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Income Tax Appellate Tribunal, MUMBAI BENCHES “K”, MUMBAI
Before: Shri Amit Shukla, & Shri Ashwani Taneja
आदेश / O R D E R Per Ashwani Taneja (Accountant Member): This appeal is filed by the Assessee against the orders of Disputes Resolution Panel -II, Mumbai {in short, ‘DRP’}, for the assessment year 2010-11.
2 Willis Processing Services.
During the course of hearing, arguments were made by Shri Rajan Vora & Shri Nikhil Tiwari, Authorised Representative (Ld. Counsel), on behalf of the Assessee and by Shri N.K. Chand, Departmental Representative (Ld. CIT-DR), on behalf of the Revenue.
The brief background of this case is that during the year under concern, the assessee company operated as a back office support centre for the Willis Group and was engaged in the processing of insurance claims/ premium processing, accounting support services and other related processing services to the Willis Group entities. With the return of income, the assessee also filed an Accountant’s Report in Form no.3CEB, in accordance with section 92C of the Act, reporting the particulars of its international transactions with its AEs. In the TP study report, as per ‘FAR’ analysis, the assessee company was categorised as a “risks mitigated back office service provider and was selected as the tested party. The TNMM (i.e. Transaction Net Margin Method) was determined as the most appropriate method (“MAM”) to determine the ALP for comparability purposes. The assessee had selected comparable companies with a functional profile similar to that of the assessee company and identified the comparable companies using certain filters. The assessee used operating profit/operating cost as the Profit Level Indicator(PLI) and arithmetic mean PLI of the comparable companies using 3 years’ weighted average worked out to 3 Willis Processing Services.
12.33%, whereas the PLI of the assessee’s for A.Y. 2010-11 worked out to 16.95%. Since the assessee’s PLI was higher than the average PLI of comparable companies, therefore, international transaction was concluded to be at Arm’s Length Price. The only international transaction was on account of provision of claim processing services for aggregate amount of Rs.95,19,43,296/- 3.1. Reference was made to the TPO. The TPO accepted the analysis of the assessee using the TNMM as most appropriate method (MAM) for determination of ALP of international transactions. The TPO arrived at final set of 14 comparables i.e. 4 common and 10 additional with an ALP margin of 24.46% on costs. Thus TPO proposed TP addition of Rs.6,15,92,067/- to the international transactions of the assessee.
3.2. The assessee filed objections against the draft assessment order before the DRP wherein assessee’s arguments for exclusion of 2 comparable chosen by the TPO were accepted. The DRP had also accepted the assessee’s contentions with respect to re-computing margin of one of the comparables. Pursuant to the directions issued by the DRP, TP adjustment was reduced to Rs.5,86,75,356/-. In pursuance to the direction of DRP, the AO framed the final assessment order re- computing the total income of the assessee at Rs.19,79,60,160/- ( including the transfer pricing adjustment of Rs.5,86,75,356/- as per direction made by the DRP).
4 Willis Processing Services.
Being aggrieved, the assessee filed appeal against the final assessment order before the Tribunal.
After hearing both the sides, the appeal is decided ground wise as under:
Ground Nos. 1 to 6: No specific arguments have been made by the Ld. Counsel and therefore these grounds are dismissed.
