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TMI Blog2018 (3) TMI 1640X X X X Extracts X X X X X X X X Extracts X X X X ..... has been filed by assessee against the order passed by Ld.CIT(A)-19, dated 17/05/17 for Assessment Year 2011- 12 on the following grounds of appeal: "1. That assessment order passed u/s 143(3) r.w.s. 92CA(3) r.w.s. 144C(l3) of the Income Tax Act, 1961('the Act') by the Assessing Officer ('AO') and the order passed by the Transfer Pricing Officer ("TPO') and the additional disallowances made by the AO/TPO, as upheld by the Commissioner of Income Tax (Appeals) ('CIT(A)') are illegal, bad in law and without jurisdiction. 2. That additional disallowances made are unsustainable, unjust, highly excessive and are not based on any material on record. The total income of the Appellant has been incorrectly and un-lawfully assessed by the AO at ₹ 22.46,350/- as against declared income at ₹ 63,28,954/-. 3. That the reference made by the AO to the TPO suffers from jurisdictional error as the AO has not recorded any reasons in the draft assessment order/assessment order based on which he reached to the conclusion that it was 'necessary or expedient' to refer the matter to the TPO for computation of the arm's length price (ALP), as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration for benchmarking the said transaction. 12. That the TPO/AO/CIT(A) have erred, in law and on facts and circumstances of the case, by wrongfully rejecting Caliber Point Business Solutions Ltd. and R Systems International Ltd., on the ground of different financial year ending as such a reason cannot be the basis for rejection. 13. The TPO/AO/DRP have erred, in law and on facts and circumstances of the case, by adding certain companies to the final set of comparable companies for the impugned transaction on an adhoc basis, thereby resorting to cherry picking of comparables. The TPO/AO/DRP have erred in not appreciating that the said companies, do not meet the FAR analysis, and hence cannot be taken as comparable companies to determine the ALP for the said transaction. The selection of such comparables is not in conformity with the principles as laid down Rule 1OB of the Rules . 14. That, the TPO/AO/DRP erred in not rejecting Accentia Technologies Ltd., Eclerx Ltd., Infosys BPO Ltd. and TCS e-serve Ltd., without appreciating that the said companies are not comparable to the Appellant. 15. That the TPO/AO/CIT(A) have erred in not appreciating that there are certain c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act, 1961 (the Act) and the case was selected for scrutiny. Statutory notices were issued to assessee in response to which Representatives of assessee appeared before Ld. AO and submitted various details. 2.1. Ld. AO observed that assessee is carrying on business of IT enabled services and was set up in SEZ. Assessee was claiming deduction under section 10AA of the Act amounting to ₹ 100,407,633/-. He observed that assessee during the year had entered into international transaction and accordingly reference was made to Transfer Pricing Officer (TPO) for determination of arm's length price. 2.2. Ld. TPO accordingly issued notice to assessee and called for various details. 2.3. Ld.TPO observed that assessee was engaged in provision of IT Enabled Services (ITES) to its Associated Enterprises (AEs). It was observed that assessee was incorporated in India on 17/12/07 and was 100% export oriented unit set up under SEZ guidelines. It was observed that assessee carried out research driven by business information, market research and intellectual property research. Ld.TPO recorded that the client executives (based in Bermuda, US, Europe and Asia-Pacific) was operating fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uitable comparable. 3. Cosmic Global Ltd. This company fails export filter (52.96%). Hence, not a suitable comparable. 4. Fortune Infotech Ltd. This company is having significant RPT (98.70%). Hence, not a suitable comparable. 5. Informed Technologies Ltd. The turnover is less than ₹ 5 crores, hence rejected. 6. Jindal Intellicom Pvt.Ltd. This is a suitable comparable. 7. Omega Healthcare Management Services Complete financial information is not available. Hence, can't be considered as a suitable comparable. 8. R Systems International Ltd. This company is having different financial year ending i.e. December. Hence, can't be considered as suitable comparable 2.7. Ld.TPO rejected all comparables except for Jindal Intellicom Pvt.Ltd., and came to different set of comparables, which are as under: Sl.No. Name of the Company OP/OC 1. Accentia Technologies Ltd. 29.18% 2. Aeropetal Technologies Ltd. (segment) 14.36% 3. e4e Healthcare Business Services P Ltd. 9.77% 4. Eclerx Services Ltd. 56.82% 5. ICRA Techno Analytics Ltd. (segment) 25.54% 6. Infosys BPO Ltd. 17.86% 7. Jindal Intellicom Ltd. 13.70% 8. TCS E-Serve Ltd. 69.31% A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he clients that include mainly investment banks. The work is customised according to the requirements of the clients and the specific request received from them. Market Research (primary research) The services involve voice-based support for conducting telephonic customer surveys in different parts of the world and formulation of preliminary hypothesis based on the surveys. Assessee has extensive primary research capabilities, including the ability to conduct research in multiple languages. 