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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI N.K. SAINI & SHRI KULDIP SINGH
(PAN : AADCV7256M) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Nageshwar Rao, Advocate REVENUE BY : Shri H.K. Choudhary, CIT DR Date of Hearing : 12.10.2017 Date of Order : 28.11.2017
O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. Vertex Customer Services India Private Limited (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 30.01.2015, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2010-11 on the grounds inter alia that :-
“1. That on the facts and circumstances of the case and in law, the order of assessment framed by the learned Deputy Commissioner of Income-tax, Circle - 26(1), New Delhi (hereinafter referred to as 'the learned AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel - II (hereinafter referred to as 'the Hon'ble DRP') under section 143(3) read with section 144C of the Act, is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and void ab- initio.
2. Based on the facts and circumstances of the case, the learned AO has erred in completing the assessment on the non-existing amalgamating entity instead of the amalgamated / successor company. Hence, the assessment order passed under section 143(3) read with section 144C of the Act is void ab-initio and the same is liable to be quashed.
3. That the directions passed by the Hon'ble DRP are bad in law to the extent the same are prejudicial to the Appellant.
4. That the learned AOI learned Transfer Pricing Officer ("TPO") has erred on facts and in law in making the transfer pricing adjustment of INR 124,940,966 in respect of the international transactions relating to the provision of IT enabled services to the associated enterprises ("AEs")undertaken by the Appellant for the period under consideration.
4.1. The learned AOI learned TPO has grossly erred on facts by considering the Appellant's total cost base of INR 528,494,432/- for determining the ALP of impugned transaction pertaining to provision of IT enabled services as against the actual cost of INR 490,265,727/- pertaining to the IT enabled services rendered by the Appellant to /AES.
4.2. Without prejudice, the learned TPO has grossly erred on facts by not considering that the Appellant's margin is at arm's length based on application of internal Transactional Net Margin Method ("TNMM') method.
4.3 That the TPO erred, on facts and in law, in rejecting documentation filed by the Appellant in terms of section 920 of the Act read with Rule 100 of the Income-tax Rules, 1962 ("the Rules") and proceeded to make a transfer pricing addition based on re- determination of the arm's length price of the international transaction.
4.4. That the learned TPO erred, on facts and in law, in changing the filters applied by the Appellant for selection of the appropriate comparable companies for determination of the arm's length price of international transaction using the TNMM as the most appropriate method in the documentation maintained under section 92D of the Act read with Rule 10D of the Rules.
4.5. That the learned TPO erred, on facts and in law, in using single year financial data (i.e. data for FY 2009-10 only) as against multiple year financial data used by the Appellant for determination of the arm's length price of the international transaction pertaining to Provision of IT enabled services.
4.6. That the learned TPO erred, on facts and in law, in rejecting certain companies selected as comparable on the ground that it had different financial year end without appreciating the fact that the financial results displayed were for a period of 12 months.
4.7. That the learned TPO erred, on facts and in law, in applying lower turnover filter of INR 5 crore to reject certain companies otherwise comparable for the international transaction pertaining to provision of IT enabled services. Without prejudice, the learned TPO erred on facts and in law in not applying an upper turnover filter.
4.8. The learned TPO has erred, in law and on facts and in law, in rejecting certain comparable companies identified by the Appellant using 'Export income less than 75 percent of total income' as a comparability criterion.
4.9. The learned TPO has erred, in law and on facts and in law, by rejecting certain comparable companies identified by the Appellant on account of showing diminishing revenues trend.
4.10. That the learned TPO erred, on facts and in law, in rejecting certain companies selected as comparable by applying employee cost filter of 25 percent of the total cost.
4.11 That the learned TPO erred in selecting Accentia Technologies Limited, Infosys BPO Limited, TCS E- Serve Limited, TCS E-Serve International Limited, Fortune Infotech Limited, e4e Healthcare Limited and iGate Global Limited as com parables without appreciating that these comparables did not satisfy the functional, assets and risks ("FAR") analysis test vis-a- vis the Appellant in relation to the international transaction pertaining to provision of IT enabled services.
