OMNIGLOBE INFORMATION TECHNOLOGIES INDIA PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

Facts of the case in brief are that the assessee filed the return of income on 10.09.2008 declaring a loss of Rs.3,11,783/- which was processed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act). Subsequently, the case was selected for scrutiny. The assessee is a 100% subsidiary company of M/s Omniglobe International LLC, USA. The AO noticed that the assessee had made international transactions with its associated enterprises on account of BPO/Data Processing Services amounting to Rs.37,93,12,422/-. The AO, therefore, referred the matter to the TPO for determination of arm’s length price u/s 92CA of the Act. The TPO observed that the international transactions reported by the assessee is to be adjusted by Rs.10,62,65,696/- to bring it at arm’s length price. The TPO rejected the assessee’s comparable on functional analysis and 4 comparables had been used to for the purpose of benchmarking the international transactions. The assessee had considered itself to be the tested party and Operating Profit/Operating Cost (OP/OC%) as the Profit Level Indicator (PLI) and considered 28 companies with Omniglobe Information Technologies (India) Pvt. Ltd. OP/OC of 8.01% as comparable for the purpose of benchmarking the international transaction. However, the TPO has selected the following 4 comparable with mean operating margin over cost at 36.34%:

Accordingly, the adjustment of Rs.10,62,65,696/- on account of the difference in the margin of the comparable companies and assessee company was worked out by the TPO as under: “Operating Cost (A) 356,152,353 OP/TC 36.34% Margin (B) Rs.129,425,765 Arm’s length Rs.485,578,118 Revenue (A+B)=C Price charged by the assessee 379,312,422 Difference (C-D) 106,265,696”

The AO passed the draft assessment order and proposed to make the addition of Rs.10,62,65,696/-. The assessee raised the objection before the Dispute Resolution Panel-II, New Delhi (DRP) and objected the consideration Omniglobe Information Technologies (India) Pvt. Ltd. of M/s Vishal Information Technologies Ltd. and Eclerx Services Ltd. as comparable. The DRP however rejected the objection of the assessee by observing that no comparable can be rejected merely on the basis of margins and that in order to exclude the extreme result case there should have been either a defect in comparability for exceptional condition faced by the comparables.

Now the assessee is in appeal and requested for admission of the following additional ground:

It has further been submitted that after excluding Eclerx Services Ltd. and Coral Hub Ltd. from the final set of comparable companies considered by the TPO, the adjusted Operating Profit/Operating Cost would be within the range of +/- 5% and shall be considered to be at arm’s length price. A request has been made to admit the additional ground under Rule 11 of the Income Tax Appellate Tribunal Rules, 1963. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. Vs CIT reported at 229 Omniglobe Information Technologies (India) Pvt. Ltd. ITR 383. The assessee had also moved an application dated 09.11.2015 for admission of the additional evidence in terms of Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 stating therein as under:

E4e Healthcare Business Services 17.50% Pvt. Ltd.

During the course of hearing the ld. Counsel for the assessee reiterated the contents of the aforesaid applications furnished for admission of the additional ground and the evidences and requested to admit the additional ground as well as the additional evidences. The reliance was placed on the following case laws:

We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the assessee has raised the additional ground relating to the computation of working capital adjustment. In in support of the additional ground the assessee also furnished the additional evidences. It is noticed from the order of the DRP dated 24.09.2012 that the assessee has raised the objection relating to credit and collection risks which arose when an enterprise supplies product or service to a customer in advance of the payment. It is also noticed that the assessee claimed for working Omniglobe Information Technologies (India) Pvt. Ltd. capital adjustment before the DRP which is evident from page no. 362 of the assessee’s paper book which read as under:

However, the DRP has not commented upon the said objection of the assessee. We, therefore, by considering the totality of the facts, are of the view that the additional ground raised by the assessee deserves to be admitted. It is also noticed that the new evidences furnished by the assessee are directly related to the computation of working capital adjustment and go to the root of the matter. Therefore, these additional evidences are also admitted.

In the instant case, it is an admitted fact that the assessee company is a voice call centre and the comparable challenged by the assessee, namely, M/s Eclerx Services Ltd. and M/s Vishal Information Technologies Ltd. are KPO. It is also noticed that the DRP in para 5 of its order dated 24.09.2012 discussed the aforesaid comparable. As regards to the M/s Eclerx Services Ltd., the DRP was of the view that the functional differences pointed out by the assessee were significant to warrant the rejection of this company as comparable. At the same time, the DRP retained the said company as comparable, therefore, a contradictory stand has been taken by the DRP. As regards to the comparable M/s Eclerx Services Ltd. is concerned, it is noticed that this comparable had been considered by the Hon’ble Jurisdictional High Court in the case of DCM Benetton India Ltd. Vs CIT (2008) 173 Taxman 283 (Del) (copy of which is placed at page nos. 1206 to 1247 of the assessee’s paper book). In the said case their lordships in para 31 to 37 has observed as under:

It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Omniglobe Information Technologies (India) Pvt. Ltd. Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider.

The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability.

We have reservations as to the Tribunal’s aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression ‘BPO’ and ‘KPO’ are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression ‘KPO’ in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value Omniglobe Information Technologies (India) Pvt. Ltd. chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently.

As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold.

As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for Omniglobe Information Technologies (India) Pvt. Ltd. determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP.

Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were Omniglobe Information Technologies (India) Pvt. Ltd. materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s Capital Iq Information Systems (India) (P.) Ltd. v. Additional Commissioner of Income-tax (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits.”

It is an admitted fact that the said judgment of the Hon’ble Jurisdictional High Court was not available either to the TPO or to the DRP because the order has been passed by the Hon’ble Jurisdictional High Court on 10.08.2015 while the orders of the DRP and the TPO are dated 24.09.2012 and 13.10.2011 respectively. We, therefore, considering the totality of the facts as narrated hereinabove, deem it appropriate to set aside this issue back to the file of the TPO/DRP for the reasons that the judgment of the Hon’ble Jurisdictional High Court and the Special Bench relied by the ld. Counsel for the assessee were not available to the TPO/DRP and that the DRP has given a contradictory findings with regard to the comparable M/s eClerx Services Ltd. Moreover, the issue relating to the working capital Omniglobe Information Technologies (India) Pvt. Ltd. adjustment was raised by the assessee before the DRP, however, no finding had been given by the DRP on the said issue. Now the assessee has furnished certain additional evidences which are essential to resolve this controversy. Accordingly, we remand the case back to the file of the TPO/DRP to be adjudicated afresh in accordance with law after considering the aforesaid judgment of the Hon’ble Jurisdictional High Court in the case of DCM Benton India Ltd. Vs CIT (supra) and the additional evidences furnished by the assessee on the issue relating to working capital adjustment raised vide additional ground, after providing due and reasonable opportunity of being heard to the assessee.

In the result, appeal of the assessee is allowed for statistical purposes. (Order Pronounced in the Court on 13/05/2016)