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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B”, HYDERABAD
Before: SHRI R.K. PANDA & SHRI LALIET KUMAR
सुिवधई की तधरीख/Date of hearing: 07.12.2023 घोर्णध की तधरीख/Pronouncement on: 11.12.2023 O R D E R PER LALIET KUMAR, J.M.
This appeal is filed by the assessee aggrieved by the assessment order passed by the Commissioner of Income Tax (National Faceless Appeal Centre), Delhi dt.29.03.2021 invoking proceedings under section 143(3) r.w.s. 144C(13) and 144C(13) r.w.s. 143(3A) and 143(3B) of the Income Tax Act, 1961 (in short, “the Act”) for A.Y. 2016-17.
The grounds raised by the assessee reads as under :
“A. General 1. On the facts and circumstances of the case and in contrary to law, the Deputy Commissioner of Income-tax (Transfer Pricing Officer)-2, (hereinafter referred to as 'the Ld. TPO') and the Ld. AO under the directions issued by Hon'ble Dispute Resolution Panel, Bengaluru ('Hon'ble DRP') erred in making a Transfer Pricing addition of Rs. 19,48,67,226 to the Appellant's income and thereby determining a total / income of Rs. 49,99,97,800 and the said addition being wholly unjustified are liable to be deleted. B. Transfer Pricing 2. On the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in rejecting the transfer pricing analysis / study prepared by the Appellant, without appreciating that none of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied.
3. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred and the Hon'ble DRP further erred in upholding the action of the Ld. TPO in confirming the application/ incorrect application of the following filters: •Rejection of companies with different financial year ending; •Rejection of companies with export revenue less than 75% of the total revenue; •Rejection of companies with peculiar economic circumstances.
4. On the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding I confirming the action of the Ld. TPO in considering provision for bad and doubtful debts and bad debts as a non-operating expenditure while computing the operating margin of the comparable companies.
5. On the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not allowing working capital adjustment, which was duly demonstrated before Ld. TPO / Hon'ble DRP, in accordance with the provisions of Rule 10B of the Income-tax Rules, 1962 ('Rules') to account for differences between the international transactions undertaken by the Appellant, being a captive unit, and those undertaken by the alleged comparables.
6. On the facts and circumstances of the case and in contrary to law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not allowing risk adjustment in accordance with the provisions of Rule 10B of the Rules to account for differences between the international transactions undertaken by the Appellant, being a captive unit, and those undertaken by the alleged comparables.
7. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO has erred and Hon'ble DRP further erred in upholding / confirming the action of Ld. TPO in accepting following companies though they are functionally not comparable, earning high margins due to extraordinary events, fails the Ld. TPO's own filters and having presence of brand: • Microland Limited • Crossdomain Solutions Private Limited • Tech Mahindra Business Services Limited • Infosys BPO Limited • SPI Technologies India Private Limited • Eclerx Services Limited • MPS Limited .
8. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred and Hon'ble DRP further erred in upholding / confirming the action of Ld. TPO in rejecting though they are functionally comparable and passes all the filters applied by the Ld. TPO: • Cosmic Global Limited • Sundaram Business Services Private Limited • ACE BPO Services Private Limited • Suprawin Technologies Limited • Informed Technologies Limited • Jindal Intellicom Limited • Allsec Technologies Limited • Tata Elxsi Limited • BNR Udyog Limited • R Systems International Limited • Tata Consulting Engineers Limited 9. Without prejudice to the above grounds on rejection of functionally dissimilar comparable companies, on the facts and circumstances of the case and in contrary to law, the Ld. TPO erred by incorrectly computing the margin of following comparable companies: • Microland Limited • Jnfosys BPO Limited • SPI Technologies India Private Limited • MPS Limited 10. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred by not restricting the transfer pricing adjustment only to the associated enterprise segment and making adjustment on overall entity level. 11. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO, in considering outstanding receivable as a separate and distinct international transaction and further erred in making transfer pricing adjustment in the nature of notional interest on receivables amounting to Rs. 2,80,004.
