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Income Tax Appellate Tribunal, DELHI BENCH “I-2” NEW DELHI
This is assessee’s appeal against the assessment order dated 14.11.2014, passed by the Assessing Officer pursuant to DRP’s directions u/s144C(5) of the Income-tax Act, 1961, relating to AY 2010-11.
Brief facts of the case are that Fidelity Business India Pvt. Ltd. (“FBS India”), was incorporated on 17.5.2002 and is subsidiary of FID holdings (Mauritius) Ltd., which is part of the FMR Group. During the year, pursuant to the scheme of Arrangement u/ss 391 to 394 of the Act, as approved by the Hon’ble High court of Delhi, on 23.3.2010, FBS India had transferred its Fidelity International Ltd. business undertaking to FIL India 2 ITA 6867/Del/2014 effective from 1.4.2009. 99.99% shares of FIL India are held by FID holdings (Mauritius) Ltd., Mauritius. FIL India provides services to FIL Group of companies and is engaged in providing IT and IT enabled services related to Fidelity Group’s business activities and was compensated on a cost plus mark up basis.
The assessee company had filed return of income declaring total income of Rs. 9,94,50,836/-. The AO noted that assessee had entered into following international transactions during the year: S. International Transaction Amount No. (In Rs.) 1 Revenue from Software Development 1,415,633,844 Services 2 Revenue from IT enabled services 997,425,829 3 Recharge to Group Companies 15,586,679 4 Recharge from Group companies 155,891,869
He, therefore, made a reference u/s 92CA to TPO for determination of ALP for these transactions.
Ld TPO, after detailed analysis, directed for making following adjustments: (i) Software development services 209,228,000 (ii) IT enabled service 138,463,000 6. Thus, ld. TPO accepted the arm’s length price (“ALP”) as declared by assessee in regard to recharge to group companies ( Rs. 15,586,679/-) and recharge from Group companies (Rs. 155,891,869). 7. After ld. DRP’s direction the ALP adjustment aggregating to Rs. 34,76,91,000/- was made by ld. AO. Being aggrieved with the order of ld. AO, the assessee is in appeal before us and has taken following grounds of appeal:
3 ITA 6867/Del/2014 “That on the facts and circumstances of the case, and in law; 1. The assessment order passed by the Ld. AO in partial pursuance to the directions issued by the Hon'ble DRP is a vitiated order as the Hon'ble DRP erred both on facts and in law in confirming part of the Transfer Pricing CTP') additions made by the Ld. AO/ Ld. Additional Commissioner of Income Tax, Transfer Pricing Officer - 1(2), New Delhi (Ld. TPO). 1.1. That the assessment order passed by the Ld. AO is bad in law in as much as the same was passed in complete disregard to the scheme of the Act which mandates the AO to incorporate the directions of the DRP in the final order. 2, The Ld. AO / Ld. TPO and the Hon'ble DRP erred in ignoring the fact that the reference made by the Ld.AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which it was concluded that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the Arm's Length Price CALP'), as is required under section 92CA(1) of the Act.
4. The Ld. AO / Ld. TPO and the Hon'ble DRP erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case.
5. The Ld. AO/DRP erred on facts and in law determining the arm's length price ('ALP') of the appellant's international transactions pertaining receipt of service fees (IT and ITeS ) from its Associated Enterprises (AEs) at Rs. 2,656,720,000/- against the sum of Rs. 2,413,060,000 received by the appellant thereby enhancing the income of the Assessee by INR 243,660,000 and in doing so have grossly erred in: 4.1. disregarding the ALP as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of-the Income-tax Rules, 1962
4 ITA 6867/Del/2014 (Rules') as well as fresh search and in particular modifying/ rejecting the filters applied by the Appellant and applying additional/ revised filters as per his capricious approach; 4.2. disregarding multiple year / prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2009-10) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; and 4.3. rejecting the economic and comparability analysis undertaken by the Assessee in its TP documentation/ fresh search and applying certain erroneous/ modified filters in determining the ALP; and 4-4. including high-profit making companies in the final comparables set for benchmarking a low risk captive unit such as the Appellant (disregarding judicial pronouncements on the issue) ; and 4.5. erroneously including certain functionally dissimilar companies that are not comparable to the Assessee in terms of functions performed, assets employed and risks assumed and excluding certain comparable companies on arbitrary/ frivolous grounds; and 4.6. arbitrarily including companies having high margin/ volatile operating profit margins in the final com parables' set for benchmarking a low risk captive unit such as the Assessee; and 4.7. ignoring the business/ commercial reality that since the Appellant is remunerated on a arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the Appellant
5 ITA 6867/Del/2014 undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; and 4.8. not considering the correct computation of operating profit margins of certain companies used as comparable in IT and ITeS segments of the Assessee; and 4.9. not considering the correct computation of working capital adjustment to operating profit margins of comparable companies used as comparable in IT and ITeS segments of the Assessee by considering non-operating and long term items as part of Trade receivables/ payables; and 4.10.not considering the correct Prime Lending Rate for computing working capital adjustment to operating profit margins of comparable companies used as comparable in IT segment of the Assessee; and 4.11. disregarding judicial pronouncements in India in undertaking the TP adjustment; and 4.12. not considering the correct computation of operating profit margins of certain companies used as comparable in IT and ITeS segments of the Assessee; and 4.13.not allowing the appeallant the benefit ofthe +/- 5% range available to the appellant as per the proviso to section 92C(2) of the Act; and The Ld. AO/Hon'ble DRP erred in ignoring the fact that the Assessee is entitled to tax holiday under section lOA of the Act on its profits and therefore would not have any untoward motive of deriving a tax: advantage by manipulating transfer prices of its international transactions.
