OSC SERVICES PVT. LTD.,GURGAON vs. DCIT, GURGAON

This appeal has been preferred by the assessee and challenges the final assessment order passed subsequent to the directions of the learned Dispute Resolution Panel (DRP) - III, New Delhi dated 16.12.2014 for assessment year 2010-11.

During the year under consideration, the assessee had entered into the following international transactions:- i) Provision of contract IT services: Rs.

23,78,46,578/- ii) Provision of contract IT enabled services: Rs.

31,94,68,166/- iii) Reimbursement of expenses paid: Rs.

38,40,543/- 2.1 The assessee used OP/TC for calculating the Profit Level Indicator (PLI). The return of income was filed declaring an income of Rs. 3,60,247/-. Reference was made to the Ld. Transfer Pricing Officer (TPO) in view of the international transactions as aforesaid. The assessee had selected 23 comparables for the purpose of demonstrating that the international transactions were conducted at Arm’s Length Price (ALP). The mean margin of the comparables was 12.45% whereas the assessee’s margin was 23.98%.

2.2 During the course of transfer pricing proceedings, the Ld. TPO directed the assessee to submit updated margins using current data of comparables and, accordingly, the assessee submitted fresh search result which was based on 17 comparables with mean margin of 9.29% whereas the assessee’s margin stood at 23.98% only. The Ld. TPO also required the assessee to furnish bifurcation between IT and ITeS services and the OP/TC in both the segments of the assessee was 23.98%.

Subsequently, the Ld. TPO selected 11 comparables in the final set of comparables with average margin of 38.61% and, thereafter, after allowing working capital adjustment to the assessee, proposed transfer pricing adjustment of Rs. 3,20,29,274/-.

2.3 Aggrieved with the draft assessment order, the assessee approached the Ld. DRP but the Ld. DRP rejected the assessee’s objections raised before it and directed the Assessing Officer to make adjustment of Rs. 3,20,29,274/- to the income of the assessee which was in line with the proposed adjustment by the Ld. TPO.

Aggrieved, the assessee is now before the ITAT and has raised the following grounds of appeal:-

“That on the facts and circumstances of the case, and in law; The assessment order passed by the Learned Assessing 1. Officer (‘Ld. AO’) pursuant to the directions of Learned Dispute Resolution Panel (‘Ld. DRP’) is bad in facts and law. The Ld. AO (following the directions of the Ld. DRP), 2. erred both on facts and in law in confirming the addition of Rs. 3,20,29,274/- to the income of the Appellant as proposed by the Learned Transfer Pricing Officer (‘Ld. TPO’) by holding that the related party international transactions pertaining to provision of Information Technology (‘IT’) and IT Enabled back- office support CITES’) services do not satisfy the arm’s length principle envisaged under the Income-tax Act, 1961 ('the Act'). In doing so, the Ld. AO/Ld. TPO have grossly erred in: That none of the conditions set out in section 920(3) of the 2.1 Act are satisfied in the instant case; Disregarding the Arm’s Length Price (‘ALP’) as determined 2.2 by the Appellant in the Transfer Pricing (‘TP’) documentation maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’) as well as fresh search; and in particular modifying/ rejecting the filters applied by the Appellant; Characterising certain activities performed by the 2.3 Appellant under ITES sendees segment during the FY 2009-10 as Knowledge Process Outsourcing (‘KPO’) sendees and thereby rejecting and ignoring the detailed functions, assets and risk analysis carried by the Appellant in the TP documentation and explained during assessment proceedings. And also ignoring the definition of ITES and KPO sendees laid down by the Safe Harbour Rules notified by the Central Board of Direct Taxes;

Rejecting the comparability analysis undertaken by the 2.4 Appellant in the TP documentation/ fresh search, and conducting a fresh comparability analysis based on application of certain erroneous, additional, revised filters in determining the ALP; Including certain companies in the final set that are not 2.5 comparable to the ITES segment of the Appellant in terms of functions performed, assets employed and risks assumed, and excluding certain companies on arbitrary/ frivolous/inconsistent grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; and 2.6 Including companies having abnormal margins/volatile margins in the final comparables’ set without appreciating the fact that such abnormal/volatile margins are due to certain abnormal conditions like business restructuring, super normal growth in revenue/net profits etc. and on the other hand resorting to arbitrary rejection of low-profit/loss making companies based on erroneous and inconsistent reasons. 3 The Ld. AO erred on facts and in law in initiating penalty proceedings under Section 27i(i)(c) of the Act. The Appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing.”

