VFS GLOBAL SERVICES P.LTD,MUMBAI vs. DCIT RG 1(2), MUMBAI

Instant appeal of the assessee is directed against the assessment order passed under section 143(3) r/w section 144C of the Income Tax Act, 1961 (for short "the Act") for the assessment year 2009–10, pursuant to the direction of the Dispute Resolution Panel (DRP)–II, Mumbai.

2 Tata AIA Life Insurance Co. Ltd.

3 Tata AIA Life Insurance Co. Ltd.

Officer for determining the arm's length price of international transactions. In course of proceedings before him, the Transfer Pricing Officer called for various details / documents and after perusing the same, he found that as per the report in Form 3CEB, assessee had disclosed the following international transactions with its A.E.

S.no. Nature of International Transaction Amount (`) Provision of business support services 21,69,95,740 1. Provision of procurement support service 4,75,58,440 2. Provision of services for visa processing 19,99,46,428 3. (U.K. Visa) Transition Income 4,87,49,980 4. Provision of logistics support services 1,00,91,812 5. Services Hub & Spoke (Logistics support 68,16,097 6. services) Total 53,01,58,497

4 Tata AIA Life Insurance Co. Ltd. assessee submitted its reply stating that the services provided by it to its A.E. in Mauritius are in the nature of business support service and not ITES. It was submitted by the assessee that it is a specialist business outsourcing agency providing technological and logistics support services to various consulates, embassies and diplomatic missions and has considerable management expertise, experience and knowledge. It was submitted, assessee also provides similar services for assisting the A.E. in Mauritius to set–up new operations and efficiently operate existing operations in terms of the agreement. It was submitted, assessee renders following services to its A.E.

Assistance in marketing and business support;  Financial and legal support;  I.T. support;  Assistance in recruitment and training of local staff at  various levels; Administration support;  Accounting and book keeping support and  Other activities for setting up operation & roll out not  covered above.

9.96%. As the margin shown by the assessee at 15.02% is much higher than the margin of the comparables, assessee had treated the price charged to be at arm's length. The Transfer Pricing Officer did not accept the computation of arm's length price by the assessee firstly for the reason that weighted average of three years is not appropriate. Further, he observed the assessee in the assessment year 2008–09, had considered itself as an ITES provider and considered comparable companies engaged in the ITES. He observed, though, the facts and circumstances in the impugned assessment year, had not changed compared to assessment year 2008–09, however, the assessee did not classify itself as ITES provider and accordingly considered comparables which are not engaged in providing ITES/BPO services. The Transfer Pricing Officer, after analysing the nature of service provided by the assessee from the transfer pricing report and agreement between the assessee and its overseas A.E., concluded that assessee is mainly engaged in providing back office support services which otherwise is called as I.T. enabled / BPO services. The Transfer Pricing Officer referring to the agreement between the parties observed, assessee is engaged in rendering ITE / BPO services pertaining to technology and logistical support (back office support) services to foreign consulates, embassies and diplomatic missions. Referring to CBDT notification S.O. no.890(E) dated 26th September

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2000, the Transfer Pricing Officer concluded that back office support service, human resource service, revenue accounting service and support centre service is part of ITES. The Transfer Pricing Officer observed, though, the assessee considering the nature of services provided, had categorised itself as ITES provider for assessment year 2008–09, however, in the assessment year under consideration, it has deviated from its own stand. Referring to the comparables selected by the assessee, the Transfer Pricing Officer observed that they are not in any way comparable to the assessee as they are functionally different. Therefore, after rejecting the transfer pricing study of the assessee Transfer Pricing Officer by applying certain filters proceeded to select comparables. Referring to the comparables considered by him in the assessment year 2008–09, Transfer Pricing Officer called upon the assessee to explain why the comparables considered for assessment year 2008–09, should not also be considered for the impugned assessment year and further, directed the assessee to furnish the computation of PLI (OP/OC) of the said comparables for the financial year 2008–09, relevant to the assessment year under consideration. In response to the query raised, assessee objected to the selection of comparables considered for the assessment year 2008–09 but nevertheless submitted the annual reports of the said comparables along with the working of the operating margin. The Transfer Pricing

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Officer after considering the objections of the assessee, did not accept the same and finally selected the following four companies as comparable to the assessee.