On the facts and circumstances of the case and in contrary to law, the addition made by the Ld. TPO with respect to interest on outstanding receivables is untenable and be deleted since the addition has been made by computing interest on an invoice to invoice basis as against on a weighted average basis for all invoices raised during the year under consideration.
On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO / Hon'ble DRP has not justified that the State Bank of India's ('SBI') short term deposit rates will be construed as an appropriate comparable uncontrolled price ('CUP') as services are not comparable, to benchmark the Appellant's outstanding receivables.
Without prejudice to Ground No. 11 to 13 above, on the facts and in the circumstances of the case and in contrary to law, the Ld. TPO / Hon'ble DRP has erred in not appreciating that the receivables due from overseas AEs are in foreign currency and hence, interest if any, is to be benchmarked with the rates prevalent in the international market for foreign currency loans, i.e., at USD LIBOR plus. C. Corporate Tax 15. On the facts and in the circumstances of the case and in contrary to the law, the Hon'ble DRP has erred in not admitting the fresh claim raised by the Appellant with respect to the claim of education cess as a tax deductible expenditure under the normal provisions of the Act. 16. Without prejudice to Ground number 15, on the facts and in the circumstances of the case and in contrary to the law, the Hon'ble DRP has erred in not allowing education cess as a tax deductible expenditure under the normal provisions of the Act. D. Consequential 17. On the facts and in the circumstances of the case and in law, the Ld. AO erred in in levying interest and penalty and the said levy of interest and penalty being wholly unjustified, ought to be deleted.
The brief facts of the case are that assessee is a Private Limited Company, filed its return of income for A.Y.2016-17 on 28.11.2016 electronically u/s 139 of the Act declaring total income of Rs.30,51,30,570/-. The said return was selected for scrutiny assessment through CASS and statutory notice u/s.143(2) of I.T.At, 1961 was issued on 17.07.2017 and duly served upon the assesses. Subsequently, notices u/s.142(1) along with detailed questionnaire were issued. The assesses company has submitted its response along with the details as called for. After verification of the information filed/submitted, Assessing Officer completed the assessment.
3.1. During the course of assessment, it was observed that assessee company had entered into international transactions during the previous year relevant to A.Y. 2016-17 to an extent of 5 Rs.169,15,84,033/-. Hence, a reference was made to the TPO for determining Arm’s length price u/s 92CA of the Act. Thereafter, the case was referred to the Transfer Pricing Officer (TPO), who passed order u/s 92CA(3) of the Act on 30.10.2019. The TPO proposed the adjustment of Rs.19,45,87,222/- in the IT-enabled services of the tax payers international transactions and Rs.2,80,004/- under interest on receivables outstanding u/s 92CA of the Act. Accordingly, draft assessment order u/s 143(3) r.w.s. 144C of the Act and section 92CA of the Act had been passed on 18.11.2019 interalia making an addition of TP adjustment of Rs.19,48,67,226/- to the total income of the assessee and thereby determined the assessed income at Rs.49,99,97,796/-.
3.2. Aggrieved with such draft assessment order, assessee raised objections before the DRP, Bengaluru on 16.12.2019, who after hearing the AR of the assessee and examination of the submissions made and material available on record, made the directions vide page 3 of the assessment order.
3.3. The TPO in his order observed that there was no change in the median of the comparables even after giving effect to the directions of the Hon’ble DRP and hence, he proposed an adjustment at Rs.19,45,87,222/- towards ITeS Segment in the order passed u/s 92CA(3) dated 30.10.2019 remains unchanged and the TPO also observed that the proposed adjustment in the order passed u/s 92CA(3) dt.30.10.2019 remain unchanged even after taking into account the delay on the realization of the amounts including the opening balance and invoices raised during the year after allowing reasonable credit period of 30 days by taking SBI Short Term Deposit rates as benchmark.
