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TMI Blog2018 (1) TMI 1413X X X X Extracts X X X X X X X X Extracts X X X X ..... not require verification of facts. We find that assertion made by AR is correct, therefore, we admit the additional grounds. 3.Effective Ground of appeal(GOA-3.1 and 3.3)is about Transfer Pricing(TP)adjustment of Rs. 7.34 crores. During the assessment proceedings, the AO found that the assessee had entered into International Transactions (IT) with its Associated Enterprise (AE).Therefore, he made a reference to the TPO to determine the ALP of such transactions. After considering available material the TPO suggested upward adjustment of Rs. 9.41 crores. The AO accordingly issued a draft order proposing the additions. The assessee filed the objections before the DRP.As stated earlier, the AO passed the order in pursuance of the DRP. During the TP proceedings, the TPO found that the assessee had entered into following IT.s and had used CUP as the most appropriate method for determining ALP. Transaction Amount of Transaction in Rs. IT enabled services provided 1,62,00,000 IT enabled services provided 87,47,000 NCI paid on behalf of Tracmail India 3,91,87,000 Payment Received against NCI Dues 1,48,59,000 Payment Received Against services 97,12,000 Advances for future servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was in the business of outsourced interactive communication solutions, that the exact match for comparability was not easy to get, that TNMM being a residuary method was more broadbased, that the comparable selected were more or less in similar line of business, that CUP could not be applied to ITs entered into by the assessee with its AE, that services rendered by assessee to its AE.s and non-AE.s were not the same, that the assessee had objected to all the comparable selected by the TPO, the DRP directed AO/TPO to recalculate the margin of comparable by excluding four comparables, namely Mould Tech Technologies Ltd. Infosys, BPO Ltd. and Wipro Ltd.(segment).It further held that the action of the TPO in not considering the multiple year data was justified, that he had rightly applied filters of export turnover(above 25%), that TPO had rightly selected the comparables which were having revenue more than 75% of their ITs . 3.2.During the course of hearing before us, the AR stated that four of the comparables namely Accentia Technologies Ltd.-Seg.(ATL);Coral Hubs Ltd.(CHL);Eclerx Services Ltd. (ESL);Genesys International Corpn Ltd.(GICL).He referred to the case of IGS Imaging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Datamatics Financial Services Ltd, and M/s. Spanco Ltd, were not having activities which were functionally different from that of the assessee. He thus upheld the order of ITO in respect of the comparability of the above companies were concerned. However, he accepted the contention of the assessee that M/s. Genesys International Corporation Ltd, was functionally different from that of the assessee, since it performed R & D activities to develop proprietory products and also owned intangibles. 16. CIT (A) also rejected the general contention of the assessee that companies which were involved in knowledge process outsourcing, eventhough it fell within the ITES segment had to be excluded from the comparison. xxxxx 23.We have heard the rival contentions. In so far as application of turnover filter is concerned, by virtue of Hon'ble Bombay High Court judgment in Pentair Water India P. Ltd, (supra), we are of the opinion that it is a valid criteria that could be adopted for inclusion or exclusion of companies in a comparability study. Hon'ble Bombay High Court had followed earlier decision of Hon'ble Delhi High Court in the case of CIT v.Agnity India Technologies P. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows:- "I. Accentia Technologies Ltd. 10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place,then the aforesaid comparable has to be excluded." 11.We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable.We are therefore of the opinion that CIT (A) was justified in direction exclusion of M/s. Accentia Technologies Ltd. 26.Vide ground 4, Revenue is assailing exclusion of Genesys International Corporation Ltd, from the list of comparables. We find that the said company was also considered by the Tribunal in the decision of M/s. Symphony Marketing Solutions India P. Ltd (supra). In relation to Genesys International Corporation Ltd,it was held as under at para 22 and 23 of the order : ' 22. This company is listed at Sl. No.12 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, therefore, rejected the contention of the assessee and treated the BPO as equivalent to KPO services. 40. We have to now consider whether a BPO and KPO are functionally similar and are comparable to each other. BPO is a sub-set of outscoring and involves the contracting of the operations and responsibilities of specific business functions or process to a third party services provider. Often business processes outsourcing are information technology based and referred to as ITES-BPO. KPO is one of the sub-segment of the BPO industry. It involves outsourcing of core information related business activities which are competitively important or form an integral part of a company's value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist expertise.The KPO services include all kinds of research and information IT(TP)A.470/Bang/2013 Page - 19 CO No.150/Bang/2015 gathering. Thus it can be seen that even though both BPO and KPO are offering information Technology based services, the skill and expertise and may be even the tools required are different which may result in different economic results of both the segments. Thus, in such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Information Technology enabled Services segment in the audited financial statements of Accentia. 5. On facts and circumstances of the case and in law, the Ld. AO / Ld. TPO erred in objecting to the exclusion of Genesys International Corporation Limited ("Genesys") by the Hon'ble CIT(A), on the basis of functional non-comparability. The Ld. AO / Ld. TPO has failed to take cognizance of the fact that the company has been additionally rejected on the ground of abnormal growth by the Hon'ble CIT(A). 