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TMI Blog2017 (12) TMI 1731X X X X Extracts X X X X X X X X Extracts X X X X ..... set of comparables for benchmarking the international transactions qua ITES. HCL Comnet Ltd. (Seg.) has been ordered to be excluded by the coordinate Bench of the Tribunal in ICC India Pvt. Ltd. [ 2016 (6) TMI 1309 - ITAT DELHI] on account of functional dissimilarity by following Rampgreen Solutions (P) Ltd. [ 2015 (8) TMI 931 - DELHI HIGH COURT] . HCL Comnet is also operating 24x7 in three shifts whereas the taxpayer is operating with single shift only. Moreover, HCL Comnet is a risk bearing company whereas the taxpayer is a captive service provider to its AE. So, there is stark functional dissimilarity. HCL Comnet is having huge asset s base of ₹ 188.90 crores and ITES revenue of ₹ 260 crores as against the total turnover of ₹ 5 crores of the taxpayer. So, in view of the matter, we order to exclude HCL Comnet from the final set of comparables Vishal Information Technologies Ltd.- different business model as it outsourced its work to external vendors to save the cost on employees which is apparent form the figure of employee cost vis - vis sales detailed in the preceding paras. So, we order to exclude Vishal from the final set of comparables for benchmark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so providing web design services, domain management services and email management services which makes it functionally dissimilar to the taxpayer. The contention of the ld. DR that this argument has not been addressed before the TPO is not sustainable because the TPO in its analysis has to compare functional profile of comparable company with the taxpayer at the very outset before going into further detail. Iservice is also not a suitable comparable for benchmarking the international transaction. Non granting of risk adjustment - TPO is directed to decide the issue afresh after considering the contentions raised by the taxpayer in the light of the Intellinet Technologies India Pvt. Ltd. [ 2012 (6) TMI 237 - ITAT BANGALORE] and Motorola Solutions [ 2014 (10) TMI 358 - ITAT DELHI] .So, the issue of risk adjustment is decided in favour of the taxpayer for statistical purposes. - ITA No.41/Del./2013, ITA No.1191/Del./2013 - - - Dated:- 15-12-2017 - SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For the Appellant : Ms. Vandana Bhandare, Advocate For the Respondent : Shri Neeraj Kumar, Senior DR ORDER PER KULDIP SINGH, JUDICIAL ME ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged under the Act and in doing so, grossly erred in: 3.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the instant case. 3.2. not appreciating that the assessee had prepared the detailed contemporaneous Transfer Pricing documentation bona fide and in compliance with the Act and Income Tax Rules 1962 ( the Rules ). 3.3. not appreciating the fact that the assessee had selected uncontrolled comparable companies based on a detailed Functional Asset and Risk ('FAR') analysis following a methodical benchmarking process thereby rejecting the comparable company set/ data which had been provided by the assessee for benchmarking its transactions of provision of IT enabled services, without giving reasons that were cogent or backed by any sound evidence. 3.4. disregarding multiple year/ prior years' data as used by the assessee in its Transfer Pricing ('TP') documentation report and holding that current year (i.e. FY 2006-07) data for comparable companies should be used despite the fact that the same was not available to the assessee at the time of preparing its TP documentation, and in interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of international transactions of the assessee in the past years have been accepted by the department as being at Arms' Length; 3.16. Computing the profit margins of the comparable companies by taking arbitrary decisions in respect of inclusion / exclusion of certain items of cost/ revenue and in total disregard to established judicial precedents; 3.17. disregarding judicial pronouncements in India in making the TP adjustment; and 3.18. disregarding the prevalent law by denying the benefit of (+ / -) 5% mentioned in the proviso to section 92C(2) of the Act to the assessee. 4. On the facts and in the circumstances of the case and in law, penalty cannot be initiated under section 271(1)(c) of the Act. 5. On the facts and in the circumstances of the case and in law, the Ld. AO has erred by charging interest u/s 234 Band 234 C of the Act. 4. Briefly stated the facts necessary for adjudication of the controversy at hand are : Everest Advisory India Private Limited, the taxpayer was incorporated as a captive unit of Everest Group of companies to provide advisory and Information Technology Enabled Services (ITES). It also provides ITES research and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58,25,317 9. The taxpayer carried the matter before the ld. CIT (A) who has only removed three companies viz., Mold Tek Technologies Ltd., Triton Corp. Ltd. and Maple Solutions Ltd.. Feeling aggrieved, the taxpayer as well as the Revenue has come up before the Tribunal by way of filing the present appeals. 10. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 11. The taxpayer by moving a separate application sought to raise additional grounds in this appeal to the following effect on the ground that these are legal grounds as the necessary facts are already on record :- 1. That on facts and circumstances of the case the TPO erred in wrong computation of the NCP margin of the assessee, by not including Miscellaneous Income of ₹ 4,09,843/- as operating income for the purpose of computing OP/OC. 2. That on facts and circumstances of the case and in law, the AO CIT (A) grossly erred in not giving full credit of pre-paid taxes amounting to ₹ 81,35,018/- paid by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to decide as to whether the taxpayer is a low end Business Processing Office (BPO) or Knowledge Processing Office (KPO). 17. Undisputedly, neither TPO nor the taxpayer in their TP study has analyzed the verticals of the profile of comparables. It is also not in dispute that whatever search has been carried out by the taxpayer has been rejected by the ld. TPO and he has conducted fresh search himself. It is also not in dispute that TPO analyzed both the agreements entered into between taxpayer and AE, available at pages 75 and 85 of the paper book. TPO while conducting its search applied section 10B(4). 18. The ld. DR for the Revenue to support his argument that the taxpayer is not a low end BPO rather KPO referred to Master Intellectual Property Agreement (MIP Agreement) entered into between the taxpayer and its AE, available at pages 75 to 89 of the paper book. For ready perusal, operative part of MIP Agreement is reproduced as under :- MASTER INTELLECTUAL PROPERTY AGREEMENT This MASTER INTELLECTUAL PROPERTY AGREEMENT (this Master IP Agreement'), is entered into, between Everest Global Inc., a Texas corporation ( IP Owner ) which is the successor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be paid by IP Owner in U.S. Dollars. 4. USE OF INTELLECTUAL PROPERTY a. Use. In consideration of the payments stated below, during the term of this Master IP Agreement, IP Owner agrees to make the Intellectual Property freely available for the commercial use of IP Developer. Without limiting the foregoing, IP Owner agrees that it will: i. Make available to IP Developer all Everest trademarks and trade names. ii. Make available to IP Developer all of its written or electronic marketing materials, including but not limited to all websites and pages, webinars, brochures, and other client communication materials iii. Provide to IP Developer all software used in assisting clients with use and implementation of its Intellectual Property. iv. Allow IP Developer to use any and all factual information, examples, models, samples, referrals. studies, to market Intellectual Property and related services or implement strategies relating to Intellectual Property. v. Allow IP Developer access to its proprietary databases ( Database Access ) b. Fees. In consideration for the agreements by IP Owner stated above, IP Developer shall pay IP Owner fees ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15% of such cost of development. As per para 7e. of the MIP Agreement, AE also agreed to indemnify, defend and hold harmless the IP developer against any claims that any intellectual property, it provides to them violates any intellectual rights of any third party. 22. Furthermore, when we examine Attachment B of MIP Agreement, it is categorically mentioned that intellectual property includes research and implementation materials; all research, white papers, manuals or other materials, whether print or electronic, relating to the Intellectual Property or to the strategies or services of IP owner; and software (any software created or owned by IP Owner), in addition to the definition mentioned in para 2g of the Agreement, which shows that all the materials necessary for developing intellectual property including intellectual property itself are owned by AE. 23. The ld. DR for the Revenue further contended that since AE is in the business of advisory services and is entitled to sell in the market, it cannot be a low end BPO or KPO. However, when the ld. TPO has not disputed international transactions qua advisory services which is admittedly a KPO rather made ALP adjustment qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making conscious selection as to the quality of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions 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 service provider, an entity rendering KPO 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 Pricing Analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 27. Hon ble High Court has categorically he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has gone into detailed functional profile of all the comparables by introducing additional filters in his TP study. The contention of the ld. DR that the taxpayer has challenged only low margin comparable cannot be accepted because the issue of comparability is factual one which requires to be determined on case to case basis by going into their functional profile. 31. Furthermore, when we examine TP study conducted by TPO by conducting Search I and Search II, available at pages 180, 181 182 of the paper book, it has accepted the filters applied by the taxpayer for comparability which are reproduced as under for ready reference :- Of the 644 companies identified for qualitative analysis, 631 companies were rejected for reasons including the following : Companies undertaking different functions compared to Everest India; Companies having persistent operating losses; Companies having abnormal variation in financials, and; Companies engaged in significant related party transactions. 