TNS INDIA PRIVATE LIMITED, HYDERABAD,HYDERABAD vs. DCIT, CIRCLE-2(2), HYDERABAD, HYDERABAD

Brief facts of the case are that assessee is engaged in the business of conducting quantitative and qualitative market research and relative services and provides related back office data processing services for domestic and international clients. They have filed their return of income for the assessment year 2012-13 on 28/11/2012 admitting total income of Rs. 32,14,98,240/- at normal provisions of the Act and MAT income of Rs. 31,37,89,151/-.

During the course of scrutiny proceedings, learned Assessing Officer noticed that the assessee entered into international transactions, namely, provisions of market research services and provision of Information Technology enabled Services (ITeS) with the Associated Enterprises (“AEs”) to the tune of Rs. 117,37,29,302/- and, therefore, determination of Arms Length Price (“ALP”) was referred to the learned Transfer Pricing Officer (TPO) who by order dated 29/01/2016 suggested upward adjustment to the tune of Rs. 6,98,15,959/-. In addition to this adjustment, learned Assessing Officer proposed an addition of Rs. 2,87,19,788/- on account of software license fee, Rs. 7,57,09,072/- on account of management allocation overhead fee and trade mark license fee and Rs. 2,06,01,475/- on account of trade mark license fee. He accordingly passed draft assessment order dated 21/03/2016.

Assessee filed objections before the learned DRP and challenged the addition on account of the ALP adjustment. Learned DRP upheld the

Aggrieved by the said orders, assessee preferred this appeal before us on as many as seventeen grounds. However, during the course of arguments, assessee not pressed ground Nos. 1 to 7, 10 to 12 and 15. Ground Nos. 16 & 17 are consequential in nature. In Ground No. 8, the assessee challenged the inclusion of certain comparables, out of which the assessee not pressed many comparables but confined the argument challenging the inclusion of two entities, namely, Eclerx Services Ltd., and Infosys BPO Ltd. Assessee also seeks inclusion of ACE BPO Services Pvt. Ltd., and Datamatics Financial Services Ltd. Apart from this, by way of ground Nos. 13 and 14, assessee is challenging the disallowance of management fee and trade mark license fee and also the capitalizing the expenditure on software license fee.

Coming to the international transactions though the assessee benchmarked the provision of market research services and provision of ITeS separately, learned TPO opined that both these services are more or less similar and fall under the category of ITeS and benchmarked the entire transaction at the entity level. Learned TPO rejected the economic analysis resulted in the study conducted by the assessee, undertook a fresh analysis by selecting ten companies, and determined the weighted average margin of such companies at 24.99% whereas the margins earned by the assessee, as per learned TPO happened to be at 16.94%. On this premise, learned TPO suggested an upward adjustment.

Before the learned DRP, assessee sought the exclusion of six entities, namely, Accentia Technologies Ltd., Crossdomain Solutions Pvt. Ltd., Datamatics Global Services Ltd., Eclerx Services Ltd., Infosys BPO Ltd., and TCS e-Serve Ltd., and the inclusion of two entities, namely, ACE BPO Services Pvt. Ltd., and Datamatics Financial Services Ltd., but the learned DRP retained all these comparables. As stated supra, before us, the challenge is limited only to Eclerx Services Ltd., and Infosys BPO Ltd.

In respect of Eclerx Services Ltd., before the learned TPO, assessee contended that the company is a KPO and engaged in providing data analytics and process solutions, apart from providing consulting and outsourcing services to support financial transactions from trade closing through settlement, clearing, asset servicing etc. and these services are high end in nature and cannot be compared to routing BPO support services provided by the taxpayer. Assessee further contented that it has different skill set of employees whereas the Eclerx Services Ltd., is having supernormal profits and high turnover.

In respect of Infosys BPO Ltd., before the learned TPO, assessee contended that the company is engaged in providing integrated services by assisting its clients in improving their competitive positioning by managing their business processes in addition to providing increased value, on the other hand, the assessee is engaged in providing routing back office support services in the nature of data collection and analysis to its AE, which is essentially low-end in nature, bearing minimal risks. Assessee further contended that in their own case for the assessment year 2008-09 and 2009-10, the comparability of these two entities were considered and these entities were excluded.

Learned TPO, however, did not find himself agreeable to this argument and opined that application of the Transactional Net Margin Method (TNMM) as the most appropriate method, which compares the net margins, much of the differences are ironed out and the strict functional comparability as in other methods is dispensable. He further held that ITeS services cannot further be bifurcated into BPO and KPO services for comparability analysis and always there exists certain degree of overlap in this sort of services.