4.12. That the learned TPO erred in selecting a few companies as comparables without appreciating that these companies have displayed exceptional profit during the relevant financial year (i.e. FY 2009-10) under consideration which was on account of exceptional circumstances and did not portray the correct operational profitability in the industry.
4.13. That, the Hon'ble DRP, erred on facts and in law, in not considering Sat yam BPO Limited, R Systems International Limited (BPO Segment), Datamatics Financial Services Limited and Axis IT&T Limited appearing as comparable companies for provision of IT enabled services.
4.14. That the learned TPO erred, on facts and in law, by not making appropriate adjustment for risk differences between the Appellant and the selected comparable companies in the arm's length price so determined for the international transaction pertaining to provision of IT enabled services, as the Appellant is remunerated on cost plus basis for impugned transactions and bears minimal risk.
4.15. That the learned TPO erred in not allowing the benefit of downward adjustment of 5%, as provided in the Proviso to section 92C of the Act, from the arm's length price determined for the impugned transaction.
5. The learned AO/ DRP have erred, in law and on facts and circumstances of the case, in making addition/ disallowance amounting to INR 201,379 on account of write-off TDS recoverable from vendors.
6. The learned AO/ DRP have erred, in law and on facts and circumstances of the case, in making addition/ disallowance amounting to INR 355,979 being write-off of provident fund recoverable from vendors.
7. The learned AO/ DRP have erred, in law and on facts and circumstances of the case, by treating such write-offs (TDS Recoverable and PF recoverable write- offs) as bad debts without appreciating the fact that such write-offs are allowed as a deductible expense under section 37(1) of the Act.
8. The learned AO / DRP have erred on facts, on the circumstances of the case and in law by alleging that the assessee has furnished inaccurate particulars of income, thereby proposing to initiate penalty proceedings under section 271 (1 )(c) of the Act.
9. The learned AO erred, on facts and in law, by proposing to levy consequential interest under section 234A and 234Bof the Act mechanically and without recording any satisfaction for its initiation.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Vertex Customer Services India Pvt. Ltd., the taxpayer is a wholly owned subsidiary of Vertex India Limited UK engaged in the provision of services in the field of customer relationship management, managing call-centre and IT Enabled Services (ITES). The taxpayer is providing services to the Vertex Group Companies under various sub-contractual arrangements and can be characterized as a BPO and ITES provider to its Associated Enterprises (AE) and a less complex entity as it performs functions and assumes risks that are less extensive as compared to the AE. The taxpayer is selected as a tested party for the economic analysis. The taxpayer entered into international transactions during the year under assessment as under :-
S. Nature of Amount Method PLI Vertex Comparables No. international (in INR) Selected India’s PLI transaction OP/OC (OP/TC) 1 Provision of IT 55,80,30,040 TNMM Enabled Operating Services Profit / 18.94% 14.27% 2 Receipt of Call 23,906,114 TNMM Cost centre support (OP/TC) services 3 Reimbursement 13,78,681 Comparable Uncontrolled Price Method of expenses
The taxpayer in order to benchmark its international transactions adopted Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) based on Operating Profit / Total Cost (OP/TC) as the Profit Level Indicator (PLI) selected 15 comparables with an average margin of 14.27% using multiyear data which has been compared with margin of 13.28% (a NCP mark up) of comparable companies and have found its international transactions at arm’s length.
The ld. TPO, after applying various filters like using current year’s data by the company for the same financial year, rejected companies having turnover less than Rs.5 crores; selecting companies having ratio of service income to the total income at least 75%; selecting companies having income from exports at least 75% of the total income; rejecting companies having related party transactions exceeding 25% of the sales; companies with employee cost that is less than 25% of the cost; companies that are effected by some peculiar economic circumstances. Finally, the TPO has selected 11 comparables having average mean margin at 37.90% arrived at the adjusted OP/TC and consequently proposed arm’s length price of international transaction at Rs.72,87,99,012/- as against Rs.59,79,94,514/- determined by the taxpayer.
The taxpayer carried the matter by way of raising objections before the ld. DRP, which have been disposed off. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1, 2, 3, 4 & 4.1
Grounds No. 1, 2, 3, 4 & 4.1are general in nature and do not require any adjudication.
