PR. COMMISSIONER OF INCOME TAX-1, DELHI vs. M/S. CONVVERGYS INDIA SERVICES PVT. LTD & ANR.

ITA 234/2022 Page 4 of 7  Companies who have export service income less than 75% of the sales were excluded This has been done primarily to exclude predominantly domestic companies which cannot be compared with the taxpayer, having major earnings from exports. This is because economic circumstances of such companies are different. Rule 10 B(2) also supports this view.” 7. He also states that the ITAT correctly held that Excel Infoways failed the diminishing revenue filter. In support of his statement he relied upon a chart reproduced in the impugned order by the Tribunal. The said chart is reproduced hereinbelow:- 8. Having heard learned counsel for the parties, this Court is of the view that the intent of Chapter X of the Act is to compute the income in relation to a controlled transaction between an assessee and its associated enterprise having regard to the arm’s length price in order to nullify the effect of transfer of income to a jurisdiction outside India, if any, in respect of the controlled transaction. The exercise of determining the arm’s length price in respect of international transactions between related enterprises is aimed at determining the price which would have been charged for products and services, as nearly as possible, if such international transactions were not Financial Year 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Revenue (INR’000) 204,161.34 203,526.39 79,096.95 76,098.95 52,7982.12 22,994.38 Operating Cost (INR’000) 42,105.89 48,794.55 55,991.57 44,541.01 41,355.78 22,896 Operating Profit 162,055.45 154,731.84 23,105.38 31,558.53 11,436.34 99 OP/TC 384.88% 317.11% 41.27% 70.85% 27.65% 0.43% 2022:DHC:2875-DB

ITA 234/2022 Page 5 of 7 controlled by virtue of their being executed between related parties. The object of the exercise is to remove the effect of any influence on the prices or costs that may have been exerted on account of the international transactions being entered into between related parties. It is clear that for the exercise of determining the arm’s length price to be reliable, it is necessary that the controlled transactions be compared with uncontrolled transactions which are similar in all material aspects. In Rampgreen Solutions Pvt. Limited v. Commissioner of Income Tax (2015) 377 ITR 533, Delhi, the learned Predecessor Division Bench has held as under:- “41. Having stated the same, it may be necessary to bear in mind that supernormal profits may in certain cases indicate a functional dissimilarity or dissimilarity with respect to a feature that has a material bearing on the profitability. In such circumstances, it would be necessary to undertake further analysis to eliminate the possibility of the high profits resulting on account of any material dissimilarity between the tested party and the chosen comparable. A wide deviation in the PLI amongst selected comparables could be indicative that the comparables selected are either materially dissimilar or the data used is not reliable. The Tribunal proceeded on the basis that an adjustment could be made only in cases where supernormal profits resulted from the factors indicated in Rule 10B of the Income Tax Rules, 1962. In our view, the factors mentioned in Rule 10B are not exhaustive. The principal object of benchmarking international transactions against uncontrolled transactions is to impute an ALP to those transactions. This exercise would fail if a factor, which has a material bearing on the value or the profitability, as the case may be, depending on the method used, is ignored. 42. Before concluding, there is yet another aspect of the matter that needs consideration. The Tribunal proceeded on the basis that while applying TNMM method, broad functionality is sufficient and it is not necessary that further 2022:DHC:2875-DB

ITA 234/2022 Page 6 of 7 effort be taken to find a comparable entity rendering services of similar characteristics as the tested entity. The DRP held that TNMM allows flexibility and tolerance in selection of comparables, as functional dissimilarities are subsumed at net margin levels, as compared to Resale Price Method or Comparable Uncontrolled Price Method and, therefore, the functional dissimilarities pointed out by the Assessee did not warrant rejection of eClerx and Vishal as comparables. 43. In our view, the aforesaid approach would not be apposite. Insofar as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction/entity. Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by TNMM method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable ALP. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in PLI must trigger further investigations/analysis.” 9. Since, in the present case Excel Infoways Pvt. Ltd. fails not only the service revenue from export/ITES filter of 75% insisted upon by the TPO but also the diminishing revenue filter as is apparent from the chart reproduced hereinabove, no interference is called for in the finding recorded by the Tribunal. 2022:DHC:2875-DB

ITA 234/2022 Page 7 of 7 10. Consequently, no question of law arises for consideration in the present appeal. Accordingly, the same is dismissed. MANMOHAN, J MANMEET PRITAM SINGH ARORA, J JULY 29, 2022 msh/KA 2022:DHC:2875-DB