E4E BUSINESS SOLUTIONS INDIA PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

O R D E R Per N.V. Vasudevan, Judicial Member

This appeal by the assessee is against the order dated 26.7.2011 of the Deputy Commissioner of Income Tax, Circle11(3), Bangalore passed u/s. 143(3) r.w.s. 144C of the Act.

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Description Amount (Rs.) Operating Revenue 64,87,05,072 Operating Expenses (*) 56,04,33,299 Operating Profit 8,82,71,773 Operating Profit to Expenses 15.75% (*) Excluding The AE, Non-AE financial result of the company (as per the TP Report) is as under: Particulars With AE With Non-AE Total Operating Income (*) 546440687 102264385 648705072 Operating Expenses 465599540 94833759 560433299 Operating Profits 80841147 7430626 88271773 Profit Margin = OP / Cost 17.36% 7.84% 15.75% The above segmental details are considered for transfer pricing analysis.

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The following are the international transactions entered into by the tax payer with its Associated Enterprises (AEs) as per the 3CB report and as per the reference received from the AO.

Services relating to e-customer relationship Rs.54,64,40,687 management Reimbursement of telecom usage expenses Rs.33,21,866

a) Financial services, and b) Technical services.

IT(TP)A No.819/Bang/2011 Page 4 of 25 Service areas The services provided by iSeva Inc.. and JSPL can he broadly classified into three categories:

• Live e-mail response; • Real-time collaborative chat: and • Voice response.

Outbound support Outbound support services provided by ISPL are in the nature of telemarketing services. ISPL obtains a list of all prospective customers from the client (alternately. iSeva Inc., could procure such a list from a third party and provide the same to ISPL). ISPL deploys Davox, an automated outbound dialler. The list of prospective clients is loaded onto the dialler and the dialler automatically dials out to these customers. Every time a contact is established with a prospective client, the call is transferred to an agent in ISPL who then reads out a predefined marketing script thus completing the selling effort. Inbound support Inbound support could be in the nature of answering status calls on clients’ products, troubleshooting, filling out application form (sales support) etc. ISPL’s telecom engineers set up a call routing process for all calls (or some set of calls based on certain pre-arranged rule) to be redirected to ISPL. Once the IT(TP)A No.819/Bang/2011 Page 5 of 25 calls arrive in India, they will be handled by a dedicated set of agents who will answer the call and resolve the customer’s queries.

IT(TP)A No.819/Bang/2011 Page 6 of 25 The TPO’s working of Turnover, RPT to sales, percentage of export sales to sales are all given at page-137 & 138 of the TPO’s order. The same is given as Annexure-I to this order to appreciate some of the contentions that were taken up before us. The TPO after giving negative adjustments towards working capital adjustment of -1.58% arrived at an arithmetic mean of 31.79% and determined the adjustment to the ALP as follows:-

“18.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure E For details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by you is computed as under: Arithmetic mean PLI 30.21% Less: Working capital Adjustment(Annexure-F) -1.58% Adj.Arithmetic mean PLI 31.79% Arm’s Length Price: Operating Cost Rs.56,04,33,299 Arms Length Margin 31.79% of the operating cost Arms Length Price (ALP) Rs.73,85,95,044 At 131.79% of operating cost

18.6.1 Price received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) Rs.73,85,95,044 At 131.79% of operating cost Price charged in the international Rs.64,87,05,072

IT(TP)A No.819/Bang/2011 Page 7 of 25 transactions Shortfall being adjustment Rs.8,98,89,972 u/s.92CA The above shortfall of Rs.8,98,89,972/- is treated as transfer pricing adjustment u/s 92CA.”

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“The learned TPO has in his fresh study, erred in selecting Accurate Data Converters Private Limited, Accentia Technologies Limited, Eclerx Services Limited, Informed Technologies India Limited, Maple eSolutions Limited and Triton Corporation Limited as comparable to the Appellant despite the same failing to meet the legally acceptable criteria for comparability. The Honourable DRP has also erred in confirming the order of the TPO in this regard. These companies should be rejected as comparables, notwithstanding that Triton Corporation Limited was earlier selected by the Appellant and notwithstanding that the abovementioned comparables were contended before the lower authorities on different parameters.”

