BLACKROCK SERVICES INDIA PRIVATE LIMITED,GURGAON vs. INCOME TAX OFFICER, GURGAON

The brief facts of the case show that assessee is engaged in rendering back-office information technology enabled services [ ITes] and related services to its associated enterprise and third-party customers in India. The back-office services and the related services performed by the appellant included web search, data entry, data management, assistance in financial and economic evaluation analytical services and other services. The assessee was remunerated at the rate of cost +12% markups by its associated enterprise. The assessee Page | 3 entered into an international transaction of the provision of these ITeS services amounting to INR 122569557/– amongst the other international transaction of reimbursement of expenses and advances received which are not in dispute before us. The assessee benchmarked the provision of ITeS services by selecting 12 comparables whose average mean margin of PLI of OP /TC was considered to be 11.85% and as assessee has earned the margin of 12% over the cost, the assessee stated that its international transactions are at arm‟s-length.

The assessee furnished its return of income on 13/10/2010 declaring income of INR 4652993/–. As assessee has entered into an international transaction the learned AO referred the matter to the learned TPO for determining the arm‟s-length price[ ALP] u/s 92CA (3) of the act in respect of the international transaction. The learned TPO examined the nature of the business of the assessee and the functional analysis carried on. He noted that assessee characterized itself as a provider of IT enabled services, selected transactional net margin method [ TNMM] as the most appropriate method [ MAM ] and carried out search using Prowess and capitaline databases selecting 10 comparables whose weighted average of profit level indicator was 11.85 percentage by considering multiple year data. The TPO asked the assessee to submit the updated margins using only the data for financial year 2009 – 10. Assessee submitted the same where the average PLI of operating profit to operating cost of all these 10 comparables was calculated at 5.3% against the assessee‟s own profit level indicator of 12%. The learned transfer pricing officer further verified the accept/reject metrics of the assessee and noted that vertical of the IT enabled industry was not a criteria for rejection/acceptance of a company as a comparable. Therefore he noted that the companies engaged in IT enabled services were treated as comparables irrespective of the verticals that is the industry to which it caters, horizontal verticals such as functions like back-office operations, medical transcription et cetera. He accepted the transactional net margin method as the most appropriate method selected by the assessee. He therefore on examination of the transfer pricing study report found that it has several defects, further the comparable selected by the assessee were also not proper and therefore he carried out the fresh search and included further 7 comparables. Those comparables were offered for the comment of the assessee and finally after considering it , and updating various margin of those comparables, he selected 11 comparables whose operating profit to operating cost average margin was 26.61%. He applied the above margin on the operational cost of the assessee of INR 10 9437104/– and found that against the price received of INR 122666327/– the ALP is RS. 138558317/– and therefore he proposed an adjustment u/s 92CA(3) of INR 15891990/–.

The assessee against the draft of the proposed assessment made by the learned assessing officer preferred objection before the learned DRP who rejected the argument of the assessee with respect to the various comparables, however with respect to the margins of those comparables, it directed the learned TPO to verify them and correct the computational errors. Consequent to those directions the learned TPO passed an order on 22/12/2014 giving effect to the direction of the DRP retaining all these 11 comparables whose average margin and therefore the proposed adjustment was reduced to INR 14283265/–. The above adjustment was incorporated in the assessment order u/s 143 (3) read with section 144C of the act dated 24/2/2015 where the assessed income was determined at INR 18936258/– against the returned income of INR 4652993/– wherein the adjustment on account of the arm‟s-length price of INR 14283265/– was made. Assessee aggrieved with the order has preferred this appeal before us. The 1st ground of appeal

