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Income Tax Appellate Tribunal, BANGALORE BENCHES : “B”, BANGALORE
Before: SHRI B.R.BASKARAN & SMT BEENA PILLAI, JUDICAL MEMBER
PER SMT BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against order passed by Ld. ACIT, Circle 7 (1) (2) under section 143 (3) read with 144C(13) of the Act for assessment year 2012-13 on following revised grounds of appeal:
IT(TP)A No.779(B)/2017 2 The grounds of appeal raised by the Appellant are without prejudice to one another. The Ld. AO in pursuance of the order of the Ld.
1. TPO and the directions of the Ld. DRP erred on facts and law while including Universal Print Systems Limited as a comparable whereas the same should have been excluded for the reason that it is functionally dissimilar to the Appellant. (corresponding to original ground 4.7)
The Ld. AO in pursuance of the order of the Ld. 2. TPO and the directions of the Ld. DRP erred on facts and law while including BNR Udyog Ltd. as a comparable whereas the same should have been excluded for the reason that it fails RPT filter of 25% and that it is functionally dissimilar to the Appellant. (corresponding to original ground 4.7 and additional ground 7).
The Ld. AO in pursuance of the order of the Ld. 3. TPO and the directions of the Ld. DRP erred on facts and law while including Excel Infoways Ltd. (Segmental) as a comparable whereas the same should have been excluded for the reason that it is functionally dissimilar to the Appellant. (corresponding to original ground 4.7)
The Ld. AO in pursuance of the order of the Ld.
4. TPO and the directions of the Ld. DRP erred on facts and law while including Infosys BPO Ltd. as a comparable whereas the same should have been excluded for the reason that it is functionally dissimilar to the Appellant. (corresponding to original ground 4.7) 5.The IA. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law IT(TP)A No.779(B)/2017 3 while including TCS E-Serve Ltd. as a comparable whereas the same should have been excluded for the reasons of functional dissimilarity (corresponding to original ground 4.7) Wrongly computing the working capital 6. adjustment for back-office support services segment; (corresponding to original ground 4.10)
On the facts and circumstances of the case 7. and in law, the learned DRP/ AO/ TPO erred in /4-f incorrectly computing the margin of Microgentetics Systems Ltd (corresponding to original ground 5)
On the facts and circumstances of the case and 8. in law, the learned DRP/ AO/ TPO erred in not considering certain expenses as operating in nature such as provision for bad debts, provision for doubtful debts, provision for warranties, etc. on the premise that these are not the routine operating costs in determining the operating mark-up of the comparable companies. (corresponding to ground no. 6) That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal.
IT(TP)A No.779(B)/2017 4 2. Brief facts of the case are as under: Ld. AO observed that assessee was incorporated in India as a wholly owned subsidiary of VWR International Pte. Ltd, Singapore which is a part of VWR Group, Assessee filed its return of income on 29/11/12 declaring ‘nil’ income. Subsequently notice under section 143 (2) was issued to assessee, in response to which representative of assessee appeared before Ld. AO and filed requisite details. 2.1 Ld. AO observed that assessee is engaged in trading and distribution of laboratory products and chemicals, strategy sourcing, information technology enabled services. It was observed that, assessee during year had entered into international transaction with its AE. Accordingly reference was made to Transfer Pricing Officer. Ld.TPO upon receipt of reference under section 92CA of the Act, issued notice to assessee calling upon to file economic details of the international transaction in form 3 CEB. 2.2 Ld.TPO observed that assessee has entered into following international transaction: Sl.No. Particulars Amount (in Rs.) 1 Receipts for back office support 295,656,798 services 2 Receipt for sourcing support 20,224,139 services 3 Receipt for marketing support 3,439,517 services 4 Purchase of traded goods 7,394,219 5 Reimbursement of communication 5,593,104 expenses 6 Reimbursement of business 602,936 promotion expenses 7 Payment for EDP/Software 6,605,232 maintenance charges 8 Reimbursement of bank charges 2,318,210 IT(TP)A No.779(B)/2017 5 2.3 It was observed that, assessee computed arm’s length price of international transaction for back office support services rendered by assessee to its AE being IT enabled services, with OP/TC as PLI. Assessee thus computed its margin at 15.80%. It selected following 7 comparables, with average margin of 11%.
