M/S MARKIT INDIA SERVICES PVT. LTD.,,NEW DELHI vs. DCIT, NEW DELHI

The grounds of appeal

The assessee Company is incorporated under the Companies Act, 1956 in March 2009 and is a wholly-owned subsidiary of Markit NV, the Netherlands. The assessee Company is engaged in the business of financial data processing and analysis including assimilation to the overseas client. Return of income declaring Rs. 4,09,11,339/- was e-filed by the assessee Company on 19/11/2011. The case was processed u/s 143(1) of the Income Tax Act, 1961. Subsequently, notice u/s 143(2) of the Act dated 11/9/2012 was issued to the assessee Company and duly certified. Thereafter, detailed questionnaire u/s 142(1) calling for furnishing details/information on 22/4/2013. Again notice u/s 143(2) and 142(1) was issued on 17/11/2014 and duly served upon the assessee. In compliance to the aforesaid notices, the Chartered Accountant and Authorized Representative of the assessee Company appeared from time to time for representing the case of the assessee and furnished the details/information requested from the assessee which was examined and place on record by the Assessing Officer. A reference u/s 92CA of the Income Tax Act was made to the Transfer Pricing Office (TPO). The TPO vide order dated 16/1/2015 made the following adjustments:- Operational Cost 17750568 ALP at a margin of 31.74% 233845835 Price received 212722513 105% of the Price received 223358639 Adjustment u/s 92CA 21123322 The above revised shortfall of Rs.2,11,23,322/- was proposed as adjustment to the price shown by the taxpayer in its books of accounts by the TPO.

Thus, the TPO directed the Assessing Officer to make an adjustment of Rs.2,11,23,322/- on account of international transactions. Thereafter, the draft Assessment Order computing the taxable income of the assessee Company at RS.6,20,47,261/- u/s 144C dated 23/2/2015 was forwarded to the assessee. The assessee filed its objection before the Dispute Resolution Panel (DRP). The DRP vide direction dated 8/9/2015 held that the Assessing Officer /TPO shall verify the margins in case of comparables’ details and carry out required corrections. The TPO vide office letter dated 15/9/2015 and reminder letter dated 9/10/2015 was requested to pass an order giving effect to the directions of the DRR. The order of the TPO dated 13/10/2015 giving effect to the direction of DRP was sent to the office of the Assessing Officer on 14/10/2015 wherein the following observations was made:- “On the basis of the DRP directions, the arm’s length price is recomputed as follows: Operational Cost 17,505,568 ALP at a margin of 26.76% 225,006,057 Price received 212,722,513 105% of the price received 223,358,639 Adjustment u/s 92CA 1,22,83,545

Being aggrieved by the assessment order dated 29/10/2015, the assessee filed appeal before us.

The Ld. AR submitted that the assessee is challenging one comparable to be excluded and three comparables to be included. As regards exclusion of Eclerx Services Ltd., the Ld. AR submitted that this comparable is functionally dissimilar. The Ld. AR submitted that it provides services through two business units i.e. Financial Services and Sales and Marketing Services. Under the Financial Service Segment, Eclerx Services Ltd. provides professional services including consulting, business analysis and solution testing. It provides a broad suite of services that allow its clients to operate on a day-to- day basis including trade processing, reference data, accounting and finance, and expense management activities. Further, under Sales and Marketing Services, Eclerx Services Ltd. provides web content management and merchandising execution, web analytics, social media moderation and analytics, search engine analytics & support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price & catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting. The Ld. AR pointed out that these services are a mix of research, advice and operation management. Hence, in view of the same, the Ld. AR submitted that Eclerx requiring specialized knowledge and having engaged in high-end services cannot be compared to routine IT enabled services provided by the assessee whereby it assumes minimal business risk. The Ld. AR submitted that as per Annual Report, the Comp0any has acquired Igentica Travel Solutions Ltd.. The said acquisition has provided the company with 28 large customers thereby increasing the customers base and overall revenues of the Company. The said acquisition has also provided the company with an entry platform in a new vertical-travel and hospitality. Further, the Company has also acquired Eclerx Pvt. Ltd, Singapore. Therefore, Eclerx Services Ltd. has abnormal circumstances and abnormally high margin due to the extraordinary circumstances and cannot be compared to the assessee. Hence, the Ld. AR submitted that this comparable should have been excluded by the TPO. The Ld. AR further submits that there appears to be a discrepancy in the revenue as per standalone financial statements and consolidated financial statements depicting the financials of Eclerx Services Ltd. along with its subsidiaries. The Ld. AR relied upon the following case laws:-

We have heard both the parties and perused all the relevant material available on record. From the Annual Reports, the Ld. AR rightly pointed out that Eclerx Services Ltd. is functionally dissimilar to that of the assessee company. It provides services through two business units i.e. Financial Services and Sales & Marketing Services. Under the Financial Service Segment, Eclerx Services Ltd. provides professional services including consulting, business analysis and solution testing. It provides a broad suite of services that allow its clients to operate on a day-to-day basis including trade processing, reference data, accounting and finance, and expense management activities. Further, under Sales & Marketing Services, Eclerx Services Ltd. provides web content management and merchandising execution, web analytics, social media moderation and analytics, search engine analytics & support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price & catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting. While the assessee company is engaged in the business of financial data processing and analysis including assimilation to the overseas client. In fact, the assessee company is providing services to this comparable company. Thus, this comparable company is functionally dissimilar to the assessee company and has to be excluded. Therefore, we direct the TPO/AO to exclude this comparable.

As regards inclusion of 3 comparables, the Ld. AR submitted as under:-

We have heard both the parties and perused all the relevant material available on record. All the three comparables which the Ld. AR submitted to be included as comparables requires a proper verification as the very basis of rejecting the comparables on the ground that the financials were not available seems to be not proper as there is database available in public domain. In fact, quarterly database of the comparable R system is available. Thus, it will be appropriate to remand back this issue for verifying these three comparbles to be included in the final list of comparables to the file of the TPO/AO. Therefore, the issue is remanded back to the file of the TPO/AO and we direct the TPO that after verifying the database available and after applying the relevant filters, if these three comparables are suitable then the same may be included in the final list of the comparables. Needless to say, the assessee be given the opportunity of the hearing by following principles of natural justice.

As regards ground relating to working capital adjustment, the Ld. AR relied on the decision of Demag Cranes & Components [2013] 30 Taxmann.com 364 (Pune-Trib.)

The Ld. DR relied upon the assessment order as well as the order of the Tribunal.

We have heard both the parties and perused the material available on record. As regards the issue of working capital adjustment the same needs to be verified properly by the TPO/AO. The appropriate transfer pricing adjustment can only to be made in consonance with the international transaction undertaken by the assessee company during the year under assessment on the basis of its comparability vis-à-vis comparable companies, by providing working capital adjustment to the assessee in view of the provisions contained under Rule 10B(1)(e) also. So, we are of the considered view that the matter is required to be restored to the TPO to provide the assessee company the benefit of working capital adjustment for transfer pricing adjustment. Therefore, we remand back this issue to the file of the TPO/AO for proper adjudication. Needless to say, the assessee be given the opportunity of the hearing by following principles of natural justice.

In result, the appeal of the assessee is partly allowed for statistical purpose.