3.4. Based on the draft assessment order dt.18.11.2019 passed u/s 143(3) r.w.s. 144C and Section 92CA of the IT Act, directions given by DRP u/s 144C(5) of the Act and “Give Effect to Directions u/s 144C order of the TPO dt.19.03.2021, the final assessment order u/s 143(3) r.w.s. 144C(13) of the Act was passed and the total income of the assessee was assessed at Rs.49,99,97,796/-. Thereafter, as the assessee furnished inaccurate particulars with regard to the international transactions carried out by it to the extent of Rs.19,48,67,226/- Assessing Officer issued penalty proceedings u/s 271(1)(c) of the Act and accordingly issued penalty notice u/s 271(1)(c) of the Act.
Feeling aggrieved with final assessment order, assessee preferred appeal before us.
At the outset, ld.AR had submitted that the assessee has challenging the inclusion and exclusion of comparables and had also insisting for the other issues.
5.1. The ld. AR for the assessee as well as the Ld. DR for the Revenue have submitted that the assessee was treated as ITeS / KPO in the preceding years, however, for the A.Y. 2014-15, the Tribunal has deleted the E-Clerx on the premise that the functions performed by E-Clerx are not comparable with that of assessee. It was submitted by the ld. AR that the assessee is a BPO whereas the ld. DR had submitted that the assessee is ITeS/KPO. It was submitted by both the parties that whether the assessee is ITeS / KPO / high-end BPO or simply BPO is required to be decided by the TPO. Based on the outcome, suitable comparable be selected and Transfer Pricing adjustment be carried out.
We have heard the rival submissions and perused the material on record on the preliminary issue agreed by both the parties mentioned hereinabove. The TPO in his order dt.30.10.2019 has classified the assessee as ITeS and Para 3 and 3.1 of the order reads as under :
“3. As per the Transfer Pricing (TP) document furnished for the F.Y. 2015-16, the taxpayer company has entered into the following international transactions with its Associated Enterprises (AEs) :
ASSOCIATED NATURE OF AMOUNT IN ENTERPRISES INTERNATIONAL RS. TRANSACTIONS Hyundai Motor Provision of ITES 1131581522 Company Kia Motor Corporation Provision of ITES 520852358 Hyundai Auto Ever Purchase of asset 28874264 Corporation Hyundai Motor Reimbursement of 4352795 Company expenses paid Hyundai NGV Reimbursement of 1412571 Company, Korea expenses paid Hyundai Motor Reimbursement of 147674 Company expenses paid Hyundai Motor Trade receivables 124477789 Company Kia Motor Corporation Trade receivables 79021142 Hyundai Auto Ever Payables 13758850 Corporation 3.1. As per the TP document filed by the taxpayer, economic analysis as prepared by the taxpayer is summarized as below :
Nature of Amount (Rs.) MAM PLI Margin Margin of International of comparables Transaction taxpayer Provision of 1652433880 TNMM OP/OC 15.65% ITES Payment for 4362849 TNMM OP/OC 15.65% services Purchase of 28874264 TNMM OP/OC 15.65% computer software Reimbursement 5765366 TNMM OP/OC 15.65% 6.07% to of expenses 16.01% paid Reimbursement 147674 TNMM OP/OC 15.65% of expenses paid
Trade 203498931 TNMM OP/OC 15.65% receivables Payables 13758850 TNMM OP/OC 15.65%
In fact, this issue of whether the assessee is a KPO/ITeS/high end BPO was examined by the Tribunal in the earlier years in the case of assessee. We may reproduce some of the relevant portions of those orders on this aspect, more particularly, from the orders for A.Y. 2011-12, 2012-13 and 2014-15. Firstly, we are reproducing the relevant portion i.e., Paras 2.1 and Paras 9.6 to 9.11 (on pages 815 and 821 to 825 placed in paper book) in the case of assessee for A.Y. 2011-12 in dt.21.12.2016, which read as under :