Sl. No. Comparable Company Average adjusted Mark-upon total cost 1 Cameo Corporate Services Ltd. 10% 2 Cosmic Global Ltd. 13% 3 Sparsh BPO Service Ltd. 2% 4 E4e Healthcare Business Services 14% Pvt.Ltd. 5 Jindal Intellicom Ltd. 13% 6 Inhouse Productions Ltd. 14% 7 Vishesh Infotechnics Ltd. 15% 2.4 Ld.TPO on application of various filters accepted 2 comparables of assessee and on basis of fresh search included following comparables with average margin of 28.11%: Op/OC Sl.No. Name of the Case 1 Accentia Technologies Ltd. 11.75 2 Universal Print Systems Ltd.(Seg. (BPO) 52.46 3 Informed Technologies Ltd. 6.08 4 Infosys BPO Ltd. 36.30 5 Jindal Intellicom Ltd. -0.05 6 Microgenetic Systems Ltd. 19.61 7 TCSE -Serve Ltd. 63.69 8 BNR Udyog Ltd.(Seg.) (IT/BVPO) 50.61 9 Excel Infoways Ltd.(Seg)(IT/BVPO) 29.79 10 E4e Healthcare Services Pvt.Ltd. 19.85 Average PLI 28.11% He thus proposed adjustment of Rs.2,83,92,667/- under ITeS (BPO) segment in hands of assessee.
Aggrieved by proposed adjustment, assessee raised objections before DRP who upheld the same. There was corporate ground issue that was alleged by assessee before DRP regarding provision IT(TP)A No.779(B)/2017 6 for bad and doubtful debts, warranties etc., to be considered as operating expenses which was rejected by DRP. Upon receipt of DRP order, Ld.AO passed final assessment order making addition in the hands of assessee. 4.1. Aggrieved by order of Ld. AO, assessee is in appeal before us now. 4.2 Assessee has also filed additional ground as under: ‘7. The Ld.AO in pursuance of the order of Ld.TPO and the directions of that the Ld. DRP erred on facts and law while including BNR Udyog Ltd., as a comparable whereas the same should have been excluded for the reason that it is functionally dissimilar to the Appellant” He submitted that it was an inadvertent omission to include this comparable while filing original grounds of appeal
. He also submitted that the comparable was alleged before DRP. Placing reliance upon decision of Hon’ble Supreme Court in case of National Thermal Power Company Ltd reported in 229 ITR 383. Ld.AR submitted that, ground may be admitted as it arises out of the records. Ld. DR though objected to admission of the additional ground, however could not controvert submissions advanced by Ld.AR. It is observed that comparable alleged for exclusion by assessee in additional ground is a part of record and was raised before DRP. The inadvertent error in not including this comparable therefore amounts to bona fides mistake. We are therefore inclined to admit the additional ground.
5. Ground No. 1-5 and additional ground raised are in respect of exclusion of following comparables.
IT(TP)A No.779(B)/2017 7 Universal Print Systems Ltd (segmental) (BPO) Infosys BPO Ltd TCS E-Serve Ltd BNR Udyog Ltd (segment) (medical transcription) Excel Infoways Ltd (segmental) (IT) (BPO) 5.1 Before dwelling into comparability, it is sine qua non to understand the functions performed, assets owned and risk assumed by assessee under the segment. Functions: In TP study, assessee has been submitted to be providing back- office support services on behalf of the group concerns. It has been submitted that assessee carries out various services through various departments including Accounts Payable, the customer master data team the cross-reference team the backorders, marketing communications and material safety that. It is also been submitted that for the services assessee is compensated on cost plus markup basis. Assessee is also held to be providing support services to its AE is in relation to sourcing of laboratory supplies, equipment and instruments from benders in India. It is also held to be providing marketing support services in respect of direct sales undertaken by the AE and distribution services in respect of equipments manufactured by group to third-party customers in India. Assets employed: Assessee utilises computer systems, office equipments et cetera for the purposes of business. And it does not own any non-routine intangibles.
