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Income Tax Appellate Tribunal, DELHI ‘I-1’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI N.K. CHOUDHARY
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the assessee is preferred against the order of the Commissioner of Income Tax [Appeals] – 19, New Delhi dated 15.05.2017 pertaining to assessment year 2011-12.
Ground Nos. 1 and 2 are general in nature and need no adjudication.
Ground Nos. 3 to 15 relate to TP adjustment. The assessee prays for exclusion of certain comparables.
Ground No. 16 relates to calculation of assessee’s PLI.
At the very outset, the ld. counsel for the assessee stated that the assessee contends for the exclusion of four comparables from the final set of comparables. It is the say of the ld. counsel for the assessee that all the comparables were considered by the Tribunal in assessee’s own case in earlier year. Copy of the order of the Tribunal was supplied.
6. Per contra, the ld. DR strongly supported the findings of the TPO.
It is the say of the ld. DR that functional profile cannot be the same in two cases and, therefore, the comparables used by the TPO are good comparables.
We have given thoughtful consideration to the orders of the authorities below. We have also perused the orders of the co-ordinate bench in assessee’s own case in dated 01.11.2019 for A.Y 2012-13 and ITA No. 6310/DEL/2012 and ITA No. 1466/DEL/2015 for A.Ys 2008-09 and 2010-11.
8. The facts on record show that the appellant company carries out IT enabled services in the form of research activities according to the terms of its agreement with its AE. The research carried out by the assessee is driven by business information, market research and intellectual property research. Normally, the client executives operating from overseas formed an interface between the client and the assessee and the deliverable was typically in the form of research report that is forwarded directly to the client under the supervision and post a quality assurance by the AEs. Reports and research studies prepared by the assessee are owned by the clients only. Operations of the assessee primarily comprised of the following segments:
a) Business information b) Investment research and financial analytics c) Market research d) Intellectual Property
9. The international transactions entered into during the year are:
(a) Provision of services – Back Office Operations [research services] Rs. 1,29,00,46,963/- (b) Cost reimbursement received/ Receivable Rs. 2,44,47,940/-
TNMM was taken as the most appropriate method and assessee’s profit level indicator was taken at 17.65% and arithmetic mean of comparables was 14.38%. The TPO was not satisfied with the comparables used by the assessee and after considering the objections regarding comparables and their margin calculations, the following set of comparables were taken by the TPO for determination of ALP:
Sl. No Name of the Company OP/OC 1 Accentia Technologies Ltd 29.18% 14.36% 2 Acropetal Technologies Limited (Segment) 9.77% 3 e4e Healthcare Business Services Pvt Ltd 56.82% 4 Eclerx Services Ltd ICRA Techno Analytics Limited (Segment) 25.24% 5 6 Infosys BPO Ltd 17.86% 7 Jindal intellicom Ltd. 13.70% TCS E-serve Limited 69.31% 8 AVERAGE 29.53%
Accordingly, ALP and adjustment was computed as under:
Operational cost 1,164,795,745 Arm's Length Price at a Margin of29.53% 1,508,759,928 Price Received 1,340,917,228 105% of the Price Received 1,407,963,089 Proposed Adjustment ii/s 92CA 167,842,700
The assessee agitated the matter before the ld. CIT(A) but without any success.
Before us, the ld. counsel for the assessee stated that she wants the following four comparables to be excluded:
(i) Accentia Technologies Ltd (ii) Infosys BPO Ltd (iii) TCS E-serve Limited (iv) Eclerx Services Ltd
14. It is the say of the ld. counsel for the assessee that all these companies were excluded by the co-ordinate bench in assessee’s own case in A.Y 2012-13.
15. We find force in the contention of the ld. counsel for the assessee. The relevant findings of the co-ordinate read as under:
“i) Accentia Technologies Ltd.
8. This comparable chosen by the TPO was objected by the assessee before the TPO on the ground that, firstly, it is functionally not similar; secondly, presence of IPRs, thirdly, extraordinary event of acquisition of a software development company during the financial year 2011-12; and lastly, there are no segmental details. This company is into medical transcription, medical billing, medical coding, claims processing and software development implementation services. Ld. TPO held that since the comparables chosen by him are providing ITeS services similar to the assessee and under TNMM brought comparability has to be seen, therefore it is a fit comparable. He observed that, this company is into health care receivable cycle management, which is pre-dominantly under ITES. The entire functions of medical transcription, coding billing and collection is one complete segment and all these various specific segments are closely related to each other. As far as developing of proprietary software products, TPO observe that there is no reference of any revenue from the software products in the annual report. Thus, he held that same is a good comparable.
