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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 ..... rice." 3. The Appellant, M/s. Everest Business Advisory India Pvt. Ltd. (hereinafter referred to as 'the taxpayer') by filing the present appeal being ITA No.1191/Del/2013 sought to set aside the impugned order dated 30.10.2012, passed by the CIT (Appeals)- XX, New Delhi qua the assessment year 2007-08 on the grounds inter alia that :- "That on the facts and circumstances of the case, and in law; 1. The Ld. CIT-A & AO erred in rejecting the benchmarking approach adopted by the appellant in the transfer pricing study and thereby making a transfer pricing adjustment of Rs. 42,17,582/- to the income of the appellant by holding that the international transaction of "Export of services" of the appellant does not satisfy the arm's length principle envisaged under the Income tax Act, 1961 (the Act). 2. The Ld. CIT-A has erred both in facts and in law in confirming the action of the Ld. Assessing Officer (" AO") as the reference made by the Ld. AO suffers from jurisdictional error. The Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. Transfer P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treating the assessee as a profit center and not considering the fact that the assessee is operating as a cost plus unit and thereby characterizing the appellant as a full risk bearing entrepreneur. 3.10. by including the segments of the companies despite knowing that margin calculations of such segments are subjective. 3.11. by using the power of under section 133(6) of the Income Tax Act,1961 for obtaining the information 3.12. violating the principles of natural justice by not providing the assessee a reasonable opportunity of being heard while rejecting / including certain companies; 3.13. denying a risk adjustment to the operating profit margins of the comparables, and in doing so have grossly erred in: 3.13.1. stating that detailed working or formula applied for calculation of risk adjustment has not been provided by the assessee while also failing to clarify what would constitute the I detailed working' for the purpose of undertaking a risk adjustment 3.13.2. reaching a conclusion that risk adjustment is required but in the absence of the formula cannot be provided for 3.14. violating the principles of natural justice by not sharing with the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage profit margin of 12.06% on cost as against taxpayer's margin of 15% on operating cost and found its international transaction at arm's length. 7. TPO, after accepting all the filters or quantitative criteria applied by the taxpayer for benchmarking the international transaction applied additional filters viz. using financial information for FY 2006-07 and to exclude the companies having abnormal financials only after defining "abnormal variations", introduced some other filters like rejecting companies having turnover less than Rs. 1 crore; companies having ITES revenues of at least 75% of its revenue from ITES; rejecting companies having consistent losses/diminishing revenue filter; rejecting companies having export earnings of more than 25% of revenue etc. for benchmarking the international transaction. 8. Finally, TPO selected 25 comparables having average of 28.37% (30.07% less working capital adjustment of 1.70%) and consequently determined the arm's length price as under :- Arm's Length Price Rs. 5,59,30,880 Price shown in the international transactions Rs. 5,01,05,563 Shortfall being adjustment u/s 92CA Rs. 58,25,317 9. The taxpayer carried the matter before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before TPO due to inadvertence on the part of the taxpayer, the perversity of facts certainly turned to be a question of law. So, when question of law arises from factual perversity as in the case at hand, we are of the considered view that additional grounds are required to be allowed as it will go to the roots of the case. Consequently, application for additional evidence moved by the taxpayer is allowed. 15. So far as international transaction qua provision of advisory services to the tune of Rs. 2,70,97,470/- is concerned, TPO has accepted the profitability of this segment. However, TPO has disputed the back office research support services and has proposed the TP adjustment of Rs. 58,25,317/-. The TPO has accepted the TNMM as the most appropriate method applied by the taxpayer with operating profit / operating cost as Profit Level Indicator (PLI). TPO also accepted billing method of AE as cost plus 15%. 16. Ld. DR for the Revenue contended that before examining the exclusion or inclusion of the comparables for benchmarking the international transaction qua ITES, it is required to decide as to whether the taxpayer is a low end Business Processing Office (BPO) or Knowledge Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logies, and trade secrets relating to the business of the IP Owner or its Affiliates, including, but not limited to, the items listed in Attachment B hereto all whether or not patented or copyrighted in any country. 3. DEVELOPMENT OF INTELLECTUAL PROPERTY. a. Development, IP Developer agrees that it will employ all personnel and make all efforts necessary for the continued development, maintenance expansion and/or enhancement of IP Owner's Intellectual Property in a timely manner, in accordance with IP Owner's specifications and with industry standards. b. Costs, in consideration of the services stated in subsection "a" above, IP Owner agrees that it will pay to IP Developer all Costs of Development incurred by IP Developer for the development, maintenance, expansion and/or enhancement of Intellectual Property by IP Developer, together with a profit margin, or "uplift", of 15% (FIFTEEN PERCENT) of such Costs of Development. Attachment C shows the allocation methodology for indirect cost. c. Payment. Costs of Development shall 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt A. Ld. DR contended that all these facts go to prove that the taxpayer is not a low end BPO. 21. However, when we examine MIP Agreement in totality, as contended by ld. AR for the taxpayer, it has become apparently clear that no doubt, the taxpayer has agreed to develop intellectual property for its AE with its own work force for which the entire know how has been undisputedly provided by the AE to the taxpayer including using the intellectual property owned by the AE for developing further