SWISS RE SHARED SERVICES (INDIA) PVT. LIMITED,BANGALORE vs. ASST.C.I.T., BANGALORE

Other grounds numbered 1 to 12 concern the transfer pricing adjustments recommended by the AO to the extent confirmed by the DRP. Ld. AR at the out set, submitted that he was pressing only grounds 7 and 8 seeking exclusion of certain comparable companies considered by the TPO and for correcting errors in computing the operating margin of such comparables.

Facts apropos are that assessee is in the business of export of customised electronic data including remote data processing and IT enabled back office service, in the field of insurance. Assessee has been registered as a STP unit. Services are provided by assessee to its AE in Korea and Switzerland named as Swiss Re Korea and Swiss Re Zurich. Such services were non-life insurance administration, providing technical accounting services in the field of property, casualty, life and health re-insurance. Swiss Reinsurance Co, Zurich is the holding company of the assessee and a global reinsurer. Assessee had classified its operation as falling into:

TPO after doing an analysis of the TP study of the assessee, held that except for four comparables among the seven selected by assessee, others were to be rejected on application of RPT filter, different financial year criteria, other income exceeding operating income etc., . Among the companies which were accepted by the TPO were e4e Healthcare Business Services Ltd, ICRA Techno Analytics Ltd, Infosys BPO Ltd and Jindal Intellicom Ltd. Thereafter the TPO made his own study on the capital and prowess data bases and zeroed in on a list of ten comparables including four from assessee’s own list. Ten comparables selected by the TPO and their PLI read as under :

Thereafter the TPO allowed an adjustment of 1.47% for working capital. Final adjustment recommended by the TPO u/s. 92 CA, read as under:

Before the DRP assessee pleaded for application of turnover filter and also made submissions with regard to functional differences of some of the companies selected by the TPO. However only adjustment granted by the DRP was with regard to application of turnover filter and in the process of Infosys BPO Ltd, Mindtree Ltd (seg), Igate Global Solutions Ltd, went out of the list of comparables. What were left after the DRP directions were Accentia Technologies Ltd, Acropetal Technologies (seg), Cosmic Global Ltd, e4e Healthcare, ICRA online Ltd (seg), Jeevan Scientific Technology Ltd and Jindal Intellicom. DRP also IT(TP)A.380/Bang/2016 Page - 7 directed the AO to rework the PLI of the comparables after including the foreign exchange gain / loss. As per the DRP, such foreign exchange gains / loss were operational in nature and had to be considered as a part of the earnings / expenditure incurred during the course of the business of the assessee. Thereafter assessment was finally completed. However in the said assessment, AO did not give effect to the directions of the DRP with regard to the foreign exchange gains / loss. Or in other words, PLI of comparables mentioned above were worked out without considering the foreign exchange gains / loss as operational in nature.

Adverting to Accentia Technologies Ltd, Ld. AR submitted that the said company had inorganic growth during the relevant previous year due to creation of a US based localised front-end company. As per the Ld. AR, Accentia Technologies Ltd, was doing outsourcing work as well as coding.

Per contra, Ld. DR submitted that 80% of the revenue of Accentia Technologies Ltd, were from medical transcription, which fell within ITES only. As per the Ld. DR, actual activities of the assessee compared favourable with Accentia Technologies Ltd. When 80% of the income was from ITES services, as per the Ld. DR further segmentation was not required. As for the reliance placed on the decisions of Delhi Bench in the case of Equant Solutions India P. Ltd, (supra) and coordinate bench in the case of Amba Research India P. Ltd (supra), Ld. DR submitted that these were for A. Y. 2010-11 and there was a clear finding by the Tribunal that results of Accentia Technologies Ltd, were skewed because of acquisition of a business during that year and also due to inorganic growth.