GROUNDS NO.4.2 TO 4.15
TPO, after conducting a thorough economic analysis in the light of the objections raised by the taxpayer for exclusion and inclusion of certain comparables finally selected 11 comparables as under :-
S.No. Company Name Adjusted OP/TC (%) 1 Accentia Technologies Ltd. 49.39 2 Cosmic Global Ltd. 29.49 3 E4e Healthcare 40.75 4 Fortune Infotech Limited 30.57 5 I-gate Global Ltd. 33.29 6 Infosys BPO Ltd. 39.36 7 Jindal Intellicom Ltd. 24.14 8 Microland Ltd. 6.91 9 Omega Healthcare 23.93 10 TCS E-Serve International Ltd. 64.62 11 TCS E-Serve Ltd. 74.46 Average 37.90
On the basis of average of 37.90% of the comparables as against mean margin of the taxpayer at 13.28% (a NCP mark up), TPO proceeded to compute the Arm’s Length Price (ALP) of international transaction qua provision for ITES as under :-
Operating Cost (A) 52,84,94,432 OP/TC 37.90% Margin (B) 20,03,04,580 Arm’s Length Price (A+B)=C 72,87,99,012 Price Charged by the assessee (D) 59,79,94,514 Difference (C-D) 13,39,13,147 Adjustment proposed 13,08,04,498
The arm’s length price of the international transaction related to provision of IT Enabled services is determined at Rs.72,87,99,012 as against Rs.59,79,94,514 determined by the assessee. The assessing officer shall enhance the income of the assessee by Rs.13,08,04,498.”
Undisputedly, there is no change in the business model of the taxpayer from the earlier year as is evident from page 2 of the TPO order during the year under assessment. Now, the only dispute before the Bench is qua benchmarking the international transactions relating to provision of ITES to the tune of Rs.72,87,99,012/- as against Rs.59,79,94,514/- determined by the taxpayer on account of TP adjustment.
TNMM used by the taxpayer as most appropriate method has been accepted by the TPO. Before ld. DRP, the taxpayer raised specific ground that the taxpayer has also provided comparable services to unrelated parties as such the margin earned in this segment should be compared to the margin earned in the related party segment. The ld. DRP rejected this contention of the taxpayer on the ground that the volume of transaction in unrelated party segment is around 6% of the total turnover of the taxpayer and the nature of services to the related party and unrelated party may be different.
However, the ld. AR for the taxpayer without prejudice to this ground raised before ld. DRP proceeded to argue for exclusion of Accentia Technologies Limited, Cosmic Global Limited, Igate Global Solutions Limited, Infosys BPO Limited, TCS e-Serve International Limited and TCS e-Serve Limited and for inclusion of Asia IT&T Limited, Datamatics Financial Services Limited, Satyam BPO Limited and R Systems International Limited (BPO Segment) for benchmarking the international transactions one by one as under.
ACCENTIA TECHNOLOGIES LTD. (ACCENTIA) 13. The taxpayer sought to exclude Accentia on grounds of functional dissimilarity; that Accentia has undergone extra ordinary activities during the year under assessment and has earned super normal profit. However, ld. TPO rejected the objections raised by the taxpayer on the ground that the taxpayer has failed to point out how acquisition effected the operation of the company and it has no significant influence from comparison of margin of FY 2008-09 and 2009-10. TPO further rejected the objections raised by the taxpayer for exclusion of Accentia on the ground that under TNMM parameter of comparability are relatively relaxed and ratio of intangibles to turnover is mere 5% having no impact on profitability of the company. Similar objections have been raised by the taxpayer before ld. DRP who has approved the decision of TPO.
First of all, to pursue the extra ordinary circumstances on account of amalgamation, the ld. AR for the taxpayer taken us to annual report of Accentia for FY 2009-10. From page 94 of the annual report, it is apparently clear that scheme of amalgamation of erstwhile Asscent Infoserve Pvt. Ltd. with the taxpayer has been sanctioned by the Hon’ble High Court of Judicature at Mumbai by order dated 21.08.2009 and Hon’ble High Court of Karnataka vide order dated 06.02.2010 and all the assets and liabilities of the erstwhile company was transferred and vested in the company.
