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TMI Blog2019 (7) TMI 1663X X X X Extracts X X X X X X X X Extracts X X X X ..... t of each comparable, certain extraordinary events had occurred during the previous periods which distorted the profitability thereby increasing the margin, cannot be characterized as unreasonable. Rejection of comparable not on the ground of functional dissimilarity, but only because of a different accounting period - As gone through the financials of this CG Vak Software the income from software development product and services is separately mentioned and was also at page 26, the segment revenue and segment results are also provided. In these circumstances, we are of the considered opinion that in the absence of any finding that this company is functionally dissimilar, ld. TPO should have considered these figures to identify whether CG Vak Software is a suitable comparable with the assessee. We, therefore, direct ld. TPO to consider this entity for benchmarking the international transaction. M/s Informed Technologies Ltd. and M/s Micro genetics Systems Ltd. Ld. TPO rejected the same on the ground that both the Companies sales are below 5 Crores - As relying on case of Chris Capital [ 2015 (4) TMI 949 - DELHI HIGH COURT] we hold that so long as a company is functionally similar to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avel related services (Charge Cards, Credit Cards, Traveler's Cheques and Travel Agency Services). During FY 2007-08, the international banking business of American Express Group was sold off. American Express group is involved in strategic decision making and evolving standardized policies and procedures to run the business. It exercises management control and oversight. It also manages the marketing and corporate governance initiatives and integrates it with the overall business objectives. Assessee is compensated for services rendered with a fee that is equivalent to operating expenses plus 20% of the mark up. During the Financial Year 2009-10, the value of the international transaction i.e. export of data processing and back office support undertaken by the assessee was ₹ 714,56,74,755/-. 3. For the AY 2010-11, the assessee filed the return of income on 1.10.2010 declaring an income of ₹ 2,42,82,74,285/- and since the international transaction undertaken by the assessee with the Associate Enterprises was to the tune of more than ₹ 15 crores, in accordance with the provision of Section 92CA of the Act, the international transaction of the assessee with the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing in case of R. Systems International Ltd. and turnover filter in respect of the other three companies. It has, therefore, become necessary for us to look into the functions performed and risks assumed as incorporated by them in their TP Report to be found from page nos.365 of the paper book: "Functions Performed 4.02.2.1 Functions Performed by American Express Group American Express Group is engaged in the business of providing travel related services (charge cards, credit cards, traveler's cheques and travel agency services). During FY 2007-08, the international banking business of American Express Group was sold off. American Express Group is involved in strategic decision making and evolving standardized policies and procedures to run the business. It exercises management control and oversight. It also manages the marketing and corporate governance initiatives and integrates it with the overall business objectives. 4.02.2.2 Functions Performed by AEIPL AEIPL is a captive contract IT enabled service provider catering to the needs of the Group. As per the contractual arrangement that AEIPL has with its AEs for the provision of such support, the resultant output ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsformation and conversion of raw data) as per requirements of its customers to generate customized output. c) Output The Company's output includes the following items processed and prepared as per the customers' specifications: Ready to use business reports and computations; Financial statements such as balance sheets, profit and loss accounts, ledgers, trial balances, accounts payable analysis, accounts receivable analysis, and fixed assets registers; Payroll processing and reports; Account reconciliation reports; Payment instructions for payment to vendors; Card transaction process outputs; Travel business transaction reports; and Other MIS reports per customers' specific requirements. Further, AEIPL also provides call centre services to Group Companies, which involves answering incoming American Express card member calls for queries related to card member transactions. These queries include, inter alia, balance enquiry, product feature queries, change in personal information, etc. 4.02.1 Risks Assumed The risk profile of AEIPL as compared to American Express Group for the above mentioned international transaction is tabulated below: RISK CATEGOR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta processing and back office support is rendered within the American Express Group, and the inter company prices are typically determined based on arm's length principle. Thus, price' risk associated with intercompany prices charged in respect of