3. The Ld. AR submitted that the final list of comparables selected by the Ld. TPO included 11 companies which are as under:-

1 Accentia Technologies Ltd. 43.07% 2 Cosmic Global Ltd. 18.28% 3 Eclerx Services Ltd. 55.97% 4 Fortune Infotech Ltd. 22.80%

5 Genesis International Corporation Ltd. 111.46% Infosys BPO Ltd. 31.46% 6 7 Jindal Intellicom Ltd. 13.62% 8 Microland Ltd. (ITES Segment) -3.62% Omega Healthcare Management Services Private Ltd. 15.31% 9 TCS E Serve Ltd. 62.55% 10 11 TCS E Serve International Ltd. 53.80% Average 38.61% 3.1 The Ld. AR submitted that the assessee was praying for exclusion of 5 comparables out of this final list viz. Accentia Technologies Ltd.; Eclerx Services Ltd.; Genesis International Corporation Ltd.; TCS E Serve Ltd. and TCS E Serve International Ltd. The arguments advanced by the Ld. AR for exclusion of the 5 comparables being contested by the assessee are as under:-

The Ld. AR submitted that the ITAT, in assessee’s own case for assessment year 2009-10, had excluded Accentia as a comparable by holding that this company was functionally dissimilar to the assessee company and segmental information was not available and there were certain mergers and acquisitions during the year. It was further submitted that there was no change in the functional profile of the assessee vis-à-vis the immediately preceding year wherein this company had been directed to be excluded by the ITAT. It was further submitted that the assessee continued to render ITeS services and, therefore, this company was liable to excluded from the final set of comparables. The Ld. AR highlighted that Accentia Technologies Ltd. was engaged in providing diversified services like software development and IT Enabled services and that its services and solutions are focused on healthcare receivables cycle management services and development of software products. It was also submitted that Accentia dealt in software products as well as it owned intellectual property rights of the software tools developed by it and that it bears substantial risk associated with the success/failure of these products/tools in the market. It was further submitted that Accentia had revenue from medical transcription, billings and collections and income from coding but the segment wise results were not available in the annual report of the company. It was also submitted that during FY 2009-10, relevant to the year under consideration, Accentia amalgamated with one of its subsidiaries, namely, Asscent Inforserve Private Limited and, therefore, this extraordinary event impacted the overall profitability of this company as the financial results for this year were inclusive of the figures of the amalgamating subsidiary resulting in abnormally high OP/TC of 43.07%. The Ld. AR also placed reliance on a number of orders of the various benches of the ITAT wherein this company had been directed to be excluded.

2. Eclerx Services Limited:

The Ld. AR submitted that the ITAT in assessee’s own case for assessment year 2009-10 had excluded Eclerx Services Limited as a comparable by holding that this company operated as a KPO providing data analytics and data process solutions which could not be compared with information technology enabled services segment of the assessee. The Ld. AR reiterated that there is no change in the functional profile of the assessee vis-à-vis assessment year 2009-10 and, therefore, for this reason alone, the Eclerx Services Limited was liable to be excluded from the final set of comparables. It was further submitted that this company was engaged in rendering consulting services, process outsourcing and automation services and, further, the annual report of Eclerx Services Limited did not contain segment wise result with respect to financial services and sales and marketing 8 support. It was also submitted that during the year under consideration, Eclerx Services Limited had earned an abnormally high margin of OP/TC of 59.57%, thereby rendering it unfit to be selected as a comparable. Ld. AR placed reliance on a number of orders of ITAT Delhi Bench wherein this company had been excluded and submitted that based on these judicial precedents, this company deserved to be excluded.

The Ld. AR submitted that this company had also been directed to be excluded in assessee’s own case for assessment year 2009-10 by the ITAT on the ground that this company operated as a high end KPO service provider and, therefore, the same could not be compared with the ITeS segment of the assessee. It was further submitted that there is no change in the functional profile of the assessee vis-à-vis assessment year 2009- 10 wherein this company was directed to be excluded by the ITAT and, therefore, there was no reason for including Genesys as a comparable. It was further submitted that Genesys is primarily engaged in the area of Geographical Information System (GIS)

Services and this company provided high end GIS services which included generation, processing, management and maintenance 9 of data for GIS and other information management systems. It was further submitted that Genesys also focussed on Research & Development (R&D) for developing new functionalities whereas the assessee was a routine service provider rendering services to its AEs and incurred no expenditure on R&D. It was also submitted that this company had also earned an abnormally high OP/TC margin of 111.46% and hence it was unfit to be included as a comparable. Reliance was placed on numerous judicial precedents of the Hon’ble Delhi High Court and ITAT Delhi Benches wherein this company had been directed to be excluded.

