BNP PARIBAS INDIA SOLUTIONS PRIATE LIMITED,MUMBAI vs. THE DY. COMMISSIONER OF INCOME TAX-CIRCLE 12(1)(2), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in IT(TP)A No.2046/Mum/2016 for A.Y.2011-12 arises out of the order by the ld. Disputes Resolution Panel-1, Mumbai in Objection No.307 dated 28/12/2015 (ld. DRP in short).

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domain expertise. The assessee had objected before the ld. TPO as well as the ld. DRP for exclusion of TCS E-serve ltd on the ground that it is functionally not comparable, among others. In this regard, we find that TCS E-serve ltd is engaged in the business of providing business process management services in the banking and financial services vertical.

3.2. On the contrary, the assessee is a mere service provider involved in providing back office services like data entry, data processing and reconciliation. It was further submitted that TCS E-serve ltd operations particularly comprises of transaction processing and technical services primarily to Citi Group entities globally. From the annual report of TCS E- serve ltd, we find that the said company is engaged in the business of providing ITes / business process outsourcing services primarily to Citi Group entities globally. Its operations particularly comprises of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, calculations, customer care and payments in relation to the services offered by the Citi group to its corporate and retail clients. Technical services involved software testing, verification and validation of software items of implementation and data centre management activities. We find from the order of the ld. TPO that the ld. TPO accepts the fact that assessee is into routine back office support services such as account payable services, Nostro reconciliation, trade finance back office, data processing, accounting controls, financial reporting, performance management etc., From the functional profile of the aforesaid comparable as detailed hereinabove, we hold that the said company is functionally not comparable with that of the assessee herein. Hence, we hold that this comparable deserves to be excluded from the financial list of comparables on functional dissimilarities.

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3.3. We also find that assessee had indeed made specific objections before the ld. TPO and the ld. DRP in support of exclusion of the comparable, TCS E-serve ltd by mentioning the various differences. The ld. DRP and the ld. TPO had only stated that the said comparable is functionally comparable with that of the assessee and had not given any finding with regard to the assets employed and risks assumed by the said comparable. Obviously due to their presence of huge intangibles in the form of ‘Tata Brand’, among others for TCS E-serve ltd, the assets employed therein shall be significantly less compared to that of the assessee. It is not in dispute that assessee herein does not possess any intangible. Moreover because of ‘Tata Brand’, the risk that could be assumed by TCS E-serve ltd would be significantly less compared to that of the assessee. These are crucial factors which have been ignored by the ld. DRP and the ld. TPO despite raising specific objections before them. The significant differences pointed out by the assessee with regard to exclusion of these comparables are as under:-

(a) Presence of intangible with TCS E-serve ltd – i.e. the said comparable belongs to Tata Group of companies and has significant ‘Tata Brand’ which would enable it to secure big business together with lesser risks. It also goes to prove that the said company possesses significant intangibles in the form of ‘Brand’ which assessee herein does not process, thereby making it incomparable. (b) The turnover of the said comparable is 48 times more than the total value of the nominal transactions of the assessee. The turnover of TCS E- serve ltd for the A.Y.2011-12 was 1442 Crores, whereas the turnover of the assessee herein was Rs.29.56 Crores.

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(c ) The said comparable was having super normal profits in the last two years and during the year under consideration as under:- Financial Year Ending OP/OC 31/03/2009 10.05% 31/03/2010 67.58% 31/03/2011 76.82%

The assessee pleaded that the aforesaid comparable has earned super normal profits thereby making it incomparable with the assessee. The assessee also stated that this comparable was considered by it in accept / reject matrix in TP study report and was ignored by it based on the aforesaid parameters.

3.3. Segmental data not available for the comparable:- We find that both the ld. TPO as well as ld. DRP had not given any finding with regard to these specific objections raised by the assessee except stating that it had passed all the filters supplied by the ld. TPO and by the assessee. In this regard, we would like to specifically state that on verification of the filters applied by the ld TPO, we find that one of the filters applied by the ld. TPO was to consider the companies whose turnover is more than One Crore. We find that assessee also has considered the same filter in his TP study report with regard to turnover, but the assessee had considered the comparables which are reasonable and comparable with the size and scale of operations with that of the assessee, whereas the ld. TPO by considering the comparable like TCS E-serve ltd with that of assessee had practically considered the comparable whose turnover is several times more than that of the assessee. We hold that the giant size ITES provider like TCS E-serve ltd cannot be compared with routine ITES / BPO service provider like that of the assessee. In this regard, we find that the Hon’ble Jurisdictional High Court in the case of CIT vs. Pentair Water India Pvt. Ltd., in 381 ITR 215 (Bom) had held as under:-

