CONVERGYS INDIA SERVICES PVT. LTD.,NEW DELHI vs. DCIT, CIRCLE- 6(2), NEW DELHI

Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Convergys India Services Pvt. Ltd., the taxpayer is a 99.99% subsidiary of Convergys Customer Management Group Inc. (CMG), USA, incorporated in India in January 2001 to provide customer care support services to CMG.

Ld. Transfer Pricing Officer (TPO) accepted all the international transactions entered into by the taxpayer with its AE at arm’s length except a transaction qua provision of Information Technology Enabled Services (ITES) for Rs.6,33,05,46,049/-, The taxpayer in its TP analysis calculated its margin during the year under assessment at 15.06%, applied Transactional Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as Profit Level Indicator (PLI) as Most Appropriate Method (MAM) in order to benchmark its international transactions qua Information Technology Enabled Services (ITES), chosen 8 comparables and computed their mean margin at 14.60% and found its international transactions qua provision for ITES at arm’s length.

Ld. TPO, however, rejected the TP analysis made by the taxpayer, however, accepted TNMM with OP/OC as PLI as MAM applied by the taxpayer, applied various filters and proposed an adjustment of Rs.53,86,94,824/- qua provision of ITES.

The taxpayer carried the matter before the ld. CIT (A) by way of an appeal who has partly allowed the same. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.

We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.

Undisputedly, ld. TPO has accepted the TNMM with OP/TC as PLI as the Most Appropriate Method (MAM) applied by the taxpayer. Ld. TPO as well as ld. CIT (A) have also accepted the profile of the taxpayer. After giving appeal effect, ld. TPO computed the average of comparables at 21.79% as against 14.06% of the taxpayer. Final set of comparables with computation of margin after giving appeal effect of the order passed by the ld. CIT (A) is as under :-

Consequently, ld. TPO reduced the proposed adjustment from Rs.55,81,27,648/- to Rs.44,61,45,228/-.

Ld. AR for the taxpayer challenging the proposed adjustment qua benchmarking the international transactions pertaining to provision of ITES made by the ld. TPO/CIT (A) sought to exclude three comparables viz. Excel Infoways Ltd. (Segment), TCS Eserve Ltd. and Infosys BPO Ltd.. Now, we would examine the suitability of all the aforesaid three comparables one by one.

Ld. DR for the Revenue, on the other hand, relied on the orders of the lower authorities below.

When we examine various filters applied by the ld. TPO in order to select the comparable companies for benchmarking the international transactions qua ITES, it is apparent on record that the ld. TPO has applied the filter that, “companies having export service income less than 75% of the sales were to be excluded.”

Similarly, companies having employee cost less than 25% of the turnover are also to be excluded and companies affected by the persistent losses in their net-worth, consistently declining sales, etc. are also to be excluded.

When we examine page 40 of the Annual Report Compendium (ARC), revenue from ITES is merely 51.06%, thus fails service revenue filter from export/ITES of 75%. Computation of revenue of Excel from ITES is as under :-

Furthermore, when we examine pages 31 & 41 of the ARC, Excel’s ratio of employee cost to sales is merely 13.05% as against filter of 25% applied by the ld. TPO. The taxpayer has given computation of employee cost to sales which matches with annual report, available at pages 31 & 41 of the ARC, is as under :-

Ld. AR for the taxpayer also sought exclusion of Excel on the ground that it fails diminishing revenue filter as its revenue is consistently diminishing since 2009-10 and the taxpayer has given the declining revenue status of taxpayer form FY 2009-10 to 2014- 15 as under :-

So, in view of the aforesaid facts, we are of the considered view that since Excel does not qualify the filters applied by the ld. TPO himself, it cannot be a suitable comparable vis-à-vis the taxpayer.

In Baxter India Pvt. Ltd. (supra), coordinate Bench of the Tribunal excluded Excel as a comparable vis-à-vis ITES provider on ground of failing diminishing revenue filter adopted by the ld. TPO himself from FY 2009-10 to 2011-12. So, in view of the matter, we order to exclude Excel from the final set of comparables form benchmarking the international transactions qua ITES.