4.5. Thus in the TP report assessee has characterised itself to be providing ITES-BPO services there and it provides researchbased specialized reports and services to its clients in Europe and North America. It undertakes projects spanning multiple dimensions including project scope, schedule, language, format of deliverables etc. Assessee makes use of a right of research tools including the Web databases and publications apart from analytics and forecasting. The industry covered include financial services (banking and insurance), high-tech, software, electronics, engineering, nanotechnology, networking, biomedical engineering), telecom equipment and operators, pharmaceutical and biotech chem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .176-180 CLC) 4)Ameriprise India Pvt Ltd. (ITA No. 7014/Del/2014) (pg. 60-62 of CLC) 5)Bechtel India Pvt. Ltd. (ITA No. 1478/Del/2015) (pg. 95-96 of CLC) 6)Techbooks International Pvt. Ltd. (IT/ No. 240/Del/2015 for AY 2010-11) (pq. 119 of CLC) 7)Sun Life India Service Centre P. Ltd. (ITA No. 750/2015) (pg. 2. Eclerx services td.(pg. 734-37- Vol. 3-Annual Report) 1) Functionally dissimi lar (pg. 739, 740, 757, 758)- it is a KPO 2) Unreliable data- the standalone financials include the turnover of the subsidiar ies also (pg. 784, 808, 827) ' 3) Significant intangible assets.-(computer software- pg. 787) 4) Insufficient Segmental detai ls 1) Ameriprise India Pvt Ltd. (ITA No. 7014/Del/2014)(pg. 69-70 of CLC) 2) Rampgreen Solutions vs. CIT (ITA No. 102/2015)-377 ITR 533 (Del) 3 Igate global solutions td.(pg. 838-42- Vol. 3-mnual veport) 1. Exceptional year of operations (amalgamation) (pg. 888k hence fails TPO's own filter of peculiar economic circumstances 1) Delhi High Court- PCIT vs. Ameriprise India P. Ltd.- ITA No. 461/16- pg. 79A- 79B CLC 2) Functionally different and Insufficient segmental information (IT and ITES services) (pg. 888 and 893, 904, 910) 2) Unite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... client is Citigroup (pg. 10^8) 07. First full-year as step down subsidiary of TCS- which has led to substantial growth-Total income is 3 times higher as compared to last year from 54 crores to 150 crores). Operating Income higher by 173% as compared to last year. From loss of 24 rores to profit of 44 crores this year, due to improved operational performance and increased utilization of infrastructure capacities, (pg. 1034) 1) United Health Group Information Services P. Ltd. (ITA No. 1038/D/15)(pg. 208-210 of CLC) 2) Equant Solutions India P. Ltd.(ITA No. 1202/D/2015) (pg. 184-187 of CLC) 3) Ameriprise India Pvt Ltd. (ITA No. 7014/Del/2014) (pg. 63-66 of CLC) 4) Bechtel India Pvt. Ltd. (ITA No. 1478/Del/2015) (pg. 95 of CLC) 5) Techbooks International Pvt. Ltd. (ITA No. 240/Del/2015 for AY 2010- 11) (pg. 19-24 of CLC) 6) Sun Life India Service Centre P. Ltd. (ITA No. 750/2015) 7. TCS E-Serve 1103-1144- Vol -4 Annual Report 01. Functional dissimilarity (pg. 1122) 02. No segmental details are available (pg. 1134) 03. Owns significant intangibles 04. Uses the TATA brand royalty is paid (pg 1131) 05. High turnover-27 times more than that of the assessee 1. United Health Group Info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances that these entities had a high brand value and, therefore, were able to command greater profits; besides, they operated on economic upscale. This approach cannot be faulted having regard to the decision of this Court in Pr. Commissioner of Income Tax v. B. C. Management Services Pvt. Ltd. 2018 (89) Taxman.com 68 (Del), which reads as follows: "13. The exclusion of second comparable ICRA Techno Analytics Ltd. was on the basis that it had engaged itself in processing and providing software development and consultancy and engineering services/web development services. The reasons for execution were functional dissimilarities and that segmental data were unavailable. Again the findings of the ITAT are reasonable and based on record. The third comparable that the AO/TPO excluded is TCS Esserve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value; that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of all the comparables argued before us for exclusion it is observed that there is no difference or exception to the functions performed by these comparables for assessment year 2010-11. 8.2. It is observed that this Tribunal in assessee's own case for assessment year 2010-11 vide paragraph nos. 9-14 and 16-29 excluded these comparable by analysing these comparables and its functions as under: "9. Accentia Technologies is selected by the ld TPO but is challenged now by the assessee submitting that it has an extra ordinary event during the year, functionally dis-comparable as it is engaged in medical transcription, has significant intangibles and abnormally high profit margin. For this proposition the ld AR relied upon several judicial precedents. The ld DRP rejected all the above contention of the assessee with respect to this comparable at page No. 23 to 26 of its order. 10. The ld DR reiterated the same facts as stated by lower authorities. 