32. So, when the TPO has strictly compared the company strictly in the lights of their functions vis- -vis the taxpayer by accepting segmental Profit Loss account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO as well as taxpayer have taken the entire verticals of ITES as comparables and now if strict functional comparability is insisted, then Flextronics Software is also to be excluded; that any comparable can be excluded on the ground of extra ordinary events only if it is demonstrated by the taxpayer that it has impacted net profitability and relied upon the case of the coordinate Bench of the Tribunal in M/s. Virage Logic International India Brand vs. JCTI (2016) 72 taxmann.com 11 (Delhi). 38. As discussed in the preceding paras, comparability for the purposes of benchmarking the international transactions is to be examined on the basis of contents and value of services rendered by the taxpayer to its AE vis- -vis comparables and not on the ground that if Accentia is excluded then some other comparable is also liable to be excluded. So far as functional profile of Accentia is concerned, it is into business of medical transcription, medical billing, medical coding, health care receivables management which includes development of software products. As per annual report of Accentia, available at page 212 to 225 of the paper book, to consolidate the company, it has successfully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparability and held that company cannot be considered as comparable because of financial results distorted due to mergers and demergers etc. 41. Coordinate Bench further ordered to exclude Accentia in ICC India Pvt. Ltd. vs. DCIT in ITA No.25/Del/2012, available at page 348 of the Case Law Compilation Vol.2, by following Ciena India (P.) Ltd. and Taluna India Pvt. Ltd. (supra) ordered to exclude Accentia as comparable vis- -vis ICC India, both into providing low end BPO services on ground of merger and demerger. 42. So in view of what has been discussed above, when we see the financial results of Accentia discussed in the preceding paras, extra ordinary growth, extra ordinary operating cost towards overseas business expenses and substantial market cost towards overseas business expenses, it leads to the irresistible conclusion that growth of 3197% in profitability of Accentia in comparison to its earlier year itself is an eye opener to make it incomparable with the taxpayer. So, we order to exclude Accentia from the final list of comparables. ECLERX SERVICES LTD. (ECLERX) 43. The taxpayer sought to exclude Eclerx from the final set of comparables for benchmark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the tune of 13% of the gross total assets. 48. So, when we compare the profile of the Eclerx vis- -vis the taxpayer which is a captive unit of Everest Group of companies providing ITES and also providing ITES research and analysis on the issue of outsourcing market and advisory services to support client engagement owned by the AE as has been discussed in detail in the preceding paras and as such, is not a valid comparable. 49. Moreover, Eclerx has been ordered to be excluded by the Hon ble High Court of Delhi in Rampgreen Solutions (P) Ltd. (supra) and the coordinate Bench of the Tribunal in Macquarie Global Services (P.) Ltd vs. DCIT (2015) 55 taxmann.com 259 (Delhi Trib.) on the ground that, Eclerx is engaged in data analytics, data processing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of functional dissimilarity by following Rampgreen Solutions (P) Ltd. (supra). HCL Comnet is also operating 24x7 in three shifts whereas the taxpayer is operating with single shift only. Moreover, HCL Comnet is a risk bearing company whereas the taxpayer is a captive service provider to its AE. So, there is stark functional dissimilarity. HCL Comnet is having huge asset s base of ₹ 188.90 crores and ITES revenue of ₹ 260 crores as against the total turnover of ₹ 5 crores of the taxpayer. 54. So, in view of the matter, we order to exclude HCL Comnet from the final set of comparables for benchmarking the international transactions. VISHAL INFORMATION TECHNOLOGIES LTD. (VISHAL) 55. The taxpayer sought to exclude Vishal on ground of functional dissimilarity having huge assets and company is operating on outsourcing business model having low asset base with employee cost of 2% of the turnover vis- -vis the taxpayer who has employee cost/turnover ratio of 36%. 56. The ld. DR for the Revenue contended that in case Vishal is to be excluded on ground of outsourcing its work then Cosmic Global and Spanco are also liable to excluded. However, to counter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .) Ltd. vs. DCIT (2015) 56 taxmann.com 417 (Delhi). Ld. DR further contended that since the TPO did not have the opportunity to examine the argument now addressed before the Tribunal, it should be restored back for fresh decision. However, we are of the considered view that when the entire annual reports relied upon by the taxpayer to examine the business profile of Wipro was there and comparability issue is to be decided in view of the settled principle of law though not argued specifically, the matter is not liable to be restored. 