IT(TP)A No.779(B)/2017 8 Risks assumed: it has been submitted that assessee do not own any significant risk except for foreign exchange risk as compensation for the services rendered is received by assessee in foreign currency which is subjected to foreign exchange fluctuations. Thus in toto assessee has been characterised as less than minimal risk service provider in relation to provision of back-office support services. a) Universal Print Systems Ltd (segmental) (BPO) Assessee sought to exclude this comparable for the reason that, it fails employee cost filter and has insufficient company information. It is also been submitted that, functionally this company is providing integrated print solution to its customers and does not provides routine ITEs services like that of assessee. It has been submitted that this company is not a captive service provider like that of assessee and has products sale as well as services sale, which is evident from page 1360 of paper book volume 1 (Index for Annual Reports). Ld.CIT DR placed reliance upon orders of authorities below and submitted that this comparable is functionally comparable with that of assessee. We have heard submissions advanced by both sides in light of record placed before us. On perusal of annual report of this company placed in paper book, we are of considered opinion that this comparable is basically into sale of products and services unlike a captive service provider such as assessee, who works on cost plus basis, providing services only to its AE’s. It is also IT(TP)A No.779(B)/2017 9 observed that this comparable is basically providing BPO services from its Prepress units. In written submission filed, assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Pvt Ltd., vs ACIT reported in (2019) 101 taxman.com 292, wherein this comparable has been excluded by observing as under:
10.4 We heard rival submissions and perused the material on record. The issue of comparability of universal Print Systems Ltd. with that of the assessee-company has been duly considered by TPO after referring to information contained in Annual Report. The relevant findings of the TPO had not been countenanced by learned AR of the assessee. However, the issue of comparability of Universal Print Systems Ltd. has also been considered by the co-ordinate bench of this Tribunal in the case of CGI Information Systems & Management Consultants Pvt. Ltd. (supra) wherein it was held as follows: “47. The next submission of the learned counsel for the Assessee was with regard to exclusion of 2 comparable companies from the list of 7 comparable companies that remain after the order of the DRP. The first comparable company sought to be excluded is Universal Print Systems Ltd. This company was chosen as a comparable company by the TPO. In reply to the proposal of the TPO to include this company as a comparable company, the Assessee vide its letter dated 22.12.2015 had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP TC of this company will be only 51.80%. The Assessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.6% of the total revenue from operations of this company as per its annual report. The .Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its IT(TP)A No.779(B)/2017 10 customers, which includes scanning, design/layout, trapping, hand- outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue.
The TPO at page-20 of his order has dealt with the above objections by observing as follows:
(a) Pre-Press BPO unit provides back office support services.
(b) This company has four major segments viz., Repro, Label Printing, Offset Printing and pre-press BPO. The employee cost of pre-press BPO was more than 25% of the revenue from pre-press BPO and therefore the employee cost filter is satisfied in the case of this company.
(c )On the service revenue filter viz., the requirement that a comparable company must have revenue from rendering services of more than 75% of its total revenue, the TPO again held that the pre-press BPO segment's entire income is from services and therefore this objection is not to be accepted.
On objections by the Assessee before the DRP, the DRP confirmed the action of the TPO. One of the objection before the IT(TP)A No.779(B)/2017 11 DRP was that this company did not figure in the list of companies engaged in ITES. On this objection the DRP held that though this company did not figure in the list of companies in 1TES in the main search of capital line and prowess database but on a segmental search these two companies satisfied the requirement of being considered as companies engaged in providing ITES. Aggrieved by the directions of the DRP, the Assessee is in appeal before the Tribunal. The learned counsel for the Assessee reiterated submissions that were made before the TPO/DRP. In particular it was submitted that the service revenue filter was applied by the TPO himself at the entity level and on such search this company was not regarded as engaged in providing ITES. At this stage the TPO ought to have dropped this company as a comparable company because this filter has to be applied at the entity level and not at the segmental level. The learned DR submitted that if the service revenue filter isapplied at the segmental level there can be no objection by the Assessee. She relied on the order of the DRP/TPQ.
