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TMI Blog2018 (10) TMI 1395X X X X Extracts X X X X X X X X Extracts X X X X ..... n reached by the authorities below while considering this filter as appropriate filter for comparability analysis in the facts of the present case. The ld. AR of the assessee failed to rebut the finding of the ld. DRP that more than 86% of the operating revenue is earned by assessee out of export sales. Therefore, considering the quantum of export gross revenue of the assessee, the authorities below have rightly applied this filter as an appropriate filter for comparability analysis. Accordingly, this ground of assessee has no merit and is liable to fail. Companies functionally dissimilar with that of assessee as engaged in BPO/KPO services need to be deselected from final list. The company is not passing on the filter of related party transaction in excess of 25%, applied by the TPO to be rejected.- Any extraordinary events like amalgamation occurred during the year, the financial result is affected - ITA No. 6980/Del./2017 - - - Dated:- 15-10-2018 - Shri Bhavnesh Saini, Judicial Member And Shri L.P. Sahu, Accountant Member For The Appellant : Shri Abhishek Agarwal, Advocate For The Respondent : Shri Sanjay Kumar Yadav, Sr. DR ORDER Per L.P. Sahu, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies in the final set of comparable companies not appreciating that there were not functionally comparable to the appellant for the purpose of undertaking benchmarking analysis applying TNMM i. Igate Solutions Ltd. ii. Capgemini Business Services (India) Pvt. Ltd. iii. e4e Healthcare 7. That the AO/TPO erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent ITES service provider 8. That on the facts and in the circumstances of the case and in law the AO/TPO erred in rejecting the contention of the appellant regarding risk adjustment, allegedly holding that the appellant failed to provide any evidence to demonstrate that whether any risk was actually undertaken by the comparable companies and such risks affected their operating profit margin. 9. That the AO/TPO erred on facts and in law in not allowing comparability adjustment on account of working capital employed by the appellant vis-a-vis comparable companies. 10. That the Assessing Officer erred on facts and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Caliber Point business solutions 2.19% 11. R Systems International 15.34% 12. Igate Solutions 23.61% 13. Tech Mahindra 21.33% Average 14.50% After calculating the above Arm s length margin average at 14.50%, the ld. AO/TPO made upward adjustment in relation to international transactions related to ITeS as under : Particulars Amount in Rs. Operating Cost 305,345,595 Arm s Length Margin (%) 14.50% Arm s Length Margin (Rs.) 44,275,111 Arm s Length Price 349,620,706 Price charged by the assessee 326,693,412 International Transaction 626,638,206 3% of Price charged in international transaction 9,799,146 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Companies that are affected by some peculiar economic circumstances. (viii). Companies undertaking significantly different functions compared to assessee. Based on the aforesaid filters, the TPO in impugned order rejected all the comparable companies considered by the assessee in the transfer pricing documentation, for the reason submitted as under : S. No. Company Name Remarks of TPO 1. Allsec Technologies Limited This company fails Export income more than 75%. Hence, not a suitable comparables. 2. Nucleus GIS Ites Limited This company fails Export income more than 75%. Hence, not a suitable comparables. 4. On the basis of the TPO order, the AO passed the draft assessment order. Against the draft assessment order, the assessee raised objection before the ld. DRP. The ld. DRP after considering the submissions and explanations of the assessee gave direction regarding the foreign exchange fluctuation as under : As far as foreign exchange fluctuation is concerned, as per the TP study ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while working out the operating profit margin of the assessee, as directed by the ld. DRP. We further direct that the AO/TPO should calculate operating profit margin as per Rule 10B(1)(e) of the Income Tax Rules, 1963, if the assessee satisfies the conditions as per rules. Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, these grounds are allowed for statistical purposes. 