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TMI Blog2017 (11) TMI 1591X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of benefit under section 10A of the Income-tax Act, 1961 ('the Act') of Rs. 58,57,059 to the Appellant's total income. 1.1 That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in denying and the Hon'ble DRP has erred in confirming the action of the Ld. AO on the disallowance of the Appellant's claim of deduction under section 10A of the Act amounting to Rs. 58,57,059. 1.2 That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding and the Hon'ble DRP has further erred in confirming the action of the Ld. AO, that there is no export of software by the Branch in India to the Head Office. 1.3 That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding and the Hon'ble DRP has further erred in confirming the action of Ld. AO, that the Appellant is not a separate taxable entity and' as a consequence a person cannot earn profit from itself. 1.4 That on the facts and circumstances of the case and in law, the Ld. AO and the Hon'ble DRP has failed to appreciate that if the approach adopted by them is considered to be in accordance with law, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering the data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 2.4 That on the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in not allowing appropriate adjustment(s) in accordance with the provisions of rule 10B of the Rules. 2.5 That on the facts and in the circumstance of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in not following the principle of consistency. 2.6 That on the facts and in the circumstance of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in making the adjustment without demonstrating that the Appellant had any motive to shift profits outside of India. 3. Interest under section 2340 and section 244A of the Act 3.1 That on the facts and circumstances of the case and in law, the Ld. AO has erred in withdrawing interest under section 244A and levying interest u/s 234D of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer's net cost + margin (NCPM) of 15%. In compliance to the directions issued by the ld. DRP, AO made adjustment of Rs. 49,10,761/- on account of ALP of international transaction qua ITES. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 6. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUND NO.1 7. Ground No.1 is general in nature and does not require any adjudication. GROUND NO.2.1 8. Ground No.2.1 is not pressed, hence dismissed as not pressed. GROUNDS NO.2.2, 2.3, 2.4, 2.5 & 2.6 9. Undisputedly, Transactional Net Margin Method (TNMM) and Net Cost Plus Margin (NCPM) as Profit Level Indicator (PLI) as most appropriate method adopted by the taxpayer for benchmarking its international transaction pertaining to ITES has been accepted by the TPO/DRP/AO. Functional profile of the taxpayer is also not in dispute. Out of 6 comparables chosen by the TPO, 1 comparable - Coral Hub Limited has been eliminated by the ld. DRP and in compliance thereto, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon preamble of the Agreement so as to differentiate the functional profile of the taxpayer to treat it as high end service provider. But when we examine para 4.3.17 of Transfer Pricing document, available at page 99 of the paper book Vol.I, it is categorically mentioned that, "As and when customers of US encounter any difficulty with the operation of their UTS network, they contact with Escalation Centre for repair/maintenance/trouble shooting. In the Escalation Centre, UTS India Branch personnel open a trouble ticket, allocate engineers, and use simulation techniques (i.e. replicate the problems faced by the customers using the equipment at the Escalation Centre) to try and resolve the problem. UTS India Branch personnel then guide the customers step-by-step to resolve the problem on their (customers') network". 14. Furthermore para 4.3.18 of Transfer Pricing document goes to prove that escalation centre has a team of approximately ten people, comprising mainly postgraduates/engineers and its activities are essentially in the nature of IT enabled back office support services. Customer problems are mostly resolved off-site and in case the problem is not resolved, it escalates t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al coding and billing services as well; * Consolidated the operations of Denmed Inc., the acquired Medical Transcription Company based in Salem, Oregon, USA, serving the Portland area; * Streamlined the production operations at the new facility at the Technopark campus, Trivandrum, including the billing operations; * Started initial work for setting up of an IT Park at SEZ, Visakhapatnam, where the Company owns land. 18. Furthermore, at page 32 of the annual report, performance of Oak Technologies Inc. is highlighted as under :- "During the current year the Company completed the acquisition of 96% of M/s Oak Technologies Inc., a Healthcare Back Office Processing Company engaged in Medical billing, Coding and Transcription activities and having a global work force of over thousand employees in India, Philippines and USA. In the financial Year 2008, Oak Technologies Inc. achieved a turnover of 10.3 Million USD, Oak Technologies is having its head quarters in New Jersey." 19. Comparability of the Accentia has been examined by the coordinate Bench of the Tribunal in case of Xchanging Technology vs. DCIT in ITA No.1897/Del/2014 order dated 24.04.2015, copy available at pages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods which distorted the profitability thereby increasing the margin." 21. Even functional business model of Accentia vis-à-vis the taxpayer is dissimilar as the Accentia is one of the very few companies that have expertise in all the areas of Transcription, Coding, Billing and Collections. It has over a decade of experience in this field, and is the only company in this segment listed in the Bombay Stock Exchange. It has Offshore Development Centers (ODCs) in different cities of the country and has over 3000 trained professionals working round the clock, all 365 days of the years. Furthermore, Accentia is a giant company having 3000 trained professionals as against 12 employees working with the taxpayer. 