The requirements of Rule 10B(1)(2) & (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows: "10B. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: — (a) to (d). ****** (e) transactional-margin method, by which, (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales IT(TP)A No.779(B)/2017 12 effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (if) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii): (v)the net profit margin thus established is then taken into account an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an (a) the specific characteristics of the property transferred or services provide: either transaction; international transaction with an uncontrolled transaction shall (b) the functions performed, taking into account assets be judged with reference to the following, namely:— employed or to be employed and the risks assumed, by the respective parties to the transactions (c) the specific characteristics of the property transferred or services provide: either transaction; (d) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions (e) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or Implicitly how the responsibilities, risks and IT(TP)A No.779(B)/2017 13 benefits are to be divided between the respective parties to the transactions: d)conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and. capital in the markets, overall economic development and level of competition and whether the markets are wholesale retail (3) An uncontrolled transaction shall be comparable to an internatiorial (i) none of the differences, if any, between the transactions being compared or between the enterprises entering into such transactions are likely materially affect the price or cost charged or paid in, or the profit arising from such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 5.2.There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of "net profit margin realized by the enterprise from an international transaction" with the "net profit realized from a comparable uncontrolled transaction". Therefore comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four IT(TP)A No.779(B)/2017 14 segments viz., Repro. Label Printing, Offset Printing and Pre- press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Pre- press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre- Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised the Assessee in this regard about lack of information about allied services performed by the pre- press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by the TPO or DRP. Since the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s. 133(6) of the Act, The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO.' Respectfully following the decision, we remand this comparable to the file of the TPO/AO for fresh adjudication on the above lines. Respectfully following aforesaid decision, we remand this comparable to file of Ld.AO/TPO, for fresh adjudication, on the IT(TP)A No.779(B)/2017 15 basis of directions reproduced hereinabove. Needless to say that proper opportunity shall be granted to assessee as per law. Accordingly we set aside this comparable back to Ld.TPO. b) Infosys BPO Ltd. Assessee objected for inclusion of this comparable primarily on the basis of functional incompatibility and presence of intangibles. It has been submitted that this company owns huge brand and not a fit comparables for company like assessee, who provide captive service to its AE’s. Ld. CIT DR opposed the exclusion and placed reliance upon orders passed by authorities below. We have perused submissions advanced by both sides in the light of the records placed before us. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Pvt Ltd., vs ACIT vide order dated 28/06/19 in ITA (TP) a No. 1661/Bang/2016, wherein this comparable has been excluded by observing as under:
‘5. We have heard the rival submissions on the comparability of Infosys BPO as a comparable company. The Delhi ITAT in the case of Baxter India Pvt. Ltd. Vs. ACIT for AY 2012-13 in the case of a company rendering ITES such as the Assessee, vide order dated 24.8.2017 Paragraph 23 held that Infosys BPO is not comparable with a company rendering ITES for the following reasons:- “23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Further it was also submitted that the IT(TP)A No.779(B)/2017 16 Infosys BPQ Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd.. We find the submissions of the ld. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPQ Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd. being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based company M/s Portland Group Pty Ltd. during financial year 2011-12. They provide sourcing and category management services in Sydney, Australia. Therefore, this company also failed the TPO's own filter of rejecting companies with peculiar circumstances. In view of the above i.e. functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that Infosys BPO Ltd. should not be included in the list of comparables. We accordingly direct the Assessing Officer/TPO to exclude Infosys BPO Ltd. from the list of comparables for the purpose of computing the average margin.”
It was also brought to our notice that the Hon’ble Delhi High Court in in the appeal filed by the Revenue against the aforesaid order dismissed the appeal at the admission stage observing that rationale given by the ITAT for exclusion was correct. In view of the aforesaid decision, we direct exclusion of Infosys BPO from the list of comparable companies chosen by the TPO.
From above, it is clear that this company is functionally not comparable with captive service provider.
IT(TP)A No.779(B)/2017 17 Respectfully following the same we direct this company to be excluded from the list of comparables. c) TCS e-Serve Ltd. Ld. AR submitted that this company has been objected by assessee for its functional dissimilarity as it renders both BPO and KPO services without segmental reporting. It is submitted that this company owns huge brand of TATA group and has also incurred brand related expenses and therefore cannot be accepted to be compared with a captive service provider like assessee. Ld.CIT DR on the contrary opposed its exclusion and placed reliance upon orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. Assessee placed reliance upon following decisions in support of its argument for exclusion of this comparable: Zyme Solutions Pvt Ltd. vs ACIT (supra) Baxter India Pvt. Ltd vs ACIT reported in (2017) 85 Taxmann.com 285 (Delhi-Trib) PCIT vs BC Management Services Pvt. Ltd. reported in TS-948- HC- 2017 (Del)-TP It is observed that this comparable has been excluded by this Tribunal. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Pvt Ltd., vs ACIT reported in (2019) 101 taxman.com 292, by observing as under: “11.3 We have heard rival submissions and perused material on record. The issue of comparability of this company was considered by the co-ordinate bench of Tribunal in the case of XLHealth Corpn.