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“5. On perusal of the impugned Order passed by the Tribunal dated 23.05.2014, we find that the Tribunal has recorded the reasons for not accepting the said three companies are comparable by stating as follows : (i) HCL Comnet Systems & Services Ltd :- We find force in the submission of the ld. AR that this company cannot be a comparable as the turnover of this company is 260.18 crores while in the case of the Assessee, the turnover is around Rs.11 crores only. While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of Rs.11 crores cannot be compared with a company which is having turnover of Rs.260 crores which is more than 23 times the turnover of the Assessee. This company cannot be regarded to be in equal size to the Asseessee. We, accordingly, direct the AO to exclude this company out of the comparables. (ii) Infosys BPO Ltd. :- In this case also we noted the turnover in respect of this Company is Rs.649.56 crores while the turnover of the Asseessee company is around Rs. 11 crores which is much more than 65 times of the Assessee's turnover. We, therefore, do not find any illegality or infirmity in the order of CIT(A) in excluding this Company out of the comparables. Accordingly, we confirm the order of the CIT(A). (iii) Wipro Ltd. :- After hearing the rival submissions, we noted that the CIT(A) applying the turnover filter has excluded this company out of the comparables. The turnover reported in the case of Wipro Ltd. Is Rs.939.78 crores while in the case of the Asseessee the turnover is around Rs. 11 crores. Therefore, on the basis of the turnover filter itself this company cannot be regarded to be comparable to the Asseessee company and accordingly, we do not find any infirmity in the finding of CIT(A) while he excluded this company on the turnover criteria following the decision of this tribunal in : Sony India (P) Ltd. vs. DCIT, 114 ITD 448 Delhi, E-Gain Communication, 2008 TIOL 282 ITAT (Pune) Deloittee Consulting India Pvt. Ltd. vs. DCIT, Genisys Integrating System (India)(P.) Ltd. vs DCIT,, 53 Sot 159 (Bang

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3.4. Our observation with regard to existence of huge turn over in the hands of the comparable chosen by the ld. TPO i.e. TCS E-serve ltd is duly supported by the aforesaid decision of the Hon’ble Jurisdictional High Court. We find that the ld. DR argued that both the assessee as well as the ld. TPO had only applied the turn over filter specifying the minimum range and had not specified any maximum range thereon. Hence, the ld. TPO is at a liberty to take any comparable, whose turnover is more than Rs.1 Crore. We are unable to persuade ourselves to accept to this proposition as this would lead to absurdity in as much as every ITES company would then get compared with top giants like TCS E-serve ltd and others with the same high turnover, which would in turn result in mandatory ALP adjustment in all the cases. That cannot be certainly the intention of the legislature. In order to avoid any absurdity in this regard, the test of reasonableness should be applied by the ld. TPO by comparing the cases whose turnover is either 10 times below or 10 times above the turnover with that of the assessee which would be reasonable for the purpose of comparison. Hence, the argument advanced by the ld. DR in this regard is not appreciated. Accordingly, we hold that this comparable i.e. TCS E-serve ltd deserves to be excluded due to huge turnover.

3.5. The ld. AR before us submitted the workings that if TCS E-serve ltd is excluded the mean margin of the comparables would be 16.21% as against the assessee’s margin of 12% and accordingly, the assessee would fall within +/-5% tolerance limit. We direct the ld. TPO to verify the said workings given by the ld. AR and if the contention of the ld. AR is found to be correct, then no adjustment to ALP need to be made in respect of ITES segment of the assessee. Since, we directed the ld. TPO to exclude TCS E-serve ltd from the list of comparables, the adjudication of other comparables, both inclusion / exclusion become academic in 8 IT(TP)A No.2046/Mum/2016 M/s. BNP Paribas India Solutions Pvt. Ltd. nature and no opinion is rendered by us herein. Accordingly, the ground No.2 read with ground No.4 raised by the assessee are allowed for statistical purposes.

4.1. We have heard rival submissions and perused the materials available on record including the judicial pronouncements that were relied upon before us by the Counsels of both the sides. With the consent of both the parties, we proceeded to adjudicate the exclusion of Infosys Ltd., and Wipro Technologies Ltd., from the list of comparables as either one or both are excluded, the ld. AR stated that the assessee would be through and no adjustment to ALP would be warranted. We find that assessee in its IT segment had provided software services to its AEs. The services provided in the software support services segment primarily include routine software development services as well as related IT services. These services typically require a number of steps such as system and requirement analysis, system architecture, coding, testing and implementation. The functions of BNPP ISPL include participating in various parts of the software development life cycle, which are routine in nature. The AEs are involved in the conceptualization of the software based on the business requirement. The AEs provide specifications to BNPP ISPL and monitor the progress of the activity based on the specifications given by the AEs, BNPP ISPL's role is generally restricted to specific portions of the software development life cycle. Hence, the services provided by BNPP ISPL to its AEs are process driven to a large extent and are performed using the group's standard systems. Though

9 IT(TP)A No.2046/Mum/2016 M/s. BNP Paribas India Solutions Pvt. Ltd. the said services require some technical knowledge/ expertise, they require no conceptualization and do not result in the creation of unique intangibles for the group.

4.2. From the aforesaid narration and functional profile as culled out from the order of the ld. TPO in page 10 of the order, we find that assessee is providing only routine software development services to its AE which is not in dispute. The assessee’s margin from IT segment was 15%. The turnover of the assessee from IT segment during the year under consideration was Rs.174.56 Crores.

