AMERICAN EXPRESS (INDIA) PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

For the AY 2010-11, the assessee filed the return of income on 1.10.2010 declaring an income of Rs.2,42,82,74,285/- and since the international transaction undertaken by the assessee with the Associate Enterprises was to the tune of more than Rs.15 crores, in accordance with the provision of Section 92CA of the Act, the international transaction of the assessee with the Associate Enterprise was referred to the TPO for determination of arm’s length price. Ld. TPO by order dated 16.1.2014 suggested an adjustment of Rs.114,75,06,127/- to the income of the assessee, being the difference between the arm’s length price and the price charged by the assessee. Assessee filed objections before the ld. DRP. Ld. DRP 3 by order dated 17.12.2014 gave certain directions, pursuant to which ld. AO passed the assessment order making the transfer pricing adjustment to the tune of Rs.71,35,97,820/- and also an addition of Rs.49,93,98,378/- by withdrawing deduction u/s 10A of the Act.

The assessee is, therefore, before us in this appeal challenging the same and as could be understood from the contentions of the assessee before us, the assessee is challenging the inclusion of five comparables, namely, eClerx services Ltd., Infosys BPO Ltd., Accentia Technologies Ltd., TCS e-serve Ltd. and TCS e-serve International Ltd.. Assessee is also challenging the exclusion of four comparables, namely, R. Systems International Ltd. (Segmental); CG Vak Software Exports ltd.; Informed Technologies Ltd.; Micro genetics Systems Ltd. Besides this, the assessee also complained thatthe ld.TPO/AO erroneously interchanged the operating profit/operating costs margins of the companies, namely, eClerx services Ltd. and Omega Healthcare Management Services P. Ltd. Further grievance of the assessee is that the authorities below grossly erred by charging interest on credit period granted by the company under normal trade practices and also ld. AO not granting full credit of TDS to the assessee as claimed by them in the return of income.

Contention of the assessee in respect of five comparables, namely, eClerx services Ltd., Infosys BPO Ltd., Accentia Technologies Ltd., TCS e-serve Ltd. and TCS e-serve International Ltd. is that these companies are not at all good comparables to the assessee on several ground including the functional dissimilarity, non availability of 4 segmental data and diversified activities besides high end use brand worth. Assessee also challenges the exclusion of four comparables, namely, R. Systems International Ltd. (Segmental); CG Vak Software Exports ltd.; Informed Technologies Ltd.; Micro genetics Systems Ltd. on the ground that functionally all these companies are good comparables to the assessee but for the year ending not matching in case of R. Systems International Ltd. and turnover filter in respect of the other three companies. It has, therefore, become necessary for us to look into the functions performed and risks assumed as incorporated by them in their TP Report to be found from page nos.365 of the paper book: “Functions Performed 4.02.2.1 Functions Performed by American Express Group American Express Group is engaged in the business of providing travel related services (charge cards, credit cards, traveler's cheques and travel agency services). During FY 2007-08, the international banking business of American Express Group was sold off. American Express Group is involved in strategic decision making and evolving standardized policies and procedures to run the business. It exercises management control and oversight. It also manages the marketing and corporate governance initiatives and integrates it with the overall business objectives. 4.02.2.2 Functions Performed by AEIPL AEIPL is a captive contract IT enabled service provider catering to the needs of the Group. As per the contractual arrangement that AEIPL has with its AEs for the provision of such support, the resultant output is the property of American Express Group and at no point in time shall such ownership vest with AEIPL either wholly or partly. AEIPL does not obtain any copyrights, patents rights, trade secrets or trademarks on such output. AEIPL is remunerated on a cost-plus basis without regard to the success or failure of its activities. For this purpose, costs comprise all 5 of the direct and indirect costs, including salaries, travel expenses, professional fees, rent, depreciation, financial charges, etc. Therefore, AEIPL is insulated from all key business risks. The functions performed by AEIPL are explained below: Input a) AEIPL receives raw data / raw information ("raw data") in electronic form or in the form of paper based inputs (documents, vouchers, reports etc.). The raw data is received through mail/courier, fax and electronic transmission from clients' respective locations to AEIPL servers via data links. The raw data comprises unprocessed or semi- processed accounting, financial and commercial information relating to the businesses of American Express locations worldwide: The various kinds of raw data received by AEIPL are as follows: Card.member Data: Data pertaining to transactions executed by American Express card members. American Express Company Data: Data pertaining to day-to- day transactions undertaken within American Express companies which need to be recorded and reported to the respective American Express companies ('customer country') in different reports and accounting formats. Various types of inputs received for processing and recording in electronic or physical form are as follows: Invoices; Vouchers; Vendor Purchase Orders; and Employees Travel Expense Vouchers Airlines / SES / Hotels Data: These pertain to transactions undertaken for American Express travel business and include data on: Sale of air tickets to customers and payments to airlines; ‘Payment to service establishments for purchases made through American Express cards; and Booking of hotels for customers and payments to hotels. Customers Bank Data: These include data on treasury and other transactions done by American Express card members. Processing of Inputs (Data management. Information b) Analysis and Control)