The learned transfer pricing officer considered the argument of the assessee that it is functionally dissimilar and rejected that stating that annual report has been produced and it is seen that the company is into an healthcare receivable cycle management predominantly which is an ITeS segment. He further held that 86% of the receipt is from healthcare receivable field and a small portion is in the coding activity. He thereafter extracted the annual accounts and the reports of the above comparable company and stated that healthcare management receivable system is of one single operational segment consisting of various activities which are closely related and complementary and the services cannot be termed as diversified activity. He further held that SaaS (software as a service) is nothing but bundle of all the services under one umbrella. He therefore held that the above comparable company y is functionally similar and passes all the filters applied. He further held that there is no abnormal fluctuation in the profit earning capacity of the comparable for the year under this situation and it is showing good margin consistently over the years and therefore there is no issue of supernormal profits. Therefore he stated that the comparable is robust comparable in case of the taxpayer and is retained as a suitable comparable. The learned dispute resolution panel was also of the view that the FAR profile of the company is essentially similar to that of the assessee hence it was retained as a comparable.

We have carefully considered the rival contentions and perused the annual account of comparable company placed at page number 119 – 226 of the paper book.

As in the case of the assessee for assessment year 2008 – 09 the coordinate bench has directed the learned TPO to exclude the above comparable only for the reason that it has an extraordinary events taken place during that year. Therefore for following the order of the coordinate bench in assessee‟s own case for the earlier year the facts must be similar that there should be an extraordinary event during this year in the case of the comparable. Otherwise the decision of the coordinate bench is distinguishable on the facts in absence of any such information available. Therefore merely on the basis of the earlier year‟ s order of the coordinate bench in assessee‟s own case, this comparable cannot be excluded and it is required to be tested on its own merit.

The assessee has also contested that it has undergone amalgamation of another company with the comparable company. The AR referred to page numbers 78 of the annual report wherein in „notes to accounts‟ the reference has been made that pursuant to the scheme of amalgamation of Accentia private limited with the company as approved by the shareholder in the court convened meeting held on 25th day of April 2009 and subsequently sanctioned by the honourable High Court of Mumbai vide order dated 21/08/2009 and the High Court of Karnataka vide order dated 06/02/2010, the assets and liability of the erstwhile company was transferred invested in this company with effect from 01/04/2008. On reading the above note it is apparently clear that amalgamation has happened with effect from 01/04/2008, and therefore it does not pertain to this year which is assessment year 2010 – 11 (FY 2009-10). There is no financial impact on the profitability / price of the comparable company shown to us. Therefore we reject the argument that there is an extraordinary event in the comparable company.

On careful consideration of the annual report of the above comparable company for financial year 2009 – 10 placed, at page number 41 of the annual report it is stated that the comparable company provides healthcare and receivable management services involving medical transcription, medical coding, billing and receivables management (collections). At page number 42, description of the medical transcription services have been provided which shows brief process of the medical transcription giving the process flowchart and in the end it is stated that medical transcription profession is considered very much a skilled work which can be done only after undergoing 6 to 8 months of rigorous training as it involves the identifying the generic name and trade name of the various drugs. That can be done only after reference to the pharmacology reference books which should always be a part of the library of a medical transcription profession. Further at page number 43 medical coding has also been explained by way of a flowchart. The company says that it has a sizeable number of certified coders which is assigning codes to diagnosis and procedures which help in financial reimbursement from insurance companies and government companies et cetera. It is further stated that medical coders are specialized in coding after thorough training program and certification. Further the assessee has contended that it has a significant amount of brands and software for providing IT services. For this proposition we look at page number 37 of the annual report wherein management discussion and analysis it is submitted that it is the 1st company to offer SaaS model HMRC area. It is also entering into the legal process outsourcing segment. It is also using Immaculate business process outsourcing management Page | 9 solutions for healthcare, financial and insurance sector and health the dox – cutting-edge offshore HRC solutions for healthcare sector are provided by this company. Therefore, looking to the functions performed by the Accentia technology and the various kinds of advanced assets in the form of software et cetera utilized, it is apparent that functionally the above company is not comparable with the assessee company. Hence we direct the learned transfer pricing officer /learned AO to exclude the above company from the comparability analysis. The 2nd comparable challenged by the assessee is Infosys BPO Ltd stating that it is 16. functionally dissimilar and is providing high end integrated services in the nature of business transformation services, sourcing and procurement outsourcing et cetera. It was further stated that it has a significant intangible assets and there are extraordinary events such as acquisition of a company. The learned authorised representative further referred to the several judicial precedents wherein the above comparable company has been excluded.