8.1 Before us the Ld. Counsel for the assessee submitted that from the perusal of the P & L Account it can be seen that revenue’s from operations are from different sources i.e. medical transcription, billing and coding and EMR and SAAS. However, the annual report states that it has only one segment. Thus, there is no segmental detail for various streams of revenue. She further submitted that this company is into medical transcription, coding and medical billing services and also software development services and also has developed its own products such as, IMTAS, IRTS, IAMS, IPMS. Apart from that, she submitted that there were extraordinary events in A.Y. 2012-13 in the form of amalgamation and acquisition, therefore, due to such extraordinary event this comparable cannot be included in this year. She further pointed out that in the assessment year 2008-09, the Tribunal in assessee’s own case following the principle laid down by the Hon’ble Delhi High Court in the case of CIT vs. Ameriprise India (P) Ltd. in has upheld the exclusion of the said comparable. Apart from that, the Tribunal in case of sister concern, i.e., Evalueserve.com SEZ which has a similar function profile has directed to exclude the said comparable; and this judgment of the Tribunal has been upheld by the Hon’ble Delhi High Court also.
8.2 On the other hand, Ld. CIT-DR strongly relied upon the order of authorities below and submitted that the activities carried out by Accentia Technologies Ltd. is nothing but ITeS services and all the three functions are inter related and therefore, no separate segment is required to be seen. Under the TNMM, if a comparable company is carrying out similar functions which are in the category of ITeS, then same cannot be excluded on such minute functional difference. He submitted that assessee is also rendering KPO services through professionals and therefore, Accentia technologies Ltd. which is into health care and KPO therefore, it is a good comparable.
We have heard the rival submissions and also perused the relevant finding given the impugned orders as well as the material referred before us. Accentia Technologies Ltd. is a company which is providing medical transcription services which encompasses process of prescribing or converting voice recorded reports as detected by physicians or other health care professionals who vet the actual transcription. Apart from that it is providing medical coding, billing and collection services. Medical coding is related to procedures of financial assessment which help insurance companies and Government companies. Medical billing is described as medical practice management which involves bill on insurance companies by hospitals for on behalf of the personnel for medical care expenses, which are majorly from US markets. No doubt Eclerx is providing kind of ITeS services which requires special skills,
but what is relevant to analyse is the nature of business and the functions carried out for earning the revenue and profitability. Highly specialized and skilled services definitely have higher profitability. Further assets deployed in the form of human resources and other tangible and intangible and risks undertaken also impacts the margins. Apart from that, from the perusal of the annual accounts of the said company it is seen that it has shown revenues from various operations separately, like from billing, coding, medical discrete reportable transcription and medical transcription. However, for various streams of income there are no segmental details or segmental account. In fact it has been reported that there is only one segment called as health care receivable management. As pointed out by the Ld. Counsel this company is also into software development services and also own proprietary products like IMTAS, IRTS, IAMS, IPMS, which is used for various functions. Due to these factors and comparison of functional profiles, the Tribunal in assessee’s own case for A.Y. 2008-09 has directed to exclude this company. Further, in this year there was acquisition of software development company namely, Medex Healthcare Global which is into development of software related to EMR and SAAS.
9.1 Other important fact is that the Tribunal in the case of sister concern, i.e. Evalue SEZ which is having identical functional profile has directed to exclude the said comparable after observing as under :-
“11. We have carefully considered the rival contentions as well as perused the annual accounts of the comparables. At page No. 1172, we have perused schedule 10 of the notes on account wherein it has mentioned that w.e.f. 01.04.2008 a company which was engaged in the business of medical transcription and coding has been amalgamated with the comparable. It is further stated figures for this year are related to amalgamating company also. The profit and loss account of the comparable shows that sales and services of the company are according to Schedule No.
There is no change in the income segment of the assessee after amalgamation as amalgamating company was also having the same business, hence, there is no impact of amalgamation on the company with respect to functions performed. Therefore, merely there is an amalgamation during the year it cannot be excluded as comparable as it does not change the functional profile of the comparable company. However, at page No. 27 the Ld TPO has confirmed that this company is engaged in the business of healthcare cycle management which comprises of medical transcription, coding and billing and collection. The medical transcription business requires special skill and also employs medical professional who finally vet the actual transcription. Further medical coding is related to procedure of financial assessment. Medical billing is maintenance of financial accounts on insurance company etc for the purposes of recovery of sums by Doctors. Therefore, medical transcription is a service which requires employment of medical professional also. However, the medical coding the billing may not require higher technical skill. In annual report the company has mentioned that it has only one segment and therefore it does not have segmental results pertaining to medical transcription vis-a-vis coding and billing activity. According to us the medical transcription itself cannot be said to be comparable with the functions performed by the assessee. However, the medical coding and billing activities are similar to the functions performed by the assessee. But, in absence of the segmental accounts with respect to medical coding and billing activites this comparable cannot be included. Hence, TPO is directed to exclude it.”
