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TMI Blog2015 (5) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... as a captive service provider. However, the important aspect which is to be considered is as to what functions were being performed by assessee. If assessee was merely providing data to its AE without any analysis and performing its functions only in a mechanical manner, then no doubt it would be comparable to BPO but when the results provided to AE are after detailed analysis after employing skills of highest standards, then it would come within the ambit of BPO. Therefore, merely on the ground that assessee is a captive service provider, it cannot be said that this company was functionally not comparable. Ld. counsel has pointed out that extraordinary events of acquisition had occurred. However, in this year no such extraordinary events took place. We, therefore, are not inclined to accept the assessee’s contention on this count and uphold the findings of DRP on this count. Infosys BPO and Wipro BPO keeping in view the huge turnover, economies of scale, brand value and other factors pointed out by ld. counsel in his submissions and also keeping in view the decision of Aginity India Technologies Pvt. Ltd. [2010 (11) TMI 852 - ITAT DELHI] & (2013 (7) TMI 696 - DELHI HIGH COURT) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove transactions. The TPO noticed that assessee was engaged in the services of online financial services, which included strategic advisory services, industry and operation expertise, compliance focus services, web marketing services, electronic commerce knowledge services, and intelligence and best practice services. He noted that IT enabled back office processing services were provided to New River US, which was involved in full fledged marketing, encompassing a wide range of other allied activities. The assessee had shown PLI of OP/OC at 10.33%, which had been benchmarked with the arithmetic mean of 8.45% in respect of 17 comparables selected by the assessee and, therefore, the assessee s contention was that the assessee s net margins were within the range of + 5%. 3.3. The TPO show caused the assessee and observing as under: The assessee contention as stated above was considered. However the comparables selected by the assessee are rejected for the following any or all inapt filters: a. Companies whose support service income ₹ 1 crore need to be excluded. b. Companies whose support service receipts are less than 75% of the total operating revenues need to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a ground that ld. AO/TPO erred on facts and in law by cherry picking companies which had shown very high margins vis-a-vis the industry benchmark, without considering the functional and operational comparability. 4.1. The assessee s contention was that it was a low risk captive unit, as it was remunerated on cost plus basis by its AEs for software development services to them and, therefore, it should not have been compared with companies with very high margins due to difference in functional and risk profile. 4.2. Ld. DRP rejected the assessee s contention, inter alia, observing that the profit margins of any company is not an indicator of its functional profile. It was further pointed out that in a set of functionally comparable companies, there could be companies with low margin as well as high margins. What is material is the functional comparability. Moreover, while taking arithmetic mean, such difference will ultimately average out. 4.3. Ld. DRP had relied on the decision of ITAT Mumbai in the case of Exxon Mobil Co. India Pvt. Ltd. (2011-TII-68-ITAT-MUMTP). The assessee had also object4ed to the inclusion of eClerx Services Ltd. as a comparable company to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R System International Ltd(seg) 4.3 Mean 22.77 5. Before us the assessee has primarily objected the inclusion of following four comparables: (i) Coral Hub (Vishal Information Technologies Ltd.); (ii) Eclerx Services Ltd. (iii) Infosys BPO Ltd. (iv) Wipro Ltd. (segmental) 5.1. Coral Hub (Vishal Information Technologies Ltd.) : Ld. counsel for the assessee submitted that this company is functionally different, inter alia, because it s business model is based on outsourcing. In this regard he pointed out that data entry charges incurred by this company are 84.52% of total expenditure and there is negligible personnel cost incurred by it. Ld. counsel relied on following decisions in support of its contention for exclusion of this company from list of comparables: - Maersk Global Centers (India) Pvt. Ltd. (ITA no. 3774/Mum/2011 CO 111/Mum/2011- order dated 9-11-2011); - United Health Group Information Services Pvt. Ltd. [2014] 50 Taxmann.com 177 (Del-Trib.); - BNY Mellon International Operations (India) Pvt. Ltd. [2014] 52 Taxmann.com 306 (Pune-Trib.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is high end knowledge service for carrying out processing, whereas BPO is low end service as compared to KPO. He referred to page 2 of TPO s order to point out that assessee in the relevant year was engaged in the services of online financial services, which included strategic advisory services, industry and operation expertise, compliance focus services, web marketing services, electronic commerce knowledge services, and intelligence and best practice services, IT enabled back office processing services to New River US, which is full fledged marketing, encompassing a wide range of other allied activities, which are comparable to a KPO and not to BPO. 6.1. Ld. Standing Counsel submitted that this company has now merged with Broadridge Financial solutions (India) Pvt. Ltd. w.e.f. 1-7-2011, but not in asstt. year under consideration. He submitted that in case of BPO normally following activities would be there : (a) Call facility (b) Selling products; marketing demands; no high end service. 6.2. Employees are trained to take up calls and give informations to specified customers. In BPO No mastery is required e.g. insurance companies and manual is laid down for procedure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al cost, whereas in the case of the assessee it stood at 60%. The position for the current year is also more or less similar. The employees cost of VITL for the instant year is at 2.71 % of the total cost as against a little more than 60% of the assessee. 