The taxpayer has also made investment in the foreign entities by purchasing 13% stake in Trans Service Inc. making total investment of 23% during the relevant year. Accentia has invested US$ 1.5 million for 260 equity shares of Trans Service Inc..
The ld. AR for the taxpayer also sought exclusion of Accentia on account of functional dissimilarity as Accentia is into providing the entire gamut of services under Healthcare Receivables Cycle management viz., Medical Transcription, Medical Coding and Billing and Receivables Management services, to different clients; in some cases separately and in some cases, all the three different services are offered to the same client.
The delivery of these services is using third party software in most cases and in some cases, using proprietary software.
Ld. AR for the taxpayer also pointed out that the Accentia has significant goodwill and intangible sufficient to impact profitability vis-à-vis the taxpayer which is a risk insulated contract service provider.
Perusal of annual report, available at page 88 of the paper book vol.I, which is schedule and forms part of the balance sheet, shows huge intangible brands and goodwill approximately of 57% of the fixed assets. Further from the perusal of submissions made by the taxpayer before TPO, available at page 232 to 241 of the paper book, relevant page 238, the taxpayer raised specific objection as to non-availability of the segmental information.
However, TPO has not controverted this fact while examining the suitability of this comparable.
Suitability of Accentia as a comparable company into ITES like taxpayer has been examined by the coordinate Bench of the Tribunal in Equant Solutions India Pvt. Ltd. vs. DCIT in for AY 2010-11, available at pages 207 to 237 of the paper book of case laws. Coordinate Bench of the Tribunal in Equant Solutions India Pvt. Ltd. (supra) ordered to exclude Accentia from the list of comparables by following the order of Hyderabad Bench of the Tribunal in Excellence Data Research Pvt. Ltd., Hyderabad vs. ITO, Ward 2 (1), Hyderabad in ITA No.159/Hyd./2014 dated 31.07.2014, by returning following findings :-
“c. We have considered the rival contention. During the year this comparable has been gone into substantial business restructuring resulting into extraordinary circumstances during the FY 2009-10 subsidiary of Ascentia got amalgamated with this company and the figures of the business results for the year ending 31st March 2010. In this case also excluded the figures of amalgamated company and due to which the comparable has high OP by TC margin. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No. 159/Hyd/2014 dated 31.7.2014); being relevant in this case, are reproduced below-
"19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected."
As pointed out by the learned counsel for the assessee, there was amalgamation of a company during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter alia in the case of Excellence Data Research P. Ltd. (supra). We, therefore, follow the decision of the coordinate bench of this Tribunal in the case of Excellence Data Research Services Pvt. Ltd. (supra) and direct the AO/TPO to exclude the Accentia Technologies Limited from the list of comparables on this ground. Further, this company also provides KPO services, LPO and DPO besides offering software services. Therefore as this enrolled in knowledge processing outsourcing it is functionally dissimilar to the assessee. Further, it does not contain segment wise functional results and in absence of such segmental information, it cannot be used for comparing the PLI of the assessee. It is also noted that it is also having significant amount of brands, intellectual property rights and goodwill as compared to the assessee. Therefore, in view of the above reasons this company is required to be excluded. Further relying on the decision of Jurisdictional high court in case of Rampgreen Solutions Pvt Ltd (TS-387-HC-2015(DEL)-TP) where in it is held that KPO are ITeS where the service providers have to employ advanced level of skills and knowledge. This is absent in this case of assessee which is low end ITES service provider such as which enables network management and other back office support services performed by assessee which primarily include remote monitoring and maintenance of Equant global network platforms and services, coordination, remote configuration, and implementation of quality customer networking solutions. Therefore this comparable is ordered for its exclusion accordingly.”
Accentia has been excluded as a comparable in taxpayer’s own case for AY 2009-10 on ground of having been engaged in different and diversified business by following decision rendered by the coordinate Bench of the Tribunal in for AY 2009-10 in case of Xchanging Technologies Services India Pt. Ltd. vs. DCIT dated 24.04.2015.
So, keeping in view the facts discussed in the preceding paras that Accentia has undergone extra ordinary events on account of amalgamation and it is functionally dissimilar being into gamut of services having significant intangibles and in the absence of separate segmental information, it cannot be a valid comparable to the taxpayer which is a routine risk captive service provider to its AE. So, we order to exclude Accentia from the final set of comparables.
