E4E BUSINESS SOLUTIONS INDIA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME-TAX, BANGALORE

PER S. JAYARAMAN, ACCOUNTANT MEMBER :

2. The facts in brief are that the e4e Business Solutions India Private Limited , formerly known as iSeva Systems Private Limited, the assessee, is engaged in the business of customer relationship management services and related business process outsourcing services through a variety of customer contract channels such as voice, e-mail, chat and web- IT(TP)A.1397/Bang/2016 Page - 2 based services. It acquired all the business (all assets, liabilities, employees and business) from e4e Tech Support (India) Private Limited, a group company, with effect from April 1, 2007 on slump sale basis. Consequently, it has also started rendering infrastructure management services, which is in the nature of Information Technology Enabled Services ("ITES"). e4e India renders such IT enabled services to its Associated Enterprises ("AEs") and other third parties.

On this basis, it had computed its PLI @ 15.74 percent. It has selected 9 comparable companies with an arithmetic mean of 15.82 % and since it fell within the specified range of 5 percent variation, treated the price of its international transaction at arm's length.

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A. Functionally different : Earns income from Medical Transcription business, billings and collections and coding activities(Schedule 8 of Finanacials ) as evidenced in page 773 of paper book vol-11 .

IT(TP)A.1397/Bang/2016 Page - 6 B. Presence of goodwill, brands, IPRs 0wns goodwill, brands and IPRs as evidenced in page 729 of paper book vol-11 .

C. Extra-ordinary events Merger of Geosoft Technologies Ltd and Iridium Technologies P. Ltd as evidenced in page 727 of paper book vol-11 .

D. Rejected by ITAT in earlier years : Rejected in assessee’s own case for a y 2008-09- IT (TP)A.1783/Bang/2013) and a y 2009-10; IT(TP)A.1777/Bang/2013] on the above basis.

B. Fails Onsite Cost filter : Onsite development cost is 47% and thus not comparable to e4e as upheld by DRP for A. Y. 2010-11 as evidenced in page 472 of paper book vol-1 and pages 809,815 & 816 of paper book vol-11 .

C. Fails employee cost filter :

IT(TP)A.1397/Bang/2016 Page - 7 Employee cost is only 11.51% of total cost. Not comparable as upheld by DRP for a y 2010-11 by applying same filter as evidenced in page 472 of paper book vol-1 and pages 809,815 & 816 of paper book vol-11 .

D. Rejected by ITAT in earlier years : Rejected in assessee’s own case for a y 2008-09 IT(TP)A.1783/Bang/2013) and a y 2009-10; IT(TP)A.1777/Bang/2013] on the above basis.

3. Infosys BPO Ltd :

A. Functionally different :

Has tremendous brand value which impacts pricing in the market and consequently the margin earned. Also company has incurred huge selling and marketing cost. Also company has spent significant amounts to build and retain brand value.

B. High turnover :

Has turnover of Rs.1,129.11 crores as compared to assessee’s turnover of Rs.46.45 crores. On applying filter of ten times of turnover filter, the higher limit is Rs.464.5 crores and the margin of Infosys BPO clearly exceeds this limit as evidenced in page 1102 of paper book vol-11 .

C. Rejected earlier :

In assessee’s own case for a y 2007-08 in IT(TP)A.819/Bang/2011 ; for a y 2008-09 in IT(TP)A.1783/Bang/2013; and for a y 2009-10 in IT(TP)A.1777/Bang/2013.

Hyderabad ITAT in Excellence Data Research P. Ltd in ITA No.159/Hyd/2014.

Bangalore Bench in Symphony Marketing Solutions India P. Ltd [ITA.1316/Bang/2012)

IT(TP)A.1397/Bang/2016 Page - 8 Hyderabad Bench in International Speciality Products (I) P. Ltd [ITA No.218/Hyd/2014.

9. We have considered the rival submissions and gone through relevant materials .The relevant portion of the order from the assesse’s case in IT (TP)A no. 1845/Bang/2015 & IT(TP)A.1777/Bang/2013 dt 10.11.2015 for ay 2009-10 is extracted as under :

“Accentia Technologies Ltd : ..................................................................................... .................................................................................... (iii) As regards the functional dissimilarity, we note that Accentia Technologies Ltd is engaged in diversified activity of medical transcription, medical coding, billing, receivable management. Thus it is clear that the said company is engaged in the healthcare activity and providing specific services of medical transcription, medical coding, medical billing etc., We note that these activities are quite different from the service of contact centre provided by the assessee to its AE which is purely in the nature of call centre. Therefore, we are of the view that the company Accentia Technologies Ltd cannot be considered as a functionally comparable company with the services provided by the assessee to its AE. The TPO is directed to exclude the company from the set of comparables.

