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TMI Blog2017 (9) TMI 1823X X X X Extracts X X X X X X X X Extracts X X X X ..... ch in turn is a wholly owned subsidiary of Kronos Incorporated USA (Kronos US). Kronos India is a 100% Export Oriented Unit and is also an offshore development centre for Kronos US. As per the Transfer Pricing Study (TP Study), Kronos India is engaged in delivering an integrated suite of software development services that enables organization to reduce costs, increase productivity, improve employee satisfaction, and enhance the level of service they provide. Kronos India is also engaged in provision of back office support services which involves application support services, technical support and hosting services and application and technical support in relation to cloud services. In respect of application support services, the assessee's services include providing support services in respect of the applications already developed by the Associated Enterprises (AE). The services also include fixing of bugs. With respect to technical support services, the same include addressing the queries raised by the customer on AEs. The queries addressed by the assessee are in the nature of configuration issues, data corruption issues and bug issues. With respect to hosting services, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also did not include economic adjustments like working capital adjustment and risk adjustment while computing the arm's length margin in the back office support services segment of the assessee company. The TPO determined the arm's length margin in the back office support services segment of assessee company at 29.53% as against the assessee's margin of 16.02% and proposed an adjustment of Rs. 50,74,969/- . On the assesseee approaching the Hon'ble DRP, the Hon'ble DRP accepted the approach and the comparables considered by the TPO and directed the TPO to provide working capital adjustment and also to re-compute the margins of the assessee as well as the of the comparables by removing computational errors. The Hon'ble DRP while rejecting the aseeseee's claim for excluding comparables held that the functional profile of the assessee with reference to the back office support segment was akin to a Knowledge Processing Outsourcing (KPO) service whereas the assesse's contention was that it was not a KPO but only a back office service provider. However, the TPO did not provide the working capital adjustment as per the directions of the Hon'ble DRP and also did not correct the margins as d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntation by the appellant, the complete data for financial year 2010-11 was not available within the public domain. 2. That the Ld. AO / Ld. TPO erred in not following the directions of the Ld. DRP that comparability adjustment (working capital adjustment) should be provided to appellant while determining the arm's length profit margin. 3. That the Ld. AO/Ld. TPO/Ld. DRP erred in law and facts of the case by not considering the foreign exchange gain/loss as operating in nature while computing the margins of the appellant company and comparable companies. 4. That the Ld. AO has erred in charging interest under section 234B and 234C of the Act amounting to INR 44,95,692/- and INR 5,792/- respectively. 5. That on the facts and in the circumstances of the case and in law, Ld. AO erred in initiating penalty proceedings under section 271(1 )(c) of the Act. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of appeal either before or during the course of the proceedings before the Hon'ble Income Tax Appellate Tribunal in the interest of natural justice. The aforesaid grounds are mutually exclusive and without prejudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, held the assessee's functions as akin to a KPO. It was reiterated that the functions of the assessee were more akin to ITeS services provider and not a KPO. 5.1 Coming to the comparables, the ld. AR advanced his arguments as under:- i) TCS E-Serve Limited It was submitted that TCS E-Serve earned revenue from financial information processing, voice based customer contract, business process management and analytics. It was also submitted that the erstwhile Citigroup Global Services was taken over by the TCS during financial year 2008-09 and post the takeover by Tata Consultancy Services Limited TCS E-Serve utilized the large customer base of TCS to achieve greater operational efficiencies. He drew our attention to the annual report of TCS E-Serve and submitted that this company was engaged in activities beyond normal business processing services and provided technical services in the nature of software testing, verification, validation etc. whereas the assessee was only performing routine back office functions and accordingly this company was functionally dissimilar to the assessee company. 5.2 Reliance was placed on the judgment of Hon'ble Delhi High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see company as the assessee's company only provided back office services which were more in the nature of ITeS services. Reliance was placed on a number of judgements wherein Eclerx Services Limited had been excluded as a comparable on the ground of being a KPO and catering to high end clients. It was also submitted that this comparable had a turnover 78 times more than that of the assessee and, therefore, the scale of operations were incomparable. It was also submitted that this company had a significant intangibles assets amounting to Rs. 2.94 crores as compared to the assessee's intangible assets of Rs. 23.10 lakh and the exclusion of Eclerx Services Limited was sought on this ground also. It was also submitted that this company bore the risks associated with the high end service provider whereas the assessee company was a back end service provider having a very low risk due to being a captive service provider. It was also submitted that this company mostly operated through outsourcing model whereas there was no outsourcing done by the assessee company. iii) R Systems International Limited 5.4 The ld. AR submitted that this company was rejected by the