4. TCS E serve Limited:

It was submitted by the Ld. AR that this company was engaged in providing diversified services i.e. ITeS and certain other technical services involving software testing, verification and validation of software at the time of implementation, data centre management activities and, therefore, this company was not functionally comparable to the ITeS services being provided by the assessee. It was further submitted that the annual report of this company does not contain segment wise result in the case of ITeS and technical services and, therefore, in absence of segment wise results, TCS E-Serve cannot be accepted as a 10 comparable. It was further submitted that this company has the brand value of the Tata Group which was evident from payment being made on account of Tata Brand Equity contribution to Tata Sons Limited and, therefore, it was enjoying the benefit of brand value of the Tata Group which was not so in the case of the assessee and, therefore, the same was not a good comparable. It was further submitted that this company owned intangibles in the form of software licenses which was again not so in the case of the assessee company. It was also submitted that this company had earned abnormally high OP/TC margin of 63.38% during the year under consideration. The Ld. AR placed reliance on the number of judicial precedents and submitted that in view of the various orders of the ITAT wherein this company had been directed to be excluded on similar grounds, this company needed to be excluded in the assessee’s case also.

5. TCS E-Serve International Limited:

It was submitted that this company is engaged in providing diversified services which included ITeS and technical services like software testing, verification, data processing services and validation of software at the time of implementation and data centre management activities and, therefore, the company was 11 not functionally comparable to the ITeS segment of the assessee.

It was submitted that the annual report of this company also did not contain segmental details in the case of ITeS and technical services. It was also submitted that this company owned intangibles in the form of software licenses and also enjoyed brand value of being associated with the Tata Group and, therefore, the profile of this company was dissimilar to that of the assessee company which was only a captive IT enabled service provider. It was also submitted that this company had also earned abnormally high OP/TC margin of 53.80% during the year under consideration, and, therefore, it was unfit to be selected as a comparable. Reliance was placed on numerous orders of the ITAT Delhi Bench wherein this company had been directed to be excluded from the final set of comparables.

4.1 With respect to Accentia, it was submitted that the FAR profile of the company is essentially similar to that of the 12 assessee. Moreover, the assessee has not shown how amalgamation has impacted the profitability of the company.

Hence, it is to be retained as comparable.

4.2 With respect to Eclerx Services Limited, it was submitted that the FAR profile of the company is essentially similar to that of the assessee. Further, high profit margin is no criterion to reject it as comparable if it passes the FAR comparability test.

Hence, it is to be retained as comparable.

4.3 With respect to TCS E-Serve Ltd., it was submitted that the FAR profile of the company is essentially similar to that of the assessee. High profit margin is no basis for rejection. Hence, it is to be retained as comparable.

4.4 With regard to TCS E-Serve International Ltd., it was submitted that the FAR profile of the company is essentially similar to that of the assessee. High profit margin is no basis for rejection. Hence, it is to be retained as comparable.

4.5 With respect to Genesys International Corporation Limited, it was submitted that FAR profile of the company is essentially similar to that of the assessee. Hence, it is to be retained as comparable.

(i) Accentia Technologies :

We find that the ITAT, in assessee’s own case for assessment year 2009-10 in vide order dated 23.11.2017, had excluded Accentia as a comparable by holding that this company was functionally dissimilar to the assessee company and segmental information was not available and there were certain mergers and acquisitions during the year. The Ld. Sr. DR could not point out that there was any change in the functional profile of the assessee vis-à-vis the immediately preceding year wherein this company had been directed to be excluded by the ITAT. Accordingly, in view of the order of the co-ordinate Bench of the ITAT in assessee’s own case for AY 2009-10 as aforesaid, we direct exclusion of this company from the final set of comparables.

(ii) Eclerx Services Limited:

We find that the ITAT, in assessee’s own case for assessment year 2009-10 in vide order dated 23.11.2017, had excluded Eclerx Services Limited as a comparable by holding that this company operated as a KPO providing data analytics and data process solutions which could not be compared with information technology enabled services segment of the assessee.

The Ld. Sr. DR could not demonstrate that there was any change in the functional profile of the assessee vis-à-vis assessment year 2009-10. Accordingly, in view of the order of the co-ordinate Bench of the ITAT in assessee’s own case for AY 2009-10 as aforesaid, we direct exclusion of this company from the final set of comparables.