6 ITA 6867/Del/2014 The Ld.AO/Hon!bleDRP has erred both-on facts and in law in initiating the penalty under section 271(1)(C) of the Act The Ld. AO/Hon'ble DRP has erred both on facts and in law in charging interest under section 234B and 234D of the Act”
At the outset ld. counsel for the assessee submitted that for the sake of brevity he is primarily pressing ground nos. 4.3 to 4.7. He pointed out that in the software development services segment he is primarily disputing three comparables and in the adjustment relating to IT segment, he is primarily disputing 4 comparables.
As regards adjustment directed for soft development services, ld. TPO noticed that the assessee had used TNMM as the most appropriate method in determining its international transactions and OP/TC was taken as the profit level indicator in the TNMM analysis.
Ld. TPO noticed that in the TP study the assessee had arrived at a set of 16 companies with an average margin of 10% by using multiple year data. He noticed that assessee’s own margin of this segment was worked out at 12.98%. Thus, the assessee had concluded that its international transaction in regard to software development services were at arm’s length.
As regards software development service segment, ld. counsel pointed out that in the TP study there were 16 comparables. However, after fresh search was carried out as per the various filters adopted by TPO and margins were updates, 21 comparables were selected by assessee which are mentioned in para 4 of the show cause notice contained at pages 7 & 8 of TPO’s order. He referred to page 9 of TPO’s order and pointed out that ld. TPO rejected 14 comparables and accepted 7 comparables and further included 7 new comparables. Thus, in final analysis ld. TPO took 14
7 ITA 6867/Del/2014 comparables which are given in para 4.3 of his order, the average margin of which was 28.43%. The same are reproduced hereunder: Sl. Name of the company OP/OC No. 1 Akshay Software Technologies Ltd. - 1.04%% 2 Evoke Technologies Private Limited 18.56% 3 Infinite Data System Private Limited 69.94% 4 Infosys Limited 45.47% 5 LGS Global Limited (Ybrant Digital 12.78% Limited) 6 Larsen & Toubro Infotech Ltd. 19.06% 7 Mindtree Ltd. (Segment) 13.92% 8 Persistent Systems ALimited 30.18% 9 Sasken Communicatin Technologies Ltd. 17.54% 10 Sonata Software Ltd. 35.87% 11 Tata Elxsi (Segment) 20.25% 12 Thinksoft Global Services Ltd. 17.05% 13 Wipro Technology Services Limited 73.35% 14 Zylog Systems Limited 25.07% Average 28.43%
Ld. counsel submitted that first comparable disputed by assessee is Infosys Technologies Limited. He pointed out that this comparable was rejected by assessee in TP study.