Ground Nos.7, 10 & 11: During the course of hearing, the Ld. Counsel of the assessee has argued for including only one comparable i.e. R-Systems International Ltd. This comparable was rejected by the TPO on the ground that the said company was engaged in the software development, whereas the DRP rejected it on the ground that it follows different financial year other than the April to March. It was further submitted that during the course of assessment proceedings, the assessee, on without prejudice basis, submitted the margins of the company for the period April 2009 to March 2010, worked out on the basis of calendar year data available in the public domain. But all these details and documents were not considered by the lower authorities. Reliance has been placed in this regard on the decision of the Delhi Bench of the Tribunal in the case of MERCER CONSULTING (INDIA) PVT. LTD. in which margin recomputed on the basis of calendar year results available in the public domain were considered. It was further argued that aforesaid
5 Willis Processing Services. decision was also upheld by the Mumbai Bench of the Tribunal in the case of AEGIS LTD,( for A.Y. 2009-10) in ITA No.1213/M/2014. It has been further submitted that the said company is functionally comparable with the assessee company. Our attention has been drawn to the annual report of the said company, showing that it is engaged in software services as well as BPO services and separate segmental information in respect of the same is available. Accordingly, the assessee has taken only the BPO services segment for the comparability analysis. This is evident from various disclosures in the annual report. On page 100 of the Annual Report, under the head “segmental information” in the notes to accounts, it is clearly stated that the company operates under two segments viz software development and customization. It was submitted that this company should be considered as a comparable.
7.1. On the other Ld. CIT-DR opposed arguments of Ld Counsel of the assessee, and in his support he has relied upon the judgment of the Tribunal, it was submitted by him that assessee is trying to do cherry picking exercise, which is not permitted under the law.
7.2. We have gone through the facts of the case and the judgment relied by both the parties. It is noted that in the case of MERCER CONSULTING (INDIA) PVT. LTD. (supra), the Tribunal has accepted the request of the assessee to consider this comparable by observing vide para 11.7 as under:
6 Willis Processing Services.
“We find that R. Systems International Ltd. has been excluded by the TPO solely for the reason that its financial year is different without considering that the data for the financial year adopted by the assessee can be easily compiled from the audited statements of such company. We, therefore, set aside the impugned order on this issue and remit the matter to the TPO/AO for including the case of R. Systems International Ltd. in the list of comparables by working out the figures relevant to the financial year ending 31.3.09 from the audited accounts of R. Systems International Ltd.”
7.3. It is further noted by us that similar issue has been decided by the Tribunal in the case of M/s. CISCO Systems (India) Private Ltd. and Aegis Limited vs. ACIT in ITA No.1213/M/2014 dated 27th July 2015. Thus, respectfully following the orders of the Tribunal, we remit this issue to the file of the TPO/AO for including this company in the list of comparables after re-computing the margins for the financial year under consideration, on the basis of figures available in the audited accounts of the said company, taking segmental data of BPO segment into consideration. Thus, this ground of the assessee is allowed for statistical purposes.
Ground Nos. 8, 11, 14, & 15: In these grounds, the assessee has contested the action of lower authorities in including following three companies in the list of comparables:
7 Willis Processing Services.
(i) Eclerx Services Limited (ii) Infosys BPO Limited (iii) TCS E-serve Limited
(i) Eclerx Services Limited: The TPO had included this company on the ground that it was engaged in similar activity. The DRP upheld the action of the TPO. The assessee company had vehemently contended before the lower authorities as well as before us that the said company cannot be considered as comparable due to reasons inter alia that the said company was functionally different from the assessee company. Following submissions have been made by the Ld. Counsel in support of his argument that the said company could not have been included as comparable:
“The company provides high end data analytics and customized process solutions and is a leading Indian provider of KPO services. This is evident from various parts of the annual report of the company. Willis India is engaged in provision of routine BPO services viz- Processing of insurance claims and insurance premiums. Insurance accounting support services and Data processing service for which Willis India employed ordinary graduates and hence cannot be compared to a company such providing KPO services, such as Eclerx. Further, this company has been rejected by the Special Bench in case of Maersk Global on the basis that the company is engaged in high end KPO services and cannot be compared to a 8 Willis Processing Services. company pre-dominantly engaged in routine BPO services (insurance claim processing services). Also, the Delhi High Court, in the case of Rampgreen Solutions Pvt Ltd has upheld the action of the Tribunal and rejected Eclerx by stating that the company is engaged in KPO activities and cannot be compared to routine BPO service providers.
Further, in the Assessee's own case for AY 2009-10, the Hon'ble DRP as well as the Hon'ble Tribunal held that companies engaged in KPO services cannot be compared to the routine BPO services provided by the Assessee (insurance claim processing services).
