MAERSK GLOBAL SERVICE CENTERS (INDIA) P.LTD),MUMBAI vs. ITO CIR 7(2)(1), MUMBAI

Brief facts are, the assessee an Indian company is a wholly owned subsidiary of Maersk GSC Holdings A/S, which in turn is a down–stream subsidiary of A.P. Moller Maersk (APMM). The assessee, as noted by the Transfer Pricing Officer, acts as a service provider carrying out limited functions based on instructions received from its Associate Enterprise (A.E). It does not undertake any marketing activity and does not bear entrepreneurial risk. Service provided by the assessee are in the nature of Information Technology Enabled Services (ITES) or commonly known as business process out sourcing (BPO) service relating to transaction processing, data entry, re– conciliation of statements and other similar support services. As per the terms of agreement, for the service provided by the assessee to its A.E., it is remunerated on a cost plus mark–up basis. For the assessment year under consideration, assessee filed its return of income on 12th October 2010, declaring total income of ` 2,20,660 under the normal provisions and book profit of ` 14,67,13,912 under section 115JB. During the assessment proceedings, the Assessing Officer noticed that the assessee has entered into international transactions with its A.E. and, therefore, made a reference to the Transfer Pricing Officer for determining the arm's length price. The Transfer Pricing Officer after verifying the audit report in form no.3CEB and other documents submitted before him found that during the 3 Maersk Global Service Centers (India) Private Limited relevant previous year assessee has provided ITES to its A.E. for ` 1,51,39,34,000. After perusing the transfer pricing analysis made by the assessee, he noted that the assessee has selected comparables on the basis of multiple year data instead of single year (current year’s data). Therefore, pointing out various defects and deficiencies, the Transfer Pricing Officer rejected the transfer pricing study made by the assessee and proceeded to determine the arm's length price independently, though, he accepted TNMM as most appropriate method with Operating Profit / Operating Cost (OP/OC) as the Profit Level Indicator (PLI). However, by applying certain filters, he selected nine companies as comparable with arithmetic mean of 31.73%. By applying the aforesaid arithmetic mean to the operating cost, the arm's length price was determined at ` 180,28,54,145 as against price charged by assessee of ` 151,78,06,000. The resultant shortfall of ` 28,50,48,145 was treated as transfer pricing adjustment. On the basis of transfer pricing adjustment made by the Transfer Pricing Officer, the Assessing Officer framed the draft assessment order which the assessee objected before the DRP on various grounds.

The DRP after considering the objections of the assessee, accepted its claim in relation to selection / rejection of certain comparables as well as working capital adjustment. Whereas, other objections raised by the assessee were rejected. In pursuance to the 4 Maersk Global Service Centers (India) Private Limited order passed by the DRP, the Assessing Officer passed the impugned assessment order. Though, the assessee has raised multiple grounds in the appeal memo, however, at the outset learned Sr. Counsel, Shri Porus Kaka, appearing for the assessee wanted to confine his argument to grounds no.2, 3, 5 and 6. As far as grounds no.2 and 3, are concerned, they are as under:– “2. On the facts and in the circumstances of the case and in law, order passed by the Assessing Officer under section 143(3) of the Act is bad in law as it is not passed in conformity with directions issued by Hon’ble DRP and thereby violating section 144C(10) and section 144C(13) of the Act.

Learned Sr. Counsel submitted, the DRP after considering the objections of the assessee on the issue of comparability of certain companies had directed exclusion of some companies selected by the Transfer Pricing Officer and also directed him to include some companies proposed by the assessee. He further submitted, the DRP had also directed for allowance of working capital adjustment. However, the Assessing Officer in the final assessment order has 5 Maersk Global Service Centers (India) Private Limited completely ignored these directions of the DRP which is contrary to the statutory provisions. In this context, learned Authorised Representative drew our attention to the specific findings of the DRP.

Learned Departmental Representative on the other hand submitted, this is an inadvertent mistake committed by the Assessing Officer which could have been rectified if the assessee would have moved an application under section 154 of the Act.