Ld. counsel submitted that assessee had objected to inclusion of this comparable because of the diversified functions like consulting, application design, development, re-engineering and maintenance, system integration, package evaluation and implementation and business process management etc. being carried out by this comparable. He further pointed out that the turnover of this comparable is Rs. 21,140 crores, which is approximately 150 times of the assessee’s turnover which was only Rs. 142 crores. He 8 ITA 6867/Del/2014 further pointed out that this comparable has brand ownership, which it has acquired by incurring substantial marketing expenses. Further, it owns proprietary products like finacle, Infosys ActiceDesk, Infosys iProwe, Infosys mConnect. He pointed out that this company derived substantial portion of its revenue from sale of its proprietary products (including its flagship banking product suite ‘Finacle’). On the contrary the assessee does not own any brand or proprietary products. He further pointed out that other distinguishing features from assessee were expenses incurred by Infosys on research and development which were Rs. 440 crores (Approx 2.1% of revenue), whereas assessee did not incur any expenditure on R&D. Further, offshore revenue of this company was 98.7% (total sales Rs. 21,140 crores, out of which software export revenue was Rs. 20,871 crores). He pointed out that assessee is only a captive service provider and is rendering services to its AEs only. Further, AMP expenditure of Infosys was Rs 215 crores (Approximately 1.02% of revenue) as against Nil expenditure on AMP by assessee. On the comparison of risk being undertaken by this comparable vis a vis assessee, ld. counsel pointed out that this comparable operates as full fledged risk taking entrepreneur whereas assessee being captive service provider does not take such risk. In support of various arguments noted above, ld. counsel has referred to annual report of this comparable contained in the paper book.
Ld. counsel relied on the decision of the ITAT in the case of Agnity India Technologies Pvt. Ltd. rendered in wherein this comparable has been rejected. He also referred to the decision of Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. rendered in ITA no. 102/2015 for AY 2008-09 in support of the proposition 9 ITA 6867/Del/2014 that unless the comparable satisfies the test of functional comparability, the same cannot be taken as a comparable.
The second comparable disputed by ld. counsel is Wipro Technology Services Ltd. Ld. counsel pointed out that this comparable was rejected in TP study primarily on the ground of business restructuring/ extra-ordinary circumstances and abnormally high/ volatile profit margin. Ld. counsel referred to the annual report of this company, contained at page 97 onwards of the PB. Ld. counsel pointed out that this company carries on various diversified functions – technology infrastructure development including application design, development, re-engineering & maintenance and system integration etc. specifically for Citigroup Inc. He referred to page 97 of the PB and pointed out that Wipro Technology Services Ltd. had reached an agreement with Citi Group for acquiring Citi Technology Services Ltd. On 21.1.2009 Wipro Ltd. signed a master agreement with Citi Group Inc. for the delivery of technology infrastructure Services and application development and maintenance services for the period of six years with a guaranteed revenue of US $ 500 million. After the acquisition by Wipro the name of CTS was changed to Wipro Technologies Services Ltd. on 16.3.2009. With reference to MSA, ld. counsel pointed out that this is an extraordinary event which has taken place.
Ld. counsel further submitted that the transactions with Wipro and Citi Group entities fall in the ambit of sec. 92B(2) of the Act for the following reasons: i. Wipro Ltd., parent company of the assessee, executed an agreement with Citi Group Inc. for acquiring Citi Technology Services Ltd., now called Wipro Technology Services Ltd.
10 ITA 6867/Del/2014 ii. On 21.1.2009, Wipro Ltd. signed a master agreement with Citi Group Inc., for the delivery of technology Infrastructure Service and application development and maintenance services for the period of six years. iii. This shows that income from software development support and maintenance servicers was earned by Wipro Technology Services Ltd. from Citi Group Inc. by means of master service agreement entered into between Wipro Ltd. its parent company and Citi Group Inc., a third person. iv. Rule 10B(1)(e)(ii) that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. v. Section 92B(2) provides that a transaction entered into by a enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise.
Ld. counsel pointed out that the nature of business of this company is not clear from the annual report The turnover of this company is Rs. 400 crores as against Rs. 142 crores of assessee. Further, the brand ownership gives leverage to this comparable. Wipro brand was taken over by the company on merger whereas assessee does not have any brand or proprietary 11 ITA 6867/Del/2014 products. Offshore Revenue of Wipro is Rs. 3,88,46,35,089, which shows its extent of its offshore operations whereas assessee is 100% captive service provider and rendering services to its AEs. He further pointed out that no details are available in the annual report regarding related party transactions. Further, no segmental information is available in the annual report.
He further pointed out that this comparable has abnormally high margin/ volatile profit margins of 72.48% as per correct computation and 68.84% as per TP order. He pointed out that the profitability earned by this company is 73.77%, 52.55% and 80.81% from FY 2009-10 to FY 2011-12 respectively. Thus, FY 2009-10 was an abnormal FY. Further, this company is a full fledged risk taking entrepreneur whereas assessee operates as minimal risks as it is a captive service provider rendering services to Fidelity Group companies. 19. Ld. counsel pointed out that this comparable has been rejected by the Tribunal in the case of Equant Solutions India Pvt. Ltd. Vs. DCIT rendered in and in regard to functional dissimilarity ld. counsel relied on the decision of the Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. rendered in ITA nno. 102/2015 for AY 2008-09. 20. The third comparable disputed by assessee is Persistent Systems Ltd. Ld. counsel pointed out that this comparable was not considered in TP study and its inclusion was objected because of functional dissimilarity as the company being engaged in the product development. Further, there was non- availability of segmental information and extra ordinary circumstances, being acquisition of assets in Paxonic Inc. took place during the year. He pointed out that this company was involved in merger/ demerge activities.