We have perused the orders and heard the rival contentions. Twentieth annual report of Acentia Technologies Ltd, for financial year 2010-11 has been filed at paper book page 491 to 568. In the part captioned ‘Management discussion and Analysis’, the company mentioned its medical transcription business being moved from a low-end category to a high-end category. Management of the said company had decided to acquire necessary skills inorganically so that it could do medical coding and provide end to end services in HRCM. In what is called by the said company as EMR method, it captured and stored all demographic and clinical data in data base format rather than keeping physical reports as done in orthodox medical transcription methods. That M/s. Accentia Technologies Ltd, was providing integrated end to end software services and remodelling its own business is clear from page 25 of its annual report which is reproduced hereunder :

If we have a look at the billings made by M/s. Accentia Technologies Ltd, its income for the relevant previous year read as under :

As against the above, Assessee was providing back office support to its group companies and affiliates, in the field of reinsurance, which its affiliates were engaged in. Work done by the assessee has been captured by us at para three above. This in our opinion was entirely different from the type of activities that Accentia Technologies Ltd, was into. Type of services rendered by the assessee is also clear from the service agreement IT(TP)A.380/Bang/2016 Page - 15 entered with its AE called Swiss Re, Zurich, dt.01.02.2009. Annexure-1 to this agreement, is reproduced hereunder :

Thus the functions which were done by Accentia Technologies Ltd, and the functions which were rendered by the assessee were entirely different. We cannot say that the type of services done by the assessee was of a level as sophisticated as the one which was being provided by Accentia Technologies Ltd. In the case of Rampgreen Solutions P. Ltd (supra), Hon’ble Delhi High Court mentioned as under at para 31 of its order, which reads as under :

Thus when characteristics of services rendered were dissimilar and the competence required to operate the services were different, it will not be correct to compare the results of two companies.

In the case of Amba Research India P. Ltd (supra), this Tribunal had directed exclusion of Accentia Technologies Ltd, for comparison purposes. Assessee in the said case was providing ITES services to its holding company at British Virgin Islands. Observation of the Tribunal at para 8 of the order dt.09.03.2016, is reproduced hereunder :

Accentia Technology Ltd., 2. Infosys BPO Ltd. The comparability of these company with a ITES company was considered by this Tribunal in the case of Paraxel International (India) Pvt. Ltd. (supra) and the Tribunal held as follows on the comparability of the aforesaid companies with a company providing ITES in the following manner:- “10. In grounds No.4 to 6, the assessee has challenged the comparables selected by the TPO for the purpose of TP analysis and as submitted by the learned counsel or the assessee, the assessee is objecting to the selection of only the following five comparables, out of the twelve companies selected as comparables- Sl. No. Company Name 1. Accentia Technologies Limited 2. Cosmic Global Ltd.

Genesys International Ltd.

We have heard the arguments of both the sides on the issue of inclusion/exclusion of the above five companies as comparables and also perused the relevant material on record including the various decisions of the coordinate benches of the Tribunal cited by the learned counsel for the assessee. Accentia Technologies Limited 12. As regards the selection of Accentia Technologies Limited as comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (India) Pvt. Ltd. V/s. Addl./Dy. Commissioner of Income- tax, Circle 1(2), Hyderabad and vice versa (ITA No.124 and IT(TP)A.380/Bang/2016 Page - 19 170/Hyd/2014 dated 31.7.2014); Excellence Data Research Pvt. Ltd., Hyderabad V/s. ITO Ward 2(1), Hyderabad (ITA No.159/Hyd/2014 dated 31.7.2014); and Hyundai Motors India Engineering P. Ltd., Hyderabad V/s. DCIT, Circle 2(2), Hyderabad (ITA NHo.255/Hyd/2014 dated 31.7.2014), wherein M/s. Accentia Technologies Limited(Seg) was excluded by the Tribunal from the list of comparables on the ground that it was a case of mergers and acquisition, and the company was also found to be functionally different. 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 (supra), 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 IT(TP)A No.146/Bang/2015 Page 42 of 52 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 acquisition of a company by M/s. Accentia Technologies Limited 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). Although the learned Departmental Representative has sought to contend that the acquisition of a company by M/s. Accentia Technologies Ltd. took place at IT(TP)A.380/Bang/2016 Page - 20 the fag end of the year under consideration, the learned counsel for the assessee has pointed out that the process of acquisition had started on 15.5.2008 itself, i.e. in the earlier part of the year under consideration. 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. …….. Infosys BPO 20. As regards selection of Infosys BPO as a comparable company, the learned counsel for the assessee has contended that the said company cannot be taken as comparable because of its uncomparable size of operations. He has contended that the turnover of the said company was many times higher than that of the assessee during the year under consideration. Although the Learned Departmental Representative has contended that the size of operations does not matter as far as selection of comparables is concerned especially in the sector of IT Enabled services, it is observed that similar issue has been decided by the Hon’ble Delhi High Court in the case of CIT V/s. Agnity Technologies Pvt. Ltd. (219 Taxman 26) holding that huge turnover companies like Infosys and Wipro cannot be considered as comparables with smaller companies like the assessee in the present case. Respectfully following the decision of the Hon’ble Delhi High Court in the case of Agnity Technologies P. Ltd. (supra), we direct the Assessing Officer/TPO to exclude Infosys BPO from the list of comparables.”