such support would depend upon the nature of arrangement/ agreement between Group Companies and would lie with . Group Foreign Currency Risk: The risk arises from any adverse revaluation of assets and liabilities due to fluctuation in exchange rates, which would eventually have a negative impact on the profitability of the enterprise. AEIPL does not bear this risk since it incurs expenses in local currency and also invoices its customers in local currency. AEs have an exposure to this risk. Capacity Utilizationrisk: This risk arises on account of underutilization of manufacturing/service facility/personnel. AEIPL is not exposed to this risk as it is remunerated by Group Companies on a cost plus basis, irrespective of whether the employees /systems are being fully utilized or not. The AEs bear the excess cost associated with unutilized capacity as it compensates AEIPL on a full cost-plus basis. Re-work risk: This is the risk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in this matter relates to the service of export of data processing and back office support undertaken by the assessee to the tune of ₹ 714,56,74,755/-. 7. For benchmarking this service characterized by the assessee as a back office support service operating in a limited risk environment i.e. ITeS segment, the assessee adopted TNMM method as the most appropriate method with PLI as Operating Profit/Operating Cost with a PLI arrived at 17.98%. 8. Assessee initially selected ten comparables by rejecting six in the matrix. Out of 10 comparables selected by the assessee, ld. TPO rejected six including R. Systems International Ltd. (Segmental); CG Vak Software Exports ltd.; Informed Technologies Ltd.; Micro genetics Systems Ltd. So also ld. TPO selected six comparables which were rejected by the assessee, namely, eClerx services Ltd., Infosys BPO Ltd., Accentia Technologies Ltd., TCS e-serve Ltd. and TCS e-serve International Ltd. Therefore, it is clear now that the assessee is disputing the inclusion of eClerx services Ltd., Infosys BPO Ltd., Accentia Technologies Ltd., TCS e-serve Ltd. and TCS e-serve International Ltd., which according to the assessee, rendered high end te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcing, but not Knowledge Process Outsourcing. When the facts permeating all through the years are same, we do not find any reason to take a different view. We, therefore, hold that the services rendered by the assessee are only back office operations falling in the category of ITES and not KPO. 13. Now coming to the first comparable eClerx Services Ltd., learned AR submitted that on the ground of functional dissimilarity in the assessee's own case for AY 2007-08 and 2009-10, a coordinate bench of this Tribunal rejected this company as a comparable in ITA No.295/Del/2012 and ITA No.1973/Del/2014 respectively. He further submitted that learned DRP rejected this comparable in assessee's own case for AY 2011-12 vide order dated 13.11.2015. 14. We have gone through the orders of the authorities below and also the orders cited by the assessee. Assessee challenging the inclusion of this company on the ground of functional dissimilarity, abnormal fluctuations in revenue and profits besides unreliability of the data. Learned TPO rejected the same. 15. Learned DRP held that several services provided by the assessee are also of similar nature as could be observed from the profile of this e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s first KPOs to be appraised for and rated at maturity level 3 of people Capability Maturity Model (PCMM)"(Annual report 2010-11 page 31). One of the key issues when analysing transfer prices is to refine the comparability analysis after matching the functional profile carefully. Further margins are earned as a result of functions performed, assets utilized and risks borne (FAR) wherein there lie considerable differences particularly in the outsourcing model it employs as laid down in jurisdictional HC decision in Rampgreen Solutions (P) Ltd V CIT ITA 102/2015, order dated 10 08-2015 which has clearly stated that where the controlled transactions are clearly in the nature of lowerend ITeS for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold holding as under, "42 ..... The DRP held that TNMM allows flexibility and tolerance in selection of comparables, as functional dissimilarities are subsumed at net margin levels, as compared to Resale Price Method or Comparable Uncontrolled Price Method and, therefore, the fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the risks assumed; and (h) the difference in services/products offered has no material bearing on the profitability Thus on the basis of functional differences from taxpayer and it cannot serve as a valid comparable for the ITeS segment in the case of taxpayer. TPO is thus directed to exclude eClerx from the list of comparables 17. We have gone through the annual report of this company incorporated from page 649 of the Paper Book and found that this company is into multifarious activities and it is a knowledge process outsourcing company providing data analytics, data management and process improvement solutions to global enterprise clients. Further, eClerx supports its clients through two business units - Capital Markets and Sales and Marketing Support. The Revenue recognition policy of this company says that revenue from data analytics services and process solution comprises from both time/unit price and fixed fee based service contracts. Revenue from time/unit price based contracts is recognized on completion of the related services and is billed in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfosys BPO limited commanding huge brand value. 