12 ITA 6867/Del/2014 He pointed out that this comparable has been rejected in by the ITAT in the case of Equant Solutions India Pvt. Ltd. Vs. DCIT rendered in ITA no. 1202/Del/2015.
Ld. CIT(DR) submitted that assessee has not contested the filters as adopted by ld. TPO. In this regard he referred to page 8 of TPO’s order wherein he has discussed the comparables finally selected by him. Ld. CIT(DR) submitted that assessee is objecting to only those comparables where margin is high and, thus, cherry picking three comparables. However, assessee has accepted the reject matrix adopted by TPO.
Ld. CIT(DR) referred to ld. DRP’s direction and pointed out that ld. DRP has considered all objections taken before it. He referred to page 6 of ld. DRP’s directions and pointed out that one of the issue before ld. DRP was whether AO/ TPO’s action, by applying various filters, was right in rejecting various comparables including new comparables. While considering this issue ld. DRP examined in detail various filters. He pointed out that Ld. DRP in para 7.21 has considered various case laws to buttress ld. TPO’s contentions that high turnover was not a relevant factor.
Ld. CIT(DR) submitted that ld. DRP has considered the brand, R&D and turnover filters and has given cogent reasons as to how that will not affect PLI. He pointed out that ld. DRP also included certain comparables and granted a relief of approximately Rs. 10 crores adjustment to assessee.
Ld. counsel for the assessee, in the rejoinder, submitted that assessee has specifically taken ground no. 4.1 wherein it has contested the modification/ rejection of the filters applied by assessee and ld. TPO’s action in applying additional/ revised filters. He submitted that assessee has not conceded this ground but in order to avoid detailed hearing has not seriously 13 ITA 6867/Del/2014 contested the ground. He submitted that assessee is not per se disputing the contentions of lower revenue authorities that turnover per se cannot be a relevant factor for accepting/ rejecting the comparable. But when it becomes part of other dissimilarity, which he has demonstrated with reference to the three comparables noted above, then it assumes significance. Ld. counsel pointed out that assessee has relied on the decision in the case of Equant Solutions India Pvt. Ltd. (supra) and no distinction has been shown in the profile of assessee vis a vis Equant Solutions India Pvt. Ltd. (supra) Therefore, the decision is fully applicable to the facts of the case.
We have considered the submissions of both the parties and have perused the record of the case. There is no dispute as regards the applicability of TNM method and the PLI being OP/TC. All the three comparables, which have been disputed by assessee, are primarily disputed on the functional profile of the comparables.
As far as ld. CIT(DR)’s submission that since the assessee has not contested the filters, therefore, comparables which have passed the filter, cannot be disputed, is concerned, we are not inclined to accept this plea of ld. CIT(DR), firstly because ld. counsel for the assessee has not conceded on various filters but in order to cut short the controversy did not agitate on separate filters. Be that as it may, merely because a particular comparable satisfies all the filters considered by ld. TPO and also by assessee, it cannot be concluded that the comparable has to be accepted on that basis alone. A comparable might have pass the export filter but at the same time there may be other factors like brand ownership, risk etc., which influence the profitability of a comparable and that cannot be ignored. In the case of Wipro Technologies Ltd., which is one of the comparable under 14 ITA 6867/Del/2014 consideration, there was an extraordinary factor, which was acquisition of Citi Technologies Services Ltd., renamed as Wipro Technologies Services Ltd. Though the company was taken over but the pricing arrangement continued as it was the old agreement. This definitely influenced on profitability of comparable but there was no filter which could filter ate this comparable from the list of comparables. In view of above discussion we are not inclined to accept the plea of ld. DR that merely because assessee has accepted the various filters, therefore, it cannot challenge the exclusion of comparables which passes all the filters on separate grounds., 27. The Hon’ble Delhi High court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (ITA no. 16/2014 dated 16.3.2015), while considering the attributes of TNM method has observd in para 90 of the decision as under:
The strength of the TNM Method is that net profit indicators are affected by transactional differences in comparison with some other methods. This method is more tolerant to functional differences between controlled an uncontrolled transactions in comparison with resort to gross profit margins. Yet the net profit indicators have potentiality to introduce an-element of volatility primarily for two reasons. Firstly, factors which do not affect gross profit margin and prices can influence net profit indicators due to variation of operating expenses or vice- versa. This potentiality has reference to variation in operational expenses including AMP expenses. The other factors include tax- payers competitive position in the form of price and margins and in some cases, it may be difficult to eliminate or compute the effect of these factors. These difficulties in applying or accepting the TNM Method arise when there is complexity of functions and each party to the transaction(s) makes valuable unique contribution. Reliability of the TNM Method is sufficiently certain where one of the 15 ITA 6867/Del/2014 parties makes all contribution involved in the controlled transaction. This is the position even as per the Revenue's case in the present set of appeals. Revenue has asserted that the Indian subsidiaries, i.e. the assessees are mere dummies which implement, promote and incur AMP expenses for building brand value of the foreign AE. Value addition for the Indian AE is not pleaded or argued. Selection of the TNM Method where adopted by the assessee remains unchallenged by the TPOI Assessing Officer. (Emphasis supplied by us)