“2.1. Assessee is involved in providing support services in connection with CAE/CAD modeling and iterative simulation. It receives the basic design from its group company with respect to CAD modeling and makes a 3D CAD modeling data of vehicle components using CAD software tools. Assessee is a routing support service provider and it assumes less than normal risk associated with carrying out such business. The International transactions reported by assessee are as under : Sl. ASSOCIATED NATURE OF AMOUNT IN No. ENTERPRISES INTERNATIONAL RS. TRANSACTIONS 1 Hyundai Motor Engineering / 43,57,37,674 Company, Korea Consulting Engineering Services / IT enabled 2 Kia Motor 20,52,60,386 Services (ITeS) Corporation, Korea 3 Hyundai Auto Ever Purchase of computers 2,64,56,224 Corporation, Korea Purchase of Security 64,667 equipment Annual Licence fee for 98,95,527 software Purchase of computer 23,07,715 software Reimbursement of 11,08,347 expenses 4 Hyundai Motor Reimbursement of 2,72,10,590 Company, Korea expenses
9.6. We have considered the rival contentions and perused the details placed on record. There is justification in assessee's contentions as the above said company is involved in multifarious activities including products and IPR rights. Consequently, it cannot be considered as functionally similar to assessee-company which is categorised as a KPO company, being in engineering business process services. The Co-ordinate Bench in the case of Exevo India Pvt. Ltd., Vs. ITO in (AY.2011- 12) dt. 25-07-2016 (supra) has considered this comparable and excluded by stating as under: "Accentia Technologies Ltd. 4.1. Ld.TPO considered this as a comparable. Assessee objects to the compatibility of this company is due to functional incompatibility. Ld.AR submitted that this company was having supernormal profit and is engaged in providing KPO services which is distinct from the nature of services provided by the assessee before us. He has placed reliance upon the decision of coordinate benches of this tribunal in the case of M/s.Capital IQ Information Systems (India) Pvt. Ltd. Vs. DCIT in ITA No. 1961/H/2011 and Symphony Marketing Solutions India Pvt. Ltd., in ITA No. 1316/BANG/2012, wherein the dissimilarities between KPO services and BPO service has been drawn up. He further contended similar view has been upheld by the Hon'ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd., vs. CIT in ITA 102/2015. 6.2. Ld. DR, however, referred to extracts from the ld.TPO's order to submit that Accentia Technologies Ltd. is comparable with assessee. The ld. DR relied upon order dated 27.04.2015 passed by Hon'ble Delhi High Court in the case of Chris Capital Investment versus DCIT reported in I.T.A.No. No.417/2014, wherein Hon'ble Delhi High Court has held that: ".... the mere fact that an entity makes high / extremely high profits / losses does not ipso facto, lead to its exclusion from the list of comparables for the purpose of determination of ALP. In such circumstances enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable." 6.3. After considering the rival submissions and pursuing the relevant material on record, we find that functionally, this company is into development of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DPO), high end software services. It is submitted by the ld.AR that segmental information in respect of this company is not available. We find that the Ld. TPO had adopted this company as a comparable as the Ld. TPO is of the view that the services rendered by this comparable are in the nature of BPO or back office services and that nothing he is earned from sale of products.