The learned transfer pricing officer rejected the all the contention of the assessee and stated that the above company is an ITeS company and fully comparable in the case of the assessee. Further it was stated that the presence of the brand value has not been shown to have made any impact on the profitability of this company and therefore same cannot be excluded. The learned dispute resolution panel also affirmed the finding of the learned transfer pricing officer.

We have carefully considered the annual report of Infosys BPO Ltd for financial 2009 – 10 placed at page number 213 – 296 of the paper book. Undoubtedly the comparable company belongs to Infosys group and therefore it has the support and backing of the Infosys brand which will have its own impact on the profitability and price of this comparable company. It is also not necessary that the comparable company must have spent for the brand value. In the present case of comparable is not required to do so as it belongs to as such one of the largest group in the IT segment “Infosys”. As per page number 281 in schedule 12 selling and marketing expenses shows that comparable company has spent approximately INR 7,500,000 towards the brand building and advertisement expenditure. Coupled with the fact that the comparable company belongs to Infosys group, has incurred the expenditure on the brand building and annual report itself shows the imprint of being part of the large IT segment group, it is apparent that the functional profile, the assets utilized by the comparable company are not comparable with the assessee company. Therefore, for this reason only, we direct the learned transfer pricing officer, AO to exclude the above comparable from comparability analysis.

With reference to the argument of the learned authorised representative that it has acquired one company MaCmish system LLC and therefore there is an extraordinary event in the company, deserves to be rejected at the threshold because it is merely a purchase of shares of the target company by this comparable. Purchasing shares of the company does not make any impact on the price of the margin of the comparable company. Therefore there is no extraordinary event when a company invests in some other company by purchase of shares. It is neither a case of amalgamation/merger. Hence on this ground the above comparable company cannot be excluded.

Further the authorised representative also stated that there is an amalgamation of PAN financial services India private limited with the company and therefore it should be excluded. We have carefully considered the contention and find that the board of directors in that meeting held on 06/10/2008 approved subject to the approval of the Karnataka and mothers High Court of scheme of amalgamation to amalgamate PAN financial services India private limited which is engaged in providing business process management services with the Infosys BPO Ltd with effect from 01/04/2008. Therefore even if there is an amalgamation or merger, it has happened in financial year 2008 – 09, and impugned financial year before us is financial year 2009 – 10 , hence it does not pertain to this year and therefore for this reason Infosys BPO cannot be excluded. 21. However for the reasons given by us above, we direct the learned TPO/AO to exclude the Infosys BPO Ltd from the comparability analysis for the reasons of having huge brand value. The 3rd comparable challenged by the assessee is TCS E serve international Ltd which is 22. stated to be the functionally dissimilar as it is engaged in transaction processing and technical services like software testing, verification and validation of the software. It was further stated that there is no availability of the segmental information and further the comparable company enjoys the Tata brand and is contributing significantly by payment thereof. 23. We have carefully considered the contentions and find the annual Report of the above comparable company placed at page number 297 – 371 of the paper book. Apparently TCS E serve international is a subsidiary of Tata consultancy services Ltd. Behind the above comparable company, there is a „Tata brand‟, which is almost 10 times bigger than Infosys brand ( on market cap basis) . On the perusal of schedule M of the profit and loss account there is a payment of 3738‟000s towards the Tata brand equity contribution. For this reason that it belongs to Tata group and has also contributed to Tata brand which is one of the largest brand in the information technology segment, there is a definite impact on the pricing capacity of the comparable which the assessee lacks. Hence, we find that TCS E serve international Ltd deserves to be excluded. Accordingly we direct the learned TPO – AO to exclude the above comparable. The 4th comparable that challenge by the assessee is TCS E serve limited stating that it is 24. functionally dissimilar engaged in the transaction processing and technical services like software testing, verification and validation of the software. It was further stated that like TCS E serve international Ltd it also belongs to the Tata group and owns significant intangible as well as makes payment for Tata brand equity. It is further stated that the scale of operation of this company itself makes it not comparable with the assessee. The learned transfer pricing officer rejected the arguments of the assessee similar to TCS E serve international Ltd. The learned dispute resolution panel also rejected the objection of the assessee.