Therefore, we are in agreement with the submissions advanced by ld. counsel for the assessee that though turnover per se cannot be a basis for rejecting/ accepting a comparable, but, when TNM method is applied then functional similarity assumes considerable significance and if the functions performed along with other features, as noticed by us, while considering the comparable, are significantly different, then the said company cannot be taken as a comparable to the tested party.
One of the submission of ld. counsel is that Wipro Technoliogy Services Pvt. Ltd. and Persistent Systems Ltd. have been excluded in the case of Equant Solutions India Pvt. Ltd. (supra). This decision is contained at page 30 onwards of the PB and para 5 of this decision reads as under: “05. Facts apropos are that Equant Solutions India Private Limited assessee is a subsidiary of EGN BV, Netherlands. The company is engaged in providing information technology enables network management and other back office support services to its group companies. It also undertakes software development services for developing software applications, which are used within the Equant Group. The IT enables network management and other back office support services performed by assessee primarily include remote monitoring and maintenance of Equant global network platforms and Further under the category of software development services implementation of quality customer networking solutions.
16 ITA 6867/Del/2014 services, coordination, remote configuration, and assessee is engaged in the providing routine contract software development services relating to the development and maintenance of application companies like HR and accounting.”
From the above observations it is evident that this company was also undertaking software development services for developing software application which were used within the Equant group. Therefore, the functions carried out by this company were similar to that of assessee. Therefore, this decision is applicable to the facts of the case. We find that as regards Persistent Systems Ltd., Tribunal has observed in para 13 of the decision as under: “13. Persistent systems Limited a. TPO has taken Persistent Systems Limited (Persistent) which has a margin 29.02% as comparable holding that the company is engaged in software developing services. The Id DRP rejected the claim of the assessee for its exclusion. Before us, the Id AR submitted that this company is functionally different because it renders outsourced product development services and developed product as paxpro, ChemLMS etc. He further contended that segmental information of sale of software services and sale of product are not available and therefore it should be excluded. He relied on the decision of 3DPLM Software solutions Limited V 42 tamann.com 333 ( bang.) and Yadlee Infotech Pvt limited TS- 465-ITAT 2014 ( bang.) b. Ld. DR Relied on the order of AO and submitted that AO has given sufficient reason for selection of this comparable. c. We have perused the arguments on the same. Firstly on perusal of the balance sheet of this comparable it is noted that that this company has not provided segmental information for 17 ITA 6867/Del/2014 sale of services and sale of products of software's. Further It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is engaged in contract software development services. We find that, as submitted by the assessee, the segmental details are also not available separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. eIT [2012J 137 ITD 1/22 taxmann.com 96 (Mum.) that in the absence of segmental details/information a company it cannot be taken into account for comparability analysis, We hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.”
As regards Wipro Technology Services Pvt. Ltd., we find that Tribunal has observed in para 15 of the decision as under: 15. Wipro technology Services Limited. a. TPO has included Wipro Technology Services Ltd having a margin of 73.35% and it has been upheld by DRP. Before us, the Id AR submitted that this company has huge related party Transaction as company's total revenue is governed by master service agreement with CITI technology services Limited where the 100 % of the equity is owned by Wipro. Therefore, the entire revenue of this is much related party. It was further submitted that it has turnover of more than 24 times of the assessee and has huge brand value of Wipro and therefore it should be excluded. He further buttressed his claim of exclusion by submitting the volatile PLI of the company from 52.55 % to 80.81 % in a chart for three years. b. Ld. DR Relied on the order of TPO and DRP for the reason given for selection of this comparable.