intellectual property. Para 3a. is categoric enough that taxpayer will employ all personnel and make all efforts necessary for continued development, maintenance, expansion and/or enhancement of IP Owner's Intellectual Property in a timely manner in accordance with the IP owner's specifications and with industry standards. MIP Agreement is also categoric enough that AE shall pay to the taxpayer cost of development incurred by the IP developer with a profit margin or uplift of 15%, or with a profit margin or uplift of 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 intelle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34 of Rampgreen Solutions (P.) Ltd. (supra), available at page 300 of the case laws compilation, categorically defines BPO and KPO which is reproduced as under for ready perusal :- "34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPa' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is' used to indicate an 1TeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the 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 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... client. 7. Everest India is being remunerated at cost plus 15% for the functions of content development of reports being performed. 8. Everest India does not own any intangibles." 29. Hon'ble High Court on the basis of aforesaid categorization of KPO and BPO excluded Vishal and Eclerx which are into KPO in Rampgreen Solutions (P.) Ltd. (supra) case. 30. Hon'ble High Court in Rampgreen Solutions (P.) Ltd. (supra) has also held that the comparable transactions / entities must be selected on the basis of similarity with the controlled transaction / entity. Comparability of controlled and uncontrolled transaction has to be judged inter alia with reference to comparability factor as indicated under Rule 10B (2) of the Income-tax Rules, 1962. So, function and actual services rendered by the taxpayer vis-à-vis comparables are the relevant factors for benchmarking the international transaction and not that the taxpayer / comparables are KPO or BPO. Moreover, TPO 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction qua ITES (Research) one by one as under. ITA NO.1191/DEL/2013 (ASSESSEE'S APPEAL) ACCENTIA TECHNOLOGY LTD (SEGMENT) 36. The ld. AR for the taxpayer sought to exclude Accentia from the final set of comparables for benchmarking the international transaction qua ITES segment on the grounds inter alia that it is functionally dissimilar; that Accentia has undergone merger and acquisitions leading to abnormal growth; that Accentia has more than 60% of the operating cost towards overseas expenses as against nil of the taxpayer; that Accentia incurs substantial marketing expenses to the extent of 28% (Rs. 8.14 crores of Rs. 28.7 crores of the sales against almost nil of the taxpayer) and drew our attention towards relevant documents of the annual report available at pages 212 to 225 of the paper book. 37. However, on the other hand, ld. DR for the Revenue opposing the exclusion of Accentia contended inter alia that when 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 ordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 3197% 116% OP/OC -89.05% 33.34% 44.50% 40. The coordinate Bench of the Tribunal in Taluna India Pvt. Ltd. in ITA No.5645/Del/2011, available at page 183 of the case law compilation and Ciena India (P.) Ltd. vs. DCIT - (2015) 57 taxmann.com 329 (Delhi - Trib.) decided the issue of merger and demerger for the purpose of 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-à-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% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of services having own segmental data for providing numerous such services to its clients. Moreover Eclerx has employed 1500 domain specialized to render services to its clients as against 20 employees of the taxpayer having turnover of Rs. 5 crores only. Moreover, the Eclerx is having huge intangibles to the tune of 13% of the gross total assets. 48. So, when we compare the profile of the Eclerx vis-à-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 mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovider. Moreover, HCL Comnet is having huge employee cost for Rs. 185.28 crores as against total turnover of the taxpayer to the tune of Rs. 5 crores. 53. HCL Comnet has been ordered to be excluded by the coordinate Bench of the Tribunal in ICC India Pvt. Ltd. (supra) on account 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 Rs. 188.90 crores and ITES revenue of Rs. 260 crores as against the total turnover of Rs. 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-&agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT (A) the taxpayer have only argued high turnover and abnormal margin as the reason for its exclusion which cannot be a reason for exclusion as has been held by Hon'ble High Court in Chryscapital Investment Advisors (India) (P.) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal asset base of Rs. 450 crores having employee base of 11226 as against 20 employee of the taxpayer and turnover of Rs. 5 crores only; Infosys BPO is into providing high end services; whereas the taxpayer 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 simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P.) Ltd. (supra) only functional comparability is the hallmark for benchmarking the international transaction. Business profile of Iservice shows that the same is into high end diversifying services vis-à-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us. Therefore, we direct the TPO to consider all the contentions of the assessee and after taking into account all the relevant material decide the percentage 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 Rs. 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 suitab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gone up by 35.17% from Rs. 70.87 crores to Rs. 85.80 crores largely fuelled by growth of 204% in IT (KPO) Division Billings from Rs. 375 lakhs in 2005-06 to Rs. 1140 lakhs in 2006-07. Moldtek Technologies Ltd. has also achieved a profit of Rs. 830.71 lakhs as against Rs. 394.97 lakhs in the previous year registering a growth of 134%. IT/KPO Division rose sharply from Rs. 1.60 crores to Rs. 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-àvis 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 coord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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