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TMI Blog2017 (4) TMI 1448X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of providing digital imaging services falling within the category of IT enabled Services (ITeS) to its AEs. The assessee-company is compensated by the AE at cost +17% mark0up basis. It has filed return of income for the assessment year 2010-11 on 27/09/2010 declaring total income of Rs. 52,010/-. The assessee-company also reported international transaction of provision of digital imaging services (ITeS) of Rs. 17,58,08,037/- in its Form 3CEB. The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm's length. The assessee-company had also submitted transfer pricing study report adopting the operating profit to the total cost as profit level indicator (PLI) for the transfer pricing study. The assesseecompany also adopted TNMM which was considered to be the most appropriate method for the purpose of bench marking its international transaction. The assessee-company's profit margin was computed at 17.1% and the assessee-company claimed that the international transactions in the IT enabled Services (ITeS) segment are at arm's length. For the purpose of TP study assessee-company had chosen 9 comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputed operating margin of the assessee-company at 18.7%. Finally, the TPO selected the following 10 comparables: 3.2 The TPO computed operating margin of the comparables at 22.86%. After giving working capital adjustment of 0.02% adjusted arithmetic mean of PLI was determined at 26.63%. On the above basis, TPO computed TP adjustment as follows: 4. The AO passed draft assessment order dated 10/3/2014 u/s 143(3) incorporating the above TP adjustment after reducing telecommunication and freight expenditure incurred in foreign currency from export turnover for the purpose of calculating benefit u/s 10A of the Act. 5. Being aggrieved, assessee-company filed objections before the DRP contending inter alia that TPO ought to have considered operating foreign exchange fluctuations as operating income and ought to have applied upper turnover limit of Rs. 2 crores and ought not to have applied 0% RPT filter. The Hon'ble DRP, after considering the submissions, upheld the contentions of the assessee-company that foreign exchange fluctuation should be treated as operating in nature and upper turnover filter of Rs. 200 cores should also be applied. The Hon'ble DRP upheld the exclusion of RPT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bs Ltd. (d) Crossdomain Solutions Ltd. (e) Eclerx Services Ltd. (f) Genesys International Corpn. Ltd, (g) Mold Tek Technologies Ltd," We further note that the functional comparability has been examined in detailed by the co-ordinate bench of this Tribunal in the case of Equant Solutions India (P.) Ltd. v. Dy. CIT [2016] 157 ITD 292/66 taxmann.com 192 (Delhi - Trib.) as well as in the case of ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bang. - Trib.). Further in the case of Acropetal Technologies Ltd. (Seg.), the co-ordinate bench of this Tribunal in the case of Kodiak Networks (India) Pvt. Ltd. v. Dy. CIT [IT(TP)A No.l540 (Bang) of 2012] has considered the functional comparability and found that this company is not comparable with a captive service provider. Accordingly we direct the Assessing Officer/TPO to exclude these companies from set of comparables. E-clerx Services Limited 14.1 We have considered the rival submissions and relevant record. At the out set, we note that the comparability of M/s Eclerx Services Ltd. has been examined by the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entitles cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP." 14.2 As discussed by the Special Bench in the case of Maersk Global Centres (India ) (P.) Ltd. (supra), this company provides data analysis, operating management, audits, reconciliation, metrics management and operating services, it has two business verticals - financial services, retail and manufacturing. It was found to have being providing complete business solutions in the nature of high end services. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the ITES. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables. Infosys BPO Ltd. 15.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e., Infosys Technologies Ltd., be excluded form the list of comparable companies. 15.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 15.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dissimilar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 29 taxmann.com 310/140 ITD 540 (Bang.) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys BPO Ltd. is not functionally comparable since it has the benefit of market value as well as brand value. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013] 57 SOT 14 (ITAT[Hyd]). It is pertinent to note that an extra ordinary event of merger, amalgamation or acquisition is relevant only if such event affects the result and operating margin of the very segment of the company to be compared with the assessee. In case, of segmental results are taken in to account and extraordinary event of merging or demerging taken place in other division or segment of the comparable company then such event does not, affect the existing business model, function or margin of that particular segment. Therefore, the extraordinary event is a relevant factor for considering the comparability of company only when it has resulted into abnormal influence on the functions and profit margins of the company. Undisputedly, the TPO took the segmental result/data of this company for determination of ALP, hence, it becomes relevant and crucial to verify whether an extraordinary event of merger or demerger happened in the ITES segment or not We, therefore, set aside the issue of comparability of this company to the record of TPO/AO and direct to decide the same as per law and functional comparability of this company. Eclerx Servivces Ltd: 32. The Id. AR submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at Rs. 3 1,863 Crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable." Apart from this, the company is also engaged in the business of software product, therefore, it is clear that the company apart from having its own IPR and brand value also engaged in the software product. Therefore, this company cannot be considered functionally similar to that of assessee and accordingly, we direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions of the learned counsel for the Assessee. On a perusal of the Note No. 15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO]. 59. It is not in dispute that this company is engaged in providing engineering design services and software development services. In the segment ITES this company is deriving income from engineering design services and software development services and segmental data of this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 10B for selection of comparables. We are also of the considered opinion that the turnover cannot be relevant criteria in a service sector where fixed overheads are nominal and the cost of service is in direct proportion to the services rendered. Following this reasoning we hold that the above companies cannot be excluded from the list of comparables. Therefore, we direct that E-Clerk and Infosys Services cannot be excluded on the ground of turnover but these comparables came to be excluded in the ground of functionality in the case of assessee's appeal in IT(TP)A No.502/Bang/2015. 18. Ground Nos.4 and 5 challenge application of 0% RPT. While selecting comparables, assessee needs to ensure that the comparables are uncontrolled. Companies having controlled transactions need to be eliminated. However, various Tribunals having been holding that an entity can be taken as uncontrolled if RPT does not exceed 25% of the total revenue. Reliance in this regard can be placed on the decision of Global Logic India P.Ltd. vs. DCIT (12 taxman.com 295(Del) (ii) ThyssenKrupp Industries (33 taxman.com107)(Bom) (iii) ADP P Ltd .vs. DCIT (45 SOT 172)(Hyd) and (iv) ACIT vs. Hapag Lloyd Global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue in the case of this comparable i.e., 3 DPLM Software is more than 25 per cent then this comparable should be excluded from the list of comparables selected by the TPO and the average mean should be worked out after excluding this comparable and if the same is within plus minus 5 per cent of the profit margin declared by the assessee then no transfer pricing adjustment is required to be made. This ground of the assessee is allowed for statistical purposes. 6. It was submitted by the ld. counsel of the assessee that remaining grounds of the assessee may not be adjudicated upon at this stage and may be left open because the assessee is sure that it will succeed on this issue alone that the RPT in the case of 3 DPLM Software Ltd., is very high and hence that comparable has to be excluded and if that is done then no transfer pricing adjustment is required and therefore the remaining issues are of academic interest only. We find force in this argument of ld. AR of the assessee that if the assessee succeeds on this issue that RPT in the case of one comparable i.e., 3 DPLM Software Ltd. is high and for this reason that comparable has to be excluded resulting in bringing the avera ..... X X X X Extracts X X X X X X X X Extracts X X X X
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