On identical facts and circumstances we have excluded TCS E serve international Ltd that it belongs to a Tata group and has paid contribution for Tata brand. We have also perused the annual report of the comparable company which is placed at page number 372 – 507 of the paper book on careful analysis of the annual report it is found that in schedule „N‟, Tata brand equity contribution of this comparable companies is Rs 46065 (in thousands). Therefore we direct the learned transfer pricing officer to exclude the above comparable from the comparability analysis. The last comparable , 5th , challenged by the assessee is e4e healthcare business services Ltd 26. stating that it is engaged in medical transcription services and other diversified services. The learned transfer pricing officer considered the above issue at page number 67 of his order where the assessee contested that it is not functionally comparable and it is engaged in software development activities and segmental accounts are not available.

The learned transfer pricing officer has held that though the company is primarily engaged in the business of providing healthcare outsourcing services for the healthcare industry and the primary source of the income of that company is that activity. In view of this it was held that it is a comparable company. The learned dispute resolution panel also agreed with the finding of the learned TPO. The assessee also relied on the decision of coordinate bench in case of Bechtel India private limited vs DCIT ITA number 1478/del/2015 for assessment year 10 – 11 wherein the above comparable was rejected on account of being engaged in both software development and healthcare services and on availability of segmental information being functionally dissimilar (KPO) and the product company.

We have carefully considered the contention of the assessee as well as the orders of the learned TPO and dispute resolution panel. The assessee has submitted the copies of the annual accounts of the above company placed at page number 1 – 34 of the paper book. We Page | 12 have also considered the order of the coordinate bench in ITA number 1478/del/2015 at para number 3 at page number 17 where above comparable company has been excluded from the comparability analysis. We find that the facts before us are quite distinct as we do not find any reference in the order of the coordinate bench that how the assessee is engaged into a software development activity. Even otherwise the coordinate bench considered that this comparable is functionally dissimilar to the Bechtel however it never held that it is functionally dissimilar to this assessee. Hence, reliance on that decision deserves to be rejected.

On analysis of note number 1.1 of schedule 1 being significant accounting policies of schedule to the financial statements it is apparent that this company is primarily engaged in the business of providing healthcare outsourcing services for the healthcare industry. The revenue stream of this company is also income from services. The revenue recognition mentioned that note number 1.4 of the significant accounting policies provides that as per the profit and loss account, company derives its revenue primarily from healthcare outsourcing services. The revenue from outsourcing services recognizes the related services are performed, in accordance with the specific terms of the contract with the customers. Earnings in excess of billings are classified as advance revenue while billing in excess of the cost and earning is classified as unearned revenue. In view of this it is apparent that assessee is not engaged in any software development activities. We have also perused schedule 16 notes to the accounts wherein „commitments and contingent liabilities‟ company it is referred that company‟s software development centers in India are 100 % export oriented units under the software technology Park guidelines. But that does not make that assessee is engaged in the business of software development activities also, unless, the accounts, revenue stream, relevant cost, directors report, management discussion and analysis shows otherwise. It is also not mentioned anywhere in the report that assessee is engaged in medical transcription, according services. In view of this, we reject the contention of the learned authorised representative and uphold the order of the learned TPO as well as the learned dispute resolution panel, that this company is functionally comparable as it is engaged in the outsourcing services as assessee is engaged in. In view of this, we find no infirmity in the order of the learned TPO/DRP in including the above comparable company for the comparability analysis. Hence we direct them to retain the above comparable.