9.2 This decision of the Tribunal has also been upheld by the Hon’ble High Court. Since functional profile and other comparability factors of the assessee as well as comparable company Accentia Technologies Ltd. remains the same, therefore, we do not find any reason deviate from earlier year orders of the Tribunal as well as the judgment of Hon’ble Delhi High Court. Accordingly, Accentia Technologies Ltd. is directed to be excluded.
Regarding this comparable, TPO has rejected all the contention of the assessee that this company has high brand value and intangibles and it is a giant company in terms risk profile and nature of services and held that, since it is also into providing ITeS same should be included.
15. After hearing both the parties, we find on perusal of the material placed on record that Infosys is not only high turnover company, but also has a high brand value and intangibles as compared to the assessee which has very insignificant intangibles. Apart from that, Infosys in terms of risk profile, skill, nature of services, revenue, and ownership of brand proprietary products clearly outweighs the FAR analysis comparison with the assessee. Because of these factors, Hon’ble Delhi High Court in several decisions has held that giant companies like Infosys and Wipro cannot be compared with low risk or capital service provider. The lists of said judgment are as under:- 1) Delhi High Court-PCIT vs. Oracle (OFSS) BPO Services P. Ltd. ITA No. 124/2018)
2) Delhi High Court-PCIT vs. New River Software Services P. Ltd. (ITA No. 924/2016) order dated 22.08.2017-
3) Delhi High Court-CIT vs. Agnity India Technologies P. Ltd. (2013) 219 taxman 26 (Del)
4) Delhi High Court-CIT vs. Agnity Indian Technologies P. Ltd. (ITA No. 447/2018)
5) Delhi High Courtin PCIT vs. Evalueserve SEZ (Gurgaon) P. Ltd. order dated 26.02.2018
6) Delhi High Courtn in PCIT vs. Evalueserve SEZ (Gurgaon) P. Ltd. order dated 29.08.2018.
15.1 From the perusal of the annual report of the said company it is seen that it is amongst the top ten BPO of the country and has around 18,383 employees with huge advertisement expenditure and marketing of Rs. 8.73 crores as compared to the assessee which has 1163 employees and undertakes no such expense; and the turnover of Infosys is more than Rs.1312 crores as compared to assessee’s turnover which is at Rs. 144 crores. Further, in assessee’s own case as well as in the case of sister concern, this Tribunal has excluded Infosys BPO based on these comparability factors. Looking to the scale of operations and presence of high valuable assets both tangible and intangible, this company has consistently been held to be incomparable with captive service provider companies. Accordingly, we direct the exclusion of this comparable. vi) TCS E-Serve Ltd.
16. The TPO has included this comparable holding that it carries out the function of ITES and high turnover and brand value is not relevant factor and brand expenses is only Rs. 3.67 crores.
17. After hearing both the parties and perusal of material placed on record, we find that TCS E-serve Ltd. like Infosys BPO is a giant company which has high brand value and intangibles and in terms of risk profile, skill, nature of service, revenue etc. this comparable has been rejected in various
judicial rulings. The turnover of TCS is more than Rs. 1578 crore and this company is having huge assets and is under taking high risk which have direct impact on turnover and in profitability. If a company is having huge asset base, brand value, goodwill and presence in global market with significant R & D, then it cannot be compared with a company which is purely captive service provider in ITeS/BPO, having low risk and insignificant assets. Even the deployment of human resources shows that TCS has 14,785 employees whereas the assessee has 1163 employees. This factor itself shows that in the terms of human resources, there is huge difference in the assets deployed. Now there is latest judgment of Hon’ble Delhi High Court dated 24th July, 2019 in the case of M/s. Avaya India Pvt. Ltd. vs. ACIT in which had considered the comparability of TCS E-serve Ltd. and TCS serve International Ltd. with the company providing ITeS services. The relevant substantial question of law admitted by the Hon’ble High Court reads as under :-
“Whether the ITAT was justified in upholding the order of the TPO and the DRP in not excluding M/s. TCS E-Serve Limited; M/s. TCS E-Serve International Limited from the list of comparables for the purposes of determining the arms- length price of the international transactions involving the Assessee?