Keeping in view these functions performed and reasons assumed, we shall now proceed to deal with the comparability of different entities included and excluded by the ld. TPO not to the liking of the assessee. As could be seen from the record, the bone of contention in this matter relates to the service of export of data processing and back office support undertaken by the assessee to the tune of Rs.714,56,74,755/-.

For benchmarking this service characterized by the assessee as a back office support service operating in a limited risk environment i.e. ITeS segment, the assessee adopted TNMM method as the most 9 appropriate method with PLI as Operating Profit/Operating Cost with a PLI arrived at 17.98%.

Assessee initially selected ten comparables by rejecting six in the matrix. Out of 10 comparables selected by the assessee, ld. TPO rejected six including R. Systems International Ltd. (Segmental); CG Vak Software Exports ltd.; Informed Technologies Ltd.; Micro genetics Systems Ltd. So also ld. TPO selected six comparables which were rejected by the assessee, namely, eClerx services Ltd., Infosys BPO Ltd., Accentia Technologies Ltd., TCS e-serve Ltd. and TCS e-serve International Ltd. Therefore, it is clear now that the assessee is disputing the inclusion of eClerx services Ltd., Infosys BPO Ltd., Accentia Technologies Ltd., TCS e-serve Ltd. and TCS e-serve International Ltd., which according to the assessee, rendered high end technical services falling under the category of KPO.

Revenue disputes that by looking at the functional profile of the assessee, it is clear that the assessee is not providing the low end IT Services but, on the other hand, the business being carried on by the Associated Enterprises, which are receiving services from the assessee are very high end businesses. He further submitted that by looking into what is input for the service and what are output generated by the assessee and the services provided by the assessee including the data analysis to detect high risk account activity and also support initiatives such as product redesign consolidation migration organizational restructuring and project management 10 support to implementation.According to him services provided by the assessee cannot be characterized as low end ITeS.

Per contra, it is the submission of the ld. AR that all the services rendered by the assessee are only in the nature of low end services and as a matter of fact this question had arisen for the consideration of the Tribunal in assessee’s own case for the Asstt. Year 2007-08 and by order dated 7.6.2017, the Tribunal dealt with this issue at length and reached a conclusion that the assessee provides back office operation, revenueaccounting, call centre services, support center and ITES services and is definitely different from the Knowledge process outsourcing services. Merely for the reason that AEGSEC services at Gurgaon unit provides certain data risk analysis services to detect high risk account activity does not make the services provided as high end service Provider.

He further submitted that ld. TPO has not questioned the FAR analysis provided by the assessee and accepted the same to be ITeS Service Provider and not a KPO.