We have perused the annual reports of this company and have observed that Accentia owned a brand and goodwill on account of acquisition/amalgamation of a defendant in force. Further it is observed that this company is providing services in the field of medical transcription billing and collections income from coding etc for which complete segmental information are not available. In our considered opinion this company is functionally dissimilar to that of the assessee. Accordingly we direct the Ld. TPO to exclude this company from the list of comparables". Accordingly, respectfully following the above, we direct the AO/TPO to exclude the above company from the list of comparables. ii) Eclerx Services Limited; 9.7. It was submitted that this company is a Knowledge Process Outsourcing Company and as per the annual report of the company, it is engaged in the provision of services in business units of financial services and sale and marketing support. It was also further submitted that there was an extraordinary events as a subsidiary company of Eclerx Services Limited was wound-up. It has super normal profits during the year and cannot be compared to assessee-company. It was further submitted that this company was rejected in assessee's own case for AY. 2008-09 to 2010-11 on :- 10 -: & 216 /Hyd/2016 functionally dissimilar and peculiar economic circumstances. Ld. Counsel relied on the orders in earlier year. 9.8. We have perused the rival contentions and the documents placed on record. Assessee raised the similar contentions before the DRP and DRP vide it order in pg. 12 has considered as under: "Having considered the submission, we are of the view that the engineering design services provided by the assessee is comparable to the services provided by the above company. Further, in the safe harbor guidelines issued by the CBDT, engineering design services have been considered under KPO. Further, the objection in regard to the exclusion of the company due to high profit is not found acceptable due to the detailed reasons given in paragraph 2.6 of this order. There is no extraordinary event have been pointed out by the assessee similar to the earlier years in which the Hon'ble ITAT directed to exclude the company due to such event. Further, it appears to us that the high end function of the company were not brought to the notice of the Hon'ble ITAT, which resulted in exclusion of the above company. Accordingly, considering the function of the assessee, we are of the view that there is no infirmity in inclusion of the above company in comparables". 9.9. We notice that this company is categorised as KPO company and the services are similar being provided to the services being provided by the above company. Further, as seen from the so called extraordinary event, it is noticed that the said company has wound-up a subsidiary company w.e.f. 29-03-2011. Since it has not acquired the company whose turnover is included in assessee-company but only wound-up a dormant company, we are of the opinion that it does not have any bearing on assessee's operating results. Super normal profits cannot be a basis for exclusion of a company and since the DRP has considered the objections, we agree with the findings of DRP. Even though the company was excluded in earlier year, we are of the opinion that each year is to be considered separately on the basis of the facts and in TP matters the facts will vary from year to year. Accordingly, we are of the opinion that this company cannot be excluded. To that extent, the ground raised by assessee is rejected. iii) Crossdomain Solutions Private Limited: 9.10. With reference to this company, it was submitted that the company is functionally dissimilar as it has a diversified Knowledge Process Outsourcing Company providing services in insurance, health care, HR and accounting domains. Company also offers business excellence market research and data analytics and IT services. It was also submitted that the company is engaged in software development activities. It was also submitted that in assessee's own case in AY. 2008-09, this company was rejected by the ITAT due to the fact that it has diversified activity and further, segmental information was not available. It was also contended that the margin calculated by the TPO is incorrect and furnished a revised computation. The issue was whether the bad debts were non-operating expenses and TPO has not followed the guidelines on the issue. 9.11. We have considered the rival contentions and perused the documents placed on record. Assessee has raised the same objections before DRP which gave a finding that the engineering design services being rendered by assessee are akin to KPO services of the above company. It further considered that functional comparability need to be decided on the basis of the information available in the annual report and not based on the website information which may vary and may not be reliable. It was further noted that in the case of M/s. Excellence Data Research Pvt. Ltd., in the ITAT rejected the objection of assessee for exclusion of above company noting that the annual report refers only service and is in the pay roll service activity. Thus, stating DRP rejected assessee's objections. We do not find any reason to interfere with the said objections as the very basis of the contentions are based on the website information but not on the annual report. However, the DRP has directed the TPO to verify the margin which assessee submits that has not been considered. Therefore, while retaining the company as a comparable one, we direct the AO/TPO to examine the contentions with reference to margin computation of the above said company after giving due opportunity to assessee to make submissions. This issue is considered partly allowed.”