Additionally, it is submitted that the Hon'ble Mumbai Tribunal in Willis India's own case for AY 2009-10 has rejected one company namely Genpact Limited on the basis that the company is engaged in high end services and hence, it cannot he compared to low end services rendered by Willis India (refer page 495 of the legal paper book). Further, the Tribunal also rejected a company namely Crossdomain Solutions Private Limited on the basis that said company is engaged in provision of KPO services (refer page 496 of the legal paper book).”
9.1. It has been further submitted by Ld. Counsel that in assessee’s own case in A.Y.2007-08, this company was included in the comparables but when this matter reached before the Hon’ble Delhi High Court in another case in the 9 Willis Processing Services. case of Rampgreen Solutions Pvt. Ltd. vs. CIT (in dated 10.08.2015, then Hon’ble High Court did not accept the view to the Tribunal and held that BPO service provider could not be compared with KPO service provider. It was argued that this issue was covered with the judgment of Hon’ble Delhi High Court also.
9.2. On the other hand, Ld. CIT-DR has submitted that this issue was decided against the assessee by the Tribunal in assessee’ own case in A.Y. 2007-08 and therefore, in this year also this issue should be decided against the assessee.
9.3. We have heard both the sides on these issues and gone through judgments cited by both the sides. It is noted by us that although this issue was decided against the assessee by the Tribunal in A.Y. 2007-08, but this decision has been reversed by the Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) wherein contention of the Revenue was rejected, and it was observed that since said company was engaged in the ‘KPO’ activities, therefore it could not be compared with a routine ‘BPO’ service provider. Further, it is noted that in assessee’s own case for A.Y. 2009- 10, the DRP as well as Tribunal held that companies providing KPO services were not comparable with the assessee company since assessee company was engaged in providing BPO services. Few other judgments have been relied upon before us by the Ld. Counsel in support of its claim.
10 Willis Processing Services.
9.4. Undisputed facts are that the assessee company is engaged in insurance claim service process i.e. BPO services. Thus, respectfully the judgment of Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. as well as order of the Tribunal in assessee’s own case for A.Y. 2009-10, we direct that the said company (i.e. Eclerx Services Limited) is not comparable with the assessee company and therefore should be excluded from the list of comparables.
(ii) Infosys BPO Limited: This company has been introduced as a comparable by the TPO on the ground that it was engaged in the similar activity and DRP upheld TPO’s action without dealing with the contentions raised by the assessee.
10.1. During the course of hearing before us, it has been submitted by the Ld. Counsel that this company was having huge turnover of Rs.1,126.63 crores during the year under consideration. He submitted that the said company cannot be considered as comparable due to the following reasons: [1)The company is functionally different and sales are more driven by brand -Infosys BPO is engaged in wide array of services which are high end in nature and hence, cannot be compared to low end service provider i.e. Willis India. -Further, the company is a part of the Infosys group which is an entrepreneurial group owning significant intangibles and brand name. -Accordingly, Infosys BPO commands a premium in the 11 Willis Processing Services. market because of the existence of the brand. Additionally, it assumes all risks, leading to higher profit whereas Willis India is a low risk service provider. - The Delhi High Court, in case of Agnity India Technologies Pvt Ltd, upheld the ruling of the Tribunal for exclusion of Infosys as a comparable wherein the Tribunal tabulated the differences between Infosys and the assessee based on various parameters such as nature of service, risk, revenues, ownership of proprietary products, etc.
2) Significantly dissimilar turnover base: Infosys has a turnover of Rs 1,126.63 crores as against Willis India's turnover of Rs 95.19 crores. Further, Infosys has been rejected by the DRP in Willis India's own case for AY 2008-09 since it is a giant in the area of software development.