60. Comparability of the Wipro has been examined by the Hon ble Delhi High Court and coordinate Bench of the Tribunal in cases of CIT vs. Agnity India Technologies Pvt. Ltd. in ITA 1204 / 2011 dated 10.07.2013, Calibrated Healthcare Systems India Pvt. Ltd. vs. ACIT ITA No.5271/Del/2012, New River Software Services (P.) Ltd. vs. ACIT ITA No.451/Del/2013 and United Health Group Information Services (P.) Ltd. vs. ACIT ITA No.6312/Del/2012 and ordered to be excluded by taking into account its functional profile, risk profile, nature of services, ownership of IP rates, expenditure on R D etc. 61. When we compare the aforesaid business profile o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is a small scale captive service provider to its AE for ITES services and does not own any intangibles or brand value and is working on cost plus basis. 66. The comparability of Infosys BPO has been examined by the coordinate Bench of the Tribunal in Rampgreen Solutions (P) Ltd., Agnity India Technologies Pvt. Ltd., Calibrated Healthcare Systems India Pvt. Ltd., New River Software Services (P.) Ltd. and United Health Group Information Services (P.) Ltd. (supra) and ordered to be excluded by following Agnity India Technologies Ltd. (supra) rendered by Hon ble Delhi High Court. So, in view of the matter, we order to exclude Infosys BPO from the final set of comparables. INFORMED TECHNOLOGIES INDIA PVT. LTD. (INFORMED) 67. Initially, the ld. AR for the taxpayer sought to exclude Informed from the final list of comparables for benchmarking the international transaction on ground of sale/employee cost filter but later on candidly admitted that functionality of Informed is similar to the taxpayer so far as ITES are concerned. However, after arguing for sometimes, the ld. AR for the taxpayer preferred not to press her arguments for exclusion of Informed. So, we decide this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto high end diversifying services vis- -vis the taxpayer who is into divergent high end services like web hosting, email services, spam filtering, domain names and DNS hosting. web hosting, email services, spam filtering, domain names and DNS hosting is also providing web design services, domain management services and email management services which makes it functionally dissimilar to the taxpayer. The contention of the ld. DR that this argument has not been addressed before the TPO is not sustainable because the TPO in its analysis has to compare functional profile of comparable company with the taxpayer at the very outset before going into further detail. So, we are of the considered view that Iservice is also not a suitable comparable for benchmarking the international transaction. RISK ADJUSTMENT 75. The ld. AR for the taxpayer contended that the TPO has not granted risk adjustment despite the fact that the taxpayer gets assured business from its AE and is remunerated on cost plus basis and relied upon the case of Motorola Solutions vs. ACIT ITA No.5637/Del/2011. 76. The coordinate Bench of the Tribunal in the case of M/s. Intellinet Technologies India Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of risk adjustment to be made in accordance with law. This ground is accordingly, allowed for statistical purposes. 77. Following the decision rendered by the coordinate Bench of the Tribunal, the TPO is directed to decide the issue afresh after considering the contentions raised by the taxpayer in the light of the Intellinet Technologies India Pvt. Ltd. and Motorola Solutions (supra). So, the issue of risk adjustment is decided in favour of the taxpayer for statistical purposes. REVENUE S APPEAL - ITA NO.41/DEL/2013 78. The Revenue challenged the impugned order passed by ld. CIT (A) deleting the addition of ₹ 58,25,317/- made on account of arm s length price by excluding Moldtek Technologies Ltd., Triton Corp and Maple Esolutions from the final list of comparables. We would examine suitability of aforesaid comparables sought to be included for benchmarking the international transaction one by one as under. MOLDTEK TECHNOLOGIES LTD. 79. The ld. DR for the Revenue contended that Moldtek Technologies Ltd. is a suitable comparable and the reasons given by the ld. CIT (A) that indulging in evasion of tax by overstating profit in the 100% exempt ITES D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m ₹ 375 lakhs in 2005-06 to ₹ 1140 lakhs in 2006-07. Moldtek Technologies Ltd. has also achieved a profit of ₹ 830.71 lakhs as against ₹ 394.97 lakhs in the previous year registering a growth of 134%. IT/KPO Division rose sharply from ₹ 1.60 crores to ₹ 5.75 crores registering a growth of 259.4%. It is also categorically referred in Director s report, available at page 246 of the paper book, that the company is planning to pursue further acquisition opportunities to maintain a better average rate of growth for structural engineering services. So, we are of the considered view that the factum of merger and acquisitions also make Moldtek Technologies Ltd. as unsuitable comparable vis- vis the taxpayer and has been rightly excluded by the ld. CIT (A). TRITON CORP AND MAPLE ESOLUTIONS 83. The Revenue challenged the exclusion of Triton Corp. and Maple Esolutions by the ld. CIT (A) on the ground that both the comparables are part and parcel of Rastogi Group which is under serious indictment and relied upon the decision rendered by the coordinate Bench of the Tribunal in CRM Services India Pvt. Ltd. vs. CIT. The ld. DR for the Revenue opposed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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