10. Ground No. 5 challenges the rejection of comparable companies on the basis of additional filter of export sales less than 75% of the total income. In this context, we do not find any justification to discard the conclusion reached by the authorities below while considering this filter as appropriate filter for comparability analysis in the facts of the present case. The ld. AR of the assessee failed to rebut the finding of the ld. DRP that more than 86% of the operating revenue is earned by assessee out of export sales. Therefore, considering the quantum of export gross revenue of the assessee, the authorities below have rightly applied this filter as an appropriate filter for comparability analysis. Accordingly, this ground of assessee has no merit and is lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It shall further be noted that the merging entity, i.e.IgateComputer Systems (formerly known as patni computer systems), is engaged in the business of providing IT and IT enabled services. The services rendered by the company under the IT segment includes, application development, application maintenance and support, verification and validation, enterprise application solutions, business intelligence and data warehousing (refer page 8 of the annual report of patni computer systems). (annual report enclosed at pages 536 605 of the paper book). Accordingly, even if it is assumed that the company, iGATESolutions Ltd is engaged in providing IT enabled services, which is akin to the services rendered by the appellant, pursuant to the merger of Igate computer Systems Ltd (formerly known as patni computer systems), iGateSolutions Ltd ought not be considered as comparable to the appellant, as the merging entity is also engaged in providing IT services, which includes application development etc. b) Functionally not comparable and segmental daughter not available The company is engaged in the business of providing information technology and IT Enabled services to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (ITA 6803/ Delhi/2013) CL 509-533 Hon ble Tribunal in the case of appellant for the assessment year 2011 12[ITA No. 1003/Del/2016] excluded Accentia Technologies Ltd from the final set of comparable companies, interalia, on account of extraordinary event of a merger/acquisitions and nonavailability of segmental accounts. CL 615 627. Further, Igate global Solutions Ltd itself has been rejected as comparable, on account of merger/acquisition and absence of segmental accounts, in the falling decisions; Vertex customer services vs DCIT, Circle 28 (1), India Private Limited vs DCIT (ITA number 1508/Del/2015) CL 712 740 Evalueserve SEZ ( Gurgaon ) P. Ltd. Vs ACIT (ITA No. 1467/Del/2017) Ameriprise India Pvt. Ltd. vs DCIT (ITA No. 7014/Del/2014) CL 759 786 The assessee has further relied on the following decisions : (i). ITA No. 461/2016, PCIT vs. Ameriprise India Pvt. Ltd. dated 19.10.2016 (Delhi H.C.) (ii). ITA No. 124/2018 PCIT vs. M/s. Oracle (OFSS)BPO Services Pvt. Ltd. (Delhi H.C.) 13. On the other hand, the ld. DR relied on the order of lower authorities and submitted that it is a good comparable company because it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndRisk management services to many around the globe. It is submitted that the aforesaid services are in the nature of KPO services and cannot be considered comparable to the captive services rendered by appellant being in the phone activation. Reference in this regard is also made to Rule 10 TA of the income tax rules, which, the safe Harbour Rules, provides following services to be considered in the nature of KPO services: (g) Knowledge process outsourcing services means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:- (i) geographic Information System; (ii) human resource services; (iii) engineering and design services; (iv) animation or content development and management: (v) business analytics; (vi) financial analytics; or (vii) market research, but does not include any research and allotment services whether or not in the nature of contract research and development services; it is submitted that the nature of services provided by the company, viz, fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s financial research services, data management services to the financial content industry. CL 628 648. A company engaged in provision of KPO services cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transition of provision of BPO services[Rampgreen Solutions Pvt. Ltd vs. CIT (377 ITR 533)]. CL 670 696 Reliance, in this regard, is praised on the following decisions, wherein, the Hon ble Tribunal directed to exclude a company on account of non-availability of segmental data: iii. Vodaphone India Services vs. DCIT( ITA No. 7140 7097 / Mum/2012 ) iv. Macquarie Global Services (P.) Ltd. (ITA 6803/ Delhi/2013) CL 509-535 16. The ld. DR, on the other hand, relied on the orders of authorities below. 17. In our opinion, it is clear from the business profile of this company that the company is engaged in providing BPO services in the nature of business process management services and assurance and compliance services. The company is also providing business process outsourcing services in finance and accounting in India. The company also offers financial share services and sharbanes Oxley compliance s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Our approach historically addresses Revenue Cycle Management from the moment a patient enters the system to the final dollar being collected or paid all this, while delivering better outcomes in quality, turnaround times, and productivity. The various services and solutions provided by the company, as demonstrated on the website is reproduced hereunder Provider solutions Medical Billing Companies Integrated Practice and RCM Coding and Compliance