ITO, NEW DELHI vs. M/S. OMNIGLOBE INFORMATION TECHNOLOGIES (I) PVT. LTD., NEW DELHI

PER KULDIP SINGH, JUDICIAL MEMBER :

“1. On the facts and circumstances of the case, the Hon’ble DRP-II has erred in allowing the appeal of the assessee by excluding M/s. EClerx Services Ltd. and M/s. Acropetal Technologies Ltd. as a comparable. 2. On the facts and circumstances of the case, the Hon’ble DRP-II has erred in directing the TPO/AO that the Transfer Pricing adjustment, at best, could not exceed the amount of margin retained by the Associated Enterprises.” ”

The taxpayer is into the provision of BPO/Data Processing Services to its AE. It is also providing IT Enabled Services (ITES) relating to phone activation and local number portability to various clients for and on behalf of its parent company.

Sl. International Associated Amount (Rs.) Method No. Transactions Enterprises (Receipt) Applied 1. Provision of BPO/ Omniglobe 33,98,09,045 TNMM Data Processing LLC services

However, during the TP proceedings, the taxpayer recomputed the updated margin of the comparables as per TPO’s direction at 5.58% and treated its international transactions qua provisions of BPO services with its AE at arm’s length.

9. After applying the aforesaid filters, ld. TPO has finally selected the 7 comparables to benchmark the international transactions which are as under :-

Sl. Name of the Company Working No. capital adjusted OP/OC 1. Accentia Technologies Limited 29.12% 2. Acropetal Technologies Limited (Seg.) 18.12% 3. E4e Healthcare Business Services Pvt. Ltd. 13.74% 4. Eclerx Services Limited 58.57% 5. Infosys BPO Limited 21.56% 6. Jindal Intellicom Limited 16.76% 7. T C S E-serve Limited 71.99% Average 32.84%

10. Ld. TPO accordingly proposed the ALP of international transactions qua provision of ITES as under :-

Total Revenues Received (A) 339,809,045 Total Operating Cost (B( 311,012,913 Arm’s Length Profit (C = 32.84% of B) 102,136,641 Arm’s Length Price (D = B+C) 413,149,554 Difference (E = D – A) 7,33,40,509

11. It is also not in dispute that the ld. DRP has allowed working capital adjustment in order to compute the margin of the comparable companies and also ordered to restrict the adjustment, if any, to the margin retained by the AE. The Revenue has challenged the exclusion of Eclerx Services Ltd. and Acropetal Technologies Ltd. made by the DRP for benchmarking the international transactions. So, we would examine the comparability of aforesaid comparables vis-à-vis the taxpayer qua ITES as under.

GROUND NO.1 ECLERX SERVICES LTD. (ECLERX)

However, on the other hand, ld. AR for the taxpayer by relying upon the order passed by the ld. DRP contended inter alia that Eclerx is functionally not comparable; that it has exceptional year of operation; and relied upon the decision rendered by the Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. v.

CIT, 377 ITR 533 (Del.).

“37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s Capital Iq Information Systems (India) (P.) Ltd. v. Additional Commissioner of Income- tax (supra),wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits.”

Consequently, we do not find any ground to interfere into the findings of the ld. DRP.

ACROPETAL TECHNOLOGIES LTD. (ACROPETAL)

15. Ld. DRP excluded Acropetal on the ground that it is a KPO and as such it is not a good comparables. However, on the other hand, ld. AR for the taxpayer contended that the ld. DRP has rightly excluded the Acropetal because it is functionally dissimilar and it also fails employee cost filter and relied upon the decision rendered by the coordinate Bench of the Tribunal in case of ACIT vs. Flextronics Technologies (India) (P.) Ltd. – (2019) 101 taxmann.com 348 (Bangalore – Trib.).

Coordinate Bench of the Tribunal in ACIT vs. Flextronics 16.

Technologies (India) (P.) Ltd. (supra) excluded Acropetal on the ground that the engineering design services segment of Acropetal is functionally different and is not a good comparables to a company rendering ITES to its AE by returning following findings:-

“ Acropetal Technologies Limited Having considered the submissions, on perusal of the annual report, it is noticed by us that the assessing officer has considered the revenue from the engineering design segment. Hon'ble ITAT, Bangalore in IT (TP)/A/1678/Bang/2012 in the case of Global E Business Operations, directed to exclude the above company by observing that 'we have considered the submission of the learned counsel for the assessee, on perusal of note no.15 of notes to accounts, which gives segmental revenue of this company, it is clear that the major source of the income for this company is from providing engineering design services and information technology services. The function performed by the engineering design services of the company cannot be considered as comparable to the ITES /BP0 function performed by the assessee. The performance of the engineering design services is regarded as providing high end services amongst the BPO which require high skill whereas the services performed by the assessee are routing low end ITES function. We therefore hold that this company could not have been selected as comparable, especially when it performs engineering design services which only a knowledge processing outsourcing (KPO) would do and not a business processing outsourcing (BPO).' Similar View was taken by Hon'ble Bangalore ITAT in the case of -

Symphony Marketing Solutions India Pvt. Ltd. vs. ITO (IT (TP) A No. 1316/Bang/2012), held that Acropetal cannot be considered as comparable as it performs engineering design services accordingly we direct the assessing officer to exclude the company from the comparables The above company was directed to be excluded by the Hon'ble ITAT in assessee's own case for AY 2008-09.”