18 ITA 6867/Del/2014 c. We carefully considered the rival contention regarding exclusion of this comparable. This company had agreed an agreement with CITI Technology Services Ltd, which is 100% subsidiary of Wipro Technology Ltd. The entire revenue during the year is covered by a master service agreement entered into by Wipro with CITI Group Services. Further, this company is also a subsidiary of Wipro Ltd., which company has a considerable brand name, therefore benefit accruing to this company from the brand name of Wipro cannot be denied. Therefore relying on the decision of the coordinate bench in the case of Agnity Technology Pvt. Ltd, in for Assessment Year 2010--11, wherein the Infosys owns of its brand name was held to be incomparable on the same analogy, brand value of 'Wipro' does help this comparable. Hence, we direct TPO to exclude this comparable, it is ordered accordingly.
Apart from these considerations, we further find considerable force in the submission of ld. counsel for the assessee as regards Wipro Technology Services Pvt. Ltd. that the agreement between Wipro and Citi Group had bearing on the pricing. It is true that after the merger of Citi Technology Services Ltd. with Wipro the existence of the Citi Technology Services Ltd. was no more there but the pricing agreed by earlier agreement between Wipro and Citi Group remained operational. The brand of Wipro continued even after acquisition. Therefore, in view of the provision of section 90B(2), the pricing got affected by the agreement and this factor on standalone basis was sufficient enough to reject this comparable from the list of comparables. We, accordingly, direct for exclusion of Wipro Technology Services Pvt. Ltd. and Persistent Systems Ltd. following the decision in the case of Equant Solutions India Pvt. Ltd. (supra) and also for the reasons given above.
As regards Infosys Technologies Ltd. we find considerable force in the submission of ld. counsel for the assessee as noted earlier, that though 19 ITA 6867/Del/2014 turnover per se cannot be the basis for rejection of a comparable, but when it becomes part of other similar like brand, ownership, R&D expenses, offshore revenue, AMP spent etc. as noted earlier, then the turnover assumes significance and, therefore, Infosys Technologies Ltd. cannot be taken as a comparable in the present set of facts. 34. In view of the decision of Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra), wherein it has been held that turnover per se cannot be the basis for rejection of a comparable and other aspects have to be taken into consideration. Accordingly, this comparable is directed to be excluded from the list of comparables. I.T. Segment: 35. Fidelity group is an international provider of financial services and investment resources that help individual and institutions to meet their respective financial objectives. Fidelity group includes a large family of mutual funds, retirement savings plans, their distributors and investment advisors and a retail brokerage as well as unrelated business. The group mainly operates in three business areas – (i) Financial Services; (ii) Employer services; and (iii) technology. 36. Financial Services primarily includes fund management, retail and institutional services. FMR company acts as the investment advisor of Fidelity’s mutual funds. Fidelity Brokerage Company provides a full range of investment and brokerage products and services to individual investors and institutional clients. Fidelity investment life insurance company offers a variety of annuity and life insurance products. It also develops, markets and supports all f the life insurance and annuity products that Fidelity offers.
20 ITA 6867/Del/2014 37. For catering to the needs of Fidelity group the Indian unit i.e. the assessee undertakes to provide services for European Retail ( individual investors) and the Indian asset management company based in Mumbai. The back-office operations are segregated into onshore and offshore activity. Various functional owners of specific processes are spread globally. The assessee provides customer support services vide phone wherein it rsolves issues and concerns of customers in terms of their individual portfolio of investments. Further, it also provides support to various individual investors whose funds are being managed by Fidelity, brokers, financial advisors etc., resolving various queries and issues on specific funds.
In the backdrop of above functional analysis, it is evident that assessee is primarily captive service provider and is primarily catering to the needs of individual investors of Fidelity group.
In regard to the IT enabled services, rendered by assessee, the PLI of the company was arrived at 14.98% on cost in the TP study whereas the average PLI of the comparables was arrived at 13% by taking into account 15 comparables. Thus, assessee’s claim was that international transaction was at arm’s length.
After the fresh search was conducted during the course of T.P. proceedings, assessee provided in total 20 comparables, which have been listed in para 9 of ld. TPO’s order at page 12. Out of this 16 were rejected by TPO and following 4 comparables were accepted: - Cosmic Global Ltd. - Infosys BPO Ltd. - Jindal Intellicom Ltd. - Microland Ltd.