Hospital Services Hospital Coding Payer Solutions Claims Management and Admin Cost Avoidance and Audit Medical Record Audit Contact Centre Solutions Technology Solutions Payer Platforms Computer Assisted Coding Workflow Tools Value Added Services Case Studies Healthcare Life Science Analytics Detailed services as extracted from the website of the company is enclosed at pages 606 to 609 of the paper book. From the aforesaid, it shall be noted that for the revenue cycle management services provided to its health clients, the company is not only providing just billing, coding and claim processing services, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions made before the Tribunal, the ITAT remitted this matter back to the file of DRP for re-deciding the same after affording reasonable opportunity of hearing to the assessee. No further information pursuant to the remand proceedings, is furnished by the assessee before us. It is notable that before the ld. DRP, the assessee raised objection on this company only on account of non-comparability of employees cost and no objection was raised either on functional test. The objection regarding nonavailability of annual report was not raised by the assessee before the TPO. The ld. DRP was also of the view that when the assessee challenged the employees cost filter having not been passed, it leads to say that the assessee was having annual accounts of the said company. Keeping in view these facts, the ld. DRP remitted it to the AO to compare this company on the basis of employees cost filter. In pursuance to this, the AO/TPO after going through the annual report of this company found that this company passes the employees cost filter and therefore, in our considered opinion, has rightly included this company as an appropriate comparable. In presence of above facts, the objections of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain markup and, accordingly, is was working in a risk free environment. 1'he assessee further contended that the profits are directly linked with the risk profile , t e., more is the risk more should be the profit and, therefore, since the assessee was not carrying any risk, it should have been allowed adjustment for assuming lower risk as compared to the compare' vs. This Panel has carefully considered the arguments of the assessee. The adjustment for function - : differences, if any. can be made only if those differences can be ascertained accurately and then impact on the margins can be assessed with reasonable accuracy. In this case, no information is available about the risk profile of the comparables, i.e. how much was the risk assumed in respect of functions carried out by them, what was their business model, i.e., either cost plus or full time equivalent (FIE) or lump-sum. consideration. In the absence of reliable information about the risk profile of the comparables, it is impossible to quantify the adjustment for difference in the risk profile. Moreover, the assessee also bears single customer risk which is a significant risk. In stock market also, companies wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e existence is dependent on it. If the AE runs out of business or if AC - business gets reduced substantially, the assessees business will also get adversely affected The assessee being a captive service provider cannot even look, for other 1 customers. Thu?, in fact the assesses runs a greater risk than an average independent entity that can always look for other customers or other markets 2. Service liability Disclosed in transfer pricing report. The assesses argues that independent i comparables bear lull responsibility for delivery of final services to clients and hence exposed to service failures risk whereas the assessee is not exposed to this risk as it dries not have any contractual liability for losses or damages' for service failures and the cost of rework (if any) would be recoverable from AE on a cost plus basis. It is naive to argue that the assesses is not responsible for quality of service and thus does not bear risk for delivery1 of services. Further, it is the duty of the independent enterprise to rectify such error at an additional cost, which in fact, reduces the profitability as it cannot get more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer pricing report but actually borne by assessee. 10. Manpower risk Disclosed in transfer pricing report but actually borne by assesses, It is argued that the high attrition rate resulting in higher training costs, idle time etc will have an impact on the pricing of comparables. However, it is an ongoing phenomenon in any running company and the costs on account of the same are already factored in the P L of comparables. As regards loss of valuable personnel and related human intangible, even the assesses is exposed to this risk. 11. Security risk Not disclosed m transfer pricing report but actually home by assesses. 12. Environmental risk Not disclosed in transfer pricing report but actually borne by assessee. 