On this aspect, we have gone through the functional profile of the assessee as contained in the TP study report for this year with the functional profile of the assessee as incorporated in the order dated 7.6.2017 for the AY 2007-08 in ITA No.1865/Del/2015. We do not find any change in the functions performed, reasons assumed or the assets deployed by the assessee in these years. Vide Para Nos. 21 to 29, a Coordinate Bench of this Tribunal dealt with this issue in detail 11 and reached a conclusion that definitely the services rendered by the assessee falling in the category of Business Process Outsourcing, but not Knowledge Process Outsourcing. When the facts permeating all through the years are same, we do not find any reason to take a different view. We, therefore, hold that the services rendered by the assessee are only back office operations falling in the category of ITES and not KPO.

Now coming to the first comparable eClerx Services Ltd., learned AR submitted that on the ground of functional dissimilarity in the assessee’s own case for AY 2007-08 and 2009-10, a coordinate bench of this Tribunal rejected this company as a comparable in and ITA No.1973/Del/2014 respectively. He further submitted that learned DRP rejected this comparable in assessee’s own case for AY 2011-12 vide order dated 13.11.2015.

We have gone through the orders of the authorities below and also the orders cited by the assessee. Assessee challenging the inclusion of this company on the ground of functional dissimilarity, abnormal fluctuations in revenue and profits besides unreliability of the data. Learned TPO rejected the same.

Learned DRP held that several services provided by the assessee are also of similar nature as could be observed from the profile of this eClerx Services Ltd. and the extracts of the agreement produced in preceding paras. In DRP’s opinion, all the services provided by the taxpayer as well as eClerx are not high end in nature 12 but a low end and high end comparable is used in the case of the assessee.

As could be found from the discussion in relation to eClerx Services Ltd in for AY 2007-08 and in ITA No.1973/Del/2014 for AY 2009-10, it is clear that under similar circumstances, this Tribunal found that eClerx Services Ltd. is functionally different from the assessee. Further, ld. DRP in their order dated 13.11.2015 for AY 2011-12 observed in respect of eClerx as follows: Regarding eClerx This is functionally different-from taxpayer for the ITeS segment. eClerx with a margin 55.97% operates in the business data analytics and process solutions service (Annual Report 2010-11 page 69) space catering to a global client base comprising the world's 8 top banks, 12 top Global retailers, 4 top software companies, 7 top high tech OEMs and 9 top travel and leisure companies ( Sample Client Snapshot on website).Its income from operations consists of revenue from data analytics services and knowledge process outsourcing (Annual Report 2010-11 page 79) solutions/services which comprise of both time per unit price and fixed fee based service contracts. It also has incurred a substantial sum (34.31% of the total cost of the company Annual Report) on outsourcing of ITeS services to third party vendors. eClerx acquired Igentica Travel Solutions in July 2007 Limited providing it with 28 large customers primarily in Europe into a new vertical as part of its strategy for inorganic growth through "bolt on" acquisitions increasing the customer base and revenues of the companies. The Company thus clearly bears significant entrepreneurial business risks such as market, price, service liability, credit, foreign exchange fluctuation, technology obsolescence and owns intangibles constituting 11.65% (Annual report 2010-11) of its total fixed assets which enable it to earn a higher margin. ThuseClerx is not only functionally different, but has a different asset and risk profile, has developed value added services as a KPO. In this segment, the Taxpayer is essentially providing back-office support services to parent 13 while EClerx does not report segments. eClerx is one of, "India's first KPOs to be appraised for and rated at maturity level 3 of people Capability Maturity Model (PCMM)"(Annual report 2010-11 page 31). One of the key issues when analysing transfer prices is to refine the comparability analysis after matching the functional profile carefully. Further margins are earned as a result of functions performed, assets utilized and risks borne (FAR) wherein there lie considerable differences particularly in the outsourcing model it employs as laid down in jurisdictional HC decision in Rampgreen Solutions (P) Ltd V CIT ITA 102/2015, order dated 10 08-2015 which has clearly stated that where the controlled transactions are clearly in the nature of lower- end ITeS for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold holding as under, “42 ..... The DRP held that TNMM allows flexibility and tolerance in selection of comparables, as functional dissimilarities are subsumed at net margin levels, as compared to Resale Price Method or Comparable Uncontrolled Price Method and, therefore, the functional dissimilarities pointed out by the Assesses did not warrant rejection of eClerx and Vishal as comparables; 43. In our view, the aforesaid approach would not be apposite. Insofar as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction/entity. Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 108(2) of the Income Tax Rules, 1962. Comparability analysis by TNMM method may be less sensitive to certain dissimilarities between the tested party and the comparables, However that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable ALP. Therefore, as for as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in PLI must trigger further investigations/analysis.