Ld. TPO further added 5 comparables which were as under:
21 ITA 6867/Del/2014 - Accentia Technology Ltd. - E4e Healthcare Business Services Pvt. Ltd. - Fortune Infotech Ltd. - TCS E-Serve Ltd. - TCS E-Serve International Ltd.
Total margin of these 9 comparables was computed at 30.58%.
Ld. DRP confirmed the TPO’s action in regard to following comparables: - TCS E-Serve Ltd. - TCS E-Serve International Ltd. - Infosys BPO Ltd. - Accentia Technology Ltd. 44. The first comparable disputed by ld. counsel for the assessee is TCS E-Serve Ltd. Ld. TPO had included this comparable as RPT as per annual report was found to be less than 25% of sales. The assessee had rejected this company primarily on the ground that this company was having RPT. 45. Before ld. DRP the assessee raised objection on following grounds:
46. Functional Dissimilarity:- Ld. counsel pointed out that this company provides business process management services in banking and financial services verticals. Provides services comprising transaction processing and technical services. Transaction processing includes processing, collections, customer care and payments in relation to the services by citigroup to its corporate and retail clients.
47. Technical services involve software testing, verification and validation of software at the time of implementation and data centre 22 ITA 6867/Del/2014 management activities. Segmental details for income from transactions processing services not available in annual report.
48. He further pointed out that this company is engaged in the business process outsourcing( transaction processing) services to the Banking & financial services industry, which is single segment and there is no separate segmental report of ITes segment. This company has only given its financial details of on geographical basis.
49. Ld. counsel further pointed out that turnover of this company is Rs. 1440 crores, whereas assessee’s IT segment turnover is only Rs. 100 crores. Further, this company has the economic benefit on account of payment for TATA brand equity. He pointed out that brand equity payment made by the company were Rs. 4.2 crores whereas no branded or proprietary products are owned by FIL India.
50. Further offshore revenue export income/ sales is 74.67% whreas that of FIL India is 93.67%. Further AMP spent of this company is 0.15 crores whereas assessee has not incurred any expenditure on advertisement. He further pointed out that the company largely renders services to worldwide Citigroup entities. Such services are rendered in continuation of the related party agreements which were executed when the company was under the management of Citi group.
51. As regards risk profile of this company, ld. counsel pointed out that this company operates as full fledged risk taking entrepreneur, whereas assessee is a captive service provider to Fidelity Group companies. Further, during the year there is abnormally high margin/ volatile profit margins earned by this company which is 60.49% as per correct computation. He pointed out that profitability earned by this company in FY 2007-08 was 23 ITA 6867/Del/2014 24.50%; FY 2008-09 45.94%; FY 2009-10 60.49%. Ld. counsel relied on the decision of ITAT in the case of Equant Solutions India Pvt. Ltd. (supra).
Ld. DRP while considering the assessee’s objection has pointed out that this company is primarily in ITes field which is evident from various extracts reproduced in DRP’s direction from the annual report. Ld. DRP further considered the assessee’s objection on taking over of this company by the TCS group and referring to page 13 of annual report observed that the company was taken over by the TCS in the preceding year and not during the relevant year under consideration.
As regards the objection raised by the assessee of the exhorbitant growth in the revenue, ld. DRP demonstrated with reference to the data contained in the annual report that the company was doing even better before the taking over by the TCS group and the growth had in fact slowed down after the takeover.
As regards the assessee’s objection that the export turnover of this company was less than 75%, ld. DRP demonstrated that on correct computation the export turnover was 79.15% and not 74.68%.
As regards the assessee’s objection that TCS E-Serve Ltd. had not shown transactions undertaken by it with its related parties, namely, Citi group company, ld. DRP pointed out that after the acquisition by Tata group, there was no reason to assume that Citi group was a related party.
