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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B R BASKARAN
Per N.V. Vasudevan, Vice President
This appeal by the revenue is against the order of CIT(Appeals)-2, Bengaluru dated 27.04.2018 relating to assessment year 2007-08. The grounds of appeal read as follows:-
“1. Assessee is a low end BPO service Provider:- i) Whether the ld. CIT(A) has erred in fact and law by holding the assessee as, low end BPO service Provider. ii) Ld CIT(A)) has erred in not appreciating the fact that the assessee is providing high end services and hence cannot be termed as low end BPO services provider.
2. Exclusion of Eclerx Services Limited & Mold-Tek Technologies Limited from the list of final comparable selected by the TPO in ITES Segment:-. i) Whether the Ld CIT(A) erred in fact and law by holding the company M/s. Eclerx and M/s Mold Tek Technologies as functionally dissimilar without, analyzing the fact of the company. ii) Whether the Ld CIT(A) erred in not appreciating the fact that the assessee functionally similar to that of M/s Eclerx and M/s Mold Tek Technologies.
3. Exclusion of Accurate Data Converters Limited from the list of final comparable selected by the TPO in ITES Segment:- i) Whether while seeking the exact comparability as mentioned above the ld. CIT(A) was right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. ii) Whether the ld. CIT(A) erred in fact and law by holding the company Accurate Date Converters Limited as functionally dissimilar without analysing the facts of the company. iii) Whether the ld. CIT(A) erred in fact and law by rejecting the comparables on a low employee cost filter without appreciating the fact outsourcing of certain manpower is common in ITES segment and it does not anyway make them functionally dissimilar.
4. Internal TNMM method should applied for determining the Arm's, Length Price:- i) Whether the ld. CIT(A) erred in fact and law by directing the TPO to adopt the. Internal TNMM as the most appropriate method for benchmarking without appreciating the fact that the revenue earned from the AE is from the international market whereas the revenue earned from the non-AE is from the domestic market. ii) Whether the ld.CIT(A) erred in not appreciating the fact that services rendered in two different markets cannot be same or similar and hence Internal TNMM was not the most appropriate method for benchmarking the international transaction. iii) Whether the ld. CIT(A) erred in not appreciating the fact that the profit margins earned from transaction with international markets cannot be same or similar to the profit margins earned from transaction with the domestic market since there are differences in the factors that influence the profit margins and hence Internal TNMM was not the most appropriate method for benchmarking the international transaction. iv) Whether the Id. CIT(A) ought to have appreciated the fact that factors like geography, functions performed, assets employed, risk taken, cost of labor, legal provisions between two different markets have a bearing on the profit margins. Hence, the profit margin earned from internationals transactions cannot be compared with profit margins earned from transactions with the domestic market, therefore internal TNMM was not the most appropriate method for benching the international transaction. v) Whether the ld. CIT(A) ought to have appreciated the fact that the taxpayer has not reported segmental break-up in respect of AE and Non AE's transaction in the audited financials. It is only before the transfer pricing officer that a break-up between AE and Non AE segment has been furnished and it is without any' key of allocation and supporting evidences in respect of expenses across the segments. Hence the internal TNMM is not the most appropriate method for benchmarking.”
As far as ground No.1 is concerned, it was agreed by the parties that if ground No.4 is decided in favour of assessee, then ground No.1 will become infructuous and will not arise out of the impugned order of CIT(Appeals).
Ground No.2 is with reference to exclusion of 2 comparable companies viz., E-Clerks and Mold Tek Technologies. The assessee is engaged in the business of rendering Information Technology enabled Services [ITeS] to its AE and in determining the ALP in respect of consideration received by the assessee for rendering ITeS services to AE, the issue was referred to TPO and addition suggested by the TPO was incorporated in the aforesaid order of assessment by the AO. Against the aforesaid order of AO, the assessee preferred appeal challenging the method of determination of ALP and consequent addition to the total income. One of the reliefs allowed by the CIT(Appeals) was to exclude two comparable companies chosen by the TPO viz., Eclerx Services Limited & Mold-Tek Technologies Limited.