No doubt the said decision was for A. Y. 2010-11, but the conditions which prevailed in the said previous year more or less existed in the impugned assessment year also. Considering all these aspects, we are therefore of the opinion that Accentia Technologies Ltd, was not a good comparable for the purpose of ALP study of the assessee.

Arguing for exclusion of Acropetal Technologies Ltd, (seg), Ld. AR submitted that Acropetal Technologies Ltd, was rendering service in the field of engineering design for health-care enterprise solutions and IT infrastructure solutions. As per the Ld. AR, AO took the engineering design services done by Acropetal Technologies Ltd, as a comparable IT(TP)A.380/Bang/2016 Page - 22 segment with ITES services of the assessee. Ld. AR pointed out that engineering design services rendered by M/s. Acropetal was entirely different from the type of services done by the assessee. Further according to him Hyderabad bench of the Tribunal in the case of Excellence Data Research P. Ltd v. ITO [ITA.159/Hyd/2014, dt.31.07.2014 had held that Acropetal Technologies Ltd, was not a good comparable in the BPO segment. As per the Ld. AR M/s. Excellence Data Research P. Ltd, was rendering back office data creation, content development and support services which were not comparable to what assessee was doing. Though the decision of the Hyderabad Bench was for A. Y. 2009-10, as per the Ld. AR, M/s. Acropetal Technologies Ltd, was doing the very same business during the relevant previous year also and therefore it could be considered as a good precedent.

Per contra, Ld. DR submitted that TPO had considered the argument of the assessee that BPO and KPO had to be distinguished. According to him, Acropetal Technologies Ltd, was giving engineering design services and the assessee was rendering insurance support services. Though these services did not fit in the same mould, the level of expertise required stood more or less on the same pedestal.

We have perused the orders and heard the rival contentions. There is no dispute that M/s. Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Services that were being rendered by Acropetal Technologies Ltd, appears at page 8 of its annual report. It comprised of architectural , structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural healthcare, engineering design and enterprise solutions. In our opinion, the type of services that was being provided by Acropetal Technologies Ltd, was not at all comparable with the type of services that the assessee was providing. It is also mentioned in the annual report of the said company that it was providing high end services in the engineering design services. No doubt as mentioned by the Ld. DR, it may not be IT(TP)A.380/Bang/2016 Page - 24 feasible to have comparables which fit in the exact mould as that of an assessee in TP analysis. However, when one company is giving sophisticated set of services which involves higher level of skill sets, and the other is doing it on a lower level, we cannot say that the former should be considered as a comparable to the latter. Though for a different year, comparability of Acropetal Technologies Ltd, (seg) had come up before Hyderabad bench of the Tribunal in the case of Excellence Data Research P. Ltd (supra). Observations of the Tribunal as it appears at para 18.1 reads as under :

Considering all these, we are constrained to take a view that engineering design services segment of M/s. Acropetal Technologies Ltd, (seg), cannot be considered as a proper comparable for the TP study of the assessee.

Seeking exclusion of ICRA Online Ltd, Ld. AR submitted that the said company had three lines of business namely, outsourcing services, information service and software product services. As per the Ld. AR, TPO had taken the outsourcing service for comparing the assessee. Relying on the annual report of the said company, placed at paper book pages 645 to 667, Ld. AR submitted that ICRA Online Ltd, was providing knowledge process outsourcing. As per the Ld. AR the back end analytical services done by the said company which included data extraction, aggregation, validation and analysis could not be compared with the low end services in the insurance field that was being done by the assessee. Reliance was once again placed on the case of Rampgreen Solutions P. Ltd, (supra) of Hon’ble Delhi High Court.

Per contra, Ld. DR submitted that ICRA Online Ltd, was also providing support services. According to him just because the said company called itself a knowledge process outsourcing provider would not mean it was giving any such high end services. As per the Ld. DR nature of activities of ICRA Online Ltd, compared favourably with that of the assessee.