11. We have carefully considered the rival contentions as well as perused the annual accounts of the comparables. At page No. 1172, we have perused schedule 10 of the notes on account wherein it has mentioned that w.e.f. 01.04.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the assessee is also a knowledge process outsourcing unit as it employs 616 personnel. He referred to page No. 6 of the order of the ld Transfer Pricing Officer for this. He submitted that assessee's case falls into all three horizontal segments of ITES industries such as call centre and technical support, payment supply chain and analytics. He therefore, stated that eClarx is the right comparable 14. We have carefully considered the rival contentions and perused the annual report of the comparable for AY 2010-11 at page No. 734 to 83.7 of the paper book. The functions of the company are described at page No. 23 of its annual report under management discussion and analysis. It provides that eClerx supports its clients through its two business units- Capital markets and sales and marketing support. Across both these units, the company supports and improves processes that are core of its customers day to day business operations. The company continues to focus on engagements where it can tap the largest percentage of client spend by leveraging its domain expertise and by bringing together consulting, project management and solution based service delivery. In the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le jurisdictional High Court on the point, we direct to eliminate e-Clerx from the list of comparables. As such, e-Clerx Services Ltd. cannot be considered as comparable. 16. The next comparable contested by the ld AR is ICRA Techno Analytics Ltd stating that this company is functionally not comparable as it is engaged in business intelligence and analytics. 17. The ld DR contested the argument of the assessee and submitted that the assessee is engaged in such high end services. 18. We have carefully considered the rival contentions. This company as per its annual accounts placed at Page NO. 1210 shows that it is engaged in the business intelligence and analytics space. It is also engaged in software development and consultancy, engineering services, web development and hosting services. It is also noted that it has two income segments of services and sales and it does not have the complete segmental information with respect to both the segments of services and sales as fixed assets and services are used inter-changeability. In view of this we find that this company is functionally not comparable as well as it does not have complete segmental information with respect to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f software. It was held that ostensibly verification and validation are broadly speaking a parcel of the process of software development. This company also contributes to Tata Brand Equity from this year and according to Schedule M of the financial statement during the year it has contributed ₹ 37 crores towards the brand. In view of this the functional profile of the assessee as well as the assets employ are not comparable. In view of this ld Transfer Pricing Officer is directed to exclude it. 25. The next comparable is TCS eServe Ltd. The assessee has contested it on the similar line as TCS Eserve International Ltd. 26. The ld DR relied on the order of the ld Transfer Pricing Officer and ld DRP. 27. We have carefully considered the rival contentions and also perused the annual report of the company for year ended 31.03.2010. The company is mainly engaged in IT enabled services and business process outsourcing. It is also providing technical services which involve software testing, verification and validation. It also contributes similarly to Tata Brand Equity and for this year the contribution was ₹ 42 crores. Therefore, following the same reasoning given by us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vations of Hon'ble High Court in assessee's own case for assessment year 2010-11 (supra) we direct Ld. TPO to exclude these comparables from the final list of comparables. 8.4. Now coming to the comparables that have been argued by Ld. Counsel for exclusion, it is observed that the Tribunal for assessment year 2010-11 vide paras 30-32 set aside these comparables by observing as under: "30. The next comparable is R Systems Pvt. Ltd which was included by the assessee but excluded by the ld TPO for the reason that it follows different financial year compared to the assessee. It is apparent that R Systems Ltd is having the January to December as an accounting period. Therefore, the ld Transfer Pricing Officer did not consider the same. It is held in several decisions that if the assessee can demonstrate with publicly available authentic information for the remaining period and exclusionary period and further produces the tabulated data for the similar accounting year as followed by the assessee then if the FAR analysis of that company is comparable, it may be included. Therefore, it is now the duty of the assessee to satisfy the Assessing Officer/TPO with such information. Hence, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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