IT(TP)A No.779(B)/2017 18 India (P.) Ltd. (supra). The relevant findings of the Tribunal are as under: '. . . . We have heard the rival submissions and perused the material on record. From the perusal of the Annual Report of this entity placed at page Nos. 583 to 678 of paper book, at page No. 604 it is stated as under. "2. COMPANY OVERVIEW Your Company, along with its subsidiary companies - TCS e-Serve International Limited and TCS e-Serve America Inc., is primarily engaged in the business of providing Business Process Services (BPO) for its customers in Banking, Financial Services and Insurance domain. The Company's operations include delivering core business processing services, analytics & insights (KPO) and support services for both data and voice processes. Your Company is an integral part of the Tata Consultancy Services' (TCS) strategy to build on its 'Full Services Offerings' that offer global customers an integrated portfolio of services ranging from IT services to BPO services. The Company provides its services from various processing facilities, backed t) a robust and scalable infrastructure network tailored to meet clients' needs. A detailed Business Continuity Plan has also been put in place to ensure the services are provided to the customers without any disruptions. T hus, th is c o mp an y is also s tate d to be a Kno wledge Process Ou ts ourcing and th ere f ore f or I' - re ason s s tate d b y us wh ile de aling wi th th is issue of co mp ar ab ili ty of the co mp any Inf osys B POL td. sh all equally hold good and th eref ore we direc t the AO/T PO to exclude th is comp an y f ro m lis t of co mp ar able sSince the appe ll an t co mp an y is in to l o w end BPO, it c anno t be co mp ared wi th KPO serv ice prov ider. 11.4 Respectfully following the decision of the co-ordinate bench of Tribunal, we direct for exclusion this company from the list of comparable”. It has been observed that this company is into high-end KPO services and an assessee rendering low end BPO services cannot be compared with it. Further, this company has been excluded due to absence of segmental information.
IT(TP)A No.779(B)/2017 19 Respectfully following aforesaid decision, we direct Ld.TPO to exclude this company from the list of comparables. d) BNR Udyog Ltd. (segmental) Ld.AR submitted that this company fails RPT filter and also fails export filter applied by Ld.TPO. It is submitted that this company is into medical transcription, coding, business support services and e-governance projects and therefore functionally not similar with that of assessee. Ld. CIT DR however contended that this company is compared only for segment of medical transcription and therefore should not be excluded. She placed reliance upon decision of this Tribunal in case of Mobily Infotech India (P) Ltd vs DCIT reported in (2018) 97 taxman.com 2 in support. We have perused submissions advanced by both sides in the light of the records placed before us. Assessee is challenging functional dissimilarity of this company with that of assessee as it is into medical transcription. We have our reservation to consider medical transcription services to be one of KPO services. In our considered opinion medical transcription services is basically back-office services provided by graduates who are trained for short period of 6 months to one year. These are short crash courses undertaken by graduates who are trained to understand and speak English. There is no value addition in the services rendered by people in medical transcription. To our understanding, basically these people who carry out medical transcription services are trained to understand language spoken IT(TP)A No.779(B)/2017 20 by doctors, outside India to whom medical reports of patience are sent for expert opinion. Medical transcriptionist simply reproduces opinion expressed by Doctor, which is then communicated to the patients. It is observed from annual report placed at page 745 of paper book Volume (Index to Annual Reports) that this company has segmental information of medical transcription and revenue earned under this segment is Rs.147.40 Lacs. It is also been observed that various other decisions by co-ordinate Benches of this tribunal has remanded this comparable back to Ld.TPO, for proper analysis and fresh consideration. We draw support for same from Indegene (P) Ltd vs ACIT reported in (2017) 85 Taxmann.com 60, wherein it has been held as under: “9.3.1. We have heard the rival contentions and perused and carefully considered the material on record including the judicial pronouncements cited. From the details on record we observe that while the assessee has contended that the services rendered by this company M/s TCS E-serve Ltd are high end KPO services, it has not brought out as to which of these are the services that would come under technical services. On the other hand, w also notice that that the TPO has held all the services rendered by the assessee to be BPO services with any proper analysis. In this factual matrix of the case, we find that on similar facts, the co- ordinate Bench o ITAT Bangalore in the case of Indegene (P) Ltd., (supra) has remanded the matter of comparability of this company to the file of the TPO for fresh consideration. In view of the factual matrix of the case on hand, as laid out above and following the IT(TP)A No.779(B)/2017 21 decision of the co-ordinate Bench in the case of Indegene (P) Ltd. (Supra) which is also rendered on similar facts, we deem it appropriate to remand the matter of the comparability of this company, TCS E-serve Ltd. To the file of the TPO for fresh consideration in the light of out abov observations. Needless to add, the TPO shall afford the assessee adequate opportunity of being heard and to file details/submissions in this regard. It is also been observed that similar view has been taken by decision of this Tribunal in case of M/s Nielson Sports India Pvt.Ltd., Vs ACIT in IT(TP)A No.196(B))/2017 vide order dated 28- 06-2019. Respectfully following the same, we set aside this comparable back to Ld.TPO for considering it afresh. Needless to say that proper opportunity shall be granted to assessee as per law. Accordingly we set aside this comparable back to Ld.TPO. e)Excel Infoways Ltd. (segmental) This comparable elected by ld.TPO is alleged to be functionally not comparable with assessee, as it is handling business relations and managing customer relationships. It has been submitted by Ld.AR that this comparable fails employee cost filter.