Consideration for a transaction would reflect the functions 14 performed, the significant activities undertaken, the assets or resources used/consumed, the risks assumed, Thus, comparison of activities undertaken/functions performed is important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be apposite to ignore functional dissimilarity only for the reason that its impact may be reduced on account of using arithmetical mean of the PLI The DRP had noted that eClerx was functionally dissimilar, but ignored the same relying on an assumption that the functional dissimilarity would be subsumed in the profit margin, As noted, the content of services provided by the Assessee and the entities in question were not similar, In addition, there were also functional dissimilarities between the Assessee and the two entities in question. In our view, these comparability factors could not be ignored by the Tribunal. While using TNMM, the search for comparables may be broadened by including comparables offering services/products which are not entirely similar to the controlled transaction/entity However this can be done only if (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the risks assumed; and (h) the difference in services/products offered has no material bearing on the profitability Thus on the basis of functional differences from taxpayer and it cannot serve as a valid comparable for the ITeS segment in the case of taxpayer. TPO is thus directed to exclude eClerx from the list of comparables 17. We have gone through the annual report of this company incorporated from page 649 of the Paper Book and found that this company is into multifarious activities and it is a knowledge process outsourcing company providing data analytics, data management and process improvement solutions to global enterprise clients. Further, eClerx supports its clients through two business units – Capital Markets and Sales and Marketing Support. The Revenue recognition policy of this company says that revenue from data analytics services and process solution comprises from both time/unit price and fixed fee based service contracts. Revenue from 15 time/unit price based contracts is recognized on completion of the related services and is billed in accordance with the contractual terms specified in the respective customer contracts. Revenue from fixed fee based service is recognized on achievement of performance milestones specified in the customer contracts. Unbilled revenue represents costs incurred and revenues recognized on contracts to be billed in subsequent periods as per the terms of the contract. Interest income is recognized using the time proportion method based on rates implicit in the transaction. The operating expenses of this company include the employee costs, general and administration expenses and selling and marketing expenses, which is different from the assessee. Further the employee cost increased to Rs.1077.81 millionin the year under review from 748.84 million in the previous year primarily due to increase in the head count by about 45% which includes senior level employees hired in India, US, UK and Singapore operations which learned AR submits that an abnormal one.

In view of all these factors, we are of the considered opinion that eClerx is not a good comparable at all to the assessee. Apart from that no segmental information is also available. The reasoning given by the ld. DRP in respect of AY 2011-12 equally applies to the facts obtaining in this year also. We, therefore, find eClerx not a good comparable and have to be deleted from the list of comparables for benchmarking international transaction.

Now turning to M/s Infosys BPO limited, M/s Accentia technologies limited, M/s TCS E-Serve limited and M/s TCS E-Serve 16 international Ltd are concerned, it is the argument of the Ld. AR that these four entities are not good comparables not only because of their diversified activities but also because of the extraordinary events that took place during the relevant previous year i.e. Financial Year 2009-10.

He further submitted that M/s Infosys BPO Ltd is into a wide array of services, customer service outsourcing, finance and accounting, knowledge services, human resources outsourcing, legal process outsourcing, sales and fulfillment, sourcing and procurement outsourcing, banking and capital outsourcing, media outsourcing, energy outsourcing, retail etc with the significant large scale of operations to the tune of Rs.1,126.63 crores. He further submitted that during this financial year there took place the acquisition of McCamish Systems LLC besides this Infosys BPO limited commanding huge brand value.