Similarly, in the case of assessee for the assessment year 2012-13 in dt.08.06.2018 vide paras 2.3 and 6.1 to 6.3 (placed on Pages 848 to 849 of the paper book) which reads as under :
“2.3 International Transactions : As per 3CEB report, the international transactions reflected are as under :
AE NATURE OF AMOUNT RS. TRANSACTION Hyundai Auto Ever Purchase of 20,88,403 Corporation equipment Purchase of 2,12,08,832 computer Purchase of 27,41,790 computer software Reimbursement of 49,08,346 expenses Payable 60,88,745 Hyundai Motor Provisions ITeS 47,99,49,928 Company Reimbursement of 3,63,21,335 expenses Receivables 6,34,42,881 Kia Motor Corporation Provision of ITeS 23,26,70,265 Receivables 4,32,08,022 6.1 Eclerx Services Ltd. - Ld. AR submitted that this company cannot be a comparable to the assessee company as this company is a knowledge process outsourcing company and as per the annual report of the company, it is engaged in the provision of services in business units of financial services and sale and marketing support. He submitted that there was an extraordinary events as a subsidiary company of Eclerx Services Ltd. was wound-up. It has super normal profits during the year and cannot be compared to the assessee company. He submitted that it has diverse activities & no segmental details are available and it has high turnover of Rs. 472 crores. Further, he brought to our notice that, by referring to annual reports of this company vide page 395 of paper book, this company has acquired Agilyst Inc, USA. The extraction of the submission is reproduced below: "This year also saw us acquire Agilyst Inc, a US company providing operations and data analysis support to some of the largest cable and telecommunication companies in the world. We are very excited about this acquisition as it provides us access to new customers and services and reduces our reliance on our existing large customers. The Agilyst business model is also very similar to ours and so we see many business synergies, including opportunities for cross-selling services across our combined customer base. The acquisition also adds delivery capability in Chandigarh - now our third location after Mumbai and Pune in India, and brings an additional 1,000 people into the eClerx family". By this acquisition, the financials are not reliable. He relied on the following cases:
1. 1. Exevo India Pvt. Ltd., Vs. DCIT, - AY 2012-13 2. Fractal Analytics Pvt. Ltd., Vs. ACIT, ITA No. 1024/Mum/17 3. S&P Capital IQ Pvt. Ltd., ITA No. 200 & 435/hyd/2016 4. Hyundai Motor India Engg. Pvt. Ltd.
5. Hyundai Motor India Engg. Pvt. Ltd., ITA No. 128/Hyd/2016 & 216/Hyd/2016 6.2 Ld. DR, on the other hand, relied on the orders of revenue authorities. 6.3 Considered the rival submissions and perused the material on record. As per the submission of ld. AR, this company has acquired new entity. Agilyst Inc, USA and it is extraordinary event. By further relying on the case law Exevo India Pvt. Ltd. (supra), he submitted that this company cannot be compared. We cannot agree with the submission of the counsel on this aspect as this company acquired new company in USA, how it will have an impact on the financials during this year since, the USA company is an independent entity and engages in USA and having its own functions may be similar to the assessee. We do not see any impact of acquiring independent entity in USA will have any impact on the functions of the assessee further. It is accepted that assessee and Ecelrex are both classified as high end BPO. Further, we find that in assessee's own case for AY 2011- 12, the coordinate bench has held as under: "9.9. We notice that this company is categorised as KPO company and the services are similar being provided to the services being provided by the above company. Further, as seen from the so called extraordinary event, it is noticed that the said company has wound-up a subsidiary company w.e.f. 29-03-2011. Since it has not acquired the company whose turnover is included in assessee- company but only wound-up a dormant company, we are of the opinion that it does not have any bearing on assessee's operating results. Super normal profits cannot be a basis for exclusion of a company and since the DRP has considered the objections, we agree with the findings of DRP. Even though the company was excluded in earlier year, we are of the opinion that each year is to be considered separately on the basis of the facts and in TP matters the facts will vary from year to year. Accordingly, we are of the opinion that this company cannot be excluded. To that extent, the ground raised by assessee is rejected." Following the decision of the coordinate bench as above, we exclude this company as comparable.