We have considered the rival submissions and perused the material available on record. This comparable has been directed to be excluded in the case of Equant Solutions India Pvt. Ltd. (supra). The business profile of Equant Solutions India Pvt. Ltd. (supra), inter alia, comprised of rendering IT enabled net work management and other back office support services, 24 ITA 6867/Del/2014 which included remote monitoring and maintenance of Equant global network platforms and services, coordination, remote configuration and implementation of quality customer networking solutions. The assessee primarily undertakes to provide services for European and the Indian asset management company based in Mumbai. The assessee is primarily catering to the retail site (individual investor) to Fidelity Group business. Thus, broadly the functions performed by assessee are similar to that of Equant Solutions India Pvt. Ltd. (supra) and, therefore, this company deserves to be excluded. We find that functions performed by TCS-e-Serve Ltd. included rendering of technical services like software testing etc., which required skilled persons. As far as the objection regarding related party transaction is concerned, we are in agreement with the reasoning given by DRP that since this company was taken over by TCS group, therefore, there was no question of any separate details being given about related party transaction. However, keeping in view the various factors, pointed out by ld. counsel for the assessee, which we have noted earlier, this company cannot be taken as a comparable to the tested party.
As far as TCS E-Serve International Ltd. is concerned, ld. counsel for the assessee pointed out that as per the annual report, the functions performed by this company is to provide business process management services in banking and financial services verticals. It provides services comprising transaction process and technical services. Transaction processing includes processing, collections, customer care and payments in relation to the services 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 25 ITA 6867/Del/2014 activities. Segmental details for income from transactions processing services are not available in annual report.
Ld. counsel pointed out that other dissimilarities which have been referred with reference to TCS-e-serve, are also in this comparable. He, therefore, submitted that this comparable should be excluded. He relied on the order of the ITAT in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (ITA no. 1478/Del/2015).
We have heard both the parties. We find that the functions performed by this comparable are almost similar to that of TCS-e-Serve Ltd. and since this company is also rendering technical services and segmental details for income from transaction processing service are not available, therefore, we direct for exclusion of this comparable, as has been done in the case of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (supra).
As regards Accentia Technology Ltd., ld. counsel pointed out that this comparable provides high end functions such as knowledge processing outsourcing legal process. Outsourcing, data process outsourcing, high end software services delivery besides offering software As A Service (“SaaS”) Model in the healthcare outsourcing area. It also developed software products such as Business Process outsourcing management (‘BPOM’) solutions and HealthDox (HRCM Solution), apart from IT enabled services. He further pointed out that during FY 2009-10 a subsidiary of Accentia got amalgamated with the latter and the said extraordinary event has affected the overall profitability of Accentia. He relied on the decisions of the ITAT in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (supra).
26 ITA 6867/Del/2014 61. Having heard both the parties we find that at page 114 of the PB in the Annual Report of this company, it has been stated as under: “Accentia has gone a long way from being a single location, single service firm to a multi location, diversified knowledge process Outsourcing Company, operating from multiple locations in India, USA, UK and the Middle East. Not resting at being the fastest growing Healthcare Receivables Cycle Management Company, we have now ventured into Legal Process Outsourcing, Data Processing Outsourcing and high end software services delivery, besides offering software. As a Service model in the healthcare outsourcing area.”
Thus, it is clear that this company is primarily diversified knowledge process outsourcing company and coupled with the fact that extraordinary circumstance of amalgamation took place during the year, this comparable is directed to be excluded from the list of comparables.
As regards Infosys BPO Ltd., ld. counsel pointed out that the functions performed by this company are high end integrated services assisting in improving competitive positioning and managing business processes in addition to providing increased value. The turnover of this company is Rs. 1127 crores as against Rs. 100 crores of ITeS segment of assessee. This company has brand ownership, which is evident from the brand related expenses incurred by this company of Rs. 69,16,780/-, whereas assessee does not have any brand or proprietary products. Further, offshore revenue, Export income has not been specified separately. Therefore, it could not be found out as to whether export turnover is 75% of total income or not. Further, selling and marketing spend is 7% of revenue, which is not present in assessee’s case. This company operates as a fullfledged risk taking entrepreneur whereas assessee is at minimal basiss. He relied on the 27 ITA 6867/Del/2014 Tribunal’s decision in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (supra). 64. Ld. DRP has accepted the TPO’s contention, inter alia, observing on the issue of brand ownership that creation of brand value is not on account of marketing expenses but because of superior services. Ld. DRP has observed that this service is given by employing better process and employees, therefore, the cost are higher on account of the same and most of the extra profits on account of brand value are set off because of the cost of this higher service. 65. We are unable to agree with these findings of ld. DRP because it is not demonstrated as to what is the actual basis for these findings. The findings are purely on the basis of ld. DRP’s assumptions. As we have observed earlier, accepting ld. counsel’s plea that mere high turnover cannot be the basis for accepting or rejecting comparable, but coupled with the other dissimilarities the company is to be rejected. We, therefore, following the Tribunal’s decisions in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (supra), direct for exclusion of this comparable. Order pronouncement in open court on 12/05/2016.