Name of Operating Operating Operating OP/TC Sl. comparable Revenue (`) Cost (`) Profit (`) (%) no 1. Accentia 801440931 538121837 263319094 48.93 Technologies Ltd. 2. Coral Hubs Ltd. 617394267 450880104 166514163 26.93 3. Cosmic Global Ltd. 77639593 52415463 2522413 48.12 4. Infosys BPO Ltd. 10834585473 8702361441 213222432 24.50 39.62

the list of comparables. As a result, the transfer pricing adjustment was reduced to ` 4,06,06,491. In terms with the direction of the DRP, the Assessing Officer passed the impugned order.

9 Tata AIA Life Insurance Co. Ltd. submitted, though in assessment year 2008–09, the assessee has classified itself as ITES provider and selected comparables from that segment but in the impugned assessment year, it has retained its study and found that the nature of service provided has to be classified as business support services which is not akin to ITES. He, therefore, submitted, merely for the fact that in assessment year 2008–09, assessee has classified itself as ITES provider in the impugned assessment year also, the assessee cannot be treated as ITES provider. He, therefore, submitted the characterisation of the assessee as ITES provider need not be accepted and the transfer pricing study undertaken by the assessee by classifying itself as business support service provider should be accepted.

“assessee has not enclosed TP Study Report for F.Y. 2007- 08 i.e., relevant to A.Y. 2008-09. The Assessing Officer has given a clear finding that there is no change in the nature of activities of the assessee in the year under consideration (i.e., A.Y. 2009- 10) vis-à-vis the activities in A.Y. 2008-09. The TPO has discussed the issue in para 6 of the TP order for the current year. Reference may please be made to the discussion at pages 2 to 4 of the TP order. On page 3 of the TP order, it has been clearly stated that assessee in the assessment year 2008-09 considered itself as providing IT enabled Services as also it considered comparables engaged in ITES. The TPO further notes eventhough the facts and circumstances have not changed from the previous year the assessee did not consider itself as rendering ITES BPO services for F.Y. 2008-09 (i.e., A.Y. 2009-10). The TPO further notes that it considered entirely different comparables. The TPO also show caused the assessee on this aspect.