COSMIC GLOBAL LIMITED (COSMIC) 22. The taxpayer sought to exclude this comparable on ground of different business model as this company outsourced its significant work to outside ventures and as such, its employee cost is less than 21.30%. As per schedule to the balance sheet, available at pages 10 & 11 of the paper book vol.I, revenue of “Cosmic” from BPO activities is Rs.26,97,430/- which makes it incomparable.
Ld. DR for the Revenue contended that Cosmic is into ITES only but failed to controvert the fact that most of its work is outsourced as is evident from annual report. Even its revenue from BPO activity is not enough to make it a comparable.
Comparability of Cosmic has been examined by the coordinate Bench of the Tribunal in Cognizant Technology Services P. Ltd. vs. DCIT in ITA No.459/Hyd./2015 dated 29.01.2016, which is also into the business of ITES to its AE like the taxpayer and found to be incomparable by following decision of the coordinate Bench of the Tribunal rendered in ACIT vs. Hyundai Motors India Engineering P. Ltd. in & 1917/Hyd/2014 dated 13.11.2015. In Cognizant Technology Services P. Ltd. (supra), Cosmic has been excluded on the ground of outsourcing of its main activity out of which employee cost is less than 21.30% and most of the cost is with regard to the outsourcing charges for translation charges. So, following the decision rendered by the coordinate Bench and keeping in view the fact that Cosmic has different business model, we order to exclude Cosmic from the final set of comparables.
FORTUNE INFOTECH LIMITED (FORTUNE) 24. The taxpayer sought to exclude Fortune from the list of comparable for benchmarking the international transactions for two reasons : one, it is functionally different; two, due to peculiar economic circumstances. Ld. AR also relied upon Equant Solutions India Pvt. Ltd. (supra).
Perusal of the screenshot of the website of the Fortune relied upon by the taxpayer, available at page 243of the paper book, shows that Fortune is into web application development including mobile applications, eCommerce applications and SEO services, developing CMS based website using Drupal, Joomla, WordPress, eCommerce Magento etc., offering onsite and offsite services to various clients and also into web designing services whereas the taxpayer is into providing routine ITES to its AE.
The taxpayer also brought on record the peculiar economic circumstances showing its diminishing revenue to 54.52% as compared to FY 2008-09. This fact is evident from annual report relied upon, relevant page 127 of the paper book vol.I.
However, on the other hand, ld. DR contended that the entire revenue of Fortune is from ITES and for providing ITES, some software requires to be used and balance sheet available at page 131 of the paper book does not show any intangible. However, there is no material on record to controvert the functional dissimilarity highlighted by the screenshot of the website of the company available at page 243.
More so, comparability of Fortune has been examined by the coordinate Bench of the Tribunal in Equant Solutions India Pvt. Ltd. (supra), available at pages 207 to 237 of the paper book, relevant page 230, and found to be incomparable with Equant Solutions India Pvt. Ltd. (supra), which is also into providing ITES by relying upon the decision rendered by the Tribunal in case of 24/7 Customer.Com (P.) Ltd. on the ground that this company has developed its own software called “Finetran” and “image index” for performing specialized services in medical transcription and patient record management.
Moreover, due to peculiar economic circumstances, Fortune is also incomparable with the taxpayer. So, in view of the aforesaid facts and circumstances and by following the decision rendered by the coordinate Bench of the Tribunal in Equant Solutions India Pvt. Ltd. (supra), we order to exclude Fortune from the final set of comparables.
IGATE GLOBAL SOLUTIONS LIMITED (IGATE) 30. The taxpayer sought to exclude IGATE for benchmarking the international transaction on grounds of functional dissimilarity, insufficient segmental information, high turnover and exceptional year of operation which has impacted the profitability.