10.2. Ld. Counsel has also drawn our attention to the annual report of the said company enclosed in the paper book in support of his factual contentions made by him. It has been further argued by Ld. Counsel that this issue is no more res- integra, as in many judgments wherein similar facts were involved, it has been held that this company is not comparable on the ground of large turnover: - Stream International Services Private Limited vs ACIT (1 T.A. o.8290/M um/20 11) [AY 2007-08] dated 10 October 2014 (page no 474 to 480 of the paper book) - M/s. C3i Support Services private Limited vs DCIT (ITA No.435/Hyd/20 14) [AY 2009-10] dated 31 October 2014 (page no 514 to 521 of the paper book)
12 Willis Processing Services.
- M/s TNS India Pvt. Ltd. vs DCIT (ITA No.1875/Hyd/2012) [AY 2008-09] dated 17 April 2015 (page no 522 to 528 of the paper book) - M/s.Novo Nordisk India Pvt. Ltd. vs DCIT [IT(TP)A No. 146/Bang/2015] (AY 2010-11)dated 30 July 2015 (page no 529 to 536 of the paper book)
- M/S.e4e Business Solutions India Private Limited vs. DCIT (IT(TP)A No.819/Bang/2011) [AY 2007-08] dated 26 May 2015 (page no 537 to 542 of the paper book)
10.3. On the other hand, Ld. CIT-DR has supported the order of lower authorities, and submitted that the assessee company is also having turnover of Rs.95.19 crores which is in similar turnover bracket, and that higher profit and lower profits are part of the Industry and that does not make a comparable company as non-comparable.
10.4. We have gone through the facts of the case as well as submissions made by both the sides, and also judgments relied before us, it is noted that the said company has been rejected by the DRP itself in assessee’s own case for A.Y. 2008- 09 on the ground that it was involved in the area of software development. It is further noted that Hon’ble Delhi High Court in the case of Agnity India Technical Pvt. (supra) has also excluded the said company, by upholding the order of the Tribunal. We have also gone through the several of the judgments which have been submitted before us by the Ld. Counsel, names of which have been given above. It is noted that this company was held to be non-comparable on account of many reasons. Ld. Counsel has also demonstrated in his
13 Willis Processing Services. submissions that the said company is functionally different from the assessee company and also the turnover of the company is based upon the huge brand value. The other points put forth by the Ld. Counsel in his submissions to make a distinction are also correct, as per our view. Thus, keeping in view all the facts of the case and aforesaid judgments, we find that Infosys BPO Limited is not comparable with the assessee company, and therefore, directed to be excluded.
(iii) TCS e-serve International Limited: The TPO has included in this company in the list of comparable on the ground that the said company was engaged in the similar activities. The DRP rejected detailed submissions made by the assessee, and upheld the action of the TPO.
11.1. During the course of hearing before us, detailed arguments have been made by the Ld. Counsel to show that the said company was not comparable with the assessee company, and therefore, wrongly included in the list of comparables by the lower authorities. The submissions made by the ld. Counsel are reproduced below: “1) Transactions of this company do not qualify as uncontrolled transactions: -As per the annual report, the company was taken over by Tata Consultancy Services Limited ('TCS") from the CITI Group w.e.f 1st January 2009. However, even after such takeover, the company
14 Willis Processing Services. continued to primarily render services only to the Citigroup entities globally (i.e. erstwhile associated enterprises) - refer page no. 31 of the annual report. - Further, as per the news article enclosed at page 177 of the paper book, it can be observed that the agreement to continue to provide services to the Citigroup entities was part of the transfer deal itself. - Additionally, it would also be relevant to refer Section 92A(2)(i) of the Act wherein it has been provided that 2 enterprises shall be deemed to be AEs where the goods / articles manufactured or processed by one enterprise are sold to the other enterprise, or to persons specified by the other enterprise, and the prices and other condition relating thereto are influenced by such other enterprise. - Accordingly, based on the above definition, the Citigroup entities could be considered to be the AEs of the company even-post the acquisition by TCS. - Based on the above, given that the company is continuing to render services to its erstwhile AEs, that too at pre-determined price which was agreed at the time of transfer of the company by the Citigroup to TCS, these transactions would not strictly qualify as uncontrolled transactions and hence should not be considered for the purpose of determining the arm's length price.