Similarly, we are reproducing the relevant portion i.e., Paras 9 and 10 at page 883 and Para 32 at page 894 of the paper book in assessee’s own case for A.Y. 2014-15 in which reads as under :
“9. The ld Counsel for the assessee Shri H Srinivasulu submitted that the assessee is the 100% captive service provider to its AEs in R&D support services of automobile parts. He submitted that the basic designs come from the AE while the assessee uses data base of AE located outside India and also the instructions of work which come from AE to render the services of CAD & CAE. He submitted that the assessee uses CAD and CAE software to render the support services and send it back to AE and there is no patenting of intellectual property in India. Therefore, according to him, the assessee is providing only ITeS services (BPO). He further led us to the AE agreement, wherein it is seen that no software development services are provided nor were any research services provided by the assessee and the assessee is also not rendering all the services specified in the agreement, but only CAE and CAE testing support services are provided. He submitted that the assessee company was established in the year 2007 in India and from the AY 2008-09 onwards, the assessee has been held to be an ITeS (BPO) company till AY 2010-11 and only in the AYs 2011-12 and 2012- 13, the ITAT has held this company to be comparable to E-Clerx Ltd which is a KPO. He submitted that again in the AY 2013-14 and 2014-15 the assessee has been held as ITeS by the TPO as well as the DRP. Therefore, he submitted that it is necessary to go into the actual nature of work carried on by the assessee to hold whether the assessee is an ITeS company or a KPO. He submitted that the assessee’s business falls within the ambit of Rule 10TA(e) of the Act and not under 10TA (g) of the Rules. He tried to distinguish the ITeS service from KPO service by submitting that the KPO requires Domain Expertise, Advance Analytical Skills, Technical Skill, in depth knowledge, judgment and interpretation. He submitted that for rendering these services, the manpower plays a key role. He submitted that in the automobile industry, persons having 10 years and above experience with technical qualifications come within the category of technical skill, whereas majority of the assessees’ manpower i.e. the 80% are B.Tech or fresh graduates while employees with masters degree were 7% and Master (ME/M.Tech.) degree were 8% and others are only 2%. Thus, he submitted that the assessees manpower does not have the advance analytical and technical skill which is required to render KPO services. He submitted that in the case of the assessee, the basic design and database comes from AE and fresh graduates of the assessee renders only the support services. He referred to Rule 10TA(g) of the I.T. Rules which refers to “engineering services and design services” as a KPO service, to impress upon us that the assessee is not rendering any of such services and therefore, it cannot be considered as a KPO. He also led us to page 972 of the Paper Book being the workflow chart to demonstrate that the assessee is rendering the entire work on the instructions of the AEs. He also led us through the research agreement at pages 967 to 971 of the Paper Book, wherein the assessee is required to provide the computer aided design engineering services. He submitted that the assessee has not rendered the project support services, software development services and research services which are mentioned at page 969 of the Paper Book. He also drew our attention to page 540 of the Paper Book, wherein in its TP study, the assessee has stated that it is primarily involved in advance R&D support services focused on project design engineering and quality enhancement and provides all back end operations like computer aided design and computer aided engineering. He also drew our attention to the profile of the company at page 544 of the Paper Book. As regards the functions performed by the assessee company to its AE, he submitted that the assessee is rendering only recruitment of technical manpower, rendering and delivering of CAD/CAE engineering services and professional and quality review of services. He also submitted that the assessee is taking risk of only foreign exchange, manpower and local and statutory risk. Therefore, all the risks and major functions are borne by the AE. He submitted that both the TPO as well as the DRP have considered the assessee as an ITeS company only and therefore, it cannot now be held to be a KPO. He also drew our attention to page 946 of the paper book which is “notes forming part of the financial statements for the year ending March, 2014” wherein the corporate information is given and it is stated that the company located in Hyderabad, was primarily engaged in research & development focussed design engineering and quality enhancement and provides back end operations like computer aided engineering and computer aided design etc. He submitted that this sentence is not included in inter-company agreement with AE. He has also drawn our attention to the ITAT orders in the assessee’s own case for the earlier AYs wherein for the AY 2008- 09 to 2010-11, the assessee has been held to be ITeS and E-Clerx Ltd has been directed to be excluded on account of functional dissimilarity and an extra ordinary event. He submitted that only for the AY 2011-12 and 2012-13 the assessee has been held to be comparable with E-Clerx Ltd which is a KPO. He therefore, tried to distinguish the said decisions from the facts of the case for the AY before us. As far as the comparability of E-Clerx Ltd is concerned, he submitted that financials of E-Clerx Ltd are not reliable as segmental details are not available. He submitted that E Clerx Ltd is rendering both ITeS and KPO services and the TPO has taken the entity level results as no segmental results are available. He also submitted that the business model of the E Clerx Ltd is different as it outsources most of its work. Therefore, he sought exclusion of this company from the final list of comparables.
