EXL SERVICE.COM INDIA PRIVATE LTD.,NEW DELHI vs. DCIT, NEW DELHI

Appearances by: Tarun Arora and Deepa Nanda the appellant Amrendra Kumar, for respondent Date of concluding the hearing : April 27, 2016 July 25th, 2016 Date of pronouncing the order :

O R D E R Per Pramod Kumar, AM:

This appeal is directed against the order dated 19th July 2010 passed by the 1. Assessing Officer under section 143(3) r.w.s 144C of the Income Tax Act, 1961, for the assessment year 2006-07.

That, on the facts and in the circumstances of the case, and in law; 1. the Ld. DRP has erred in upholding the order passed by the Ld. TPO/ AO holding that the international transactions of the Appellant do not Assessment year: 2006-07 Page 2 of 5 satisfy the arm's length principle and in upholding the adjustment made by the Ld. TPO/ AO. 2. the Ld. DRP erred both on facts and in law in confirming the Ld. AO/ TPO's action of making an adjustment of Rs.13,49,73,854 to the income of the Appellant by holding that its international transactions of provision of IT enabled services do not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP has grossly erred in: 2.1 not appropriately considering the functions, assets and risk profile of the companies used for comparison with the Appellant, thereby including in the final comparable set certain companies with different functional profile; 2.2 ignoring/disregarding the Appellant's contentions on the erroneous operating margin computation of one comparable company, viz., Wipro BPO Ltd. selected in the final comparable set; 2.3 excluding Fortune Infotech Limited as a valid comparable only on account of the fact that the said company has a different financial year ending; 2.4 agreeing with the Ld. TPO's action of holding that only current year (i.e FY 2005-06) data for comparable companies should be used for comparability analysis despite the fact that the same was not available to the Appellant at the time of preparing its TP documentation; 2.4.1 without prejudice to the above, in case the current year data is to be used to adjudicate on the Appellant's transfer prices, then the Ld. DRP ought to have also considered the results of the fresh search carried out by the Appellant using data for FY 2005-06, presented during the proceedings before the DRP; 2.5 erroneously retaining in the final comparable set certain companies which have earned extraordinarily high operating margins, thus signifying a high element of entrepreneurial risk as opposed to the limited risk bearing captive IT enabled services provided by the Appellant; 2.6 following a contradictory approach in considering companies demonstrating supernormal growth in revenue /profit while rejecting companies with declining profits/declining phase; 2.7 denying the benefit of a working capital adjustment to the Appellant; 2.8 in not allowing the benefit of risk adjustment to the Appellant. Assessment year: 2006-07 Page 3 of 5 2.9 not appreciating the fact that in the relevant assessment year the Appellant was entitled to a tax holiday on its profits from provision of IT enabled services and therefore did not have any motive of deriving any tax advantage by manipulating the transfer prices of its international related party transactions.

3. When this appeal was called out for hearing, learned counsel for the assessee submitted that this appeal can be disposed on the basis of two short points- first, grant of working capital adjustment, and – second, exclusion of VITL (Vishal Information Technologies Limited) as a comparables. Both of these issues, according to the learned counsel, are covered issues. As for the working capital adjustment, it is pointed out that the CIT (A) himself had allowed the same in the assessment years 2003-04 and 2004-05 and by the TPO himself in the assessment year 205-06, yet these adjustments have been disallowed in the present year. Learned counsel further points that in the subsequent years 2007-08, 2009-210 and 2010-11 these adjustments have been allowed by the DRP though there were certain computational errors which were pointed out at the Tribunal. In the assessment year 2011-12, the working capital adjustment has been allowed by the DRP. On the strength of these submissions, it was pointed out that the working capital adjustment prayed by the assessee be allowed in the present year. As for the prayer for exclusion of VITL as a comparable, learned counsel submits that there is no dispute that the assessee is engaged in IT enabled services, but the VITL, as evident from a plain look at the annual report of VITL, is also engaged in the providing technical solutions and services. It was also pointed out that VITL has significant payments to the vendors which suggests that the VITL is outsourcing the services through third party vendors, and is only acting as an intermediary. It is submitted that such a business model is significantly different from business model of the assessee. He then makes an interesting mention about the concept of ‘services distributor’, which is what VITL seems to be pursuing, which is functionally different from the contract service provider. A reference is then made to Hon’ble Assessment year: 2006-07 Page 4 of 5 Delhi High Court’s judgment in the case of Rampgreen Solutions Pvt Ltd Vs CIT [(2015) 377 ITR 533 (Del)] which has, inter ala, held that business model of VITL was completely different vis-à-vis business model normally employed by IT enabled services provider, and it cannot, therefore, be normally compared to be a valid comparable. Learned counsel then submits that in the event of the assessee being allowed the working capital adjustment, coupled with exclusion of VITL from the list of comparables, the transaction price will be well within the arm’s length price.