We have considered the submissions of the parties and perused the material available on record. On a perusal of the order dated 27th October 2014 of the DRP, we have noticed that upholding the objection of the assessee, the DRP had directed for exclusion of some of the companies selected by the Transfer Pricing Officer which are as under:–

Further, the DRP has also directed the Transfer Pricing Officer to include two of the companies selected by the assessee viz. Spanco Ltd. and Caliber Point Business Solutions Ltd., which were earlier rejected by the Transfer Pricing Officer. Further in Para–37, the DRP had 6 Maersk Global Service Centers (India) Private Limited directed the Transfer Pricing Officer to allow working capital adjustment. As it appears, the Assessing Officer passed the impugned assessment order without implementing the aforesaid directions of the DRP. In this context, we may observe, sub–section (10) of section 144C mandates that every direction issued by the DRP shall be binding on the Assessing Officer. Further, sub-section (13) of section 144C provides that the Assessing Officer shall complete the assessment in conformity with the directions of the DRP. That being the clear statutory mandate, the Assessing Officer has failed to perform his statutory duty in not implementing the directions of the DRP. We, therefore, direct the Assessing Officer / Transfer Pricing Officer to compute the arm's length price after implementing the directions of the DRP as noted above. Grounds no.2 and 3 are allowed.

In ground no.5, the assessee has objected to the selection of the two companies as comparables, namely, Accentia Technologies Ltd. and Infosys BPO Ltd. Herein after we will deal with each of the companies objected by the assessee.

Objecting to the selection of this company, learned Sr. Counsel submitted, the assessee is a back office service provider to its A.E., whereas Accentia Technologies Ltd. is a parent company. It takes all

Learned Departmental Representative justifying the selection of this company submitted, captive service provider filter has not been applied either by the assessee or Transfer Pricing Officer. Referring to the Full Bench decision of the Tribunal in Mearsk Global Service Centre India Pvt. Ltd., learned Departmental Representative submitted, the Tribunal itself has held that the BPO segment again cannot be further divided into high end and low end service. Learned Departmental Representative submitted, as all the functions of this company is similar to assessee, it is to be treated as comparable. Referring to the financials of the company, he submitted, all income has been reported under single segment and the software development, if any, is for own use of the company.

We have considered the submissions of the parties and perused the material available on record. Though, the Transfer Pricing Officer has categorized the assessee as a KPO service provider, however, as could be seen from the extracted portion from the order of the Tribunal, Special Bench decision in assessee’s own case in Para–3.13 of the DRP’s direction, the Special Bench has specifically observed that 9 Maersk Global Service Centers (India) Private Limited work force employed by the assessee comprised of 96% of graduates and post graduates and only 4% workforce was professional such as Chartered Accountant, B. Tech., etc., which goes to show that function performed by the assessee to its A.E. were mainly in the nature of providing back office support service of low end nature. Thus, the aforesaid observation by the Special Bench leaves no room for doubt that the nature of service provided by the assessee to its A.E. is low end BPO service and cannot be considered as KPO service. Whereas, on a perusal of the information contained in the annual report of Accentia Technologies Ltd., a copy of which has been placed in the paper book, we have noticed that the company is into diversified activities like development of software, legal process out sourcing, health care management, etc. A reference to the Profit & Loss account of the company for the relevant financial year indicates that there is no segment–wise data maintained by this company. Further, Schedule–I forming part of the Balance Sheet indicates that during the relevant previous year, there was amalgamation of Asscent Infoserve. with the company. The Tribunal, Mumbai Bench while considering the comparability of Accentia Technologies Ltd. to the assessee in assessment year 2009–10 in ITA no.2594/Mum./2014 and Anr., dated 16th January 2015, has held as under:–

We have also noted, considering the aforesaid order of the Tribunal, the DRP in assessee’s own case in assessment year 2011–12 and the Transfer Pricing Officer himself in assessment year 2012–13 have rejected Accentia Technologies Ltd. as a comparable. The Tribunal, Delhi Bench in Equant Solutions India Pvt. Ltd. v/s DCIT, in 11 Maersk Global Service Centers (India) Private Limited ITA no.1202/Del./2015 dated 21st January 2016 for the very same assessment year 2010–11, while examining the functionality of this company found that it provides KPO service, LPO and DPO besides operating software service. The Tribunal also found that this company was having substantial amount of Brands, IPRs and goodwill, hence, it cannot be compared to a low end ITES service provider. The Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. v/s CIT, dated 10th August 2015, in fact, disagreed with the view expressed by the Tribunal, Mumbai Special Bench in Mearsk Global Centers India Pvt. Ltd., that ITES services cannot further be bifurcated to the BPO and KPO service for the purpose of comparative analysis. The Hon'ble High Court held that even though KPO may be coming under the broad category of ITES but the nature of service provided by KPO is completely different from the nature of service provided by a BPO service provider. The Hon'ble High Court held while the KPO is on the higher end of the spectrum involving employment of advanced skills and knowledge for providing service, BPO does not necessarily involve advanced skill and knowledge. Therefore, BPO service provider cannot be functionally comparable to a KPO. Reverting back to the facts of the present case, there is no discernible difference in the functional profile of the assessee and Accentia Technologies Ltd. in the impugned assessment year compared to the earlier assessment years.