10. The ld DR, on the other hand, submitted that the services rendered by the assessee company are also similar to the functions performed by the E-Clerx. He submitted that the assessee itself has specified, that it was rendering high end services at page 946 of the paper book and at page 967, it is stated that the services are included but not limited to. He submitted that the above high-end services can be performed only by highly qualified persons and the workforce is to be highly suited for such services and the assessee is also having such skilled workforce. Therefore,
according to him, the assessee is not low end BPO, but is a KPO and therefore, E-Clerx Ltd cannot be excluded.
Thus, on a comparison of the functions of the assessee and other companies reproduced above, we find that E- Clerx Ltd is not only into ITeS services, but is also rendering KPO services and therefore, it cannot be compared to the assessee. In the decisions of the ITAT where it has been held to be a comparable to the assessee, we find that ITAT has held that the services provided by the assessee company and E-Clerx Ltd are similar and that the extra-ordinary event of winding up of the subsidiary company has not been proved to have any bearing on the assessee’s profits and that super normal profit may not be a basis for exclusion of this company. However, we find that the Coordinate Benches of the Tribunal nor the Revenue Officers have not brought out functions which are similar to both the companies. The decision of the ITAT for year AY 2011-12 was followed in the AY 2012-13. Therefore, we are of the opinion that these decisions cannot exactly be binding on this Tribunal for the relevant AY, where the AO/TPO have considered the assessee as an ITeS service provider and not as a KPO. Further, as pointed out by the ld Counsel for the assessee, The TPO has himself has not taken E- Clerx Ltd as a comparable for the AY 2013-14. Therefore, we direct the TPO/AO to exclude this company from the final list of comparables to the assessee.”
From the reading of the above said three decisions of the Tribunal, it appears that there is inconsistency in the adjudication of this issue. The Tribunal in the case of the assessee for A.Ys. 2011-12 and 2012-13, treated the assessee as TPO/KPO whereas while deciding the appeal for A.Y. 2014-15, the Tribunal had deleted the E-Clerks on the premise that the assessee is not a KPO / ITeS. In our considered opinion, though the TPO in his order has mentioned that the assessee is a ITeS, however, the issue is required to be examined afresh by the TPO on the basis of the agreements entered by the assessee with its AEs and functions performed. The TPO shall examine the work profile of the assessee vis-à-vis it’s A.E. and the qualifications and experiences of employees / work force engaged by the assessee in discharging its duties pursuant to the contracts entered with its A.E. and remuneration paid. Based on the above said data, the TPO shall adjudicate and decide whether the assessee is a ITeS / KPO / high
17 end BPO or merely low end BPO after following due process of law and decide the Arms Length Price afresh after providing the opportunity of hearing to the assessee, in accordance with law. The assessee is directed to produce all the documents / submissions before the TPO to substantiate its case that the assessee is not KPO / ITeS. In the light of the above direction, the matter is remanded back to the file of TPO / Assessing Officer for fresh adjudication of all the grounds. We have not adjudicated other grounds urged before us, as both the parties have agreed for remand of the matter to the file of TPO for adjudicating the ground as to whether the assessee is a ITeS/KPO/High end BPO/low end BPO. Accordingly, the appeal of the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.