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TMI Blog2019 (7) TMI 1279X X X X Extracts X X X X X X X X Extracts X X X X ..... ding programming and application support for switching integration and PBX systems. It specifically deals with IVR, call centres, AIC, CMS technologies. The Assessee also provides marketing support services to its Associated Enterprises (AEs), which includes assistance in advertising and promotion of the product sold by 'Avaya' group. The Assessee also provides back-office services to its AEs, which includes provision of services relating to indirect billing, fixed assets, accounts payable, accounts receivable etc. 5. During the year under consideration, the Assessee provided software development services ('CSD'), information technology enabled services ('ITES') and marketing support services ('MSS') to its AEs on cost-plus basis. It purchased fixed assets and availed legal, finance, human resource, IT support and other support services from its AEs. 6. On 15th October 2010, the Assessee filed its return of income for the AY in question declaring a total income of Rs. 29,83,98,593/-. The return was picked up for the scrutiny. The Assessing Officer ('AO') noticed the international transactions carried out by the Assessee with its AEs and referred the matter to the Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s accepted by the ITAT and it ordered their exclusion. As regards the comparables picked up by the TPO for the ITES segment, and approved by the DRP, the ITAT accepted the plea of the Assessee in respect of the following comparables and excluded them: (i) Accentia Technologies Ltd. (ii) Eclerx Limited. (iii) Infosis BPO Ltd. (iv) Fortune Infotech Ltd. 11. However, the plea of the Assessee for exclusion of M/s TCS E-Serve Limited and M/s TCS E-Serve International Limited was rejected by the ITAT and that is how the Assessee is in appeal in this Court against the said decision of the ITAT. The question of law framed by this Court is therefore confined to the exclusion of the said two comparables. It requires to be noted that the Revenue is not in appeal before this Court against the decision of the ITAT so far as it accepted the plea of the Assessee and directed exclusion of the other comparables picked up by the TPO both in the ITES and MSS segment transactions. Submissions on behalf of the Assessee 12. Dr. Shashwat Bajpai, learned counsel appearing for the Assessee made the following submissions: (i) Both the comparables i.e. M/s TCS E-Serve Limited and M/s TCS EServe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v BC Management Services P. Ltd. (supra) and in those cases also M/s TCS E-Serve Limited was excluded as a comparable. The turnover of Infosys BPO Ltd. was Rs. 1126 crores, which was similar in scale to M/s TCS E-Serve Limited and this was also the reason why Infosys BPO Ltd. was excluded from the comparables. (vi) M/s TCS E-Serve Limited and M/s TCS E-Serve International Limited, were associated with the 'Tata' brand and made a brand equity contribution of Rs. 37 crores. The ITAT only picked up this figure in percentage terms and not in actual money terms. The Assessee on the other hand made no brand contribution to its parent. This was another reason that made the two comparables unequal to the Assessee. (vii) A reference was made to the Director's report of M/s TCS E-Serve Limited in the first year of acquisition by TCS of the company by the Citi Group. The total income had increased from Rs. 1299 crores to Rs. 1441 crores @ 11%, the profit before the tax was higher over the previous year figure of 226%, it was noted that M/s TCS E-Serve Limited along with its subsidiary M/s TCS E-Serve International Limited and M/s TCS E-Serve America, Inc. maintained its leadership positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the ALP. 14. Ms. Malhotra submitted that as rightly pointed out by the ITAT the expenditure corresponding to the contribution of the TATA brand TCS Eserve Ltd. was only 0.43% of the total operational expenses. That the said comparables were owned by the Tata group lent credence to the TPO's conclusion that the margins earned by them from CITI group, were on arm's length. She submitted that there is no case made out for excluding the said two comparables. Analysis and reasons 15. The above submissions have been considered. In a large number of decisions this Court has emphasized, that for there to be reliable benchmark studies for determining ALP not only the comparables have to be functionally similar but should have similar business environment and risks as the tested party. A detailed exposition of the legal position with specific reference to Rule 10 B (2) of the Income Tax Rules, 1962 is found in this Court's decision in Chryscapital Investment Advisors (India) Pvt. Ltd. v. DCIT 376 ITR 183 (Del) as under: "30. The reasoning adopted in various judgments noticed above, shows that functional analysis seeks to identify and compare the economically significant activities and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead with sub-rule (1)(e) of that rule after taking into account assets employed or to be employed and the risks assumed by the respective parties to the transaction. As noticed earlier, Rule 10B(3) mandates that a given or select uncontrolled transaction selected in terms of Rule 10B(2) "shall be comparable to an international transaction" if none of the differences, if any, between the compared transactions, or between enterprises entering into such transactions "are likely to materially affect the price or cost charged or paid or the profit arising from such transaction in the open market or reasonably accurate adjustment can be made to eliminate the effects of such difference." 