Objecting to this company, the learned Authorised Representative submitted, this company provides business process management service to organizations that out source their business process unlike the assessee which broadly provides back office support service. He submitted, as per the information provided in the website of the company it applies business excellence frameworks to significantly reduce costs, enhance effectiveness and optimize business process of its clients. Learned Authorised Representative submitted, this company is a giant in the field owning significant goodwill and has substantial brand value of the Infosys Group. He submitted, the assets

We have considered the submissions of the parties and perused the material available on record in the light of relevant case laws cited

In ground no.6, though the assessee has raised the issue of rejection of a number of comparables by the Transfer Pricing Officer but at the time of hearing learned Sr. Counsel confined his argument in respect of only one comparable viz. R. Systems International Ltd.

Challenging the decision of the Transfer Pricing Officer / DRP in rejecting this company and specifically referring to the observations of DRP, learned Authorised Representative submitted that the only

Learned Departmental Representative on the other hand supporting the reasoning of the Transfer Pricing Officer / DRP justified rejection of this company as a comparable. Learned Departmental Representative relying upon a decision of the Tribunal, Pune Bench in Honeywell Automation India Pvt. Ltd. v/s DCIT, ITA no.4/Pn./2008 dated 10th February 2009, submitted that since the company and the assessee have different financial year / accounting period cannot be considered as comparable.

We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. We find from the record that the Transfer Pricing Officer rejected this company as a comparable on the ground that the assessee is a KPO service provider whereas this company is into low end BPO service. However, the aforesaid objection of the Transfer Pricing Officer was not accepted by the DRP in assessee’s own case for assessment year 2008–09 and, in fact, DRP held R. Systems International Ltd. as comparable to the assessee. Taking note of the aforesaid observations of the DRP, the Transfer Pricing Officer himself

Thus, consistent with the fact that in A.Y. 2007-08, TPO himself has accepted R. System as a good comparable and DRP in A.Y. 2008-09 has also accepted the same to be comparable, which has been upheld by the Special Bench, therefore, we do not find any reasons to deviate from such a precedence of the earlier years, so as to come to a different conclusion without any material difference on record for this year. Thus, we direct the TPO/AO to include R. System International Ltd. in the list of final comparables for bench marking the assessee’s margin.”

Following the aforesaid decision of the Tribunal, the DRP also in assessee’s own case for assessment year 2011–12 has accepted R. Systems International Ltd. as a comparable. As could be seen from the impugned order of the DRP, the only reason on which the company was rejected is on account of different financial year. As already stated while assessee is following financial year as accounting period this company follows calendar year as it’s accounting year. However, there is no dispute that contemporaneous data relating to nine months i.e., April to December is available in public domain. Therefore, the data available for nine months in public domain can be extrapolated to make a reasonable comparability analysis. This view was expressed by the Hon'ble Delhi High Court in Mckinscy Knowledge Centre India Pvt. Ltd. (supra) while approving the decision of the Tribunal. Therefore, this company having been found to be functionally similar to the assessee thereby accepted as a comparable by the Tribunal as well as the Departmental Authorities in assessee’s own case in earlier and subsequently assessment years, we do not find any reason to exclude the same as a comparable. Accordingly, accepting assessee’s plea, we direct the Assessing Officer / Transfer Pricing Officer to consider R. Systems International Ltd. as a comparable. Thus, ground no.6, is partly allowed.

Insofar as the other grounds are concerned, the learned Authorised Representative did not wish to press them. Hence, these grounds are dismissed as “not pressed”.

In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 29.07.2016