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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI BASKARAN BR & SHRI KULDIP SINGH
Per : Kuldip Singh, Judicial Member:
The appellant, ACIT, Mumbai (hereinafter referred to as ‘the Revenue) by filing the present appeal, sought to set aside the impugned order dated 24.06.2021 passed by the Assessing Officer (AO) in consonance with the orders passed by the Transfer Pricing Officer (TPO)/Commissioner of Income Tax (Appeals) [CIT (A)] under section 254/143(3) of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2015-16 on the grounds inter alia that :- “1. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in excluding the comparable MPS Ltd. stating that it 2 M/s. Eclerx Services Ltd. (Successor of M/s. Agilyst Consulting Pvt. Ltd.) is a KPO company when it is seen that the same is a BPO company and hence functionally similar to the assessee.
2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in directing the TPO to recalculate the margins of the comparable M/s Jindal Intellicom Ltd. after giving the assessee the opportunity of being heard, when it is seen that as per section 251 of the Act the CIT(A) doesn't have the power to set aside the order of the AO/TPO 3. The appellant craves to amend, alter and delete any of the aforesaid grounds and add any additional grounds either before or at the time of hearing.”
Briefly stated facts necessary for adjudication of the controversy at hand are : M/s. Eclerx Services Ltd. (Successor of M/s. Agilyst Consulting Pvt. Ltd.) is into providing Information Technology Enabled Services (ITES) to Agilyst Inc. The Agilyst Consulting Pvt. Ltd. serves as the service delivery department of Agilyst Inc. and enables the back office operational support services offered by Agilyst Inc (USA) to its clients. During the year under consideration assessee entered into international transactions qua provision of ITES to the tune of Rs.77,65,29,181/-. Assessee in order to benchmark its international transactions applied Transactional Net Margin Method (TNMM) with OP/OC as profit level indicator. Ld. TPO accepted the TNMM with OP/OC as profit level indicator as the most appropriate method to benchmark the international transactions finally selected six comparables with average of 24.62% as against assessee’s own margin of 16.60% and thereby proposed the adjustment on account of Arms Length Price (ALP) at Rs.6,37,00,000/-.
Assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has partly allowed the same. Pursuant to the order passed by Ld. TPO/Ld. CIT(A)/AO framed the assessment at 3 M/s. Eclerx Services Ltd. (Successor of M/s. Agilyst Consulting Pvt. Ltd.) Rs.17,19,70,360/- and Rs.10,20,81,416/- under normal provisions of the Act and under section 115JB of the Act and under section 143(3) read with section 144C of the Act. Feeling aggrieved the Revenue has come up before the Tribunal by way of filing present appeal.
Assessee by filing the present appeal challenged the impugned order passed by Ld. CIT(A) on two grounds: one exclusion of MPS Ltd. as comparable and two challenging the direction issued by Ld. CIT(A) to TPO to recalculate the margin of M/s. Jindal Intellicom Ltd. Before proceeding further for ready perusal, the final set of comparables selected by the Ld. TPO to benchmark the international transactions qua ITES and ALP adjustment made are extracted as under: “11, The final set of comparable companies considered is summarized hereunder:
SI No Name of the FY 2012-13 FY 2013- FY 2014- Weighted Company 14 15 average
1 Excel Infoways 75.7 42.25 4.58 48.31 Ltd 2 MRS Ltd 29.71 53.26 55.51 46.16 3 Jindal Intellicom NC 15.91 6.31 11.11 4 ICRA Techno 16.73 4S.50 33.31 33.68 Analytics Ltd 5 IRIS Business NC 24.37 6.26 15.56 Services Limited
6 Interglobe NC 9,49 18.12 14.13 Technologies Pvt Ltd 35th percentile 14.13 65th percentile 33.68 4 M/s. Eclerx Services Ltd. (Successor of M/s. Agilyst Consulting Pvt. Ltd.) Median 24.62
As assessee has earned OP/TC% of 15.17% (forex as non-operating) during FY 2014-15 which is not within the 35th to 65th percentile range, the transactions of the assessee are not considered to be ALP and adjustment is done as follows: Total operating revenue (in crores) 77.65 Total operating cost (in Crores) 67.42 Assessee margin @15.17% (in 10.23 Crores) ALP margin @ 24.62% 16.60 Difference 6.37
In view of the above, the adjustment of Rs. 6,37,00,0007- is made to this transaction.”
Now Ld. D.R. for the Revenue challenging the impugned inclusion of MPS Ltd. as comparable by Ld. CIT(A) contended that MPS Ltd. is a valid comparable because under TNMM broad comparability is required and that broadly speaking MPS Ltd. is a BPO Company and as such functionally similar vis-à-vis assessee& relied upon the order passed by Ld. TPO.