30. A reading of ground 1 show that assessee is seeking exclusion of M/s. Coral Hub Ltd, and M/s. Eclerx Services Ltd, which come back to the list of comparables. In the case of M/s. Coral Hub Ltd, assessee says that it was functionally uncomparable and in the case of Eclerx Services Ltd, it says that there were extra-ordinary events during the relevant previous year which took it out of the realm of comparable. In this regard, Ld. AR placed reliance on the decision of coordinate bench in the case of M/s. Symphony Marketing Solutions India P. Ltd. xxxxx 32. We have heard the rival contentions. In so far as M/s. Coral Hub Ltd, is concerned, the coordinate bench in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- "IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it sub-contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008-09, wherein the DRP, after taking into consideration, the aforesaid aspect, has accepted the claim of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR's argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the ITES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP." 17. Applying the aforesaid decisions, we are of the view that Coral Hubs Ltd. cannot be considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that in relation to Revenue's appeal we have held M/s. Accentia Technologies Ltd, was rightly excluded from the list of comparables by the CIT (A). Therefore, this ground raised by the assessee has also become infructuous. 40.With respect to ground 5 of the assessee,we have already held that CIT (A) was justified in excluding M/s. Genesys International Corporation Ltd, from the list of comparable companies. Hence ground 5 is also treated as infructuous." 3.5.We find that the Hon'ble Delhi High Court in case of Rampgreen Solutions P. Ltd. (supra)has also dealt with the similar issue wherein the assessee was providing ITE Services to its AE. In its order,the Hon'ble High Court has dealt with the validity of inclusion of CHL and ESL for comparing the services provided by them vis-a-vis the services provided by the assessee.We are reproducing relevant portions of the judgment of Hon'ble Delhi High Court in Rampgreen Solutions P. Ltd.(supra)which reads as under: "2.The Assessee is, essentially, aggrieved by the TP Adjustments made in respect of the consideration for the services rendered by the Assessee to its overseas holding company. The TP Adjustments have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains "special provisions relating to avoidance of tax". The object of Chapter X of the Act is not to tax any notional income but to ensure that the real income is brought to tax under the Act. This has also been explained by a Division Bench of this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. and Ors. v. Commissioner of Income Tax-III and Ors. 374 ITR 118 in the following words:- '77. As a concept and principle Chapter X does not artificially broaden, expand or deviate from the concept of "real income". "Real income", as held by the Supreme Court in Poona Electricity Supply Company Limited versus CIT, : [1965] 57 ITR 521 (SC), means profits arrived at on commercial principles, subject to the provisions of the Act. Profits and gains should be true and correct profits and gains, neither under nor over stated. Arm's length price seeks to correct distortion and shifting of profits to tax the actual income earned by a resident/domestic AE. The profit which would have accrued had arm's length conditions prevailed is brought to tax. Misreporting, if any, on account of non-arm's length conditions resulting in lower profits, is corrected.' 22. In the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fessionals. 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 processing of routine data. In the case of Maersk Global Centers (India) Pvt. Ltd. v. ACIT (supra) a Special Bench of the Tribunal had referred to a report prepared by National Skill Development Corporation (NSDC) on Human Resource and Skill Requirements in IT and ITES Sector (2022) and noted that the KPO sector has been described as "a value play". The said report also indicates that KPO services are likely to span activities such as "patent advisory, high-end research and analytics, online market research and legal advisory". 26. A Knowledge Process is understood as a high value added process chain wherein the processes are dependent on advanced skills, domain knowledge and the experience of the persons carrying on such processes. 27. The Government of Rajasthan (Department of Information Technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce-based call centers that render routine customer support for their clients. Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 32.It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s Capital Iq Information Systems (India) (P.) Ltd. v. Additional Commissioner of Income-tax (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits. 38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the basis that an adjustment could be made only in cases where supernormal profits resulted from the factors indicated in Rule 10B of the Income Tax Rules, 1962. In our view, the factors mentioned in Rule 10B are not exhaustive. The principal object of benchmarking international transactions against uncontrolled transactions is to impute an ALP to those transactions. This exercise would fail if a factor, which has a material bearing on the value or the profitability, as the case may be, depending on the method used, is ignored. 42. Before concluding, there is yet another aspect of the matter that needs consideration. The Tribunal proceeded on the basis that while applying TNMM method, broad functionality is sufficient and it is not necessary that further effort be taken to find a comparable entity rendering services of similar characteristics as the tested entity. The DRP held that TNMM allows flexibility and tolerance in selection of comparables, as functional dissimilarities are subsumed at net margin levels, as compared to Resale Price Method or Comparable Uncontrolled Price Method and, therefore, the functional dissimilarities pointed out by the Assessee did not warrant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed comparable entity are similar including the assets used and the risks assumed; and (b) the difference in services/products offered has no material bearing on the profitability." 3.6.We find that the services offered by the assessee and above mentioned four comparables are not in same field therefore respectfully following the above judgment/order of the Hon'ble Delhi High and the Tribunal,we direct that the above mentioned four comparables should be taken out from list of valid comparables. 3.7.In the case of Fire Stone International (P.) Ltd. The Hon'ble Bombay High Court has held that TP adjustments had to be restricted to the transactions made with the AE.s.Therefore, in our opinion the TPO/DRP was not justified in holding that TP adjustments had to be made for the non-AE transactions also. 3.8.Accordingly,the TPO/AO is directed to determine the TP adjustment after excluding yhese comparables. We find that the AR has fairly conceded adjustment @9% (approx.) of AE transaction which would not be objected to by the assessee. AO is directed to work out exact adjustment. Effective ground of appeal is allowed in favour of the assessee,in part. As a result, appeal filed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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