The taxpayer sought exclusion of TCS E-serve on the grounds inter alia that it is functionally dissimilar; that TCS E- serve is making payment of brand TATA; that segmental information to bifurcate revenue from ITES and IT and consultancy services is not available; that there is a difference in the risk profile of the TATA vis-à-vis the taxpayer; that TCS E- serve has been excluded by the Revenue itself in subsequent years in taxpayer’s own case and relied upon the decisions of Avaya India Ltd. vs. ACIT ITA 532/2019, PCIT vs. Actis Global Services Pvt. Ltd. ITA 94/2017, PCIT vs. BC Management Services Pvt. Ltd. ITA 1064/2017 and PCIT vs. E-Valueserve SEZ P. Ltd. ITA 948/2018.

When we examine page 143 of the ARC it is proved on record that TCS E-serve has made payment for brand TATA to the tune of 3.67% during the year under assessment. When we examine the functional profile of TCS E-serve at pages 131 & 145 of the ARC it has come on record that TCS E-serve is operating in inter alia delivering core business processing service, analytics/ insights and support services for both data and voice processes in the name of KPO services, whereas the taxpayer is rendering routine call center services to its group companies.

When we examine profit & loss account of TCS E-serve, available at page 128 of the paper book, it has shown revenue from operation of Rs.1578.44 crores with no segmentation of revenue between ITES, IT and consultancy services. Furthermore, perusal of pages 84 & 85 of the ARC, TCS E-serve is bearing significant risks, such as, micro economic risk, regulatory risk, financial risk, etc., whereas the taxpayer is a low risk captive provider to its group companies remunerated at cost plus basis.

Hon’ble Delhi High Court in the case of Avaya India Ltd. (supra), available at pages 32 to 52 of the case laws compendium, relevant pages 50 & 51, excluded TCS E-serve vis-à-vis routine ITES provider on the ground inter alia that size and scale of TCS E-serve operation makes it unsuitable comparable; that when Rule 10B(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. 23. Hon’ble Delhi High Court in case of Actis Global Services Pvt. Ltd. (supra) also excluded TCS E-serve on ground of non- availability of segmental turnover data.

In view of what has been discussed above, we are of the considered view that TCS E-serve is not a suitable comparable vis-à-vis the taxpayer on the grounds inter alia that TCS E-serve is making payment of TATA brand equity; that it is functionally dissimilar and its segmental financials bifurcating revenue from ITES, IT and consultancy services is not available and that it is a risk bearing company whereas the taxpayer is low risk bearing captive service provider being remunerated on cost plus basis.

The taxpayer sought exclusion of Infosys BPO on the grounds inter alia that it has huge brand value; that Infosys BPO has undergone extra ordinary event; that it is functionally dissimilar and that there is a difference in the risk profile of Infosys BPO and the taxpayer and it is having no significant intangibles and relied upon the decisions of Baxter India, BT e-serve and Societe Generale (supra).

When we examine the functional profile of Infosys BPO, available at page 217 of the ARC, it has come on record that Infosys BPO is providing high end integrated services in order to facilitate its clients to improve their competitive positioning by managing their business processes in addition to providing increased value. On the other hand, the taxpayer is providing low level back office support services as a captive service provider remunerated on the cost plus mark-up. It is also come on record that Infosys BPO has acquired Portland Group Pty Ltd., Australia during the year under assessment, as is evident form pages 170, 175, 184, 191 of ARC. Furthermore, Infosys BPO is a huge brand having significant investment in creating intangibles.

Hon’ble Delhi High Court examined a comparable having huge brand value vis-à-vis routine ITES service provider in the case of PCIT vs. Oracle (OFSS) BPOL Services Pvt. Ltd. ITA 124/2018 and ordered to exclude Wipro Limited on ground of huge brand value for the reason that brand value of an entity has a significant role in its ability to garner profits and negotiate contracts and as such, brand plays its own role in price and cost determination.

Coordinate Bench of the Tribunal in the case of Societe Generale Global Solution Global Centre Pvt. Ltd. (supra) excluded Infosys BPO vis-à-vis routine ITES provider on ground of huge turnover, having huge brand value, having no brand intangibles and having incurred huge advertisement expenditure of Rs.5.54 crores and marketing expenses of Rs.1.54 crores.

In view of what has been discussed above, we are of the considered view that Infosys BPO is not a suitable comparable vis-à-vis the taxpayer to benchmark the international transactions qua provision of ITES services.

In view of what has been discussed above, appeal filed by the taxpayer is allowed and AO/TPO is directed to recompute the TP adjustment accordingly. Order pronounced in open court on this 22nd day of November, 2019.