We have heard the rival contentions. What the assessee has been doing is reproduced by us at para three above. What ICRA Online Ltd, was doing as it appears in its annual report for the relevant financial year is reproduced hereunder :

Type of work being done by the assessee captured by us at para three above would show that assessing was also doing analysis of results, testing and calibration etc., It had to use market intelligence, maintain e-tools and provide reporting analytics. In our opinion the level of expertise being IT(TP)A.380/Bang/2016 Page - 27 used by the assessee in its technology enabled services and that being used by ICRA Online Ltd, were comparable, though they were in different streams of operation. Here we are one with the argument of Ld. DR that exact fitting in the mould of comparables is not necessary in a TNMM study. However, once the level of knowledge that is being used for the outsourcing is on a reasonably comparable pedestal, the type of service industry to which the concerns cater may not matter much. In the case of Rampgreen Solutions P. Ltd, (supra), their Lordship had observed that there could be different level of skill sets used within the very same ITES services and a comparison can be attempted only after making a proper analysis of the skill sets that were being employed. In our opinion considering the observation of their Lordship in Rampgreen Solutions P. Ltd, (supra), ICRA Online Ltd, was correctly considered by the lower authorities as a proper comparable. We do not find any reason to interfere with the orders of authorities below in this regard.

Seeking exclusion of Jeevan Scientific Technologies Ltd, (seg), Ld. AR submitted that the turnover of the said company was less than Rs.1 crore. As per the Ld. AR, TPO himself had excluded companies having turnover below Rs.1 crore. Relying on paper book, page 719, which is a IT(TP)A.380/Bang/2016 Page - 28 part of the annual report of Jeevan Scientific Technologies Ltd, (seg), Ld. AR submitted that the revenues from BPO operations of the said company came to only Rs.79.21 lakhs. As per the Ld. AR, the total operating revenue of the said company for the relevant previous year was only Rs.2.49 crores of which substantial part was from other streams of operation.

Per contra, Ld. DR submitted that the segment considered by the TPO had a turnover of Rs.246,75,00,000/-. Thus according to him Jeevan Scientific Technologies Ltd, (seg), was a good comparable.

We have heard the rival contentions. Audited balance sheet and financial statement of Jeevan Scientific Technologies Ltd, (seg), taken from capitaline data base has been filed before us by the assessee at paper book page.677 to 740. Net revenue of the said company for the relevant previous year from its operation was Rs.2,45,39,231/-, as per its income statement at paper book page 725. TPO had considered the revenue as Rs.2,46,75,000/-. However segmental revenue of the said company, as it appear at paper book page 719 show its earnings from BPO operations is Rs.71.219 lakhs. Thus TPO had considered the total revenue instead of the segmental revenue. The turnover of the segment which was being IT(TP)A.380/Bang/2016 Page - 29 compared was less than Rs.1 crore and by the yardstick applied by the TPO himself, the company ought have been excluded from the list of comparables. Whether the segmental information of the said company given by the assessee at paper book page 719, nevertheless requires a verification. We therefore set aside the comparability of Jeevan Scientific Technologies Ltd, (seg), back to the file of the AO / TPO for consideration afresh. In case the earning of the said company from its BPO operations is less than Rs.1 crore it has to be excluded from the list of comparables.

In the result, we direct exclusion of Accentia Technologies Ltd, Acropetal Technologies Ltd, (seg) from the list of comparables, whereas we uphold the inclusion of ICRA Online Ltd, (seg) in the list of comparables. However, viz., Jeevan Scientific Technologies Ltd, (seg), we are remitting the issue of its fitness for comparison back to the AO / TPO for considering the turnover of the BPO segment of the said company. Ordered accordingly.

The only other ground pressed by the Ld. AR concerns inclusion of foreign exchange gains / losses as operating in nature. Directions of the DRP in this regard as it appears at page.10 of its order is reproduced hereunder :

It is clear from the above that DRP had directed the AO / TPO to consider foreign exchange gains / losses in respect of assessee as well as the comparables as operating in nature for the TP analysis. Since Revenue is not in appeal on the above directions of the DRP, we are of the opinion that the AO / TPO has no option but to follow the directions of the DRP. We direct so.

In the result, appeal of the assessee is partly allowed for statistical purpose.