17.1 Hon’ble High Court has dealt this issue in detail after observing as under:-
“Analysis and reasons
The above submissions have been considered. In a large number of decisions this Court has emphasized, that for there to be reliable benchmark studies for determining ALP not only the comparables have to be functionally similar but should have similar business environment and risks as the tested party. A detailed exposition of the legal position with specific reference to Rule 10 B (2) of the Income Tax Rules, 1962 is found in this Court‟s decision in Chryscapital Investment Advisors (India) Pvt. Ltd. v. DCIT 376 ITR 183 (Del) as under:
"30. The reasoning adopted in various judgments noticed above, shows that functional analysis seeks to identify and compare the economically significant activities and responsibilities undertaken, assets used and risks assumed by the parties to the transaction. Quantitative and qualitative filters/criteria have been used in different cases to include or exclude comparables. The intuitive logic for excluding big companies from the list of comparables while undertaking the FAR analysis of a smaller company is attractive, given that such big companies provide services to diverse clientele, perform multifarious functions, often assume risks and employ intangible assets which are specially designed, unlike in the case of smaller companies. The bigger companies have an established reputation in the segment, are well known and employ economies of scale to a telling end. On the other hand, these obvious - and apparent features should not blind the TPO from the obligation to carry out the transfer pricing exercise within the strict mandate of Section 92 C and Rules 10-A to 10-E.
31. Arm's length price determination, in respect of an international transaction has necessarily to confirm to the mandate of Rule 10B. In this case, the method followed for determining the arm's length price of the international transaction adopted by the assessee and the revenue is the TNMM. The comparability of an international transaction with an uncontrolled transaction has, in such cases, to be seen with reference to the functions performed, taking into account the assets employed or to be employed and the risks assumed by the respective parties to the transaction as per rule 10B(2)(b). The specific characteristics of the property transferred or services provided (contemplated by Rule 10B(2)(a)) in either transactions may be secondary, for judging comparability of an international transaction in the TNMM, because the price charged or paid for property transferred or services provided and the direct and indirect cost of production incurred by the enterprise in respect of property transferred or services provided go into reckoning comparability analysis in the transaction methods, i.e. the comparable uncontrolled price, resale price and cost plus whereas the profit based method such as transactional net margin method takes into account, the net margin realised. In TNMM, comparability of an international transaction with an uncontrolled transaction is to be seen with reference to functions performed as provided in sub-rule (2)(b)
of rule 10B read with sub-rule (1)(e) of that rule after taking into account assets employed or to be employed and the risks assumed by the respective parties to the transaction. As noticed earlier, Rule 10B(3) mandates that a given or select uncontrolled transaction selected in terms of Rule 10B(2) "shall be comparable to an international transaction" if none of the differences, if any, between the compared transactions, or between enterprises entering into such transactions "are likely to materially affect the price or cost charged or paid or the profit arising from such transaction in the open market or reasonably accurate adjustment can be made to eliminate the effects of such difference."
Now, the sequitur of Rule 10B (2) and (3) is that if the comparable entity or entity‟s transactions broadly conform to the assessee‟s functioning, it has to enter into the matrix and be appropriately considered. The crucial expression giving insight into what was intended by the provision can be seen by the use of the expression: "none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, .. such transactions in the open market." The other exercise which the TPO has to necessarily perform is that if there are some differences, an attempt to "adjust" them to "eliminate the material effects" should be made:
"(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences."
Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile - in respect of the activity in question can be viewed independently from other activities- cannot be subject to a per se standard of loss making company or an "abnormal" profit making concern or huge or "mega" turnover company. As explained earlier, Rule 10B (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B(1), while judging comparability. Rule 10B (3) on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company
- otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature - such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made.
The Court is also aware of the factors mentioned in Rule 10B (2), i.e. characteristics of the service provided, functions performed taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; contractual terms of the transactions indicating how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and the Government orders in force; costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. These elements comprehend the similarities and dissimilarities; clause (f) of Rule 10C(2) specifically provides that "the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions and the nature, extent and reliability of assumptions required to be made in application of a method" have to be taken into consideration by the TPO.
