MORGAN STANLEY SOLUTIONS INDIA P.LTD,MUMBAI vs. DCIT RG 9(2), MUMBAI

Briefly the facts are, the assessee, a resident company, is a part of Morgan Stanley group and as a captive service provider, provides back office support services to group entities, worldwide. Thus, the services provided by the assessee are in the nature of information technology enabled services (ITES). In the year under consideration, the assessee had entered into international transactions with its overseas associated enterprises (AEs) by providing back office support services and has earned revenue of Rs.33,62,71,615/-. Assessee has benchmarked the transactions with the AEs by adopting transactional net margin method (TNMM) as the most appropriate method. For comparability analysis, the assessee selected 13 companies which was subsequently reduced to 7 with arithmetic mean of 16.91%. Since, the margin shown by the assessee was higher than the average margin of the comparables, the transaction with AEs was claimed to be at arm’s length. The transfer pricing officer, however, did not accept the benchmarking of the assessee. After analyzing the functionality of the assessee, he held that the services provided by the assessee are in the nature of knowledge process outsourcing (KPO) services which falls within the broad category of ITES/BPO services. Thus, he was of the view that the companies providing KPO services would be functionally similar to assessee; hence, have to be selected as comparables. Whereas, he observed, the assessee has excluded all KPO companies. Further, applying certain additional filters, he rejected almost all the comparables of the assessee. Having done so, the TPO proceeded to select comparables independently. In the process, he shortlisted the following companies as the final set off of comparables with average margin of 49.88%:- 1 Accropetal Technologies Limited (Segmental) 35.30 2 Coral Hubs Limited (earlier, Vishal Information 50.68 Technologies Limited)

Applying the average margin of 49.88% to the operating cost, the TPO determined the ALP at Rs.43,93,06,335/-. Thus, the resultant shortfall of Rs.10,30,34,720/- was proposed as adjustment to the ALP. Assessee contested the aforesaid adjustment before learned Commissioner (Appeals). After considering the submissions of the assessee, learned Commissioner (Appeals) excluded three comparables, viz. Accropetal Technologies Limited (Segmental), Mold-Tek Technologies Limited, and Triton Corp Limited, out of the comparables selected by the TPO while retaining the balance three. Being aggrieved, the assessee is before us.

Though, the assessee has raised multiple grounds on various aspects of the TP adjustment; however, at the time of hearing, learned counsel for the assessee restricted his argument to selection/rejection of certain comparables. 6. He submitted, the first appellate authority has accepted assessee’s contention that it is not providing KPO services. Therefore, he submitted, the companies which have been finally retained, being KPO companies, cannot be treated as comparable. He submitted, the benchmarking done by the assessee in the preceding three assessment years by characterizing it as an ITES/BPO company was accepted by the TPO. Therefore, there is no justifiable reason to treat the assessee as a KPO company. He submitted, before the merger with the present assessee, the merged company, Morgan Stanley Solutions India Pvt Ltd was carrying out the same services as is being carried out by the present assessee.

The learned departmental representative submitted, the assessee has not properly applied the filters which otherwise are applicable for selection of comparables. He submitted, the nature of services provided by the assessee would categorize it as a high end BPO service provider. He submitted, the comparables selected should be retained.

As regards inclusion of certain comparables selected by the assessee, the learned departmental representative submitted, Allsec Technologies and CG Vak Software & Exports Ltd are consistent loss making companies. He submitted, the reasons for which the companies have made loss are not forthcoming. He

In rejoinder, learned counsel for the assessee submitted, Allsec Technologies and CG Vak Software & Exports Ltd cannot be considered as consistent loss making company, as, they have incurred loss only in the current year, whereas, they have shown profit in the preceding two assessment years.

We have considered rival submissions and perused materials on record. As discussed earlier, the dispute before us is confined to selection/rejection of certain comparables. Before, we proceed to deal with the acceptability or otherwise of the comparables disputed before us, it is necessary to observe, the assessee, undoubtedly, provides back office support services to its group entities. The assessee has claimed itself to be a routine ITES/BPO service provider, whereas, the TPO has re-characterized the assessee as a KPO company and accordingly, has selected similar nature of companies. However, learned Commissioner (Appeals) has accepted assessee’s contention that it is not a KPO service provider. Admittedly, the department has not challenged the aforesaid decision of the first appellate authority. Thus, keeping in perspective the aforesaid factual position, we have to examine whether certain companies are comparables to the assessee or not.