“Architectural, Structural, Electrical, Plumbing, Steel Detailing, External Utilities, Design Engineering.”

“8.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that a co-ordinate bench of this Tribunal in the case of Swiss

Re Shared Services (India) Pvt. Ltd., for asst. year 2011- 12 (Supra) has examined in detail the comparability of this company as a comparable to that of a service provider of ITES services to its AE's and at6 para 21 to 24 thereof held as under:-

“21. Arguing exclusion of Acropetal Technologies Ltd, (seg), Ld. AR submitted that Acropetal Technologies Ltd, was rendering service in the field of engineering design fin- health-care enterprise solutions and IT infrastructure solutions. As per the Ld. AR, AO took the engineering design services done by Acropetal Technologies Ltd, as a comparable segment with ITES services of the assessee. Ld. AR pointed out that engineering design services rendered by M/s. Acropetal was entirely different from the type of services done by the assessee. Further according to him Hyderabad bench of the Tribunal in the case of Excellence Data Research P. Ltd v. ITO [17'A.159/1-Iyd12014, dt.31.07.2014 had held that Acropetal Technologies Ltd, was not a good comparable in the BPO segment. As per the Ld. AR M's. Excellence Data Research P. Ltd, was rendering back office data creation, content development and support services which were not comparable to what assessee was doing. Though the decision of the Hyderabad Bench was for A.Y. 2009-10, as per the Ld. AR, M/s. Acropetal Technologies Ltd, was doing the very same business during the relevant previous year also and therefore it could be considered as a good precedent.

Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Services that were being rendered by Acropetal Technologies Lid, appears at page 8 of its annual report. It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural healthcare, engineering design and enterprise solutions. In our opinion, the type of services that was being provided by Acropetal Technologies Ltd, was not at all comparable with the type of services that the assessee was providing. It is also mentioned in the annual report of the said company that it was providing high end services in the engineering design services. No doubt as mentioned by the Ld DR, it may not be feasible to have comparables which fit in the exact mould as that of an assessee in TP analysis. However, when one company is giving sophisticated set of services which involves higher level of skill sets, and the other is doing it on a lower level, we cannot say that the former should be considered as a comparable to the latter. Though for a different year, comparability of Acropetal Technologies Ltd, (seg) had come up &fore Hyderabad bench of the Tribunal in the case of Excellence Data Research P. Ltd (supra). Observations of the Tribunal as it appears at para 18.1 reads as under 18.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end, by the coordinate bench of the Tribunal in the case of Hyundai "Motors India Engineering’ (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company.

8.3.2 Taking into consideration the facts and circumstances of the case and respectfully following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) Pvt. Ltd., for asst. year 2011-12 (Supra), we hold that the engineering design services segment of Acropetal Technologies Ltd., is functionally different and hence cannot be considered as a good comparable to the assessee in the case on hand who is providing only ITES services to its AE's. The AO/TPO are, therefore, directed to exclude this company from the list of comparables in the case on hand.”

17. The ld. DR for the Revenue contended that healthcare segment of Acropetal should be taken as a comparable. However, balance sheet of Acropetal, available at pages 182 to 261 of the paper book, shows that its healthcare segment is not a BPO. So, following the decision rendered by the coordinate Bench of the Tribunal in the case of ACIT vs. Flextronics Technologies (India)

(P.) Ltd. (supra), we are of the considered view that ld. DRP has rightly excluded the Acropetal from the final set of comparables.

So, ground no.1 is determined against the Revenue.

GROUND NO.2

“11. Without prejudice to the assessee company’s contention that the adjustment made by the TPO in not sustainable, it was submitted that the adjustment at best could be made only to the extent of Rs. 11,960,457, being the amount which has been retained by the associated enterprise.

12. The Ld. CIT(A) in his order restricted the Transfer Pricing adjustment to Rs. 1.19 crores holding as under: "The Transfer Pricing Officer has computed an adjustment of Rs.17.04 crores while the value of international transactions is Rs.13,00,89,632. The total revenue received by the associated enterprises in respect of BPO services rendered by the appellant amounting to Rs.13,00,89,632 is Rs.14,20,50,089. In other words, the associated enterprise has retained Rs. 1, 19,60,457 out of the total proceeds received from the customers. The adjustment computed by the TPO in the order passed under section 92CA(3) of the Act at best cannot exceed the net amount retained by the associated enterprises in respect 'of international transactions, i.e., gross revenue' received from the end customers less amount paid' to the appellant and, other operating expenses. It is observed that the gross revenue received from the end customers in respect of various contracts, the associated enterprise have retained only Rs. 1,19,60,457 at their end and the balance has been passed on to the appellant.”