Ld.CIT DR however contended that this company is compared only for segment of medical transcription and therefore should not be excluded. She placed reliance upon decision of this Tribunal in case of Mobily Infotech India (P) Ltd vs DCIT reported in (2018) 97 taxman.com 2 in support.
We have perused submissions advanced by both sides in light of records placed before us. Annual report of this company is IT(TP)A No.779(B)/2017 22 placed at page 795 of paper book (Index for Annual Reports) volume 1. In the Significant Accounting Policies reported at page 830 of paper book, it is observed that these companies operating businesses are organized and managed separately, according to nature of business and services provided with each segment, representing different strategic business unit. Note 15 at page 834 refers to revenues from operations under the head information technology/BPO related services separately. It is observed that function performed by this company as reported at page 806 reveals that it is engaged in business of providing customer care services and handling client business relations on their behalf by maintaining relation with customers and also providing services by assisting in managing the workflow and updating the records. It is observed that this Tribunal in case of Zyme Solutions Pvt Ltd., vs ACIT vide order dated 28/06/19 in ITA (TP) a No. 1661/Bang/2016, this comparable is excluded by observing as under: “ The third and last company that is sought to be excluded from the list of comparable companies is Exclusion of Excel Info Ltd. The Tribunal had retained this company as a comparable company in its original order. The assessee sought exclusion of this company on the ground that this company was functionally different from the assessee company and the employee cost to the revenue was less than the threshold limit of 25% and that there were peculiar economic circumstances which impacted the profit margin of this company thereby rendering this company as not comparable company. The Tribunal while adjudicating of exclusion of this company in paragraph 14.3 of its order held that on application of IT(TP)A No.779(B)/2017 23 employee cost filter that the Assessee has failed to show as to how the findings of the TPO and DRP are not correct. The assessee has pointed out certain facts with regard to 2. employee cost and diminishing revenue of this company which takes it out of the comparability and these aspects have not been considered by the Tribunal in its order. On the above objections in the MA, the Tribunal held as follows:- “8. We have examined the contents in the misc. petition and we find that there has been omission to consider the application of employee cost filter by the Tribunal though attention of the Bench was invited to relevant pages pointed out in the misc. petition. We do not however agree with the assessee that functional comparability of this company has not been examined by the Tribunal in paragraph 14.4. The Tribunal has come to the conclusion that this company is a ITeS company and that cannot be reviewed in the misc. application. However there has been omission to adjudicated exclusion of this company on account of extraordinary events. We therefore recall the order of the Tribunal to the limited extent of examining of the employee cost filter and the presence of extraordinary events on warranty exclusion of this company.” We have heard the rival submissions on the exclusion of this 3. company on the basis of extraordinary events that occurred during the relevant previous year which had impact on the profit margin of this company and therefore rendering this company from being chosen as a comparable company. The Delhi ITAT in the case of BT e-Serve (India) Ltd. Vs. ITO for AY 2012-13 IT(TP)A No.779(B)/2017 24 order dated 19.6.2018 considered the comparability of this company and came to the conclusion in paragraph 5.4 of its order that there was abnormal volatility of revenue of this company from 2009-10 to 2014-15 and therefore this company should not be regarded as comparable company. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid company from the list of comparable companies chosen by the TPO. It is observed from order passed by Ld.TPO at page 10 that assessee objected this company that employee cost filter being more than 25% has not been examined by Ld.TPO. It is observed that in decision of coordinate bench of Delhi Tribunal in case of Baxter India private limited vs ACIT reported in (2017) 85 Taxmann.com 285 this comparable failing employee cost filter has been analyzed as under: Further, from the order of the TPO we find he has obtained the employee cost and the sale for the ITES segment by exercise of his powers u s. 133(6). wherein the said company has allocated entire employee cost to IT - BPO segment with no allocation to Infra Activity segment which accounts to 49% of Excel's total revenue. In our opinion. it is highly