The ld. DR for the Revenue by relying upon the order of TPO contended that it is a case of acquisition and not amalgamation and is not going to impact PLI. But the ld. AR for the taxpayer controverted this argument of the ld. DR by relying upon the annual report of IGATE, available at page 192 of the paper book vol.I, wherein factum of amalgamation has been categorically explained having been carried out as per order dated 24.02.2010 passed by Hon’ble High Court of Karnataka. The ld. AR for the taxpayer also relied upon the cases of the coordinate Bench of the Tribunal in Ameriprise India Pvt. Ltd. vs. DCIT in order dated19.01.2016 and United Health Group Information Services (P.) Ltd. vs. DCIT order dated 26.08.2016.
Perusal of the annual report of IGATE, available at pages 192 and 197 of the paper book vol.I, shows that IGATE is engaged into providing IT and ITES whereas no segmental information is available in its annual report. So, this sole reason makes Fortune incomparable with taxpayer which is a routine ITES provider.
Moreover, IGATE has undergone restructuring by way of amalgamation as has been discussed in preceding paras, IGATE is also having huge turnover of Rs.932.18 crores as against turnover of the taxpayer from the relevant segment at Rs.76.91 crores which is 12 times of the turnover of the taxpayer as is evident from annual report available at page 183 of the paper book vol.I.
In view of what has been discussed above, we are of the considered view that IGATE is not a suitable comparable for benchmarking the international transactions, hence ordered to be excluded from the final set of comparables.
INFOSYS BPO LIMITED (INFOSYS BPO) 35. The taxpayer sought to exclude Infosys BPO from the final set of comparables on grounds of different and diversifying functions, high turnover, high brand value, and having exceptional year of operation. Infosys BPO was ordered to be excluded as comparable in taxpayer’s own case for AY 2009-10.
Ld. DR relied upon the order passed by TPO.
Keeping in view the fact that Infosys BPO is into different and diversifying services like customer service outsourcing, finance and accounting, knowledge services, human resource outsourcing, legal process outsourcing, sales and fulfillment, sourcing and procurement outsourcing, banking and capital outsourcing, media outsourcing, energy outsourcing, retail, etc. as against taxpayer company which is into routine ITES. It cannot be a suitable comparable.
Moreover Infosys BPO is having huge turnover of Rs.1126.63 crores and has goodwill of Rs.19.3 crores as per annual report, available at pages 249 & 330 of the paper book. Infosys is also incurring selling and marketing expenses to the tune of 6.96% to enhance its business. Moreover Infosys BPO is having exception year of operation due to acquisition of McCamish Systems LLC to provide end to end services.
More so, Infosys BPO has been ordered to be excluded as a comparable in taxpayer’s own case for AY 2009-10 order dated 22.04.2016 on the ground that KPO company cannot be compared with BPO company as has been held by Hon’ble High Court in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT – 60 taxmann.com
Since the taxpayer is into ITES and is a KPO, so cannot be compared with Infosys BPO which is a BPO. Consequently, we order to exclude Infosys BPO from the final set of comparables.
TCS ESERVE INTERNATIONAL LTD. and TCS ESERVE LTD. 40. The taxpayer sought to exclude TCS Eserve International Ltd. and TCS Eserve Ltd. (for short ‘TCS Intl.’ and ‘TCS’) on the ground of peculiar economic circumstances filter, abnormal growth, non-comparable services and insufficient segmental data.
Ld. AR contended that TCS has been ordered to be excluded in Ameriprise India Pvt. Ltd. (supra) which has been affirmed by the Hon’ble High Court.
However, on the other hand, ld. DR for the Revenue contended that since main function of ‘TCS Intl.’ and ‘TCS’ is ITES and verification of validation is done at the last stage and brand is not impacting the PLI, it is a valid comparable.
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.
Comparability of ‘TCS Intl.’ and ‘TCS’ has been examined by the Tribunal in Ameriprise India Pvt. Ltd. (supra) and has been ordered to be excluded as comparable with Ameriprise India Pvt. Ltd. (supra) which was also a routine ITES provider on the ground that ‘TCS Intl.’ and ‘TCS’ is engaged in rendering BPO services to the banking and financial services industry and Travel, Tourism and Hospitality such services include transaction processing and technical services. Since verification of validation is part of the software development this cannot be taken as a valid comparable.
So we are of the considered view that TCS Eserve International Ltd. and TCS Eserve Ltd. are not suitable comparables vis-à-vis the taxpayer.
