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TMI Blog2019 (7) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... t the directions of the DRP on this issue. Inclusion of ACE BPO Services and APE Technologies (P) Ltd - The learned DR was also heard and on consideration of the relevant material, we deem it fit and proper to remand this issue to the file of the AO/TPO to reconsider the same and only if it is found that these companies do not fail the relevant filters adopted by the TPO, then these companies should be included in the final list of comparables Risk adjustment - Provision for bad and doubtful debts and provision for loans and advances as operating in nature and allowing risk adjustment, since the assessee has sought exclusion of only Eclerx and we have held it to be not comparable to the assessee, the adjudication of these grounds would only result in an academic exercise at this stage. Therefore, we are not inclined to adjudicate the same at this stage. Similarly, adjudication of Ground No.1 also is not required as by exclusion of E Clerx Services Ltd from the final list of comparables, the margin of the assessee falls with the + or 3% of the margin of the comparables and the adjudication of this issue also is academic in nature. TP adjustment regarding interest on ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er CASS. 3. During the assessment proceedings u/s 143(3), the AO noticed that the assessee has entered into various international transactions with its Associated Enterprises (AEs) to the tune of ₹ 2671,51,51,628/-. The AO therefore, referred the matter to the file of the TPO u/s 92CA of the Act for determination of the Arm s Length Price (ALP) of the transaction. 4. The TPO observed that the assessee (HDPI in short) was set up in India as wholly owned subsidiary of HSBC Holdings BV Netherlands to meet the back office processing needs of the HSBC group. He classified the services rendered by HDPI (assessee) to the HSBC group entities under the following 4 heads; (a) call center; (b) data processing; (c) data entry; and (d) professional services. He observed that the HSBC group entities are rendering the banking and financial services and have migrated some of the back office and call center activities to the assessee. After perusing the financial results of the taxpayer company for the financial year 2013-14, the TPO observed that OP/OC (%) of the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rossly erred in: 1. Not applying the terms of the Advance Pricing Agreement entered by the Appellant with the CBDT wherein 1ay 2014-15 is a year prior to the covered period under APA without any change in the facts and circumstances of the Appellant s business. 2. Without prejudice to the above agreement on nonapplication of the APA terms, we wish to submit that based on the facts and circumstances of the case and in law, the learned AO/Hon'ble DRP erred in Ground No.2 to 13). Rejection of TP documents. 2. Rejection of the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules 1961 (Rules) and undertaking a fresh economic analysis during the course of assessment proceedings and thereby making an adjustment of INR 305,33,05,656 to the international transactions. Rejection of use of multiple year data in applying TNMM 3. Rejecting the use of multiple year data of the comparable companies for determining the arm s length margin under Transactional Net Margin Method (TNMM). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustments taking into account the functional and risk differences between the international transactions of the Appellant and the comparable transactions under TNMM, in accordance with the provisions of Rule 10B(1) of the I.T.Rules, 1962. 11. Imputing interest on outstanding receivables as on 31st March, 2014 ₹ 17,31,66,150/- . a) Not appreciating that the instant transaction is not covered in the definition of international transaction as defined u/s 92B of the Act in the facts and circumstances of the case. b) Not appreciating the fact that the receivables are consequential/closely linked to the principle transaction of provision of IT enabled services and hence have been aggregated for determination of ALP under TNMM c) Not appreciating the fact that the company has outstanding payables on which no interest has been charged by the AEs d) Not appreciating the facts and circumstances surrounding the receivables and re-characterizing the outstanding receivables as unsecured loans advanced to AEs. 12. Without prejudice to the above, not undertaking an object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cations Ltd as directed by the DRP and not the entity level result taken by the TPO. 7. As regards Ground No.8, it is submitted that the assessee is seeking inclusion of the companies, which were selected by the assessee but were rejected by the TPO. It is submitted that in the grounds, though 8 companies are mentioned, the assessee is seeking inclusion of only two companies i.e. ACE BPO Services Ltd and Altex Technologies Ltd in the final list of comparables and also of office back operations segment of Hartron Communications Ltd. 8. Ground No.9 10 are stated to be included in Ground No.6 and therefore, these two grounds need no separate adjudication. It is submitted all the that other grounds i.e. 11 to 18 are also pressed by the assessee. 9. Let us now therefore, proceed to dispose of the assessee s appeal ground-wise. 11. As far as Ground No.1 is concerned, it is submitted by the Learned Counsel for the assessee that the assessee had entered into Advance Pricing Agreement (APA) with the Department CBDT on 29.8.2016 for the period covering the A.Ys 2015-16 to 2019-20 and the international transactions covered, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces Ltd is engaged in the providing high end IT enabled services such as Consultants, Business Analytics, Solution Testing, Data Management etc., which require much advanced skills in comparison to the assessee, which is engaged in provision of routine IT enabled Services to its AEs. He also referred to the APA agreement wherein the operations/activities carried on by the assessee, salary cost of the employees in the analytics division being less than 20% of the cost were considered and, the APA authorities have agreed for a markup of 18% on cost because of the nature of the services rendered by the assessee. Therefore, he submitted that care is taken so that even small portion of the analytical work carried on by the assessee should not affect the whole outcome of the APA which is the very reason as to why any taxpayer opts for an APA. With regard to the specific argument that E Clerx Services Ltd is a KPO company and cannot be considered as IT enabled service company, the assessee relied upon the following case law: i) Assessee s own case for the A.Y 2007-08 in ITA No.1826/2011 dated 24.10.2014. ii) Hon'ble Delhi High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e