TPO/Hon'ble DRP on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving their competitive positioning by managing their business processes in addition to providing increased value. It was further submitted that this company had a turnover 260 times more than that of the assessee company. Reliance was placed on the judgment of Hon'ble Delhi High Court in the case of Actis Global Services Pvt. Ltd. (supra) wherein this company was rejected on ground of high turnover. Reliance was also placed on the case of Agnity India Technologies vs ITO in ITA 1204/Del/2011 wherein the ITAT Delhi Bench had rejected this comparable on the ground of high turnover. Ld. AR also submitted that Infosys BPO was associated with the brand "Infosys" which was one of the most prominent brands in the Indian IT industry. Infosys BPO being a subsidiary of Infosys had an element of brand value associated with it and it incurred significant amount of brand promotion and advertising expenses which led to the creation of marketing intangibles. It was submitted that Infosys BPO was a giant company with high risk profile and it operated as a full-fledged entrepreneur and, therefore, it could not be compared with back office support service provider like the assessee and, accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed declaring income of Rs. 73202670/-. On a reference being made to the TPO, the TPO disregarded the approach followed by the assessee in the TP Study and with reference to back office support service rejected six out of eleven comparables selected by the assessee and included four new comparables in the final set. The final set of comparables, as adopted by the TPO, was as under:- S. No. Company Name OP/ TC (%) Margins as considered in TP order Comparable considered by . TPO / Appellant 1 Accentia Technologies Limited 11.95% Ld. TPO 2 Informed Technologies India Limited 7.62% Appellant 3 E4e Healthcare Business Services Private Limited 19.85% Appellant 4 Eclerx Services Limited 58.40% Ld. TPO 5 Infosys BPO Limited 36.75% Appellant 6 T C S E-serve Limited 63.69% Ld. TPO 7 Acropetal Technologies Limited (Segmental) 18.32% Ld. TPO 8 Jindal Intellicom Limited -0.05% Appellant 9 Microgenetics Systems Limited 19.61% Appellant Mean 26.24% 7.1 The TPO also rejected R System International Ltd. and did not allow working capital and risk adjustment. The OP/TC of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r companies as comparables and thereby ignoring the impact of economies of scale; 1.5. Rejecting companies whose accounting year does not end with March 31, 2012 on the basis that the transactions taking place in a different period cannot be compared; 1.5.1 Without prejudice to the above, the Ld. AO/ Ld. DRP/ Ld. TPO erred in rejecting the comparable 'R Systems International Limited' whose data for the financial year ("FY") 2011-12 can be deduced from it's published / audited annual accounts thereby satisfying the said filter. 1.6. Denying the benefit of economic adjustment on account of difference in risk profile in arriving at the arm's length margin; and 1.7. Selecting the current year (i.e. FY 2011-12) data for comparability despite the fact that at the time of preparation of transfer pricing documentation by the Appellant, the complete data for FY 2011-12 was not available within the public domain. 2. That the Ld. AO / Ld. TPO erred in not computing the margin of the Appellant for the back office support services segment as per the directions of the Ld. DRP, thereby following an inconsistent approach for margin computation of the Appellant vis-a-vis the comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of services which include processing, collection, customer care and payments in relation to the services offered by the Citi Group to its corporate and retail clients. Technical services involving software testing, verification and validation of the software at the time of implementation and data centre management activities. This is evident from a reading from the notes to accounts contained in the annual report of TCS E-serve Limited. Thus, there is strength in the contention of the assessee that TCS E-serve Limited is engaged in activities which are beyond providing back office support service and thus this company is functionally dissimilar. We also find that the Hon'ble Delhi High Court in the case of Actis Global Services Pvt. Ltd. in ITA 94/2017 had upheld the order of ITAT Delhi directing the deletion of this comparable from the final set of comparables on the ground that TCS was involved, both in transaction processing and technical services, and was, therefore, not a comparable company with respect to a company engaged only in BPO activities. Therefore, we deem it appropriate to exclude this company from the final set of comparables and direct the TPO/Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et of comparables. The Ld. AR has argued that this company was engaged in providing high-end integrated services by assisting its clients in improving their competitive positioning by managing their business processes in addition to providing increased value and, hence, was functionally dissimilar to the back end office support services being provided by the assessee. It is seen that Infosys BPO Ltd. has been rejected as a comparable by ITAT Delhi Bench in New River Software Services Pvt. Ltd. reported in ITA No. 451/Del/2013 on the ground of huge turnover, economies of scale and brand value. It is also seen that the Hon'ble High Court of Delhi had rejected this company as a comparable in Agnity India Technologies vs ITO in ITA No. 1204/2011 on the ground of high turnover wherein the comparable had a turnover of 58 times of the assessee. Similarly, the Hon'ble Delhi High Court in Actis Global Services Pvt. Ltd. in ITA 94/2017 rejected this comparable on the ground of high turnover wherein the comparable had a turnover of 66 times of the taxpayer. In the assessee's case, it is seen that the assessee's turnover from back office segment amounts to Rs. 4.35 crores whereas, as p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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