22. So, in view of what has been discussed above, we hereby direct to exclude Accentia from the final set of comparables for benchmarking the international transactions qua ITES. COSMIC GLOBAL LIMITED (COSMIC) 23. The taxpayer sought to exclude Cosmic from the final set of comparables on ground of different business model, abnormal profit and have been providing other services like medical transcriptions and its BPO services is very insignificant i.e. 5.11%. When we exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Cosmic Global Ltd. is Rs. 1,57,11,463/- on a turnover of Rs. 7,37,02,584/- and thus the employee cost to turnover ratio comes to 21.32%. In the case of the assessee as against the total employee cost of Rs. 5,86,15,132/- the turnover is Rs. 11,02,81,913/- and the ratio of employee cost to turnover comes to 53.15%. Further, Cosmic Global Ltd. has paid translation charges of Rs. 3,00,25,306/- to third parties which is to the tune of 40.74% of its turnover which indicates outsourcing of work. Therefore, we find merit in the submission of the Ld. Counsel for the assessee that functionally Cosmic Global Ltd. is incomparable to the assessee. The various decisions relied on by the Ld. Counsel for the assessee to the proposition that companies with low employee cost/sales ratio outsourcing substantial portion of work has to be rejected. The Delhi Bench of the Tribunal in the case of Xchanging Technology Services India Pvt. Ltd. (Supra) at para 8 of the order has observed as under : "8. The TPO considered Cosmic Global Ltd. as comparable with the assessee company on entity level. We have examined the Annual report of this company for the year in question, which is available in the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e financials are not available and relied upon the decision rendered by Hon'ble High Court as well as coordinate Bench of the Tribunal cited as Rampgreen Solutions Pvt. Ltd. (supra), Vertex Customer Services vs. DCIT ITA No.572/Del/2014, Market Tools vs. DCIT - (2013) 40 taxmann.com 390 and OKS Span Tech vs. ITO ITA No.481/Del/2014. 30. However, ld. TPO accepted this company as ITES company of the ld. DRP without deciding the merits of the objections raised by the taxpayer rejected the objections raised by the taxpayer and accepted the logic of the TPO and consequently proceeded to retain this company as comparable. 31. Crossdomain come up for scrutiny for its comparability with Vertex Customer Services India Pvt. Ltd. (supra), a low end ITES BPO before coordinate Bench of the Tribunal, which has ordered to exclude the same from the list of comparable by returning following findings :- "20. This comparable has been included by the TPO having 25.63% margin and rejected the contention of the assessee that it is engaged in high end services in the area of payroll mater file employee query management and tax calculation. The same contentions reiterated before us and these two decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. 25. We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable; this company should be excluded from the list of comparables, accepting the plea of the Assessee. We hold accordingly." 23. Further Honourable Delhi high court has also held in Rampgreen solutions Pvt Ltd V CIT in 60 taxmann.com 355 as under :- "25. Whilst Voice Call Center represents the lower-end of ITeS, KPO represents services involving a higher level of skills and knowledge. India has vast human resources and a large number of highly-skilled technical professionals. The expression "KPO" indicates the involvement of domain knowledge in providing ITeS. Typically, KPO includes involvement of advance skills; the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management etc. On the other hand, Voice Call Centers are normally involved in customer support and proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent on advanced skills, domain knowledge and the experience of the persons carrying on such processes." 33. From the profile of the company available in public domain brought on record by the taxpayer at pages 59 & 60 of the paper book goes to prove that Crossdomain is one of the leading KPO (Knowledge Process Outsourcing) providers, rendering a wide range of value based quality services in the area of Payroll & HR, Finance and Accounting, Administration and Tax Processes, Insurance process for leading companies in US, Europe and Indian market. Furthermore it is categorically mentioned that Crossdomain is an Insurance KPO and payroll KPO having decade of experience in payroll outsourcing. Crossdomain has created reengineered payroll service. It analyze salaries and retrials amounting to more than 75000 record. 34. In view of what has been discussed above, we are of the considered view that Crossdomain is high end KPO services, development of product suits and routine low end ITES services and its bifurcation available for such verticals of services is not available makes it functionally incomparable with the taxpayer which is into providing low end BPO services. Moreover, Crossd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that comparable is engaged in high-end integrated services in improving the competitive position of their clients and manage their business process and providing value added services to them. Further, the Infosys also carrying huge brand value and therefore this comparable should not be taken. b. Ld DR Relied on the orders of lower authorities and stated that all the reasons have been considered by the TPO and DRP for inclusion of this comparable. c. We have considered the rival contention regarding exclusion of Infosys BPO Ltd. It is engaged in high and integrated services and therefore it is functionally dissimilar. The Infosys brand is indisputably is a huge brand and definitely, result of that brand goes to this comparable. Therefore, the brand of Infosys definitely results in opening higher profits to this company. In view of the following decisions, the same is required to be excluded and hence it is ordered accordingly. ....... 27. So, respectfully following the aforesaid referred to order of the Co-ordinate Bench, we direct the AO/TPO to exclude the said companies i.e. M/s Infosys BPO, M/s TCS E-Serve International Ltd. and M/s TCS E-Serve Ltd. from the list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred to Infosys BPO Limited on December 31, 2008. As a result of the said transfer, the said three subsidiaries which were hitherto step-down subsidiaries of Infosys BPO Limited became the direct subsidiaries of Infosys BPO Limited. b. Liquidation of P-Financial Services Holding B.V. P-Financial Services Holding BV, a limited liability company incorporated under the Dutch laws and 100% wholly owned subsidiary of Infosys BPO Limited was liquidated in accordance with Dutch Laws with effect from close of business hours of December 31, 2008. The assets and liabilities of the company have been transferred to Infosys BPO Limited. c. Merger of PAN Financial Shared Services India Private Limited with Infosys BPO Limited A Scheme of amalgamation under Section 391 and 394 of the Companies Act, 1956 was filed in the High Court of Madras and High Court of Karnataka, Bangalore for merging PAN Financial Shared Services India Private Limited with Infosys BPO Limited. Both the courts have approved the scheme of amalgamation of Pan Financial Shared Services India Private Limited with Infosys BPO Limited with effect from April 1, 2008 and hence the standalone accounts have been re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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