12.3 The issue has been considered in the recent decision of Delhi Bench of the Tribunal in the case of DCIT vs. Global Vantedge P. Lid., wherein, the Tribunal held that adjustment on account of arm's length price of international transactions cannot exceed the maximum arm's length price, i.e., the amount received by the associated enterprise from the customer and the actual value of international transactions, i.e., the amount received by the assessee in respect of international transactions.

12.4 In view of the same I am of the considered view that the adjustment to the income of the appellant has to be restricted to Rs.1,19,60,457- being the amount retained by the associated enterprises.”

13. Aggrieved with this order, the Revenue had come up in the present appeal. Ld. D.R. placed reliance on the order of Ld. CIT(A) and had prayed for quashing of CIT(A)’s order on this issue. On the other hand, Ld. Sr. Counsel submitted that the appellant could not have expected to receive from the customers of the AEs of the appellant, anything more than the amount paid by some customer to the AE, if the appellant were to be obtain the contracts for services from the customers directly, i.e., without the involvement of the AEs of the appellant. Thus, at the most the consideration received by the appellant from the AEs may be replaced by the consideration received by the AEs from its customers, for the services provided by the appellant; the price charged by AEs to the customers being the CUP. Reliance is placed in this regard on the decision of the Hon'ble Delhi High Court in the case of Sony India P. Ltd. vs. CBDT (Delhi) ; 288 ITR 52 has at pages 61-62, observed as under:

"The concept of transfer pricing leading to tax avoidance has been acknowledged in the Act only recently. It is a concomitant of the operations of multinational corporations (MNCs) that set up base by incorporating a local subsidiary in a country where they seek to operate. It is often seen that the MNC transfers goods and services to its local subsidiary at a price not reflective of the market price (or arm's length price as if is referred to in the present context) and in turn the subsidiary is able to avoid, partly or wholly, payment of the local tax, Alth9ugh the expression "transfer price" has not been defined in the Act,' it is 'understood to mean "that price which is arrived at when two associated or related' enterprises deal with each other".

14. Reference was made to the Finance Minister’s Budget Speech for the year 2001 that the presence of multinational

enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions has made the issue of transfer pricing a matter of serious concern. The purpose of inserting these provisions is therefore to determine the arm's length price (ALP) of an international transaction involving an MNC and its local associate."

18. Reliance in this regard is also placed on the recent decision of Delhi Bench of the Tribunal in the case of Hyper Quality India Pvt. Ltd. vs. ACIT (ITA No. 5630/0ell2011 ), wherein, it has been held as under:

“7. Ld. TPO erred in evaluating FAR (Functions performed, Assets. employed and Risk assumed) analysis which has been summarily confirmed by DRP. To support its case, assessee furnished split financials of the appellant and its AE. Whereas the appellant has been able to earn profit in India its counterpart the AE has continuously sustained losses. There being no element of profit in the hands of the AE, there is no case of shifting of profits, practicable or probable. Invoking a higher ALP on the appellant is only anticipatory and complete ignorance of fact. The facts and figures produced before the Ld. TPO establish that there is no commercial profit available in the hands of the AE. In absence of profit availability, the any enhancement of the ALP results in artificial profit anticipated by the Ld. TPO and not earned by the Appellant. The order of the LD, TPO in enhancing the ALP offered by the appellant is in ignorance of valid FAR and factual considerations and is bad in law and facts."

'77. As a concept and principle Chapter X does not artificially broaden, expand or deviate from the concept of "real income". "Real income", as held by the Supreme Court in Poona Electricity Supply Company Limited versus CIT, [1965J 57 ITR 521 (SC), means profits arrived at on commercial principles, subject to the provisions of the Act. Profits and gains should be true and correct profits and gains, neither under nor over stated. Arm's length price seeks to correct distortion and shifting of profits to tax the actual income earned by a resident/domestic AE. The profit which would have accrued had arm's length conditions prevailed is brought to tax. Misreporting, if any, on account of non-arm's length conditions resulting in lower profits, is corrected. XXX (xii) When segmentation or segregation of a bundled transaction is required, the question of set off and apportionment must be examined realistically and with a pragmatic approach. Transfer pricing is an income allocating exercise to prevent artificial shifting of net incomes of controlled taxpayers and to place them on parity with uncontrolled, unrelated taxpayers. The exercise undertaken should not result in over or double taxation. Thus, the Assessing Officer/TPO can segregate AMP expenses as an independent international transaction, but only after elucidating grounds and reasons for not accepting the bunching adopted by the assessed, and examining and giving benefit of set off. Section 92(3) does not bar or prohibit set off."

20. In view of the aforesaid, it is respectfully submitted that the adjustment shall be restricted to Rs. 1.19 crores.

19. So, following the decision rendered by the coordinate Bench of the Tribunal in HCL Technologies BPO Ltd. vs. ACIT (supra, affirmed by Hon’ble Delhi High Court and Hon’ble Supreme Court, we are of the considered view that ld. DRP has rightly held that transfer pricing adjustment should not exceed the amount of margin retained by the AE. Consequently, findings returned by the ld. DRP are hereby confirmed. So, ground no.2 is determined against the Revenue.

Order pronounced in open court on this 15th day of April, 2019.