PANGEA3 LEGAL DATABASE SYSTEMS PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX 10(3)(2), MUMBAI

This is an appeal by the assessee arising out of the final assessment order passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 for the assessment year 2013-14 in pursuance to directions of the Dispute Resolution Panel (DRP)-II, Mumbai.

The primary grievance as articulated in ground 3 is concerning re- characterization of the assessee as a high-end information technology enabled service (ITES)/knowledge process outsourcing (KPO) service provider.

Briefly stated, the assessee, a resident company, is registered as STPI unit with Software Technology Park of India. The assessee is mainly engaged in providing various kinds of information technology enabled services to its overseas associate enterprises (AEs). The assessee benchmarked the international transactions with AEs by applying TNMM as the most appropriate method and selected comparables in the ITES (BPO) category. However, the Transfer Pricing Officer (TPO) did not accept the comparables selected by the assessee. By re- characterizing the assessee as high-end ITES/KPO service provider, he selected comparables in KPO category. For coming to such conclusion, the TPO referred to order dated 04-11-2015 passed by the CESTAT in assessee’s own case. While considering assessee’s objection on this issue, learned DRP observed that the assessee provides services, such as, document review, abstraction services, legal support services, risk management compliance, contract drafting, intellectual property services, etc. However, document review function constitutes approximately 75% of all the functions. Further, learned DRP observed that the assessee has not demonstrated that the balance 25% functions are not intricately linked to its documents review function. Thus, learned DRP ultimately concluded that the assessee is providing high-end ITeS/KPO services.

The learned Counsel for the assessee submitted, voluminous documents have been filed before the departmental authorities to demonstrate the exact nature of services provided by the assessee. Drawing our attention to the document placed in the paper book, the learned Counsel submitted, the services provided are low-end ITeS/BPO services. He submitted, from the very beginning, the assessee has characterized itself as a low-end ITeS/BPO services and this has not only been accepted by the TPO but also by the Tribunal. He submitted, without properly verifying the documentary evidences filed by the assessee, both, TPO and learned DRP have arbitrarily concluded that the assessee is a KPO service provider. Thus, he submitted, the issue may be restored back to the Assessing Officer for fresh adjudication after examining the documentary evidences filed by the assessee.

The learned Departmental Representative, though, relied upon the observations of the TPO and learned DRP; however, he did not have any serious objection with the restoration of issue to the Assessing Officer.

We have considered rival submissions and perused materials on record. As discussed earlier, the grievance of the assessee is against its re-characterization as a high-end ITeS/KPO service provider. As could be seen from the facts on record, simply relying upon an order of the CESTAT, the TPO has re-characterized the assessee as a KPO service provider. Before learned DRP, the assessee has made specific argument that it only performs low-end work of classification of legal documents into different categories and other services based on the manual/feedback provided by the client which does not involve any legal analysis/device. Further, the assessee had submitted that the real issue before the CESTAT as referred to by the TPO was relating to entitlement of CENVAT credit to the assessee and the issue of low-end/high-end ITeS was not before CESTAT. The assessee has further stated that in appeal filed by the Service-tax department in High Court, assessee has been clearly mentioned as a BPO service provider. We have further noticed that voluminous documentary evidences have been submitted by the assessee before the TPO and learned DRP to demonstrate the nature of work/service performed. As it appears, these documentary evidences have not been properly looked into by the departmental authorities. We have further noticed, in the preceding assessment years the assessee has been characterized as a routine ITeS provider remunerated at cost + 15% mark up. Further, on a reading of the Tribunal’s order in assessee’s own case in 06-03-2017, it appears that the service provided by the assessee in the earlier assessment years are akin to services provided in the impugned assessment year. Further, the learned Counsel for the assessee has drew our attention to the Safe Harbour Rules, 2017 issued by the Central Board of Direct Taxes (CBDT) ON 07-06-2017, wherein, various services have been classified under ITeS and KPO categories. It is the contention of the learned Counsel for the assessee, the services provided by the assessee are coming under the ITeS category even under the Safe Harbour Rules, 2017 of the CBDT. In our considered opinion, all these aspects have not at all been examined either by the TPO or by learned DRP while re-characterising the assessee as a high-end ITeS/KPO service provider. In view of the aforesaid, we restore the issue to the Assessing Officer for considering assessee’s claim that it is a low end ITeS service provider and not a KPO service provider. While doing so, the Assessing Officer must verify all the documentary evidences furnished by the assessee to demonstrate the exact nature of services provided to the AEs. Further, the Assessing Officer will also examine assessee’s claim that there is no change in the nature of service provided in earlier years, wherein, it has been accepted as a low end ITeS provider. Needless to mention, the Assessing Officer must provide reasonable opportunity of being heard to the assessee before deciding the issue.

In view of our decision above, all other issues raised by the assessee have become academic at this stage, hence, do not require adjudication. However, all these issues are left open for decision if need arises in future.

In the result, assessee’s appeal is partly allowed for statistical purpose.