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3.6.2 The TPO in the current year has passed the order on 16/01/2013. The TP Study for the year under consideration was conducted before the due date of filing of the return. The date of filing of return in this case is 29/09/2009 recorded on the assessment order by the A.O. 3.6.3 The TP Study for A.Y. 2008-09 has also been conducted around the same time i.e., before the due date of filing the return for the relevant Assessment Year i.e., September 2008. In the A.Y. 2008-09, assessee had filed appeal before the Ld. CIT(A), which was disposed off by the Ld. CIT(A) vide order dt. 19/09/2013. The final hearing in the case of assessee for A.Y. 2008-09 took place on 14/08/2014 and the decision was pronounced on 27/08/2014. 3.6.4 In view of the above facts, following submissions are made: (a) The issue of characterization and the comparables were open to the assessee in the proceedings for A.Y. 2008-09 till the decision of ITAT dated 27/08/2014. Though the assessee conducted a search for comparables for its TP Study before the due date for filing return for A.Y. 2009-10 (i.e., in the month of September 2009). The assessee company went ahead with the A.Y. 2008-09 proceedings based on the TPSR for A.Y. 2008-09 wherein it had selected comparables based on ITES. It is evident from the order of the hAT in A.Y. 2008-09. It is also relevant to point out that after giving effect to the directions of the ITAT for A.Y. 2008-09, following comparables were considered by the TPO in the order dated 12/01/2016 submitted before the Tribunal, during the course of hearing. These comparables, as per the table on page 4 of the TP Order dt. 12/01/2016 are as under: (i) Datamatics Financial Services Ltd. (ii) Infosys BPO Ltd. (iii) Maple Esolutions Ltd. (iv) R Systems International Ltd. (v) Triton Corporation Ltd. (vi) Wipro Ltd. (Segment) It is relevant to point out that all these comparables are engaged in the business of providing ITES services. It is also relevant to point out that the Hon’ble Tribunal has passed a detailed order in this regard. A reference is invited to TP Study Report for the A.Y. 2009- (b) 10, which is available in assessee's Paper Book-1 at pages 25 to 78 submitted before the TPO vide letter dt. 09/12/2011. A 11 Tata AIA Life Insurance Co. Ltd. specific reference is invited to Page 60 of the paper book 1 filed by the assessee (dt. 14/07/2014). In para 5.1.5, Table 9 gives six comparables identified by the assessee for the business support services segment for benchmarking purposes. It may be noted that the table contains data for the multiple years - 2007, 2008, 2009 respectively. It would be seen that the data in respect of these comparables was available in the database for earlier year as well. It is therefore submitted that the contention of the assessee that data for this segment within the ITES was not available earlier cannot be accepted. It has not been demonstrated that the data of 2007 and 2008 which is available in respect of these comparables was not there in the year 2008 when assessee company had conducted the search for the comparables. It would be evident that even 2007 data is available in the year 2009. Therefore the contention of the assessee does not deserve to be accepted. I (c) There is one more aspect to this issue. The assessee could have conducted a separate search for A.Y. 2008-09 immediately after the conduct of the search for A.Y. 2009-10. As submitted earlier, data for F.Y. 2006-07 and 2007-08 in respect of the comparables was available. The assessee did not bring this fact to the notice of the TPO and continued with the proceedings for A.Y. 2008-09 as such. The TPO has clearly given a finding that there is no change in the facts relating to nature of the provision of services in the year under consideration vis-à-vis A.Y. 2008-09. In other words, when the TP proceedings for A.Y. 2008-09 were in progress, the data in respect of the six comparables chosen by the assessee for A.Y. 2009-10 was also available in respect of earlier years and therefore it was incumbent upon the assessee to have pleaded before the TPO [in the year 2010 - 2011] or CIT(A) [in the year 2013] or before the ITAT [in the year 2014]. The assessee did not do so. In view of the aforesaid submissions, it is respectfully submitted that this contention of the assessee deserves to be rejected.”

12 Tata AIA Life Insurance Co. Ltd. is a very low end service. However, after considering the entire gamut of facts and the nature of service rendered to A.E., we are of the considered opinion that the business support service provided by the assessee to A.E. is nothing but in the nature of I.T. enabled (BPO) services. The distinctions attempted to be made out by the assessee to differentiate from ITES is too thin a line to hold water. ITES in common parlance is understood to mean a service wherein service provider utilizes telecommunication technologies and internet to provide a wide range of services to companies in the areas of manufacturing, healthcare, banking, insurance, telecommunication, finance, etc. The services provided broadly are call centre service, payroll, insurance claim, credit card processing, including customer care, human resources, administration, back office data processing and accounting. The nature of services rendered by the assessee, as could be seen from the facts on record, are akin to services provided by ITES companies. Therefore, effort should be made to find out comparables which are functionally similar within ITES segment. It is also a fact that in the preceding assessment year, assessee itself has classified the service rendered as that of an ITES provider. There being no change in the nature of service provided in the impugned assessment year, the claim of the assessee that it should be classified as a business support services provider is not 13 Tata AIA Life Insurance Co. Ltd. acceptable. In view of the aforesaid, we decline to interfere with the orders of the Departmental Authorities on this issue.

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Authorised Representative submitted, for this very reason, the Tribunal in assessee’s own case for assessment year 2008–09, while observing that a company which outsources a substantial part of its business cannot be compared with a company which does it on its own, directed the Assessing Officer / Transfer Pricing Officer to verify this aspect.

