricing officer mentioned his own criteria and proceeded to select comparables and accordingly made the transfer pricing adjustment. 11. Upon the assessee's appeal, the ld. CIT(A) has accepted that the characterization by the transfer pricing officer of the assessee's functions as knowledge process outsourcing was not correct. Thereafter, the ld. CIT(A) contradicted himself by stating that the functions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enter services for customer support and a KPO service provider employ IT-based delivery systems, but characteristics of services, functional aspects, business environment, risks and quality of human resource employed are materially different; and therefore, benchmarking international transactions on basis of comparison of PLI of high-end KPO service providers with PLI of Voice Call Centers, would be unreliable. Further, Mumbai Tribunal in Wills Processing Services (India) Ltd. vs. ACIT (supra) on considering similar contentions excluded this comparable. 38. The Id. AR submitted as we recorded earlier that Coral Hubs Ltd. was outsourcing its significant part of its operation as evident from its low employee cost and have substantial different business model compared to assessee and prayed for exclusion. The ld. DR has supported the inclusion. The TPO while making benchmarking taking his view that this comparable company is in the business of IT enabled services to overseas markets and included in the list of comparable. The Id. CIT(A) confirmed the action of TPO holding that the TPO conducting benchmarking after calling information under section 133(6) and is benchmarking a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....atics Financial Services also fails the export filter of 75% which has been adopted by the transfer pricing officer. Hence, in the background of aforesaid, we hold that following comparable are to be rejected: * Eclerx Services Ltd. * Vishal Information Technologies Ltd * Crossdomain Solutions * Datamatics Financial Services." 7.1 Accordingly, we direct the AO to exclude this company M/s. Datamatics Business Solutions Ltd. from the list of comparables as this company is a KPO company and not comparable to assessee company. Manipal Digital Systems Pvt. Ltd. 8. The ld. A.R. submitted that this company is functionally different. He submitted that apart from ITES services Manipal Digital is also engaged in providing multiple other services such as pre-media services, web-development services and e-book distribution and various publishing services and no segmental information is available. It is engaged in multiple high end services including conceptualization, designing, analytics, etc., which could not be compared with the low end BPO support services provided by the assessee. 8.1 The CIT(A), NFAC having considered issue observed that it....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... regards lack of segmental information, the ld. CIT(A) observed that the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the ITES activities only. This is further supported by the clarificatory note No. 27 at page 52 of the annual report that "the company was operating under one reportable geographical segment and one business segment. Therefore, disclosure as prescribed under AS 17- segment reporting is not applicable. Hence, the objection on lack of segmental information is not valid and not acceptable by the ld. CIT(A). 8.4 On perusal of the annual report by the ld. CIT(A), it was observed that M/s. Manipal Technologies Limited is the promoter and holding company of the assessee. As per the information given under share holding pattern, it was seen by the ld. CIT(A) that there is no change shown under the head Change in Promoter's holding. On the other hand, during the year under review, Manipal Venture Gmbh and Medien Fabrik GmbH has been merged and named as Medienfabrik GMbH. Under the head....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld as under:- 16. "The next company the assessee seeks to exclude is Manipal Digital Systems Pvt. Ltd. In this regard, it was submitted that this company is engaged in provision of multiple high-end services including KPO activity like Design Services, Animation. It was submitted that no segmental details were available in the financial statements on the variety of services provided by this company like Design Services, Animation. Reliance was placed on the decision of the ITAT, Pune Bench in the case of Credence Resource Management Pvt. Ltd., (supra) wherein this company was excluded by the Pune Bench with the following observations: "8. The assessee submits that the Manipal Digital Systems Private Limited is functionally different from the assessee which is involved in provision of ITes services. As per the annual report of the company, the activity undertaken by the company is in the nature 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. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., it is comparable company with that of the assessee company. 12. Placing strong reliance on 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 copy of which is placed before us, the Ld. Counsel brought to our notice at Para 31 wherein the Hon'ble Delhi High Court observed that the Tribunal had held that once a service falls under the category of ITes then there is no subclassification of segment. Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITes. The Hon'ble Delhi High Court rejecting such view of the Tribunal had held that such a view, if upheld, would be contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITes encompasses a wide spectrum of services that 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 b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ity can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature 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 b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP." 13. The Ld. Counsel for the assessee further submitted therefore, it is clear that merely because two companies are doing ITes services, on general categorization comparability is not permitted and one has to look into the specific services rendered in the spectrum of ITes and for this reason, the said company i.e. Manipal Digital Systems Private Limited is not a comparable company with that of the assessee company since absolutely functionally different. The Ld. Counsel also submitted that the TPO should have specifically stated why he has selected this company 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Assessment Year 2017-18 also. 18. We have given a careful consideration to the rival submissions and are of the view that it would be just and appropriate to set aside the question of comparability of Manipal Digital Systems Pvt. Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee and the assessees in the decisions cited by the learned AR remains the same in Assessment Year 2017-18 as it was in Assessment Year 2016-17." 12.1.10 Accordingly, the above comparable i.e. Manipal Digital Systems Pvt. Ltd. is directed to be excluded from the list of comparables. 9.1 In view of the above, taking a consistent view, we direct the AO/TPO to exclude Manipal Digital Systems Pvt. Ltd. as comparable on the similar lines. CES Limited: 10. The ld. A.R. submitted that this company is functionally different and engaged in KPO services. It is engaged in diversified services including IT services and solutions, KPO services and no merely routine software support services. It is also engaged in providing high-end IT services such as product engineering, cloud and infrastructure, data analytics, Enterprise applications and digital e-commerce ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....low end to high end in ITES services is mainly on account of differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly qualified / skilled also goes up steeply and, therefore, the margins are not much affected. In fact, no evidence has been produced before ld. CIT(A) to show that margins in the high end segments of ITES services is high compared to low end services. Therefore, ld. CIT(A) was unable to accept the argument advanced by learned AR that the comparables belonging to high end segments such as KPO etc. should be excluded from the comparability list on this ground alone. In fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. In view of the above, ITeS services cannot be further classified as BPO and KPO servi....