32. Now, the sequitur of Rule 10B (2) and (3) is that if the comparable entity or entity's transactions broadly conform to the assessee's functioning, it has to enter into the matrix and be appropriately considered. The crucial expression giving insight into what was intended by the provision can be seen by the use of the expression: "none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions and the nature, extent and reliability of assumptions required to be made in application of a method" have to be taken into consideration by the TPO. 36. This Court holds that in the facts of the present case, the assessee was incorrect, both in its reliance placed upon previous years' data as well as the manner of such reliance. First, the assessee's justification for relying on such data is the volatility in the comparables' profit margins and the consequent inability to transact at a consistent ALP. However, this is not warranted herein. Whilst there may be a wide fluctuation in the profit margins of comparables from year-to-year, this by itself does not justify the need to take into account previous years' profit margins. The transfer pricing mechanism provided in the Act and the Rules prescribes that while determining the ALP, the arithmetic mean of all comparables is to be adopted. This is to offset the consequence of any extreme margins that comparables may have and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essarily adopted." (all emphasis in original) 16. In Rampgreen Solutions Pvt. Ltd. v. CIT (2015) 377 ITR 533 this Court further discussed Rule 10-B (2) of the IT Rules. This Court pointed out how although both the Knowledge Process Outsourcing (KPO) services and the Business Process Outsourcing (BPO) services fall within the broad definition of ITES, companies engaged in KPO services cannot be used as comparables for the TP study of a company engaged in providing BPO services. In that process, it was observed by this Court as under: "20. In order for the benchmarking studies to be reliable for the purposes of determining the ALP, it would be essential that the entities selected as comparables are functionally similar and are subject to the similar business environment and risks as the tested party. In order to impute an ALP to a controlled transaction, it would be essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in all material aspects that have any bearing on the value or the profitability, as the case may be of the transaction. Any factor, which has an influence on the PLI, would be material and it would be necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP"." 17. The above dictum was followed and reiterated in Avenue Asia Advisors Pvt. Ltd. v. Dy CIT (2017) 398 ITR 320 (Del) where this Court, inter alia, observed that "though in the TNMM method there is sufficient tolerance, mere broad functionality is by itself insufficient." 18. On the aspect of exclusion of comparables that have a high economic upscale viz., Infosys, TCS and Wipro, particular reference may be made to the decision of this Court in PCIT v. BC Management Services Pvt. Ltd. (supra) where a particular reference was made to TCS E-serve as under: "13. ...The third comparable that the AO/TPO excluded is TCS E-serve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value: that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore that this Court has consistently upheld decisions of the ITAT excluding both these very comparables. The ITAT itself appears to have taken a consistent view in a large number of cases excluding these two comparables and its decisions have been upheld by this Court. Illustratively reference may be made to the decision of the Tribunal in Vertex Customer Services India Private Limited v. DCIT (2017) 88 Taxmann.Com 286 (DelTri), Stryker Global Technology Centre Private Limited v. DCIT (2017) 87 Taxmann.com 43 (Del-Tri), Samsung Heavy Industries Private Limited v. DCIT (2017) 84 Taxmann.com 154 (Del-Tri) and Equant Solutions India Private Limited v. DCIT (2016) 66 Taxmann.com 192 (Delhi-Tribunal). 24. All of these decisions pertained to AY 2010-2011. What weighed invariably is the fact that both companies had huge turnovers when compared to the tested entity. Both entities had close connection of the Tata Group of Companies and TCS E-Serve International had given a huge amount to TCS towards brand equity. Further there was no segmental bifurcation between the transaction processing and technical services. The assets employed by TCS E-Serve along with huge intangibles in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the domain of "assets" and this also would make both these companies as unsuitable comparables. 28. The Director's report of TCS E-Serve Limited bears out the contention of the Assessee that both entities have been leveraging TCSs scale and large client base to increase their business in a significant way. The submission that the two comparables offer an illustration of "an identical transaction being conducted in an uncontrolled manner" overlooks the effect of the Tata brand on the performance of the impugned comparables. The question was not merely whether the margins earned by the Tata group in providing captive service to the Citi entities were at arm's length. The question was whether they offered a reliable basis to re-calibrate the PLI of the Assessee whose scale of operations was of a much lower order than the two impugned comparables. The mere fact that the transactions were identical was not, in terms of the law explained in the above decisions, either a sole or a reliable yardstick to determine the apposite choice of comparables. 29. For all of the aforementioned reasons, the Court finds merit in the contention of the Assessee that both the impugned comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X
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