2) The company is functionally different: In addition to the transaction processing services (i.e. BPO services), the company also provides technical services like
15 Willis Processing Services. software testing, verification and validation of software etc. This fact is evident from the disclosure under para 1 of Notes to Accounts- Schedule N, Page 31 of the annual report. The relevant extract has been reproduced below: 'Technical services involve software testing, verification and validation of software at the lime of implementation and data centre management activities. Hence, it is clear from the above, that the company also renders software development which are not comparable to Willis India’s BPO services, and no segmental details are available for the same. Accordingly this company should be rejected on the basis of functional dissimilarity. In this regard, reliance has been placed on the recent Tribunal ruling in the case of Techbooks International Pvt Ltd (ITA240/Del/2015) wherein the Tribunal has held that this company is also engaged in the software development services and in the absence of segmental break up, it cannot be considered as a comparable to a pure BPO service provider.
3) The company had exceptional year of operations: As per the annual report of FY 2009-10, this is first full year of operations for the company after its takeover by TCS and it has witnessed a huge surge in earnings and profits due to the synergy it has derived by merging with TCS, which is a market leader. The above fact is 16 Willis Processing Services. evident from the following (refer page no 8 of the annual report): - The total income at 150.40 crores was three times higher as compared with previous year's income of Rs. 54.64 crores - Operating income was 173% higher over previous year's income at 149.29 crores. Profit after tax ("PAT") at Rs. 44.95 crores was almost twice the previous year's figure of Rs. 24.54 crore. The same is evident from the page 7 of the Annual Report in the Directors' Report under Operations & Business Review. - Further, the company has earned very high profits (i.e. Operating profits Operating cost of 51.65%) when the IT enable services industry was under recession, hence it is evident that the company is earning super profits and such companies should be rejected while arriving at the ALP. Further, the company has earned a operating loss of Rs.27.51 % in the preceeding year (i.e. FY 2008-09].”
The Ld. Counsel has taken us through various pages of the paper book in support of the aforesaid contentions made by him.
11.2. On the other hand, Ld. CIT-DR has submitted that there is no provision of the law under which a company can be treated as deemed controlled company, and therefore on this ground this company cannot be treated as un-comparable.
17 Willis Processing Services.
11.3. In response, Ld. Counsel of the assessee has submitted that the perusal of Rule 10B of Income Tax Rule 1962, clarifies that a clear inference can be drawn that a company controlled by other company, whether directly or indirectly, shall be deemed to be controlled by such other company, and therefore, TCS e-serve Ltd. can not at all be considered as comparable with the assessee company.
11.4. We have gone through the detailed submissions of the Ld. Counsel. In our considered opinion, the said company is part of the large group. In our view, the said company cannot be treated as an independent or uncontrolled company, in the given facts and circumstances. It is further noted by us that there is functional distinction also between the two. The assessee company has been categorised as providing BPO service, whereas the said company provides various types of the services like software development, software testing, and any other technical services. Ld. CIT-DR was not able to negate these factual points. Further we refer to the judgment of the Tribunal in the case of Techbooks International Pvt. Ltd. (supra), wherein it was held by the Tribunal that this company was also engaged in the software development services and in absence segmental breakup, it cannot be held to be comparable to a pure BPO service provider. In view of the detailed discussion made by the Hon’ble Tribunal, which we find to be squarely applicable on the facts of the case before
18 Willis Processing Services. us, we direct the AO to exclude this company from the list of comparables.
Ground Nos. 9, 12, 16, 17, 18 & 19: Nothing specific has been submitted by the Ld. Counsel with respect to these grounds and therefore, these are dismissed.
Ground Nos. 20 & 21: These grounds are consequential, and therefore, dismissed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 9th December, 2015.