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providing translation services and medical transcription business is not a comparable to ITES providers. In fact, in assessee’s own case in assessment year 2008–09, the Tribunal, following the principle laid down in other decisions restored the matter back to the file of the Assessing Officer / Transfer Pricing Officer to examine the comparability of Cosmic Global Ltd. to the assessee. It is further observed, the Transfer Pricing Officer while carrying out the direction of the Tribunal having found Cosmic Global Ltd. to be functionally different from the assessee excluded it from the list of comparable. No material difference in facts has been brought to our notice by the learned Departmental Representative in the impugned assessment year. Therefore, we direct the Assessing Officer / Transfer Pricing Officer to exclude this company as a comparable.

18 Tata AIA Life Insurance Co. Ltd. as a comparable. He further submitted that though Infosys BPO Ltd. was established as BPO subsidiary of Infosys Technologies Ltd., but it has no service wise segment and has only one segment i.e., business process management. He submitted, the company has not only substantial sales and marketing and selling expenses such as brand building and advertisement but it has substantial goodwill. In this context, he referred to the annual report of Infosys BPO Ltd. He submitted, during the relevant previous year, Infosys BPO Ltd., has undergone restructuring which might have impacted its profitability. He, therefore, submitted that for various factors such as economies of scale, brand value, goodwill, diversified activities, Infosys BPO Ltd. cannot be treated as a comparable.

assessee’s own case for assessment year 2008–09, has rejected assessee’s contention for removing Infosys BPO Ltd. by applying high turnover filter. Learned Departmental Representative submitted, even otherwise also, there is hardly any substantial difference between the turnover of the assessee and Infosys BPO Ltd., as assessee’s turnover at entity level is ` 121 crore as against the turnover of Infosys BPO Ltd. at ` 1,081 crore which is about five times assessee’s turnover. Referring to the decision of the Hon'ble Jurisdictional High Court in CIT v/s Pentair, Learned Departmental Representative submitted, in the said case, the turnover of the assessee was ` 11 crore as against ` 649.56 crore of Infosys BPO Ltd. which is 65 times more. Therefore, the Hon'ble High Court held that Infosys BPO Ltd. is not a comparable. However, facts are different in assessee’s case.

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BPO Ltd. is ` 1,081 crore. Therefore, compared to assessee’s turnover, the turnover of Infosys cannot be considered to be very high. The contention of the learned Authorised Representative that only turnover from business support services should be compared and not the turnover at entity level, in our view, is not acceptable as it will give a distorted analysis. For example a company having turnover of more than ` 5,000 crore can seek exclusion of Infosys BPO Ltd. simply for the reason that its turnover from BPO segment is comparatively lower compared to Infosys BPO Ltd. In our view, such a proposition is not acceptable. Moreover, the Tribunal in assessee’s own case for assessment year 2008–09, has rejected assessee’s contention for excluding Infosys BPO Ltd., only on the basis of high turnover. As rightly pointed out by the learned Departmental Representative, in case of CIT v/s Pentair, the turnover of the assessee was much lower than the turnover of Infosys BPO Ltd., which is not the case in the appeal before us. Therefore, in our view, Infosys BPO Ltd., cannot be rejected as a comparable on the basis of high turnover alone. However, as far as other contention of the learned Authorised Representative relating to brand value, goodwill, economies of scale, etc., are factors which cannot be ignored while selecting Infosys BPO Ltd. as comparable as they have a crucial bearing on profitability. As these aspects have not been considered either by the TPO

21 Tata AIA Life Insurance Co. Ltd. on DRP, we are inclined to restore the issue relating to selection of Infosys BPO Ltd., as a comparable to the file of the Assessing Officer / Transfer Pricing Officer for deciding afresh after considering the submissions of the assessee and all other relevant facts.