21. In respect of M/s Accentia Technologies Ltd he submitted that this company is also into diversified services which includes HRCM (using SaaS model), also into KPO and LPO. With reference to the annual report of this company, Ld. AR submitted that this entity owns significant intangible assets at 57% and undertaken extraordinary activities (amalgamation) during the year. Ld. AR submitted that the extension technologies Ltd also falls in the category of KPO providing high end services and, therefore, functionally also it is a dissimilar to the assessee. 22. Ld. AR further submitted that both M/s TCS E-Serve Limited and M/s TCS E-Serve International Ltd are not good comparables to the assessee because of the exceptional year of operation pursuant to the acquisition by Tata group. Besides this, these two companies are providing different services including the transaction processing, voice based services and technical services. He also submitted that no segmental information is available in respect of these twocompanies. He brought to our notice the findings of a coordinate Bench of this Tribunal in the case of Ameriprise India Priv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es which cannot be characterized as back office support services. It was further observed that there is no segmental bifurcation between the transaction processing and technical services. 27. Apart from this, though the Revenue preferred appeal to the Hon'ble High Court against the findings of the Tribunal in respect of M/s AccentiaTechnologies, M/s iGate global consultants Ltd and M/s Infosys BPO Ltd. in the case of Ameriprise India P. Ltd. (supra), Revenue did not seem to have preferred any appeal against the findings of the Tribunal in respect of M/s TCS E-Serve limited. In the circumstances, we find strength in the argument of the Ld. AR that in view of the judgment of the Hon'ble Apex Court in the case of Berger Paints India Ltd. Vs. CIT [2004] 266 ITR 99 (SC) wherein the Hon'ble Apex Court held that if the revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one assessee, then it is not open to the revenue to challenge its correctness in the case of other assessee, without just cause, it is not open for the Revenue to challenge the contention of the assessee that Tata E-Serve limited is not a good comparable. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fit case to direct the ld. AO to consider the quarterly results and work out the proportionate profit margin for this purpose, we remand the matter to the file of the ld. TPO/AO for compliance of our direction. 32. In respect of CG Vak Software, observations of the ld. TPO for rejecting this company is that under ITeS segment, sale was only just ₹ 82.78 lakhs and on that ground this company was rejected. Assessee contended that inappropriateness of the turnover filter has not been considered by the ld. TPO. Ld. DRP on a perusal of the financials found that CG Vak Software is mainly involved into software development and earns major portion of its revenue from the same and the revenue from ITeS/BPO is only 15% i.e. ₹ 83 lakhs and, therefore, it fails the turnover filter. 33. Assessee assails the application of turnover filter so long as functional dissimilarity is not attributable to this company and submitted that a similar contention of the revenue was considered by the Tribunal in assessee's own case for the AY 2009-10 wherein the Tribunal by placing reliance on Chrys Capital Investment Advisors (I) P. Ltd. vs ACIT, ITA No.6504/Del/2013 reached a conclusion that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of the Hon'ble Delhi High Court in ITA No.765/2016 in the case of Kusum Healthcare P. Ltd. 38. In Ground No.16, the grievance of the assessee is that ld. TPO/AO has erroneously interchanged operating profit/operating cost margin of the companies, namely, eClerx Services Ltd. and Omega Healthcare Management Services P. Ltd. and it requires rectification. Since it is not a part of adjudication but only a mistake that had crept in the order, we are of the opinion that the same could be rectified by the ld. TPO/AO. We, therefore, direct the same. 39. Ground No.20 is in respect of the claim for deduction under 10A of the Act in respect of AEGSC(STP) Unit set up by the assessee during the financial year 2002-03 on the ground that the STP unit was set up after splitting up its existing business of FCE(EOU) Unit. On this aspect, it is submitted that in respect of Asstt. Year 2009-10, the Tribunal considered this aspect at length and directed the AO to allow deduction u/s 10A of the Act. 40. Paragraph Nos. 33 & 34 of the order dated 3.8.2018 in ITA No.1973/Del/2014 for Asstt. Year 2009-10 are to the effect that,- "33. The next issue raised by the assessee relates to claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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