(iii) Genesys International Corporation Limited:

We find that the ITAT, in assessee’s own case for assessment year 2009-10 in vide order dated 23.11.2017, had excluded Genesys on the ground that this company operated as a high end KPO service provider and, therefore, the same could not be compared with the ITeS segment of the assessee.

During the course of proceedings before us, the Ld. Sr. DR could not demonstrate that there was any change in the functional profile of the assessee vis-à-vis assessment year 2009-10.

Accordingly, in view of the order of the co-ordinate Bench of the ITAT in assessee’s own case for AY 2009-10 as aforesaid, we direct exclusion of this company from the final set of comparables.

4. TCS E serve Limited:

It is seen that this company is engaged in providing diversified services i.e. ITeS and certain other technical services involving software testing, verification and validation of software at the time of implementation, data centre management activities and, therefore, this company was not functionally comparable to the ITeS services being provided by the assessee. It is also seen that the annual report of this company does not contain segment wise result in the case of ITeS and technical services and, therefore, in absence of segment wise results, TCS E-Serve cannot be accepted as a comparable. We also note that this company was directed to be excluded as a comparable by ITAT Delhi Bench in the case of BC Management Services Pvt. Ltd. in ITA 5829/Del/2015 vide order dated 25.05.2017. The relevant observations of the co- ordinate Bench in this case are as under: 16

“18. We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as the material available on record. One of the main points of distinction which is quite ostensible is that the ‘TCS E-Serve' is a subsidiary of ‘Tata Consultancy Services Limited’, which is one of the leading and giant company in the world and has an inherent element of very high brand value associated with it. Such a high brand value definitely has an impact on the pricing policy, niche market, contractual terms, etc. and thereby affecting the profit margins. Annual report of this company reflects that huge payments have been made by TCS E-Serve to ‘TCS Limited’ for the use of the brand as a “royalty”. This fact itself shows the effect of brand value in the pricing mechanism. On a further analysis it is seen that the employee cost base is more than 64 times than the assessee and even the turnover is also more than 67 times as compared to the assessee. This only goes to suggest that assets employed by TCS E-Serve” along with huge intangibles in the form of brand value definitely has a huge effect in PLI and vitiates the comparability under FAR analysis with a company like assessee which is a captive service provider without much intangibles and risks. Another important thing which has been pointed out by learned counsel is that, the operation of TCS E-Serve’ broadly comprise of transaction processing and technical services including software testing, verification and validation for which no segmental bifurcation is available. In absence of such vital information of the margins of such varied segments it becomes quite difficult to put such company in the comparability basket so as to bench mark the correct profit margin. All the aforesaid factors have been held so in various decisions of this Tribunal in several cases as relied upon by the Ld. Counsel, including the decision of Amri Price India Private Limited (supra). Thus, in our opinion ‘TCS E-Serve’ cannot be held to be a good comparable for the purpose of bench marking the assessee’s PLI and accordingly, we direct the Ld. AO/TPO to exclude TCS E-Serve from the comparability list.”

Therefore, in view of the above observations of the co-ordinate Bench of the ITAT, respectfully following the same, we direct the exclusion of TCS E serve from the final list of comparables.

(v) TCS E-Serve International Limited:

It is seen that this company is engaged in providing diversified services which included ITeS and technical services like software testing, verification, data processing services and validation of software at the time of implementation and data centre management activities and, therefore, this company is not functionally comparable to the ITeS segment of the assessee. It is further seen that the annual report of this company also did not contain segmental details in the case of ITeS and technical services. We also note that this company was directed to be excluded as a comparable by ITAT Delhi Bench in the case of Vertex Customer Services India Pvt. Ltd. in ITA 1508/Del/2015 vide order dated 28.11.2017. The relevant observations of the co- ordinate Bench in this case are as under:

“42. However, perusal of the background and principal activities of the ‘TCS Intl.’ and ‘TCS’ given in annual report, available at page 413, shows that the company’s operation is broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities whereas for all the diversifying services no break up is given. So, in the absence of complete segmental data, TCS cannot be treated as ITES. Moreover abnormal growth in operating income of 174% and operating profit of 355% as is evident from page 389 of the annual report paper book vol.I makes it incomparable with the taxpayer which is a routine ITES provider having turnover of Rs.76.91 crores. So, in the absence of incomplete segmental data, peculiar circumstances and normal growth, we are of the considered view that TCS Eserve International Ltd. and TCS Eserve Ltd. are not a valid comparable.

Therefore, in view of the above observations of the co-ordinate Bench of the ITAT, respectfully following the same, we direct the exclusion of TCS E serve International Ltd. from the final list of comparables.

Order is pronounced in the open court on 14th August, 2018.