Learned TPO further held that earning super normal profits and high turnover are the possession of brand, in the absence of any clinching evidence as to their impact the profitability of the companies, cannot be a ground to seek exclusion of the companies. According to the learned TPO, the economic rationale in the crux and the link between profits and turnover should also be established with cogent reasons.

Learned DRP was of the opinion that when a company is functionally similar to that of the assessee, the same cannot be exclusion merely because its turnover is at a higher or lower level and section 92C(1) of the Act provides for computation of ALP by one of the methods prescribed therein by applying most appropriate method and by taking the arithmetic mean of the margines of the comparable companies. According to the learned DRP, the functional comparability is the touch stone and not the volumes of turnover or profits. Accordingly, learned DRP decline to interfere with the observations of the learned TPO.

It is submitted before us by the learned AR in respect of Eclerx Services Ltd., that it is a KPO company deriving income from data analytics and customised process solution,s providing a broad suite of services including financial services like trade processing, reference data, accounting and finance expense management activities and sales marketing services like online operations and web analytics, business intelligence, data management and reporting etc. He further submitted that no segmental information in respect of various segments is not available. He further submitted that Infosys BPO Ltd., is a business giant with a turnover of 1312 crores whereas the assessee is of 214 crores, with huge brand value and asset base. Apart from this he submitted that on January, 4, 2012 Infosys BPO Ltd., acquired 100% of the voting interest in Portland Group Pty Ltd., a strategic sourcing and category management services provider based in Sydney.

Learned DR placed reliance on the observations in the orders of the authorities below.

We have gone through the record in the light of the submissions made on either side. There is no denial of the fact that these two entities were considered by a Co-ordinate Bench of this Tribunal for the assessment year 2008-09 in ITA No. 1875/Hyd/2012 and by order dated 17/04/2015, both these entities were not found to be comparable companies with the assessee on the ground of high end KPO services, supernormal profits huge brand value turnover and other diversified activities. For the assessment year 2009-10 and 2010-11, Eclerx Services Ltd., was exclusion from the comparison with the assessee on similar grounds. For the assessment year 2011-12, learned DRP found that these

Now coming to the request of ACE BPO Services Pvt. Ltd., and Datamatics Financial Services Ltd., which the assessee seeks to include in the list of comparables, the grievance of the assessee is that the order of the learned TPO does not decipher the reasons for their exclusion whereas learned DRP decline to retain them as comparables on the ground that the annual report was available in the segments for which the search process was conducted by the learned TPO or the same is available from the search conducted by the assessee. According to the learned DRP, the assessee failed to substantiate the functional comparability or the fulfilment of filters applied by in respect of ACE BPO Services Pvt. Ltd. For want of segmental information in the annual report, Datamatics Financial Services Ltd., was not considered.

It is submitted by the learned AR that ACE BPO Services Pvt. Ltd., is engaged in only revenue cycle management related activities for health

Having gone through the record in the light of the above submissions, we are of the considered opinion that it is a fit case to set aside the issue relating to these two comparables to the file of learned Assessing Officer/learned TPO and the assessee is directed to submit all the relevant records before the learned Assessing Officer/learned TPO. Ground No. 9 is accordingly treated as allowed for statistical purposes.

Ground No. 13 relates to the expenditure incurred towards management service fee and trade mark license fee which issue according to the learned AR was considered by a Co-ordinate Bench of this Tribunal in assessee’s own case for the assessment year 2011-12 in ITA No. 627 & 636/Hyd/2016 and by order dated 04/10/2021 it was restored to the file of learned Assessing Officer for fresh factual verification as per law by

Considering the similarity of the issue and view taken in the earlier assessment year by a Co-ordinate Bench in assessee’s own case, we are of the considered opinion that the interest of justice would be met by restoring this issue to the file of the learned Assessing Officer for fresh factual verification as per law by directing the assessee to submit all the relevant material before the learned Assessing Officer. Ground No. 13 is accordingly allowed for statistical purposes.

Coming to the last contested ground, namely, Ground No. 14 which relates to the prayer of the assessee to allow depreciation on software license fee at 60% instead of capitalizing the same and allowing 25% as depreciation.

On this aspect, learned TPO observed that the assessee failed to furnish any evidence to prove that the expenses were incurred in acquisition of software for the use of business, by filing the agreement and other evidences before the learned Assessing Officer/learned TPO. Learned DRP, therefore, held that mere submission without substantiating with evidence that the software was actually acquired and used for the purpose of business, such claim cannot be allowed.

On a perusal of the orders in assessee’s own case from assessment year 2008-09, we find that the Co-ordinate Benches allowed the depreciation at 60% on the software purchased by the assessee for their business purpose and it is evident from order in ITA No. 1875/Hyd/2012. Even in the order for the assessment year 2011-12 (supra), this issue was

In the result, appeal of assessee is treated as partly allowed for statistical purposes.