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 Information services  Application receipt of validation services  Fee handling services  Biometric Recording services  Data Entry services  Application delivery services  Status Tracking services  Interview booking services  Return of documents service  Telephony services  Document management services

transaction is at arm’s length. The Transfer Pricing Officer, however, was not convinced with the explanation of the assessee. He observed that the overseas A.E. has entered into Global contracts with U.K. authorities for providing visa processing services. He alleged, the rate negotiated by the A.E. for that purpose was not brought to the notice of the Departmental Authorities. He further observed that the rate cannot be decided on the basis of old contracts which have already expired and a new contract has been entered into with A.E. on fresh terms and conditions, under which assessee is required to provide biometric recording services. The Assessing Officer observed, while providing similar Visa processing service to its A.E. in Nepal, the assessee has received ` 675 per application. Applying that as a CUP, the Assessing Officer observed, on an estimate during the relevant previous year, assessee would have processed ` 3,99,893, passports for which it claimed to have received ` 19,99,46,428 at ` 500 per application whereas, applying the rate of ` 675 per application, he determined the arm's length price at ` 26,99,27,775. The resultant shortfall of ` 6,99,81,347, was treated as the transfer pricing adjustment.

price charged but the DRP did not find merit in any of the submissions of the price charged but the DRP did not find merit in any of the submissions of the assessee and ultimately upheld the transfer pricing adjustment made by the Transfer Pricing Officer.

nothing extra ordinary except installing the machines for recording of personal physical data. He submitted, the assessee has provided valid internal CUP by way of provisions of services to U.K. / U.S.A. authorities with much lesser price at ` 400 and ` 350 respectively per application which should have been accepted. He submitted, in any case, the Transfer Pricing Officer was not justified in applying the price charged to the A.E. at Nepal as in assessee’s own case for assessment year 2008–09, the Tribunal has disapproved such method followed by Transfer Pricing Officer. Learned Authorised Representative submitted, that being the case, the price charged by the assessee at ` 500 per application to A.E. being higher than the price charged to the U.K. / U.S.A., visa authorities, no adjustment should have been made to the arm's length price.

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Departmental Representative submitted, as per the information available on record, the rates are to be reviewed once biometric recording is introduced which was not included in terms and conditions of the first agreement. He submitted, while applying CUP, high degree of comparability is required. Similarity of terms and conditions of service or products is essentially required. As the assessee has not made any adjustment in respect of additional functions performed and in the absence of relevant agreement valid CUP is not available. He, therefore, submitted the issue can be restored back to the Transfer Pricing Officer to examine afresh after considering agreements between the concerned parties if they are available.

27 Tata AIA Life Insurance Co. Ltd. with another A.E. The Tribunal held, the price charged by the assessee from its A.E. at Nepal cannot be considered as comparable in respect of international transaction with its A.E. at Mauritius. In fact, the learned Departmental Representative also fairly submitted before us, the price charged to Nepal A.E. is not a valid CUP for various reasons like courier charges, bank charges, etc. In the aforesaid view of the matter, the issue has to be restored back to the file of the Assessing Officer / Transfer Pricing Officer for deciding afresh after considering the submissions of the assessee in the light of relevant facts on record. However, we may observe, the assessee has provided two internal CUP by way of provisions of services to U.K. / U.S.A. visa authorities directly by the assessee at ` 400 and ` 350 per application which according to the assessee are valid CUP. The assessee has also submitted that the inclusion of biometric services will not make a material difference in the price charged to the A.E. compared to price charged to U.K. / U.S.A. visa authorities by the assessee directly. In our view, while deciding the issue, the Transfer Pricing Officer must take into consideration the aforesaid submissions of the assessee and also the claim of the assessee that the services rendered to its overseas A.E. at Mauritius are more or less similar to services rendered by the assessee to U.K. / U.S.A. visa authorities except biometric services. Both the assessee and the Transfer Pricing Officer

28 Tata AIA Life Insurance Co. Ltd. must also deliberate whether any adjustment at all is required to be made to the price on account of biometric recording services and if so, what should be the quantum. It goes without saying, the Transfer Pricing Officer must afford reasonable opportunity of being heard to the assessee before deciding the issue and pass a reasoned order dealing with all submissions of the assessee.