36. This Court holds that in the facts of the present case, the assessee was incorrect, both in its reliance placed upon previous years‟ data as well as the manner of such reliance. First, the assessee‟s justification for relying on such data is the volatility in the comparables‟ profit margins and the consequent inability to transact at a consistent ALP. However, this is not warranted herein. Whilst there may be a wide fluctuation in the profit margins of comparables from year-to- year, this by itself does not justify the need to take into account previous years‟ profit margins. The transfer pricing
mechanism provided in the Act and the Rules prescribes that while determining the ALP, the arithmetic mean of all comparables is to be adopted. This is to offset the consequence of any extreme margins that comparables may have and arrive at a balanced price. Similarly, the wide fluctuations in profit margins of the same entity on a year-to-year basis would be offset by taking the arithmetic mean of all comparables for the assessment year in question. In any case, in the event that the volatility is on account of a materially different aspect incapable of being accounted for, the analysis under would Rule 10B (3) would exclude such an entity from being considered as a comparable. Secondly, as regards the manner of using previous years‟ data, the assessee has taken the arithmetic mean of the comparables‟ profit margins for the assessment year in question and two previous years. This Court disagrees. The proviso to Rule 10B(4), read with the sub-rule, itself indicates that the purpose for which previous years data may be considered is - analysing the comparability of an uncontrolled transaction with an international transaction. It does not prescribe that once an uncontrolled transaction has been held to be a „comparable‟, in order to obviate an apparent volatility in the data, the arithmetic mean of three years (the assessment year in question and two previous years) may be taken. That would amount to assigning equal weight to the data for each of the three years, which is against the mandate of Rule 10B(4). The use of the word "shall" in Rule 10B(4) and, noticeably, "may" in the proviso, implies that the relevant assessment year‟s data is of primary consideration, as opposed to previous years‟ data.
This Court proceeds on the basis that there is sufficient guidance and clarity in Rule 10B on the principles applicable for determination of ALP. These include the various factors to be taken into consideration, approach to be adopted (functions performed, taking into account risks borne and assets employed, size of the market, the nature of competition, terms of labour, employment and cost of capital, geographical location etc). The extent of accurate adjustments possible, too, is a factor to be considered. Rule 10B (3) then underlines what the ALP determining exercise entails, if there are dissimilarities which materially affect the price charged etc: the first attempt has to be to eliminate the components which so materially affect the price or cost. In other words, given the data available, if the distorting factor can be severed and the other data used, that course has to be necessarily adopted." (all emphasis in original)
In Rampgreen Solutions Pvt. Ltd. v. CIT (2015) 377 ITR 533 this Court further discussed Rule 10-B (2) of the IT Rules. This Court pointed out how although both the Knowledge Process Outsourcing (KPO) services and the Business Process Outsourcing (BPO) services fall within the broad definition of ITES, companies engaged in KPO services cannot be used as comparables for the TP study of a company engaged in providing BPO services. In that process, it was observed by this Court as under:
"20. In order for the benchmarking studies to be reliable for the purposes of determining the ALP, it would be essential that the entities selected as comparables are functionally similar and are subject to the similar business environment and risks as the tested party. In order to impute an ALP to a controlled transaction, it would be essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in all material aspects that have any bearing on the value or the profitability, as the case may be of the transaction. Any factor, which has an influence on the PLI, would be material and it would be necessary to ensure that the comparables are also equally subjected to the influence of such factors as the tested party. This would, obviously, include business environment; the nature and functions performed by the tested party and the comparable entities; the value addition in respect of products and services provided by parties; the business model; and the assets and resources employed. It cannot be disputed that the functions performed by an entity would have a material bearing on the value and profitability of the entity. It is, therefore, obvious that the comparables selected and the tested party must be functionally similar for ascertaining a reliable ALP by TNMM. Rule 10B (2) of the Income Tax Rules, 1962 also clearly indicates that the comparability of controlled transactions would be judged with reference to the factors as indicated therein. Clause (a) and (b) of Rule 10B (2) expressly indicate that the specific characteristics of the services provided and the functions performed would be factors for considering the comparability of uncontrolled transactions with controlled transactions. ......
As indicated above, in order to determine the ALP in relation to a controlled transaction, the analysis must include comparables which are similar in all aspects that have a material bearing on their profitability. Paragraph 1.36 of the "OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" published in 2010 (hereafter 'OECD Guidelines') indicates the "comparability factors" which are important while considering the comparability of uncontrolled transactions/entities with the controlled transactions/entities. Sub-rule (2) of rule JOB of the Income Tax Rules, 1962 also mandates that the comparability of international transactions with uncontrolled transactions would be judged with reference to the factors indicated under clauses (a) to (d) of that sub-rule, which are similar to the comparability factors as indicated under the OECD Guidelines. .....
As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP"."
17. The above dictum was followed and reiterated in Avenue Asia Advisors Pvt. Ltd. v. Dy CIT (2017) 398 ITR 320 (Del) where this Court, inter alia, observed that "though in the TNMM method there is sufficient tolerance, mere broad functionality is by itself insufficient."