“Contention that DM was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the CIT(A) in appeal and therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins is not sustainable. In the first place, these are initial years of implementation of transfer pricing legislation in India and taxpayers as well as tax consultants were not fully conversant, with this new branch of law when proceedings were initiated or even at appellate stage. Besides, Revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to undertake above exercise. This has not been done in this case. Prima facie, as per the material, DM does not appear to be comparable. Even if the taxpayer or its counsel had taken DM as comparable in its T.P. audit, the taxpayer is entitled to point

IT(TP)A No.819/Bang/2011 Page 9 of 25 out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the DM. The case of DM is like that of IC representing extreme positions. If IC has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the DM has earned extraordinary profit and has a huge turnover. Besides differences in assets and other characteristics. The Tribunal is a fact-finding body and, therefore, has to take into account all the relevant material and determine the question as per the statutory regulations. Taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part.”

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15. The Assessee next seeks exclusion of the following four companies from the list of comparable companies by applying the employee cost to sales filter, viz., Asit C.Mehta Financial Services Ltd., (previous known as Nucleus Netsoft and GIS Limited), Informed Technologies Ltd., Vishal Information Technologies Limited (now known as Coral Hub Limited) and Accentia Technologies Ltd. The employee cost filter is an accepted filter in the matter of choosing comparables. In the case of First Advantage Offshore Services Pvt.Ltd., Vs. DCIT IT (TP) A.No.1086/Bang/2011 for AY 07-08 order dated 30.4.2013 in para- 35, this tribunal has held that in ITES sector also the companies which has less than 25% of the sales as employee cost should not be selected for comparability analysis for determination of ALP.

IT(TP)A No.819/Bang/2011 Page 12 of 25 is dispute in the case of Asit C.Mehta about the percentage of employee cost to turnover. In respect of Asit C.Mehta the learned DR submitted that the Data processing charges mentioned in Schedule-12 of the Profit and Loss Account should also be considered as employee cost and the percentage worked out accordingly. In respect of Accentia technologies Ltd., also the issue should be remanded as the employee cost to turnover issue was not raised before the DRP/TPO by the Assessee and the figures given by the Assessee before Tribunal needs verification. We are of the view that the plea put forth by the learned DR is acceptable and in respect of these two companies the employee cost to sales should be examined afresh by the AO/TPO after due opportunity to the Assessee. In respect of the other two companies there is no dispute that the employee cost to sales is less than 25% and therefore these two companies are directed to be excluded from the list of comparable companies.

IT(TP)A No.819/Bang/2011 Page 13 of 25 Ltd. (supra) wherein it was held that where the RPT exceeds 15%, such companies should not be taken as comparable companies. Following the said decision, we hold that companies at Sl.Nos. 5, 14 & 16 referred to above of the list of the comparable companies chosen by the TPO be excluded from the list of comparable companies while working out the ALP.

In respect of comparable company Caliber Point, which is at Sl.No.9 of the list of comparables chosen by the TPO, the related party transaction is shown by the TPO is 13.70%. The Assessee has filed a chart before us showing RPT at 15.44%. The same is given as ANNEXURE-III to this order. We therefore remand for fresh consideration by the TPO the RPT in the case of this company after affording opportunity of being heard to the Assessee. In the event of RPT being more than 15%, the said company has to be excluded from the list of comparable companies.

IT(TP)A No.819/Bang/2011 Page 14 of 25 “(5) Eclerx Services Ltd.

20. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- “14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services.

21. We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was functionally different.”

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“(8) Mold-tek Technologies Ltd.

25. This company is listed at Sl.No.16 of the list of comparable companies chosen by the TPO. As far as this company is concerned, the submission of the assessee before us is that it is in the business of Knowledge Process Outsourcing and cannot be considered as a comparable. The functional profile of this company is as follows:- “As per the annual report for the F.Y. 2007-08, the company primarily operates in two business segments: Plastic division: The plastic division is engaged in the manufacture of tube & oils, paints, pet products, consumer products, etc. The company demerged the said segment effective 1 April, 2007 and transferred the business unit to the Company Plastics Lt. The extract from the annual report confirms the fact that the Company had restructured its operations resulting in demerging the plastic segment business. Information Technology (IT) division: The IT division (also referred to as the KPO division by the company) of the company specializes in providing structural design and detailing services which can be categorized as structural engineering services. The structural engineering services provided by the IT division of the company cannot be classified as falling with the scope and ambit of ITES services. On the contrary, the said services would fall under the category of engineering services. Excerpts from the Annual Report of the company Page 10 of the Annual Report for the FY 2007-08 contains the following observation regarding the KPO division of the Company: ‘The Company has achieved about 56.49% growth in 2007-08 to register a turnover of IT(TP)A No.819/Bang/2011 Page 16 of 25