However, on the other hand Ld. A.R. for the assessee to repel the argument addressed by the Ld. D.R. contended that MPS Ltd. is functionally dissimilar to the assessee being a KPO Company and it is also a product company and also into carrying out online activities and relied upon the order passed by co-ordinate Bench of the Tribunal in case of M/s. Red Hat India Private Limited in order dated 25.02.22 wherein MPS Ltd. has been found to be not a valid comparable vis-à-vis routine ITES provider. 5 M/s. Eclerx Services Ltd. (Successor of M/s. Agilyst Consulting Pvt. Ltd.) 7. In order to examine the suitability of MPS Ltd. as a comparable vis-à-vis assessee who is a routine ITES service provider we have perused the annual report available at page 159 to 211 of the paper book. Profile of the MPS Ltd. shows that MPS Ltd. provides complete end to end publishing solution across the author to reader value chain. Their services include content development, print and digital publishing services, technology solutions, rich media products and customer services for educational, trade and scholarly publishers. It is a one stop destination for some of the largest publishing companies in the world.
MPS Ltd. in its acquisition plan highlighted that “We acquired only the brand, employee profile and customer list of the acquisition target and not the company, liberating the company from the risk of hidden liabilities. Besides, we do not acquire with the objective to move jobs to India; on the contrary, we select to retain the teams within the acquired companies, making it possible to protect last-mile customer familiarity.”
In addition to traditional content processing services, MPS Ltd. has a strong suite of SAAS (software as a service) offerings including workflow management (MPS Trak), editing and automated composition (MPS DigiCore) and business analytics (MPS Insight). These software services help MPS add more publishing customers beyond its traditional customer base of large global publishers such as Macmillan, Elsevier, Cengage Learning, and McGraw-Hill. 6 M/s. Eclerx Services Ltd. (Successor of M/s. Agilyst Consulting Pvt. Ltd.) 10. When we examine the aforesaid functional profile of MPS Ltd. vis-à-vis assessee it has come on record that MPS Ltd. is into providing high end services and is also a product company whereas, assessee is a routine ITES service provider and enables the back office operational support services offered by Agilyst Inc., USA its Associate Enterprise (AE) to its clients.
Ld. CIT(A) has thrashed the functional profession of MPS Ltd. vis-à-vis assessee in para 6.5 by holding that it is a product company engaged in creating new technology and LED products. At the same time, MPS Ltd. is into providing diversified services with no segmental financials available. More so MPS Ltd. is a risk taking company having supernormal profit whereas assessee is working on a cost + mark up model in providing routine ITES services. Even otherwise it is a matter of record as mentioned in para 6.5.1 of the impugned order passed by Ld. CIT(A), MPS Ltd. has not been accepted as suitable comparables vis-à-vis assessee in A.Y. 2014-15 by the Revenue itself it being a KPO companies, hence cannot be a valid comparable qua BPO company. So we are of the considered view that Ld. CIT(A) has rightly excluded MPS Ltd. as a comparable vis-à-vis assessee. So ground No.1 is determined against the assessee.
12. So far as second ground as raised by the Revenue challenging the direction issued by Ld. CIT(A) to TPO to recalculate the margins of comparables M/s. Jindal Intellicom Ltd. is concerned, the Ld. D.R. for the Revenue contended that since Ld. TPO has no such power to set aside the order of the Ld. TPO under section 251 of the Act the directions are not sustainable. 7 M/s. Eclerx Services Ltd. (Successor of M/s. Agilyst Consulting Pvt. Ltd.) 13. The Ld. CIT(A) returned the findings by issuing direction to the Ld. TPO to adopt the correct margin after providing opportunity of being heard to the assessee by returning following findings: “In case of Jindal Intellicom Ltd. the margin is 7.9% (weighted average) as per appellant’s submission where as the TPO has adopted 11.11% margin. This is primarily because of inclusion of data for FY 2012-13 which was not considered by TPO as the comparable company did not pass export filter for FY 2012-13. In the submission, appellant has stated that Jindal Intellicom Ltd. passes export filter for FY 2012-13 with export to sales ratio of 81.85%. This is a matter of verification and AO/TPO are directed to adopt correct margin after giving opportunity to the appellant.”
Aforesaid findings go to prove that the Ld. CIT(A) issued the direction by noticing the patent irregularity committed by the Ld. TPO by not computing the correct margin. Moreover, when M/s. Jindal Intellicom Ltd. passes the export filter for F.Y. 2012-13 with export to sales ratio of 81.85%, the correct margin needs to be calculated. So we find no illegality in issuing directions by Ld. CIT(A) to the Ld. TPO to verify the facts after providing opportunity of being heard to the assessee. Hence, ground No.2 is also determined against the Revenue. In view of what has been discussed above present appeal filed by the Revenue is hereby dismissed. Order pronounced in the open court on 29.07.2022.