“ 6.3. Acropetal Technologies Ltd :

6.3.1. The learned Authorised Representative for the assessee submitted that this company, selected by the TPO, is functionally different from the assessee as apart from being engaged in the business of export of software services, it is also engaged in rendering engineering design services and software development Services which are high end service and require highly skilled employees, whereas the ussessee in the case on hand is engaged in providing low end, routine BPO services. In support of its proposition for IT(TP)A.1397/Bang/2016 Page - 9 exclusion of this company from the list of comparables on grounds of functional differences, the learned Authorised Representative of the assessee, inter aira, placed reliance on the decision of the ca-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for A.Y. 2008-09 wherein this company was excluded from the list of comparables.

6.3.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.3.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement cited by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt ltd. (supra) held this company to be functionally different from the assessees performing ITES / BPO back end support services whereas, Acropetal Technologies Ltd.: segmental revenues show that its major source of income is from providing engineering design services and information technology services which are knowledge process outsourcing services (KPO) and not BPO / ITES low end BP0 services, like those performed by the assessee in the case on hand. At paras 12 and 13 of its order, the co-ordinate bench has held as under “12. This company is listed at SI No, 2 of the comparables chosen by the TRO. As for as this company is concerned, the objection of the assessee is that this company is not functionally comparable. The assessee is a BPO company that provides market analytics and data management services. To provide market analytics solutions, the assessee gives strategies that impact on client revenue including data based marketing strategies for customer acquisition, devising customer retention strategies and excluding loss mitigation strategies through cutting edge forecasting fools. The data management services provided by the assessee include routine business data reporting and management, website management, market/rig data analysis and top line reporting As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen front segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services, It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fell in the definition of ITES.

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Following the above decision of the co-ordinate bench in the case of Symphony Marketing Solutions India Pvt. Ltd (supra) for Assessment Year 2008-09, we ore of the view that in the case on hand also, where the assessee is only providing ITES / BPO based low end support services, this company i.e. Acropetal Technologies Ltd. providing KPO services is to be excluded from the list of comparables as it not functionally comparable to the assessee, in the case on hand. We hold and direct the TPO accordingly. “

“ 6.7 Infosys BPO Ltd. 6.7.1 As far as this company, chosen by the TPO as comparable, is concerned, the learned Authorised Representative for the assessee submitted that this company, being a wholly owned subsidiary of Infosys Technologies Ltd. would enjoy a premium in the market, due to brand value and goodwill of the parent company, whereas the assessee is a low end provider of BPO / ITES support services. It is submitted that Infosys BPO Ltd. incurred huge selling and marketing expenses and is not only a market leader but also has huge, breadth in terms of economies of scale with diversity and worldwide geographical dispersion of customers. It is IT(TP)A.1397/Bang/2016 Page - 11 submitted that in view of these factors, Infosys BPO Ltd. is functionally dis- similar and different from the assessee in the case on hand. In support of its proposition for excluding this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co- ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the set of comparables.

6.7.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.7.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded this company i.e. Infosys BPO Ltd. from the list of comparables to low end ITES / BPO support service providers as it is functionally different being an established market leader, enjoying huge brand value and goodwill, with huge economies of scale and diversity and geographical dispersion of customers. At para 24 of its order, the co-ordinate bench has held as under :-

“ (7) Infosys BPO Ltd 24. This company is listed at Sl.13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit & loss account of this company for the F.Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F.Y. 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at Rs.31,863 Crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable.”

IT(TP)A.1397/Bang/2016 Page - 12 Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES / BPO support services, this company i.e. Infosys BPO Ltd. is to be excluded from the list of comparables to the assessee in the case on hand. We hold and direct the TPO accordingly.

Thus, the assessee has made out a case in its favour from the above decisions. Following them, the TPO is directed to exclude Accentia Technologies Ltd , Acropetal Technologies Ltd & Infosys BPO Ltd from the list comparables and the assessee’s corresponding appeal grounds are allowed.

A. Functionally different : It is a KPO which is different from BPO as held in First Advantage Offshore P. Ltd (ITA.1096/Bang/2011), Symphony Marketing Solutions India P. Ltd [ITA.1316/Bang/2012) and Capital IQ Information Systems (India) P. Ltd [ITA.1961/Hyd/2011].

B. Rejected by DRP in a y 2010-11 :

Rejected by DRP in a y 2010-11 for failing export earning filter of 75% and the current year export earning is 64% only.