As far as Eclerx Services Limited is concerned, it is undisputed that this company was considered as not comparable with a company providing ITeS such as the assessee for the same assessment year by the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. in IT(TP)A No.1086/Bang/2011. The Tribunal in the aforesaid decision took the view that this company was outsourcing all its activities and therefore cannot be regarded as a company engaged on its own in rendering ITeS.
As far as Mold-Tek Technologies Limited is concerned, this Tribunal by the very same decision by which Eclerx Services Limited was excluded referred to in the earlier para, excluded Mold-Tek Technologies Limited also on the ground that it was functionally different from an ITeS company. In view of the aforesaid judicial precedents, we are of the view that there is no merit in ground No.2 raised by the revenue.
As far as ground No.3 is concerned, we find that the CIT(Appeals) excluded this company in para 18 & 19 of his order on the ground that this company fails the employee cost filter of 25% applied by the TPO i.e., employee cost should be at least 25% of the revenue to regard this company as comparable with ITeS. The CIT(Appeals) found that the employee cost was only 11.45% of the turnover and this company was excluded from comparables. In the ground of appeal, the revenue has not chosen to challenge this finding of the CIT(A). Even otherwise, the TPO himself has employed this filter for the purpose of excluding and including comparable companies and therefore the revenue cannot be heard to say that this employee cost filter ought not to have been applied in the ITeS segment where outsourcing of manpower is common. We therefore find no merit in ground No.3 raised by the revenue and dismiss the same.
7. As far as ground No.4 is concerned, the CIT(Appeals) in the impugned order in page 21 has found that in assessee’s own case for AY 2010-11 in IT(TP)A No.324/Bang/2015 the Tribunal has taken a view that that internal margins even under TNMM should be preferred. The CIT(Appeals) following the aforesaid decision held as follows:-
“ Having considered the submissions, it is observed that the services rendered by the appellant to AE and Non-AE are similar, which is evident from the Schedule 1.6 to the Financial Statements uncle! the head "Revenue Recognition" wherein it is stated: ''The company derives its revenue primarily from customer relationship management services to the parent company as well as external customers. Revenue from services rendered to parent company are billed on the basis of the contract with the parent company. Revenues from other customers are charged based on time and material or unit based pricing. Revenues from other customers are charged based on time and material or unit based contracts is recognised upon performance of services.” It is also stated that as the TPO has not disputed the key of allocation and also the nature of services, he should have therefore applied the Internal margin under the Transactional Net Margin Method (TNMM). The TPO should have concluded that the international transactions are at arm's length on application of Internal margin under the Transactional Net Margin Method since the margins earned on AE transactions are more than the margin earned on Non-AE transactions. In this regard on this specific issue, the Bangalore Bench of the Hon'ble ITAT in the appellants own case for in ITA IT(TP)A No.324(B)/2015 for AY 2010-11 has ruled that preference should have been given to Internal Margin under the Transactional Net Margin Method. Considering the facts and circumstances, I am in agreement with the submissions that due to the similarity of functions performed to AE and Non AE during the current financial year, internal comparable should have been adopted. Further, it is submitted that the facts and circumstances and the functional profile of the company remained same going forward upto the AY 2010-11. Even though, the decision of the jurisdictional ITAT is binding particularly in the appellant’s own case in ITA IT(TP)A No.324(B)/2015, for AY 2010-11, however in view of the findings given supra in respect of Ground No.3 to 3.3, this ground becomes infructuous, hence dismissed.”
In the light of the CIT(Appeals) following the aforesaid decision of the coordinate Bench of this Tribunal, we are of the view that there is no merit in ground No.4 raised by the revenue and accordingly the same is dismissed. Consequently ground No.1 is rendered academic.
In the result, the appeal by the revenue is dismissed.
Pronounced in the open court on this 19th day of February, 2020.