4.3. Exclusion of Wipro Technologies Ltd.,:- The ld. TPO had stated that this company is functionally comparable to the assessee and passes all the filters proposed by the assessee as well as ld. TPO and accordingly, accepted the same as comparable with that of the assessee. We find from the annual report of the said comparable for the relevant year under consideration, it is engaged in providing software related services and diversified activities thereon. It has got different pricing models and super normal profits. The operating margin for this comparable for 31/03/2011 is 54.42% and for the corresponding earlier two years it was 73.33% and 48.03% respectively. This goes to prove that this company has got super normal profits because of his presence in the industry for quite a long time and because of its giant size and having different pricing models. We also find that the said comparable activities comprise software related support services, primarily information technology, software solutions / maintenance and technology infrastructure support services. We also find that the said company provides services like data analytics, applications, business processes, cloud computing, consulting, digital, eco energy, information management, infrastructure services, Internet Of Things,

10 IT(TP)A No.2046/Mum/2016 M/s. BNP Paribas India Solutions Pvt. Ltd. product engineering, mobility, etc., These services go to prove that the said comparable is engaged into diversified activities for which segmental data is also not available hence, we hold that the said comparable deserves to be excluded due to functional dissimilarities as well as for the absence of segmental data. Accordingly, we direct the ld. TPO to exclude the same from the list of comparables.

4.4. Exclusion of Infosys Limited:- The turnover of this comparable is Rs.25,385 Crores. From para 52 of the order of the ld. TPO it is found that assessee is engaged into routine software support services which are only the basic works which are not capable of creating any intangibles. We hold that Infosys by its mere presence in the field for several years had created a mark and possesses huge intangibles in the form of Brand and the risk of the said comparable also would be very minimal. It is well settled that Infosys would be able to penetrate into the IT market and obtain bigger clients which would fetch them higher revenues. These huge advantages possessed by Infosys Ltd., are not admittedly available to the assessee herein. Hence, we hold that Infosys Ltd., cannot be accepted as a comparable.

4.5. We find that the ld DR argued that turn over filter adopted by the ld. TPO was only for the minimum range of the turnover and the ld. TPO had not specified the maximum range of the turnover of comparables in the filters applied by him. We also find that if the argument advanced by the ld. DR is to be accepted for both the comparables (i.e Infosys and Wipro) , filters adopted by the assessee as well as by the ld. TPO, then in every transfer pricing adjustment of any software company, Infosys Limited and Wipro Technologies Ltd, would be subject matter of comparability and adjustment to ALP would have to be made mandatorily, which is not the 11 IT(TP)A No.2046/Mum/2016 M/s. BNP Paribas India Solutions Pvt. Ltd. intention of the legislature as it would only result in absurdity. In view of the aforesaid observations we direct the ld. TPO to exclude both Infosys Ltd., as well as Wipro Technologies Ltd., from the final list of comparables in IT segment and recompute the margins of the comparables and decide whether at all any adjustment to ALP need to be made in IT segment of the assessee. Accordingly, the ground Nos.3 read with ground No.4 are allowed for statistical purposes.

5.1. We have heard rival submissions. We find that the ld. AR argued that this sum of Rs.9,99,600/- representing house property income was not disclosed by the assessee in the original return of income but was offered in the revised return of income filed within time. However, the ld. AO while finalizing the draft assessment order had not taxed the said sum of Rs.9,99,600/-. Hence, there was no occasion for the assessee to file any objection in this regard before the ld. DRP. The ld. AR further argued that the ld. AO while passing the final assessment order pursuant to directions of the ld. DRP, had resorted to tax this house property income at Rs.9,99,600/- which in his opinion, is against the provisions of the Act. In support of this, the ld. AR placed reliance on the Co-ordinate Bench decision of this Tribunal in Piramal Enterprises Ltd., vs. Additional CIT reported in 97 taxmann.com 352 dated 30/07/2018. We agree with the argument of the ld. AR, but both the parties before us were not able to give us the workings specifically as to whether this sum was included in the final computation adopted by the ld. AO both in draft assessment proceedings as well as in the final proceedings. Hence, with the consent of both the parties, we hereby direct the ld. AO to verify whether this sum

12 IT(TP)A No.2046/Mum/2016 M/s. BNP Paribas India Solutions Pvt. Ltd. of Rs.9,99,600/- representing house property income was at all considered by him in the draft assessment order. If it is so considered, then, the ld. AO is justified in considering the same in final assessment order pursuant to direction of the ld. DRP. If from verification, it is proved otherwise, then the said addition requires to be deleted. With these observations, the ground No.5 raised by the assessee is disposed off.

enhancement of the profits of the eligible business and that deduction in Chapter VIA is admissible on the profits so enhanced by the disallowance. The same analogy would apply for deduction u/s.10A of the Act also. Respectfully following the aforesaid decision of Hon’ble High Court reported in Lionbridge Technologies (P) Ltd. (supra) and the Circular of the CBDT, the ground 6 & 7 raised by the assessee are allowed.

Order pronounced in the open court on this 10/07/2019