13. Technology Risk Comparable companies as well .as the assesses tire exposed to similar type of technological obsolescence or risk, further, technological changes are an ongoing phenomenon and place an additional cost burden which pull down the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal risk etc.. which affect this muter and which ultimately, affect the results of the company. All the aforesaid factors make it impracticable to any authority to find out exact duplicate company of the assessee as comparable. Some variation bound to exist. We find that the TPO had made efforts to identify the comparables whose functions are similar to the assessee company by applying filter quantitatively and qualitatively to eliminate, the differences between the assesses companies with that of comparable companies neutralize the aforesaid risk factors. The argument of the learned counsel for the assessee in the written submissions as well as submissions made before us were all in the background of showing the assessee company its low end performer. We do not find force in the contention of the-learned counsel for the assessee that the assessee is a risk free service provider and sufficient adjustment needs to be allowed to compare with the other comparable companies. The learned counsel for the assessee placed reliance on several decisions in support of his case that there should be some adjustment for risk to be given However, we find that the first appellate authority utter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a question of fact and has to be decided on the facts of the case. 8.7. It is not sufficient to merely spell out risks. It has to be shown which risk was actually undertaken by the comparables and to what extent it affected the profitability. The assessee has not done so. Adjustment can be allowed only if it is demonstrated that is leading to better comparability and only when a credible methodology is adopted for calculating a reasonably accurate adjustment. 8.8. Since, the methodology is nor well established and-requires making several assumptions, the risk adjustment calculated as per the methodology will not lead to reasonably accurate adjustment as required as per the Income Tax Act and Rules. Therefore, it will not be possible to give risk adjustment under the Indian law. 8.9. The discussion on the risk adjustment is summarized as under: a. As discussed above, the assessee has also undertaken several risks. Therefore, it is not correct to say that it is a risk mitigated entity. b. The assessee is totally dependent on the AE tor business. Thus the assessee takes the risks associated with heavy dependence on a single customer. In common business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to better comparability and only when a credible methodology is adopted for calculating a reasonably accurate adjustment. The methodology used by the assessee does not have any application in the area of transfer pricing. i. In the various decisions of the ITATs as referred to above no risk adjustment has been allowed in such cases in absence of any credible methodology to gram risk adjustment. In view of the above discussion it is held that no risk adjustment is to be given to the assessee. 8.10. Further the assessee has quantified the risk adjustment based on the difference between bank rate and PLR. It is mentioned here that reference to PLR and bank rates in the context of transfer pricing is not pertinent. Though the honorable ITAT was persuaded in the case of Philips that bank rates and PLR are in some way connected with the under lying risk of lending; in fact it is not. so. Loosely speaking bank rate is the rate at which the central bank (RBI in India) advances credit to other banks. The bank rate also refers to the rate of interest charges on interbank short term borrowings (call money). However it is in no way connected with the perceived under lying r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o release/suck out liquidity from the market. It is naive to postulate that the difference between the bank rate and the PLR/Base rate represent the underlying risk of lending,. The 29rystall's argument is therefore not acceptable. 8.14. Further, in the assessee own ease for AY 2012-13, the assessee has filed an appeal before DRP against the order u/s 92CA(3) passed by the TPO on this issue. However, the DRP vide its order dated 14.09.2016 has dismissed the assessee s ground with the remarks It is also worth adding that it is not sufficient to merely spell out risks, it has to be shown which risk was actually undertaken by the comparables and to what extent it affected the profitability .. Since, the methodology is not well established and requires making several assumptions, the risk adjustment calculated as per the methodology will not lead to reasonably accurate adjustment as required as per the Income Tax Act and Rules. Therefore, it will not be possible to give risk adjustment under the India law. DRP Directions: Objections ix and x are related to risk analysis and risk adjustments hence are being adjudicated together. Risk adjustment as a general ..... X X X X Extracts X X X X X X X X Extracts X X X X
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