COMPARABLES SOUGHT TO BE INCLUDED BY THE TAXPAYER
The taxpayer initially sought to include four comparables viz. Asia IT&T Limited, Datamatics Financial Services Limited, Satyam BPO Limited and R Systems International Limited (BPO Segment), however during the course of argument, the ld. AR for the taxpayer opted to argue for inclusion of Satyam BPO and R.
Systems rejected by the TPO/DRP for benchmarking the international transactions.
SATYAM BPO LIMITED (SATYAM) 45. The taxpayer contended that Satyam is functionally comparable being engaged in providing ITES and BPO services in the nature of business processing management, transitioning services and customer contract services. However, Satyam was rejected by DRP on ground of fraud which took place in Satyam.
Functional comparability of the taxpayer vis-à-vis Satyam is not in dispute.
Ld. AR for the taxpayer relied upon the decision of the coordinate Bench of the Tribunal in American Express (India)
Pvt. Ltd. in order dated 07.06.2017 wherein Mapple Solutions Ltd. and Triton Corporation Ltd. was excluded by the TPO on ground of serious indictment being part of the Rastogi Group but Tribunal ordered to retain both the comparables by emphasizing the fact that balance sheet of the company is duly audited by the auditor as per standard approved by the Ministry of Corporate Affairs.
However, we are of the considered view that we cannot compare scam which took place in Satyam BPO with Mapple Solutions Ltd. and Triton Corp Ltd. because of its magnitude and because of the fact that numerous companies are available to be taken as comparable in TNMM. Moreover the scam which took place in Satyam BPO in 2008 was also detected despite the fact that all balance sheets were audited qua the preceding years and when the creditability of a company due to such a big scam is at stake, we are of the considered view that this Satyam BPO cannot be taken as a valid comparable for inclusion as contended by the taxpayer. So we confirm the findings returned by the ld. TPO/DRP.
R. SYSTEMS INTERNATIONAL LIMTIED (BPO SEGEMENT (R. SYSTEMS) 48. Ld. DRP rejected this company on the ground that the same was not taken before TPO and it is having a different financial year ending.
Inclusion of R. Systems was also rejected by the TPO in United Health Group Information Services (P) Ltd. (supra) on ground of different financial year ending. However, the coordinate Bench held that different financial year cannot be the sole reason to reject a comparable when functional similarity exist. In case, the taxpayer is in a position to provide reconciliation of the profitability with authentic and reliable data reconciliation of profitability of R. Systems vis-à-vis with the taxpayer with authentic and reliable data, it can be retained as a comparable. So, following the order passed by the coordinate Bench of the Tribunal in United Health Group Information Services (P) Ltd. (supra), we hereby set aside this comparable to the ld. TPO to examine R.
Systems as comparable by also examining its functional comparability.
In view of what has been discussed above, Grounds No.4.2 to 4.15 are partly allowed and AO/TPO to recompute the margin accordingly.
CORPORATE GROUNDS GROUNDS NO.5, 6 & 7 51. AO/DRP have disallowed an amount of Rs.5,57,358/- being written off advance by the taxpayer on account of TDS recoverable from the vendors and amount recoverable in respect of provident funds paid by the taxpayer for its vendors. The ld. AR for the taxpayer challenging the impugned disallowance contended that excess deduction of TDS and amount recoverable in respect of provident fund by the taxpayer from its vendors was due to mistake committed in the regular course of business and claimed the same as trading loss. AO/DRP disallowed the same that the amount is actually recoverable from the vendors but enough efforts were not made by the taxpayer and as such, it cannot be treated as business losses.
We are of the considered view that the disallowance made by the AO/DRP is allowable on two grounds : (i) when the same has become bad debts and written off by the taxpayer and books of account have not been challenged; and (ii) even otherwise, it is trading losses suffered by the taxpayer due to bonafide mistake committed during the regular course of business and as such is allowable business expenditure. So, grounds no.5, 6 & 7 are determined in favour of the taxpayer and disallowance made by the AO/DRP stands deleted.
GROUND NO.8 53. Ground No.8 being premature needs no specific findings.
GROUND NO.9 54. Ground No.9 being consequential in nature needs no specific findings.