18. On the aspect of exclusion of comparables that have a high economic upscale viz., Infosys, TCS and Wipro, particular reference may be made to the decision of this Court in PCIT v. BC Management Services Pvt. Ltd. (supra) where a particular reference was made to TCS E-serve as under:
"13. ...The third comparable that the AO/TPO excluded is TCS E-serve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value: that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld."
19. The same decision also noted that one reason for exclusion was the "unavailability of the segmental data" for the above comparable.
20. In M/s. Oracle (OFSS) BPO Services Pvt. Ltd. (decision dated 5th February 2018 in ITA 124 of 2018) while upholding the exclusion of M/s.Wipro Ltd. from the list of comparables it was noted that the ITAT took into account the Related Party Transactions („RPT‟).The filter adopted was to exclude comparables with unrelated party transactions equal to or in excess of 75% of their business. The ITAT did that on the basis that Wipro Ltd. had a significant brand presence in the market and could, therefore, not be deemed to be a comparable entity. This Court explained the RPT filter as under:
"The RPT filter, is relevant and fits in with the overall scheme of a transfer pricing study which is premised primarily on comparing light entities having similar if not identical functions. Therefore, if a particular entity predominantly has transactions with its associate enterprise - in excess of a certain threshold percentage, its profit making capacity may resulted in a distorted picture, either way."
A reference may next be made to the decision in The Principal Commissioner of Income Tax-3 v. Evalueserve Sez (Gurgaon) Pvt. Ltd. (supra) where a reference is made to the earlier decision to the BC Management Services Pvt. Ltd. (supra). This decision dealt with the exclusion of three specific comparables, which have also involved in the present case namely M/s.TCS E-Serve Ltd., M/s.TCS E-Serve International Ltd. and M/s. Infosys BPO Ltd. This Court upheld the exclusion of all three comparables and in particular since the entities had "a high brand value and therefore were able to command greater profits; besides they operated on economic upscale."
The Revenue‟s appeal against the same Assessee for AY 2011-2012 against another order of the ITAT excluding TCS E- Serve International Limited, Infosys BPO Limited from comparables met the same fate. In its decision dated 29th August, 2018 the Court referred to the earlier decision dated 26th February, 2018 which again pertained to AY 2010-2011. Reference was again made to the decision in BC Management Services Limited.
It appears therefore that this Court has consistently upheld decisions of the ITAT excluding both these very comparables. The ITAT itself appears to have taken a consistent view in a large number of cases excluding these two comparables and its decisions have been upheld by this Court. Illustratively reference may be made to the decision of the Tribunal in Vertex Customer Services India Private Limited v. DCIT (2017) 88 Taxmann.Com 286 (Del- Tri), Stryker Global Technology Centre Private Limited v. DCIT (2017) 87 Taxmann.com 43 (Del-Tri), Samsung Heavy Industries Private Limited v. DCIT (2017) 84 Taxmann.com 154 (Del-Tri) and Equant Solutions India Private Limited v. DCIT (2016) 66 Taxmann.com 192 (Delhi-Tribunal).
All of these decisions pertained to AY 2010-2011. What weighed invariably is the fact that both companies had huge turnovers when compared to the tested entity. Both entities had close connection of the Tata Group of Companies and TCS E-Serve International had given a huge amount to TCS towards brand equity. Further there was no segmental bifurcation between the transaction processing and technical services. The assets employed by TCS E-Serve along with huge intangibles in the form of brand value were found to have a definite considerable effect on its PLI. These factors vitiated its comparability under the FAR analysis with the tested company, which could be a capital service provider without much intangible and risks.
In this context it requires to be noted that the ITAT also referred to the decision of this Court CIT v. Agnity India Technologies Private Limited (2013) 36 Taxmann.com 289.
The Court may also note that the Karnataka High Court has in PCIT v. Softbrands (2018) 406 ITR 513 (Kar) noted as under:
"48. The Tribunal of course is expected to act fairly, reasonably and rationally and should scrupulously avoid perversity in their Orders. It should reflect due application of mind when they assign reasons for returning the particular findings.
For instance, while dealing with comparables of filters, if unequals like software giant Infosys or Wipro are compared to a newly established small size Company engaged in Software service, it would obviously be wrong and perverse. The very word "comparable" means that the Group of Entities should be in a homogeneous Group. They should not be wildly dissimilar or unlike or poles apart. Such wild comparisons may result in the best judgment assessment going haywire and directionless wild, which may land up the findings of the Tribunal in the realm of perversity attracting interference under section 260-A of the Act."
