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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 ..... t ₹ 14.61 crores. 2.1. During the course of hearing before us the Authorised Representative (AR) stated that Grounds of appeal No. 1,2 and 3.2 were general in nature.Hence, we are not adjudicating the same. He did not press Ground No.3 and 4.Therefore,both the grounds stand dismissed as not pressed. He further stated that only Ground No.3.1 and 3.3 were to be decided. 2.2. The asessee has filed additional Ground of appeal. It was argued before us, that the additional Ground were legal in nature and did 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 ₹ 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 ₹ 9.41 crores. The AO accordingly issued a draft order proposing the additions. The assessee filed the objections before the DRP.As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.25% of oprating cost Arms Length Price(ALP) @129.25% of operating cost Rs.35,14,79,865/- Arms Length Price of Service rendered Rs.35,14,79,865/- Price received (excluding other income) Rs.25,73,07,000/- Shortfall being adjustment u/s. 92CA Rs.9,41,72,865/- 3.1.The AO issued draft order to the assessee. It filed objections before the DRP and made detailed submissions. It objected to the selection of the comparables stating that they were not functionally similar to the assessee. The DRP held that the assessee 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 furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, but had in its relevant previous year acquired one Indian company and three foreign companies. By accepting this contention of the assessee, CIT (A) directed exclusion of M/s. Accentia Technologies Ltd, from the list of comparables. 15. Vis-a-vis contention of the assessee for excluding those companies having different functional profiles CIT (A) was of the opinion that M/s.Acropetal Technologies Ltd, M/s. Asit C. Mehta Financial Services Ltd, M/s. Caliber Point Business Solutions Ltd, M/s. Cross Domain Solutions P.Ltd, M/s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 11 of the order dt.14.08.2013 as under : "10. This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007-08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger." 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activities of the assessee such as accounting, web management, network management are BPO services using technology but these services are not categorized as KPO. He held that a call centre may offer support services like telemarketing to high end services like technical support services, where not only the level of knowledge, skill required would be high, but the technical knowledge as well would be high. According to him, back office transaction process services may be as remarkable and as complicated as insurance/market transaction processing services. He, 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 competi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erx. Further, the learned CIT(A) also erred in concluding that Eclerx is functionally comparable to the Respondent. xxxxx 4. On facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in objecting to the rejection of Accentia Technologies Limited ("Accentia") by the Hon'ble CIT(A) on the basis that the company witnessed extraordinary events like acquisitions and amalgamations during the relevant year. Without prejudice to the above ground, the Hon'ble CIT(A) ought to have adjudicated on the other ground pertaining to non-availability of segmental data for the 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/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of comparables." 15.Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007- 08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library & Print on Demand in F.Y. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a), we accept that this company cannot be taken as a comparable." 16. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT, IT(TP)A No.1086/Bang/2011, order dated 30.4.2013, has taken the following view:- "36. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 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 sk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee." 21. We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was functionally different. xxxxx Following the above we are of the opinion that M/s. Coral Hub Ltd, and M/s. Eclerx Services Ltd, have to be excluded from the list of comparables for reasons other than abnormal losses. Directed accordingly. 39.In respect of ground 4, we find 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in cross-border transactions. However, with a large number of multi-national companies establishing operations in India, either through their subsidiaries or through other related ventures, a need was felt to provide a statutory framework to ensure that there is no avoidance of tax by transfer of income from India to other tax jurisdictions. Circular no. 14 of 2001 issued by the CBDT indicates that the provisions of Section 92 to 92F of the Act were introduced "With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India". 13. The heading of Chapter X also clearly indicates that it contains "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uiring application of knowledge and advanced analytical and technical skills, namely:‐ (i)geographic information system; (ii) human resources 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 development services whether or not in the nature of contract research and development services;" 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 processing of routine data. In the case of Maersk Global Centers (India) Pvt. Ltd. v. ACIT (supra) a Special Bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S, then there is no sub-classification of segment". Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITeS. We find it difficult to accept this view as it is contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITeS encompasses a wide spectrum of services that use Information Technology based delivery. Such services could include rendering highly technical services by qualified technical personnel, involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITeS would also include voice-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating 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 Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusion for such statistical reason. 41. Having stated the same, it may be necessary to bear in mind that supernormal profits may in certain cases indicate a functional dissimilarity or dissimilarity with respect to a feature that has a material bearing on the profitability. In such circumstances, it would be necessary to undertake further analysis to eliminate the possibility of the high profits resulting on account of any material dissimilarity between the tested party and the chosen comparable. A wide deviation in the PLI amongst selected comparables could be indicative that the comparables selected are either materially dissimilar or the data used is not reliable. The Tribunal proceeded 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar, but ignored the same relying on an assumption that the functional dissimilarity would be subsumed in the profit margin. As noted, the content of services provided by the Assessee and the entities in question were not similar. In addition, there were also functional dissimilarities between the Assessee and the two entities in question. In our view, these comparability factors could not be ignored by the Tribunal. While using TNMM, the search for comparables may be broadened by including comparables offering services/products which are not entirely similar to the controlled transaction/entity. However, this can be done only if (a) the functions performed by the tested party and the selected 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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