research and development services rendered by McKinsey are KPO services and support the order of the TPO. A copy of the Delhi High Court judgment is also filed before us. 16. In rebuttal, the learned Counsel for the assessee has filed the letter making the following submissions: A) Characterisation of services as 'KPO' in nature 1. The learned DR during the hearing placed reliance on the decision of Hon'ble Delhi Tribunal in case of McKinsey Knowledge Centre Private Ltd (ITA No 154/De1/20 16) dated 15 December 2016 affirmed by Delhi High Court in ITA 461/2017 dated 9 August 2018 wherein it was held that research development services rendered by McKinsey are 'KPO' services and supported the order of TPO, wherein he has held that services being rendered by Appellant's analytic division are 'KPO' in nature. In the rejoinder, learned Counsel for the Appellant based on news flash mentioned that the High Court order in case of McKinsey Knowledge Centre Private Limited (Supra) has been recalled, however the copy of the order was not available during the hearing. 2. In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S company both by the assessee as well as APA authorities and even the TPO in the TP study for the relevant A.Y has treated the assessee to be a ITeS company and therefore, it is not open to the learned DR to take a different stand and argue that the assessee is also a KPO. Even otherwise, as seen from the Annual Report of the assessee, it is performing the following functions: a) Electronic Data Processing; b) Call Centre; c) Professional services; d) Other support functions 18. Whether these functions can be categorized as KPO functions?. The Special Bench of the Tribunal in the case of Maersk Global Centre (India) Pvt. Ltd was considering the distinction between a KPO and BPO and in this process, has listed out the services/functions which can be considered as KPO services as defined in clause (g) of the Rules 10TA. 72. The term knowledge process outsourcing services is defined in clause (g) of 10-TA as under: (9) Knowledge process outsourcing services means the following business process outsourcing services provided mainly with the assistance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption of ITeS and cannot be compared to E Clerx Services Ltd which is a KPO service provider. The relevant paras of the Hon'ble High Court decision are as under: 22. In the facts of the present case, it is not disputed that Vishal and eClerx are entities engaged in Knowledge Process Outsourcing Services (KPO Services). Thus, the principal question to be addressed is whether a KPO Service provider could be considered as a comparable for benchmarking international transactions entered into by an entity rendering voice call services such as the Assessee with its associated enterprise by using TNMM and taking operating profit margin as the PLI . 23. In this case, the Tribunal noted that eClerx was engaged in data processing and analytics services and held that the activities of the Assessee were functionally similar to those of eClerx. The Tribunal concluded that voice call services and KPO services were essentially ITeS and, therefore, entities rendering the aforesaid services could be considered as comparables for the purpose of benchmarking international transactions by using TNMM. The Tribunal held that further sub-division of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Technology Communication) has also floated a scheme on 12th December, 2011 known as The Rajasthan Incentive Scheme for BPO Centers and KPO Centers, 2011 . The said scheme is for providing incentives to promote ITeS and to generate further employment opportunities. In terms of the said scheme, Business Process Outsourcing (BPO) is defined to mean the transfer of an organization's entire non-core but critical business process/function to an external centre which uses an IT-based service delivery and Knowledge Processing Outsourcing (KPO) has been defined to mean allocation of relatively high-level tasks to an outside organization or a different group (possibly in a dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist of comparables, the Hon'ble Delhi High Court has also considered the same and held as under: 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 outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity. 21. Further, we find that the Coordinate Benches of the Tribunal, in various cases referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has sought exclusion of only Eclerx and we have held it to be not comparable to the assessee, the adjudication of these grounds would only result in an academic exercise at this stage. Therefore, we are not inclined to adjudicate the same at this stage. Similarly, adjudication of Ground No.1 also is not required as by exclusion of E Clerx Services Ltd from the final list of comparables, the margin of the assessee falls with the + or 3% of the margin of the comparables and the adjudication of this issue also is academic in nature. 26. As regards Ground No.11, on imputing interest on outstanding receivables as on 31st March, 2014, it is submitted by the learned Counsel for the assessee that average credit period allowed by the assessee is 92.7 days as against the period of 90 days usually allowed by various Benches of the Tribunal in various other cases. He further submitted that the international transactions were bundled transactions and the interest on trade receivables is included while computing the ALP, therefore, no further adjustment is to be made. In support of his contention that credit period of one year should be allowed, he placed reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd India reported in (1997) 225 ITR 798 (SC) . The learned Counsel for the assessee pointed out that this decision also was considered by the Hon'ble Special Bench in the case of Biocon Ltd. 30. Having regard to the rival contentions and the material on record, we find that this issue is covered in favour of the assessee and therefore, we direct the AO to grant relief to the assessee by following the directions of the Special Bench in the case of Biocon Ltd. This ground is accordingly allowed. 31. As regards ground No.15 against the disallowance of forex loss on forward contracts, the learned Counsel for the assessee placed reliance upon the decision of the Hon'ble Supreme Court in the case of Woodwand Governor, reported in (2009) 312 ITR 254 (S.C). The learned DR, on the other hand, relied on the CBDT Circular No.03/2010 dated 23.3.2010. 32. Having regard to the rival contentions and the material on record, we find that the Hon'ble Supreme Court in the case of Woodwand Governor India (P) Ltd has held that the loss suffered by an assessee on account of foreign exchange difference as on date of Balance Sheet is an item o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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