There is merit in the contention of the Assessee that the scale of operations of the comparables with the tested entity is a factor that requires to be kept in view. TCS E-Serve has a turnover of Rs.1359 crores and has no segmental revenue whereas the Assessee’s entire segmental revenue is a mere 24 crores. As observed by this Court in its decision dated 5th August 2016 in ITA 417/2016(PCIT v. Actis Global Services Private Limited) "Size and Scale of TCS‟s operation makes it an inapposite comparable vis-a- vis the Petitioner." As already pointed out earlier there is a closer comparison of TCS E-Serve Limited with Infosys BPO Limited with each of them employing 13,342 and 17,934 employees respectively and making Rs.37 crores and Rs.19 crores as contribution towards brand equity. When Rule 10(B) (2) is applied i.e. the FAR analysis, namely, functions performed, assets owned and risks assumed is deployed then brand and high economic upscale would fall within the domain of "assets" and this also would make both these companies as unsuitable comparables.
The Director’s report of TCS E-Serve Limited bears out the contention of the Assessee that both entities have been leveraging TCSs scale and large client base to increase their business in a significant way. The submission that the two comparables offer an illustration of "an identical transaction being conducted in an uncontrolled manner" overlooks the effect of the Tata brand on the performance of the impugned comparables. The question was not merely whether the margins earned by the Tata group in providing captive service to the Citi entities were at arm‟s length. The question was whether they offered a reliable basis to re-calibrate the PLI of the Assessee whose scale of operations was of a much lower order than the two impugned comparables. The mere fact that the transactions were identical was not, in terms of the law explained in the above decisions, either a sole or a reliable yardstick to determine the apposite choice of comparables.
For all of the aforementioned reasons, the Court finds merit in the contention of the Assessee that both the impugned comparables viz., TCS E- Serve Limited and TCS E- Serve International Limited ought to be excluded from the list of comparables for the purposes of determining the ALP of the international transactions involving the Assessee and its AEs.”
18. Respectfully following the aforesaid principle of Hon’ble Jurisdictional High Court which applies in the present case also we direct the TPO to exclude the said comparable.
Revenue.” 7. 7.5 When on similar facts and circumstances, Eclerx has been found to be incomparable with the assessee, which finding has been affirmed by Hon’ble Delhi High Court and there is no change in the material facts and circumstances in this year, then we do not find any reason to deviate from such finding. Accordingly, respectfully following the same, we direct the TPO/ AO to exclude Eclerx from comparability list. “
16. As there is no change in the functional profile of the assessee, facts being same, we do not find any reason to differ from the findings of the co-ordinate [supra]. Accordingly, we direct the TPO to exclude the aforementioned comparables from the final set of comparables.
Ground Nos. 3 to 15 and all other grounds relating to TP adjustment are allowed.
Next grievance relates to recalculation of PLI of the assessee by the TPO.
We find that a similar adjustment was considered by the co- ordinate bench in assessee’s own case in and 1466/DEL/2015 for A.Y 2008-09 and 2010-11. Relevant findings of the co-ordinate bench read as under:
“28. As relates to Ground No. 6, the Ld. AR submitted that TPO has erred in re-calculating Assessee's PLI from 20.17% to 16.17%. The same is not acceptable to the assesse as per the Ld. AR. The Ld. AR submitted that assesse in its TP Study at page 499, 485 of PB Vol. 2 has stated that Rs. 3,06,71,861/- was incurred on NOIDA unit where no operation was done but fixed cost had to be incurred. Hence, this is a non-operating expense. However, TPO stated that this is an operating expense because according to him the AE should have reimbursed this expense. The Ld. AR submitted that this is a non-operating expense as these expenses related to Noida unit which is not operational during the year. Further, the Ld. AR pointed out that EVS India had two STPI units in Gurgaon and Noida respectively. However, there were no operations in the Noida unit. The said unit was in the process of shutting down due to certain business reasons. EVS India did not undertake any operations in the Noida unit while it continued to incur the fixed costs pertaining to this unit. These costs relate to rent and hire charges, depreciation, insurance, security charges, repair and maintenance, etc. The Ld. AR further submitted that the Assessee did not carry out operations in the Noida unit and the fixed costs incurred were unproductive costs and were not billed to the parent company. Thus, as the expenses incurred for the Noida unit were non- recurring and extraordinary in nature, these expenses have been excluded from the operating profit computation. This was mentioned in TP Study at page 499, 485. Also detailed submissions in this regard have been filed before TPO and DRP. The