Rs.17.86 crore. The company having established its credentials in structural engineering services to US clients is devising aggressive marketing strategy to achieve rapid growth.” This company is also engaged in providing a host of engineering services like civil and structural engineering services, mechanical product design, plant engineering, IT services and GIS services. As we have already seen, this company is to be classified as KPO and cannot be compared with the assessee. The decision of the Bangalore Bench of the ITAT in the case of First Advantage Offshore Services Ltd. (supra) which we have referred to in the earlier part of this order will clearly apply to this company. We therefore direct this company to be excluded from the list of comparables.”

IT(TP)A No.819/Bang/2011 Page 19 of 25 Data cleansing; (iii) E-paper Ads; (iv) E-paper processing. The revenue from these activities are given in TPO’s order. The nature of services performed by Bodhtree in its division of Data Cleansing was confirmed by it as in the nature of ITES. The Assessee did not dispute this fact before the TPO. The Assessee took a plea of extra-ordinary profit due to hiving off of e-paper activity. The TPO however has demonstrated that the margin of Data Cleansing business alone was being considered for comparability and hence the plea of the Assessee was not sustainable. The decisions referred to by the learned counsel for the Assessee are concerned, the facts as brought out by the TPO in his order are not discussed. In the case of NXP Semi conductors India Pvt.Ltd. in its order the Tribunal at para 15.3.1 & 15.3.2 has held that the company profits are fluctuating and the same is owing to revenue recognition method followed by Bodhtree Ltd. The Tribunal also observed that Bodhtree Ltd. was into software development and not a pure ITES company. In our view the objections and the reasons given by the TPO for considering this company as a comparable are different and the objections raised by the Assessee before TPO were also different. On the facts as it transpired before the TPO and the arguments of the Assessee before TPO/DRP, we are of the view that this company was rightly regarded as comparable.

The TPO therefore considered this company as in the business of ITES. Thereafter he has analysed the financial results of this company and export revenues of this company and has considered this company as a comparable. The company had furnished its annual report to the TPO and it is stated so by the TPO in his order. In its objection before the DRP, the assessee specifically pointed out that the TPO did not afford any opportunity to the assessee for analyzing the business and performance of the company before including it as a comparable. The assessee also pointed out that the Annual report of this company was not available in the public domain and was also not provided by the assessee to the TPO.

"33.18 IServices India Pvt Ltd (OP/TO for the FY 2006-07 - 49.47%) The company was not part of the companies considered by the taxpayer in the accept I reject matrix given as Appendix-D to the TP report. However, the data of the company is available in Capitaline database. The Annual Report was not available for tile FY 2006-07. RPT information was not available. Thus notice 133(6) notice was issued to the company. As per the reply received from the company and the annual report submitted, it is seen that the company is into IT enabled services and qualifies all the filters applied by the TPO. Thus the company is proposed as a comparable vide this office letter dated 17-05-2010. In response, the taxpayer in its letter dated 28-06-2010 did not offer any comments. Thus the company is considered as a comparable. However, there is a mistake in the computation of PLI of the company. The same is rectified as under :

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Description Amount (Rs) Operating Revenues 16,29,20,061 Expenses debited to P&L 11,11,80,761 account Less: Interest . 14,80,537 Less: Exchange difference 6,42,614 Less: Miscellaneous expenses 55,880 written off Operating Expenses 10,90,01,730 Operating Profit (PBIT) 5,39,18,331 OP / TC (PLI) 49.47% Thus the company is considered as a comparable with the above revised PLI of 49.47% on cost."

before the Tribunal has also projected its grievance regarding the action of the learned Assessing Officer and Honorable Dispute Resolution Panel in excluding while computing deduction u/s.10A of the Act telecommunication charges of Rs.2,39,12,226/- on the ground that these expenses are attributable to delivery of software outside India from the export turnover. It is the plea of the Assessee that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this regard has placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR

98. (Karn).

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Pronounced in the open court on this 26th day of May, 2015.