5.4. At this juncture, it is paramount to record the contention of the Id. DR that the filter of employees cost to total cost is not relevant as it does not ultimately impact the overall profltability. He fortified this contention on the strength of the order passed by the Hyderabad Bench of the Tribunal in the case of DCIT Vs Deolite Consulting India Pvt. Ltd. (a copy of order placed on record) in which it has been held that such a filter does not impact the overall profitability and the specific case of VITL has been held to be comparable. 6.9. He submitted that Tribunal did not follow the contrary view taken in the case of Deolite Consulting India Pvt. Ltd. (supra) on the ground of consistency and, therefore, this decision cannot be of any assistance to the assessee. 6.10. As regards reliance of Tribunal in the case of M/s Maersk global Service Center (India) P. Ltd. (supra) is concerned, ld. counsel referred to para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent case assessee is dealing in financial services like Eclerx Services Ltd. and, therefore, rightly selected as comparable. 6.13. As regards the assessee s reliance on Tribunal s decision in the case of Hyundai Motors India Engineering P. Ltd. (ITA no. 1850/Hyd/2012 - order dated 21-02-2014) is concerned, ld. Standing Counsel submitted that the said company is also functionally different because this company was engaged in the business of providing support services in connection with the Computer Aided Engineering (in short CAE ). Computer Aided Design (in short CAD ). This company was involved in providing support services in connection of modeling and iterative simulation. It received the basic design from its group company. 6.14. As regards Infosys BPO and Wipro BPO, ld. standing Counsel pointed out that no objection was taken before TPO. Objection was taken before DRP. There is no dispute about functional similarity and only objection is with respect to turn over of the assessee. As regards assessee s reliance on the decision of the Tribunal in the case of Aginity India Technologies Pvt. Ltd. (ITA no. 3856/Del/2010) and that of Hon ble Delhi High court in CIT Vs. Agnity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cker Update - Specific Chem Requests - Canadian Mutual funds - And various reports from US office. 7.9. Ld. counsel further submitted that the distinction between BPO and KPO has been amplified in the Safe Harbour Rules from which it is evident that assessee was providing only BPO service to the group. He pointed out that assessee is not KPO. The assessee s profile is completely different from KPO. Ld. Standing counsel submitted that safe harbor rules were not applicable in the assessment year under consideration. 8. We have considered the rival submissions and perused the record of the case. Keeping in view the foregoing discussion, the short controversy before us is now confined to inclusion of following four companies, being included in the list of comparables by TPO, whether justified in the facts and circumstances of the case or not. (i) Coral Hub (Vishal Information Technologies Ltd.); (ii) Eclerx Services Ltd. (iii) Infosys BPO Ltd. (iv) Wipro Ltd. (segmental) 8.1. Before we embark upon to consider different comparables, it is necessary to first examine the submission of ld. Standing Counsel regarding nature of services rendered by assessee. The ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he list of comparables, though it might be carrying on the similar functions which asesssee was carrying on. The functional profile no doubt is one of the major criteria but not the sole criteria for deciding whether the said company can be included in the list of comparables or not. The assets and risk profile also has to be taken into consideration. This company was selected by TPO and, therefore, the submissions of ld. Standing Counsel on the ground of functional profile cannot be accepted. Moreover, we note that ld. Counsel has pointed out that data entry charges were 84.5% of total expenditure and, therefore, this cannot be compared to assessee, which was primarily imparting high end services. We, accordingly, direct for exclusion of this company from the list of comparables. 8.4. Eclerx Service Ltd.: Ld. counsel for the assessee has, inter alia, relied on the decision of Tribunal in the case of M/s Calibrated Healthcare Systems India Pvt. Ltd. (supra). In this decision we note that the Tribunal has observed that this company was a knowledge process outsourcing KPO company, providing data analytic and data processing solutions to its clients. It is further observed that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Annexure H in the case law paper book, filed by assessee, had considered only the profile of Infosys Technologies Ltd. In para 3.3 of its order, the Tribunal has observed as under: For the sake of ready reference, the case of the ld. counsel for excluding the case of Infosys Technologies Lted. Is shown in tabular form as under:- Basis/ Particular Infosys Technologies Ltd. Agnity India Risk Profile Operate as full fledged risk taking entrepreneurs Operate at minimal risk as the 100% services are provided to AEs. Nature of Services Diversified- consulting, applicationdesign, development, re-engineeringand maintenance, systemintegration, package evaluation andimplementation and businessprogress management etc. (referpage 117 of the paper book) Contract Software Development Services. Revenue ₹ 9,028 crores ₹ 16.09 crores Ownership of branded/ proprietary products Develops/ owns proprietaryproducts like Finacle, InfosysActice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital deployed by any organization. We find that in case of United Health Care Information Services Pvt. Ltd. (supra), the Tribunal in para 13.2 of its order has observed as under: 13.2. Having heard the rival submissions and perused the relevant material on record, it is manifest that the working capital adjustment is required with reference to stock, trade receivable and trade payables. By carrying the high trade receivables, a company allows its customers a relatively longer period to pay their accounts, which results into higher interest cost and lower profit. By carrying high trade payables, a company benefits from a relatively longer period available to it for paying back its suppliers, which results into its lower interest cost and higher profit. Similarly, high stock. means blockage of funds and the resultant lower profit. These three ingredients directly impact the working capital and resultant profit of comparables vis-a-vis the assessee. A working capital adjustment is required to be effected for bringing the comparables and the assessee at the same pedestal. The ld. DRP upheld the denial of such adjustment by noticing that there were no means to ascertain the workin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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