Ld. AR submitted that the comparables did not incur such extraordinary / non recurring expenses and hence for a like to like comparison, it is necessary to adjust such abnormal expenses from the computation of operating profit. The Ld. AR submitted that the very basis of Transfer Pricing Regulations is to undertake an exercise of comparability to eliminate differences, if any, by a suitable adjustment. The Ld. AR relied upon Rule 10B(3) and Rule 10B(1)(e)(ii) of the Income Tax Rules, 1962 as well as relied upon Safe Harour Rules notified by CBDT, which is now incorporated as Rule 10TA of the Income Tax Rules, 1962. The said Rules state that "operating expense" means the cost incurred in relation to international transaction. This fixed cost of NOIDA unit is not in relation to international transaction as this year business and operations of the Assessee were carried out only in the GURGAON unit and there were no operations in the NOIDA Unit and thus all costs that were incurred in relation to the international transaction, were incurred in the GURGAON unit. These fixed cost of NOIDA unit has no relation to providing of services to the AE. The Ld. AR submitted that it specifically refers to expenses incurred in course of normal operations and excludes extra- ordinary expenses and other expenses not relating to normal operations of the assesse. Thus, a bare reading of Safe Harbour Rules states that the intent is to exclude such extra-ordinary expenses which have no corelation with day-to-day operations. Further, the Ld. AR pointed out that TPO at page 29 states that these Safe Harbour Rules are applicable and applies them when determining the PLI of the comparables. Hence, the Ld. AR submitted that TPO must apply these Safe Harbour Rules when determining the PLI of the Assessee also. The Ld. AR relied upon the following judgments-
•Marubeni India (P.) Ltd. v. DIT 120131 354 ITR 638/215 Taxman 122 (Maq.)/33 taxmann.com 100 (Delhi)- Delhi High Court • CIT vs. Transwitch India (P.) Ltd Delhi High Court • HOV Services Ltd. vs. JCIT [2016] 73 taxmann.com 311 (Pune - Trib.) • HCL Technologies BPO Services Ltd. v. Asstt. CIT 120151 60 taxmann.com 186/69 SOT 571 (Delhi-Trib) • Dy. CIT v. Exxon Mobil Gas (India) (P.) Ltd. [20151 152 ITD 220/120141 51 taxmann.com 256 (Delhi-Trib) • Transwitch India (P.) Ltd. v. Dy. CIT [20121 21 taxmann.com 257/53 SOT 151 (Delhi-Trib)
29. The Ld. AR submitted that Marubeni India (P.) Ltd. v. DIT (2013) 354 ITR 638- Delhi High Court is directly on this issue wherein the Hon'ble Delhi High Court held that expenditure for closure of its India units would represent
abnormal cost and the same has to be excluded while computing the operating margin of the assesse. In the case of Marubeni India (supra), also the Revenue argued that since the assessee is a captive unit of its associated enterprise, it was actually the latter that undertook the entire risk. Even in assessee's case, the TPO states that assesse is a captive unit and risk is with the AE and hence AE should bear this expense and compensate. However, this was rejected by the Hon'ble Delhi High Court. The Ld. AR further submitted that the TPO cannot sit in the chair of the businessman and decide how the business is to be conducted. The incurring of expense are not doubted. TPO has not doubted that there is a material difference on this account. He has denied only on the ground that Assessee should have been compensated by the AE without realizing that the assesse is not charging on cost plus basis. The expense have been allowed u/s 37 of the Act and the limited reason for denying a higher PLI by the TPO is that the expenses should have been compensated by the AE, which is not correct. The DRP at para 11 has stated that evidence was not made available. This is factually incorrect. All evidences/bills/details/correspondence was made available to them and is also being filed in Court today. This argument of the Revenue that AE should have shared this cost, is again rejected by Hon'ble Delhi High Court in the case of CIT vs. Transwitch India P. Ltd. ITA No. 678/2012.
30. The Ld. DR relied upon the orders of the TPO/AO and directions of the DRP.
We have heard both the parties and perused all the relevant records. It is pertinent to note that the DRP observed that the evidence was not produced. But according to the Ld. AR, all evidences/bills/details/correspondence were produced. Since the evidences have not been verified by the revenue authorities, therefore, it will be appropriate to remand back this issue to the file of the TPO/AO for adjudicating the issue in the right of all the evidences produced by the assessee and after taking the same into consideration, decide the issue as per fact and law. Needless to the say, the assessee be given the opportunity of hearing by following principles of natural justice. Ground No. 6 is partly allowed for statistical purpose.”
Respectfully following the findings of the co-ordinate bench, we direct accordingly. Ground No. 16 is treated as allowed for statistical purposes.
Since the appeal has been decided, the stay petition becomes infructuous.
In the result, the appeal of the assessee in is partly allowed for statistical purposes.
The order is pronounced in the open court on 28.01.2020.