The next adjustment by the assessee is with respect to the granting of working capital adjustment. The learned transfer pricing officer at page number 76 of his order has held that assessee has failed to give any answer that why the working capital adjustment should be allowed to the assessee. The learned transfer pricing officer further held that that in case of Page | 13 the service industry as it does not have any inventory, issue becomes quite irrelevant. Further he also noted that assessee has not been able to demonstrate that the difference in the working capital deployed is making a difference in the margins earned by the assessee and the other comparables. The learned dispute resolution panel also considered this argument of the assessee vides ground number 11 and 12. Even before us, assessee has only relied upon the submissions made before the learned dispute resolution panel for allowability of the working capital adjustment, however, it did not provide any working of the same. In view of the absence of proper working and the reasons given by the assessee before the lower authorities or before us, we do not find any reason to accept the contention of the learned authorised representative. Therefore we reject the argument of the working capital adjustment while computing the margins.

Accordingly ground number 2 of the appeal of the assessee is partly allowed.

Ground number 3 of the appeal is with respect to the judicial decisions on the transfer pricing adjustment not followed by the lower authorities. No specific arguments were advanced before us. Even otherwise the comparability analysis is a complete factual analysis and therefore any comparable which is held to be not comparable for consideration in case of any other assessee cannot be held to be not comparable with the whole world, as that would make that comparable which has been excluded on the basis of the judicial precedent as a unique comparable and only „one alien existing‟ in the whole corporate world. Such is not the mandate of the income tax act and rules there under. The comparability is to be tested only with the functional analysis of the assessee viz a viz the comparable contested. The judicial decisions, unless otherwise warranted, cannot be relied upon for exclusion of such comparables. Hence we reject the ground number 3 of the appeal.

Ground 4 is with respect to initiation of the penalty proceedings and ground number 5 is with respect to the charging of interest under the various provisions of the income tax act, both are consequential in nature, hence both are dismissed.

In view of this appeal of the assessee in ITA number 1671/del/2015 for assessment year 2010 – 11 is partly allowed. ITA number 441/del/2016 Assessment year 2011 – 12 35. This appeal is filed by the assessee against the order of the learned assistant Commissioner Of Income Tax, Circle – 1 (1), Gurgaon (the learned AO) passed u/s 143 (3) read with section 144C of The Income Tax Act on 23/11/2015 in pursuance of the direction of the learned Dispute Resolution Panel – 1 (the learned DRP) New Delhi dated 10/del/2015 in objection filed by the assessee in draft of the proposed assessment passed by the learned Page | 14 Deputy Commissioner Of Income Tax, Circle 1 (1) wherein the adjustment of Rs 33397407/– to the international transaction of the assessee was made by the order of The Assistant Commissioner Of Income Tax, Transfer Pricing Officer – 1 (1) (1), New Delhi passed u/s 92CA (3) dated 07/01/2015 was considered an adjustment to the arm‟s-length price of the international transaction of Rs. 33397407/– proposed by the learned TPO was made of Rs. 28328904/–.

The assessee has raised the following grounds of appeal in for the Assessment Year 2011-12:- “1. The assessment order passed by the Learned Assessing Officer („Ld. AO‟) u/s 143(3) read with section 144C of the Act, pursuant to the directions of Ld. Dispute Resolution Panel („Ld. DRP‟) u/s 1440(5), based on the facts and in the circumstance of the case is bad in law.

There is no change in the facts and circumstances of the case of the assessee for assessment year 2000 – 11 and assessment year 2011 – 12 , so far as the services provided by the assessee are concerned. During the year the assessee has entered into an international transaction with its associated enterprise of provision of information technology enabled services (ITeS) of Rs. 216186841/–. The assessee benchmarked above international transaction selecting 16 comparables, adopting the profit level indicator of operating profit by total cost (OP/TC), computing the margin of the comparable at 9.34 percentage and comparing it with the cost plus markup model of the assessee of 15%, submitted in the transfer pricing study report that international transaction of provision of ITeS services carried out by the assessee is at arm‟s-length.

