ACIT 10(3), MUMBAI vs. PRUDENTIAL PROCESS MANAGEMENT SERVICES INIDA P.LTD, MUMBAI

The major issue raised by both the parties is with regard to acceptance/rejection of certain comparables by learned Commissioner (Appeals).

Shri Dhanesh Bafna, the learned Counsel for the assessee submitted, if two of the comparables rejected by learned Commissioner (Appeals) and contested by the Revenue are excluded, assessee’s margin would fall within ±5% of rest of the comparables. Hence, acceptability or otherwise of the other comparables disputed by both the Revenue and the assessee would become redundant.

Smt. Nilu Jaggi, the learned Departmental Representative agreed with the aforesaid submission of the learned Counsel for the assessee.

In view of the aforesaid, at the outset, we proceed to deal with the acceptability or otherwise of the following two comparables, (i) Vishal Information Technologies Ltd. and (ii) Cepha Imaging Pvt. Ltd.

Before we proceed to deal with the comparability of the aforesaid two companies, it is necessary to narrate the relevant facts briefly.

The assessee, as stated by the Transfer Pricing Officer, is an Indian company providing Information Technology Enabled Services (ITeS) to its overseas Associated Enterprise (AE) viz. Prudential U.K. Services Ltd. The services rendered by the assessee are of Call Centre and other back office services. During the year under consideration, the assessee received an amount of ` 78,14,49,071, from the provision of ITeS to the AE. In the transfer pricing study report, the assessee benchmarked the aforesaid transaction by applying Transactional Net Margin Method (TNMM) as the most appropriate method with Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI). By undertaking a search process, the assessee selected 22 companies as comparables. Since, the PLI of the comparables selected was within ±5% of the margin shown by the assessee @ 13.09%, the transaction with the AE was claimed to be at arm's length. The Transfer Pricing Officer, however, did not accept the benchmarking of the assessee, though, he agreed that TNMM is the most appropriate method. He rejected 16 out of 22 comparables selected by the assessee. Having done so, the Transfer Pricing Officer proceeded to select fresh comparables and ultimately short listed 11 companies as comparables with average PLI of 26.88%. Accordingly,

The learned Departmental Representative submitted, this company was selected by the assessee itself in the transfer pricing study report due to functional similarity. Therefore, learned Commissioner (Appeals) was not justified in rejecting it as a comparable. Further, he submitted, the reasoning of learned Commissioner (Appeals) while rejecting this company is unacceptable, as, the Box Plot method is based on the Inter Quartile range which is not recognized in the statute. Thus, she submitted, the decision of learned Commissioner (Appeals) is not correct.

The learned Counsel for the assessee submitted, though, on the basis of insufficient data available in the public domain, assessee has 6 Prudential Process Management Services India Pvt. Ltd. selected this company as comparable in the transfer pricing study report, however, the company is not functionally similar to the assessee. He submitted, the annual report of the company clearly reveals that a major portion of the work is outsourced to third parties which is evident from the low employee cost of the company. Whereas, the assessee does the work itself. Therefore, the business model of the assessee and the aforesaid comparable are totally different, hence, cannot be treated as comparable. In support of such contention, he relied upon the following decisions:–

He submitted, though, learned Commissioner (Appeals) has excluded this company by applying Box Plot method, however, assessee seeks exclusion of the company due to functional dissimilarity. He submitted, for this reason, the assessee has raised additional ground no.6, in the cross objection.

We have considered rival submissions and perused material on record. At the outset, we must observe, the issue raised in the additional ground no.6 of the cross objection since can be decided on 7 Prudential Process Management Services India Pvt. Ltd. the basis of facts and material on record and only supports the decision of the learned Commissioner (Appeals), though, on a different reasoning, we are inclined to admit the additional ground for adjudication. Having held so, we proceed to deal with the issue on merits. No doubt, in the transfer pricing study report, the assessee has selected this company as a comparable. However, as stated by the assessee, at that juncture sufficient data relating to this company was not available in public domain. In our view, there is no reason to disbelieve the aforesaid claim of the assessee. It is now fairly well settled that this company cannot be a comparable to other companies due to its completely distinct business model. Time and again, it has been established that this company does not undertake ITeS itself, but, gets the work done by outsourcing to third party vendors. This is evident from the low employee cost of the company, as revealed from the annual report for the relevant period. The Co–ordinate Bench in DBOI Global Services Pvt. Ltd. (supra), noticing that the employee cost of the company as a percentage of total cost works out to a meager 1.36% which proves the outsourcing of work, excluded the company as a comparable. The same view has been expressed by the Tribunal in other decisions relied upon by the learned Counsel for the assessee. Considering the fact that the aforesaid decisions are for the very same assessment year and were rendered on the basis of more or less common facts, respectfully following the cited decisions of the 8 Prudential Process Management Services India Pvt. Ltd. Tribunal, we uphold the decision of the learned Commissioner (Appeals) in excluding this company as a comparable, though, on the basis of our own reasoning.

Objecting to the exclusion of this company, the learned Departmental Representative relied upon the observations of the Transfer Pricing Officer.

The learned Counsel for the assessee submitted, this company cannot be treated as comparable, as it is engaged in the development in sale of computer software. Thus, he submitted, learned Commissioner (Appeals) was correct in rejecting this company as a comparable. In support, he relied upon the following decisions:–

We have considered rival submissions and perused material on record. From the facts and materials placed on record including the annual report of this comparable, it is evident, the company is in the business of development and sale of software. That being the case, it

In course of hearing, the learned Counsel for the assessee has furnished a chart before us computing the margin of the rest of the comparables after exclusion of Vishal Information Technologies Ltd. and Cepha Imaging Pvt. Ltd. As per the said chart, after exclusion of the aforesaid two companies, the average margin of the rest of the comparables works out to 18.53%. According to the learned Authorised Representative, the margin shown by the assessee would fall within ±5% range of the arithmetic mean of the rest of the comparables @ 18.53% requiring no further adjustment. In view of the aforesaid, grounds no.4, 5 and 6, of Revenue’s appeal are dismissed. Grounds no.1, 7 and 8, of Revenue’s appeal being general

In the result, Revenue’s appeal is dismissed.

Insofar as assessee’s cross objection is concerned, grounds no.1 to 5 are dismissed as infructuous and ground no.6 is allowed.

In the result, assessee’s cross objection is partly allowed. 19. Before parting, we must observe, issues relating to other comparables disputed before us but not decided due to the reasons mentioned above, are left open for adjudication if they arise in any other assessment year in future.

To sum up, Revenue’s appeal is dismissed and assessee’s cross objection is partly allowed. Order pronounced in the open Court on 07.08.2019