In respect of M/s Accentia Technologies Ltd he submitted that this company is also into diversified services which includes HRCM (using SaaS model), also into KPO and LPO. With reference to the annual report of this company, Ld. AR submitted that this entity owns significant intangible assets at 57% and undertaken extraordinary activities (amalgamation) during the year. Ld. AR submitted that the extension technologies Ltd also falls in the category of KPO providing high end services and, therefore, functionally also it is a dissimilar to the assessee.

We have gone through the record. In M/s Ameriprise India Private Limited (supra), a coordinate Bench of this Tribunal recorded the fact that the notes to accounts of M/s Accentia Technologies Limited indicate about the amalgamation of AsscentInfoserve Private limited with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon’ble High Court on 21.08.2009.

In this order it is further held that the annual report of the Infosys BPO shows that there was acquisition of McCamish Systems LLC, which rendered such company incomparable because of the extraordinary financial event. It could further be seen from this order that financial year 2009-10 is the exceptional year of operation in respect of M/s TCS e-serves Ltd as it is the first full year of operations after its takeover by TCS. It was found that this company is engaged 18 in transaction processing and technical services activities in respect of which no separate segmental details are available. Further Schedule ‘O’ -notes to account of TCS e-serves Ltd, no information in respect of activities carried out by the company or segmental details were available. The same is the case with TCS E-Serve international Ltd.

Findings of the coordinate Bench of this Tribunal in the case of Ameriprise India P. Ltd. were upheld by the Hon’ble jurisdictional High Court in the case of Ld. PCIT vs. Ameriprise India Private Limited in ITA 461/2016 by order dated 19.10.2016, wherein the Hon’ble High Court observed that the exclusion of M/s Accentia Technologies and Infosys BPO on the ground that in respect of each comparable, certain extraordinary events had occurred during the previous periods which distorted the profitability thereby increasing the margin, cannot be characterized as unreasonable.

In the case of M/s Agilent technologies (international) private limited vs. ITO, and batch for the Assessment Years 2010-11 to 2012-13, a coordinate Bench of this Tribunal found that M/s TCS E-Serve is engaged in providing IT services primarily to Citi group entities globally and it also provides technical services involving software testing, verification and validation of software at the time of implementation and data management activities which cannot be characterized as back office support services. It was further observed that there is no segmental bifurcation between the transaction processing and technical services.

For the reasons discussed in the preceding paragraphs, we are of the considered opinion that because of the extraordinary events that took place in the period under consideration, Infosys BPO limited, Accentia technologies limited, TCS E-Serve limited and TCS E- Serve international Ltd are not good comparables and are liable to be excluded from the list of comparables to benchmark the international transaction.

Now coming to the entities which were found to be comparable, as stated above, among the six comparables rejected by the ld. TPO, assessee is challenging such rejection in respect of R.

Contention of the assessee has been that this company files return of income and such parties prepare the accounts as required under the Income-tax Act and, therefore, it is within competency of the ld. AO to seek requisite information by invoking the powers u/s 133(6) of the Act, so long as the company is functionally comparable with the assessee. It is further submitted that M/s R. System’s comparability was considered at length and accepted on the very same ground by a coordinate bench of this Tribunal in for Asstt. Year 2009-10 and the Tribunal recorded that inasmuch as this company has not been rejected on the ground of functionality, if the quarterly results are available in the public domain wherein the figures for the relevant quarter are also available, there cannot be any difficulty to work out the proportionate margin. While placing reliance on the decision of this Tribunal in the case of Cadence Design Systems India Ltd., the Tribunal directed the TPO to consider the quarterly results and work out the proportionate margin results.