The learned transfer pricing officer rejected the TP study report prepared by the assessee and carried out the fresh search taking the single year data as provided by the Indian tax laws, adopted certain filters and selected finally 7 comparables whose average profit level indicator was 31.51 % (OP/TC) and compared it with the margin of the assessee which is 15% and made an adjustment of INR 31657652 /- on ALP of transaction of provision of ITeS services. 39. On objection before the learned dispute resolution panel, 1 of the comparable was excluded and further the margins were recomputed. Therefore ultimately 6 comparables were upheld for inclusion whose average margin PLI was 29.50 percentage and the ultimate adjustment was revised to INR 27848043/–. Further adjustment with respect to the interest cost of the receivables imputed at INR 1739755/– by the learned transfer pricing officer which has been reduced by the learned dispute resolution panel to INR 480861/–. Consequently this appeal is filed by the assessee. 40. The ground number 1 of the appeal is general in nature and therefore the same is dismissed. 41. The ground number 2 challenges the transfer pricing adjustment of INR 2 7848043/–. The assessee challenges the inclusion of the comparable as under:- a. Accentia technologies Ltd b. Eclerx services Ltd c. TCS E serve limited d. Infosys BPO Ltd 42. The arguments of the both the parties with respect to the exclusion of above comparables remained the same as were advanced for assessment year 2000 – 11. The only new comparable which assessee is seeking for exclusion is Eclrex services Ltd. 43. We have carefully considered the rival contentions and perused the orders of the lower authorities. On comparison of the functions performed by the assessee as well as the Page | 17 functions performed by the comparable companies, discussion made by us in the order of the assessee for assessment year 2010 – 11, we direct the learned transfer pricing officer to exclude (1) Accentia technologies Ltd, (2) TCS E serve limited, (3) Infosys BPO Ltd for reason given by us therein.

Now we come to the new comparable E clrex services Ltd, which assessee contest for exclusion stating that it is functionally dissimilar as it is engaged in rendering knowledge process services focused on financial services and sales and marketing support services. Therefore the contention of the learned authorised representative is that it is KPO which cannot be compared with the functions of the assessee. It was submitted that the functions provided by the assessee are not at all knowledge process outsourcing functions. The learned TPO held that it is functionally similar, though it is a KPO as claimed by the assessee, several services provided by the taxpayer are also of similar nature. He further held that all the services of the taxpayer are not high end and therefore both the lower end and high-end comparables have been used. He further held that the services provided by the comparable are part and parcel of the ITeS segment. The learned dispute resolution panel upheld the findings of the learned TPO.

We have carefully considered the rival contentions and find that knowledge process outsourcing comparable cannot be held to be comparable with the functions provided by the assessee, such is the mandate of the decision of the honourable Delhi High Court in the Rampgreen solutions private limited vs. CIT (ITA number 102/2015 for assessment year 2008 – 09). Ld TPO has also accepted that comparable company is a KPO. Therefore respectfully following the decision of the honourable Delhi High Court, we direct the learned transfer pricing officer to exclude the above comparable from the comparability analysis.

The assessee did not contest any other issues as mentioned in ground number 2, and therefore the ground number 2 of the appeal of the assessee is decided on the exclusion of the above comparable is only and same is partly allowed.

Ground number 3 is not pressed before us, therefore, the same is dismissed.

Ground number 4 is challenged by the assessee where the contention of the assessee is that the receivables outstanding beyond 30 days from the associated enterprise are deemed as loan and charging notional interest at the rate of one month LIBOR +400 basis points resulting into the interest rate of 4.78% for the period of delay in receipt of payment beyond 30 days of the invoice is not correct. The learned transfer pricing officer after the direction of the learned dispute resolution panel has made an adjustment of INR 4 80861/– against the original adjustment proposed by the learned transfer pricing officer of INR 1 739755/–. Page | 18