impractical that no employee has been hired by Excel for Infra Activity segment. We therefore. find merit in the argument of the Id. counsel for the assessee that the information provided as per section 133(6) by Excel Infoways Ltd. is unreliable and should not be used to compute employ ee cost for ITES segment. The Delhi Bench of the Tribunal in the case of Motorola Solutions India (P.) Ltd. v. Assts. CIT[2014] 48 taxmann.com 24842015] 152 ITD 158 (Delhi) has held that a company should be IT(TP)A No.779(B)/2017 25 rejected as comparable in case there is contradiction in the facts or data sourced from annual report and as per the information gathered u/s. 133(6). In view of above discussion, we hold that Excel Infoways Ltd. cannot be considered as comparable and should be excluded from the list of comparables. We hold and direct accordingly”. From the above observation by coordinate bench, objection raised by Ld.CIT DR stands clarified, as this company for year under consideration made a statement under 133 (6) regarding allocating entire employee cost to IT-BPO segment, with no allocation to other segment, which amounts to almost 49% of its total revenue during the year under consideration. At this stage, we clarify that, we are not inclined to express our opinion regarding functional similarities/dissimilarity of this company with that of present assessee before us and the same is kept open to be considered in an appropriate case. We therefore agree with contention raised by assessee regarding this comparable not satisfying employee cost filter. Respectfully following aforestated decision of Delhi Tribunal reproduced hereinabove, we direct Ld.TPO to exclude this comparable from the final list. 6.Ground No. 8 is raised by assessee in respect of not treating provision for doubtful debts, provision for warranty is, provision for doubtful deposits as operating expenses. It has been submitted that these items cannot be considered as normal expenses as the nature of these being doubtful depends upon various factors. He submitted that assessee is a risk insulated company and therefore IT(TP)A No.779(B)/2017 26 such exclusion has to be provided in the case of comparables while computing margin. In support of his contention, Ld.AR placed reliance upon decision of this Tribunal in case of Commscop Connectivity Services India Pvt.Ltd. vs DCIT in ITA (TP)A No. 285/B/2017 for assessment year 2012-13 vide order dated 30/05/19 placed at page 1157 of case law compendium II. 6.1 Ld. DR placed reliance upon the orders of authorities below. 6.2 We have perused submissions advanced by both sides in the light of the records placed before us. Ld.AR contends that Ld.AO while computing margins of the comparables has not included certain provisions. It is observed that this Tribunal in case of Commscop Connectivity Services India Pvt.Ltd. vs DCIT (supra), held as under: “9.2 we have heard the rival contentions and perused the record. Under the scheme of income tax act mentioned in chapter 10 a LP is required to be determined of the tested party by comparing price percentage charged by the assessee whiz comparable in respect of international transactions entered by the assessee with its AE. If the bad debts, provisions of warranty, doubtful interest, miscellaneous expenditures are taken for earlier years then formula for calculating the profit percentage would be disturbed, as only current year’s turnover with the corresponding operating revenue are operating expenses are required to be considered. By allowing this to be considered for the purpose of determining ALP, distorted results will arise, there will be change in numerator without corresponding changes in the denominator i.e., bad debts etc., would be taken into account without taking into account the turnover of the earlier years. Further our view is also supported by the fact that ALP is to be IT(TP)A No.779(B)/2017 27 determined with reference to the international transaction entered for the year under consideration. However the details of the various heads namely bad debts doubtful debts etc., are not available which are restricted to the year under consideration, as consolidated figures are available on record. In view of the above, ground No. 8 is remanded back to the file of the TPO/AO for granting bad debts, doubtful debts et cetera as permissible expenses, if the same appertaining to be under consideration.” 6.3 We are also therefore respectfully following the same direct Ld. AO to compute the provisions claimed in case of comparables by considering those which pertains to the year under consideration. Accordingly this ground raised
by assessee stands allowed for statistical purposes. In the result, appeal filed by assessee stands partly allowed as indicated hereinabove. Order pronounced in the open court on (B.R.BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: am* Copy of the Order forwarded to: 1.Appellant; 2.Respondent; 3.CIT; 4.CIT(A);