13. We have considered the rival submissions and gone through relevant materials. The relevant portion of the order from the case of First Advantage Offshore Services P. Ltd (ITA.1096/Bang/2011) for ay 2007-08 dt 30.4.2013 is extracted as under :

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“36. As far as 3rd group is concerned, the learned counsel for the assessee submitted that this group consists of- 1) Bodhtree Consulting Ltd. 2) Eclerx Services Ltd. 3) Mold Tek Technologies Ltd,

selected by the TPO are not comparable to the assessee. Having heard both the parties and having considered their rival contentions, we find that the assessee had raised elaborate objections each of the comparables in group 3 before the TPO. The TPO has also reproduced the said objections in his order para 6.5.1 of page 178 of his order. He has rejected the contention of the assessee by holding that every function within BPO sector can be from low end to high end and the activities of the assessee such as accounting, web management, network management are BPO services using technology but these services are not categorized as KPO. He held that a call centre may offer support services like telemarketing to high end services like technical support services, where not only the level of knowledge, skill required would be high, but the technical knowledge as well would be high. According to him, back office transaction process services may be as remarkable and as complicated as insurance/market transaction processing services. He, therefore, rejected the contention of the assessee and treated the BPO as equivalent to KPO services.

From the above, it is clear that those whose functions are of High end services among the BPO, which require high skill can not be compared IT(TP)A.1397/Bang/2016 Page - 15 with the ITES/BPO functions performed by the assessee which are routine low end ITES functions. However, we find that the profile of ICRA Online Ltd (Seg) is not available although the assessee objected this case being included by the TPO on functional difference. In the facts and circumstances, this issue is set aside to the TPO who woud re- adjudicate it in the light of the above decisions after affording due opportunity to the assessee. The corresponding appeal ground is treated as allowed for statistical purposes.

A. Fails TPO’s own filter of ITES and related services ie less than 75% of total income. Foreign earning is only 32.1% at entity level and 46% at segment level as evidenced in page 1038 of paper book vol-11 and the AR furnished the workings as given below.

B. Low employee cost : ie employee cost at 26% only as evidenced in page 473 of paper book vol-1 and pages 1030 & 1034 of paper book vol- 11 IT(TP)A.1397/Bang/2016 Page - 16 We have considered the rival submissions and gone through relevant material. Although, the assessee objected this case before the TPO, the TPO inter alia rejected stating that the assessee accepted this comparable in the earlier year. In the facts and circumstances, this issue is set aside to the TPO who would re-adjudicate it after affording due opportunity to the assessee. The corresponding appeal ground is treated as allowed for statistical purposes.

A. Functionally different :

Renders both IT and ITES services and provides both onshore and offshore services.

As per the segmental information provided by iGate, it is engaged in the business of software development and services, contact center services and IT Enables services is considered as the only business segment as evidenced in page 1244 of paper book vol-11 .

B. Extra-ordinary events :

Amalgamation of iGate Global Solutions Sdn Bhd, Malaysia with the company during the period ended 31st March 2010. Also acquired majority stake in Patni Computer Systems Ltd as evidenced in page 1244 of paper book vol-11 .

C. Presence of intangibles :

9.08% of asset base comprises of intangibles (both acquired goodwill and other intangibles). Appellant has none as evidenced in page 1292 of paper book vol-11 .

IT(TP)A.1397/Bang/2016 Page - 17 D. High Turnover of Rs.1,184.55 crores. We have considered the rival submissions and gone through relevant material. Although, the assessee objected this case before the TPO, the TPO inter alia , rejected it stating that iGate Global Solutions Ltd considers all services under ITES. In the facts and circumstances, this issue is set aside to the TPO who would re-adjudicate it after affording due opportunity to the assessee. The corresponding appeal ground is treated as allowed for statistical purposes.

“8.6 Against the final assessment order both assessee and the department are in appeal. The assessee has raised ground no.11. The ground raised in the department appeal in IT (TP)A No.220(B)/2015 is as follows; “1. The directions of the DRP are opposed to law and facts of the case.

2. On the facts and in the circumstances of the case the DRP erred in law in directing the AO to exclude reimbursement of specific expenditure both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 10A, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub-clause(4) of Explanation 2 below Sub-section (8) of Section 10A and the total turnover has not been defined in this section.

3. On the facts and circumstances of the case the DRP erred in directing the AO to compute deduction u/s 10A in the above manner by placing reliance on the decision of Hon’ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd. which has not become IT(TP)A.1397/Bang/2016 Page - 18 final since the same has not been accepted by the Department and SLPs are pending before the Hon’ble Supreme Court.

4. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the DRP in so far as it relates to the above grounds may be reversed.

5. The assessee craves leave to add, alter, amend and/or delete any of the grounds mentioned above”.

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9.3 Further, BPO services, undertaken for the purposes of export cannot be equated to providing technical services outside India solely for the purpose of excluding travel expenses incurred in foreign currency from the ET as envisaged in the definition of ‘export turnover’ as provided in section 10A of the IT Act. Accordingly, the adjustment made by the AO is to be quashed in entirety. We direct the AO to re-work the same. Since we have decided ground No.11, in assessee’s appeal the grounds raised by revenue in IT(TP)A No.220(B)/2015 are dismissed.”

Following the above decision, the adjustment made by the AO is quashed in entirety. We direct the AO to re-work the same as per the above decision.

Order pronounced in the open court on 13th January , 2017.