In respect of CG Vak Software, observations of the ld. TPO for rejecting this company is that under ITeS segment, sale was only just Rs.82.78 lakhs and on that ground this company was rejected. Assessee contended that inappropriateness of the turnover filter has not been considered by the ld. TPO. Ld. DRP on a perusal of the financials found that CG Vak Software is mainly involved into software development and earns major portion of its revenue from the same and the revenue from ITeS/BPO is only 15% i.e. Rs.83 lakhs and, therefore, it fails the turnover filter.

Assessee assails the application of turnover filter so long as functional dissimilarity is not attributable to this company and submitted that a similar contention of the revenue was considered by the Tribunal in assessee’s own case for the AY 2009-10 wherein the Tribunal by placing reliance on Chrys Capital Investment Advisors (I) P. Ltd. vs ACIT, reached a conclusion that if the company is functionally comparable, the same cannot be 22 rejected on the basis of turnover and therefore, directed ld. TPO to include CG Vak Software as a comparable company.

We have gone through the financials of this CG Vak Software. At page No.21 of the Annual report of this company, the income from software development product and services is separately mentioned and was also at page 26, the segment revenue and segment results are also provided. In these circumstances, we are of the considered opinion that in the absence of any finding that this company is functionally dissimilar, ld. TPO should have considered these figures to identify whether CG Vak Software is a suitable comparable with the assessee. We, therefore, direct ld. TPO to consider this entity for benchmarking the international transaction.

The other two companies are M/s Informed Technologies Ltd. and M/s Micro genetics Systems Ltd. Ld. TPO rejected the same on the ground that both the Companies sales are below Rs. 5 Crores.In tune with our findings in respect of M/s CG Vak Software, while placing reliance on the decision of the jurisdictional High Court in the case of Chris Capital (supra), we hold that so long as a company is functionally similar to the assessee merely because it does not match with the turnover, it cannot be rejected. We, therefore, direct ld. TPO to include Informed Technologies Ltd. in the list of comparables. Further, we consider the fact that in assessee’s own case for the Assessment Years 2004-05, 2005-06 and 2006-07, the Tribunal considered this aspect and rejected the turnover filter.

Now coming to Ground No.14, this is to the effect that the interest of credit period granted by the company under normal trade practices was unjustly charged,having heard both the counsel, we are of the considered opinion that if working capital adjustment is granted, then no separate adjustment or interest receivables is required.We are fortified in our decision by the decision of the Hon’ble Delhi High Court in in the case of Kusum Healthcare P. Ltd.

In Ground No.16, the grievance of the assessee is that ld. TPO/AO has erroneously interchanged operating profit/operating cost margin of the companies, namely, eClerx Services Ltd. and Omega Healthcare Management Services P. Ltd. and it requires rectification. Since it is not a part of adjudication but only a mistake that had crept in the order, we are of the opinion that the same could be rectified by the ld. TPO/AO. We, therefore, direct the same.

Ground No.20 is in respect of the claim for deduction under 10A of the Act in respect of AEGSC(STP) Unit set up by the assessee during the financial year 2002-03 on the ground that the STP unit was 24 set up after splitting up its existing business of FCE(EOU) Unit. On this aspect, it is submitted that in respect of Asstt. Year 2009-10, the Tribunal considered this aspect at length and directed the AO to allow deduction u/s 10A of the Act.

Paragraph Nos. 33 & 34 of the order dated 3.8.2018 in for Asstt. Year 2009-10 are to the effect that,- “33. The next issue raised by the assessee relates to claim of deduction u/s 10A amounting to Rs.58,93,05,999/- in respect of AEGSC (STP) Unit. Before us ld. Counsel submitted that this issue has been decided in favour of the assessee in assessee’s own case by the Tribunal in the earlier years. On the other hand, ld. DR strongly relied upon the order of the AO.

In view of the above, while respectfully following the same, we direct the learned AO to allow the deduction u/s 10A of the Act for the Asstt. Year 2010-11 to the tune of Rs.49,93,98,378/- in respect of AEGSC(STP) Unit set up by the assessee during the Financial Year 2002-03.

In the result, appeal of the assessee is allowed. Order pronounced in the open court on 17th July, 2019.