At the outset, we will deal with the companies selected by the TPO, viz. eClerx Services Ltd, Coral Hubs Limited (Vishal Information Technologies Limited) and Crossdomain Solutions Limited. As far as eClerx Services Ltd and Crossdomain Solutions Limited are concerned, now it is fairly well settled that these two companies are KPO service providers. This has been held in a number of judicial precedents including the decision of the Hon’ble Delhi High Court in case of 6 ITA 6522/Mum/2014 Rampgreen Solutions Pvt Ltd vs Commissioner of Income Tax 377 ITR 533 (Del). In our view, learned Commissioner (Appeals) has made a fundamental error by including these two companies in spite of the fact that he himself was satisfied that the assessee is not a KPO service provider. As regards Coral Hubs Limited (earlier, Vishal Information Technologies Limited), it is a fact on record that it has abnormally low employee cost, which, pre-supposes that most of the work of this company is outsourced to third party vendors. Whereas, assessee itself provides services without outsourcing. Therefore, the business model of the company is completely different from the assessee. Though, it may be a fact that in the TP study analysis, the assessee has included Vishal Information Technologies Limited as a comparable, may be, due to insufficient data available in public domain, however, as has been held in a number of judicial precedents including the decision of the Hon’ble jurisdictional High Court in case of Rampgreen Solutions Pvt Ltd vs CIT (supra), due to its different business model the company cannot be treated as comparable. Therefore, the aforesaid three companies cannot be treated as comparable to the assessee.

As regards assessee’s contention regarding inclusion of three comparables, viz. Allsec Technologies, CG Vak Software & Exports Ltd and R Systems International Ltd, the primary objection of the learned departmental representative is, Allsec Technologies and CG Vak Software & Exports Ltd are consistent loss making companies. However, on perusal of material on record including the statement of fact filed before learned Commissioner (Appeals), we have noticed that both these companies have shown profit in the preceding two assessment years. Only in the current assessment year, the companies have reported loss. Therefore, they cannot be considered as consistent loss making

As regards the rejection of four companies, it is the submission of learned counsel of the assessee that the functions of Eclerx Services Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) has been held to be not comparable to the assessee by the ITAT for the assessment year 2007-08. In this regard, we find that ITAT in the aforesaid order has observed as under: “32. As noted earlier the Id. AR for the assessee submitted that the assessee submits that Eclerx Services Ltd. has not considered as a comparable in earlier years. Eclerx Services Ltd. is a Knowledge Process Outsourcing (KPO) Service provider which is not comparable to assessee; assessee is engaged in providing back office support services. In support of his submission, the Id. AR of the assessee relied upon the decision of Delhi High Court in Rawpgreen Solution (P.) Ltd. v. (77 (20 151 377 ITR 533 (Delhi). The TPO included this comparable by taking his view that this company is in date process and analytical services. The Id. CIT(A) confirmed the action of the TPO by taking his view that this comparable company is into the health care receivable management and therefore renders ITeS services. The Hon'ble Delhi Court in Rampgrecn Solution (P.) Ltd. (supra} held entities rendering voice call center 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. v, ACIT (supra) on considering similar contentions excluded this comparable. 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 analysis arc correct. We have noted that, though the Id. AR has relied upon a number of decisions of Tribunal/co-ordinate bench. We have noted that in a recent decision of Tribunal in Wills Processing Services (I) (P.) Ltd. (supra) on comparability, the Tribunal held as under:

The Transfer Pricing Officer has not mentioned the specific reasoning in rejecting the above comparable. While discussing his general reasoning for election/rejection, the transfer pricing officer mentioned that he is only accepting comparables where the current year data are available. In this regard, we note that though initially the assessee had submitted two-year data, subsequently, it has duly submitted the current year data. The transfer pricing officer has also mentioned that he is rejecting the persistent loss making companies. Though some of these companies have suffered loss in the current assessment year the average of two years showed the robust positive figure. Hence, it cannot be said that these are persistently loss making

Thus, as could be seen, in parallel proceedings undertaken in case of the successor company having identical business model, the Tribunal has already decided issues relating to selection/rejection of comparables as are disputed in the present appeal. Thus, facts being identical, the aforesaid decision of the co- ordinate bench would squarely apply.

In view of the aforesaid, we direct the assessing officer to include R System International Ltd, Allsec Technologies and CG Vak Software & Exports Ltd as comparables. Whereas, he is directed to exclude eClerx Services Ltd, Coral Hubs Limited (earlier, Vishal Information Technologies Limited) and Crossdomain Solutions Limited from the list of comparables. After completing the aforesaid exercise, he must compute the ALP of the international transactions. Grounds 4 and 6 are allowed. Whereas, other grounds being purely of academic interest are dismissed. 16. In the result, appeal is allowed as indicated above. Order pronounced on 12/08/2021. Sd/- sd/- (MANISH BORAD) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dt : 12/08/2021 Pavanan