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TMI Blog2018 (12) TMI 1852X X X X Extracts X X X X X X X X Extracts X X X X ..... AMP expenses, the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law. Comparable selection - functional dissimilarity - HELD THAT:- The taxpayer during the year under assessment entered into international transactions qua provision of Information Technology Enabled Services (ITES) in the form of provisions of services in the nature of payroll processes, account processes, etc. thus companies functionally dissimilar with that of assessee need to be deselected. X X X X Extracts X X X X X X X X Extracts X X X X ..... 9%, being gross profit margin of the comparable companies, on the alleged excess AMP expenditure incurred by the appellant, while computing the value of compensation to be received by the appellant on account of promotion of 'Timex' brand. Provision of back office support services 4. That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to ₹ 40,66,466 in relation to the transaction of provision of back office support services undertaken by the appellant. 4.1 That the TPO erred on facts and in law in comparing the appellant, providing routine back office support services, with the following functionally different companies for the purpose of benchmarking analysis: i. Accentia Technologies Ltd. ii. Acropetal Technologies Limited(Seg) iii. Eclerx Services Limited iv. ICRA Techno Analytics Limited v. Infosys BPO Ltd vi. TCS E-Serve Ltd 4.2 That the TPO erred on facts and in law in rejecting the following companies with export earnings less than 75% of total income, not appreciating that com parables companies are required to be selected on the basis of their functional profile and not on the basis of locat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dd to or withdraw the above grounds of cross objection." 4. Briefly stated the facts necessary for adjudication of the controversy at hand are : The Timex Group India Ltd., a subsidiary of Timex Group Luxury Watches B.V. is into designing, manufacturing and marketing innovative timepieces and jewellery. Timex Group companies include the Timex Business Unit (Timex, Timex Ironman, Opex, TX, Nautica, Marc Ecko); Timex Group Luxury Watches (Valentino, Salvatore, Ferragamo); Sequel (Guess) and Vertime (Versace, Versus). The Time Group's brand portfolio include global brands like Timex, TX, Versace, Versus, Valentino, Guess, Vincent Berard, Guess Collection, Ferragamo, Ecko, Nautica and Opex. 5. During the year under assessment, the taxpayer entered into international transactions as under :- Nature of transaction Sales Operating Cost (OC) Operating Profit (OP) OP/OC (%) Provision of software development services 2,60,97,175 2,42,59,000 18,38,000 7.58% 6. The taxpayer has incurred Advertisement, Marketing and Promotional (AMP) expenditure during the year under assessment as under :- Particulars Amount in Rs. Advertisement and Sales Promotion Expenditure (Gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it ratio vis-à-vis comparable companies by applying mark-up of 42.19% (being the average GP/cost ratio of comparable company on the alleged excess AMP expenses) made addition of ₹ 27,87,32,906/- on account of AMP expenses which is as under:- Excess AMP (A) 19,60,28,487 Markup (B) @ 42.19% 8,27,04,418 AMP Adjustment [C = A+B] 27,87,32,906 10. The taxpayer during the year under assessment also entered into international transactions of provision of ITES in the nature of pay-roll processing, account processing etc. to the tune of ₹ 2,60,97,175/-. The taxpayer in order to determine the ALP of international transactions applied Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with operating profit/operating cost as PLI and chosen 7 companies as comparables with average OP/OC at 8.75% as against OP/OC of the taxpayer at 7.85% and found its international transactions at arm's length. 11. However, TPO selected 10 comparables with average OP/OC at 24.34% and proposed ALP adjustment of ₹ 40,66,466/- on account of difference in the margin of comparable companies of the taxpayer. 12. The taxpayer carried the matter before the ld. DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer in providing AMP services utilized its own funds and proceeded to add the markup at least equal to the prime lending rate of SBI and thereby added the total of 12.26% markup on AMP expenditure. 19. The ld. AR for the taxpayer contended inter alia that incurring AMP expenses by the taxpayer is not an "international transaction" and that the ld. TPO has merely relied upon the "bright line test" to infer the international transactions between the taxpayer and its AE without having any cogent material/evidence on record. 20. Bare perusal of the order under challenge passed by the ld. TPO particularly at pages 67, 73 and 75 goes to prove that the entire adjustment qua AMP expenses has been made by the TPO on the basis of bright line method and no material whatsoever has been brought on record to show that if the taxpayer and AE have acted in concert and that they have entered into any agreement to enter into international transactions qua AMP expenses. 21. Hon'ble Delhi High Court in Sony Ericsson India Pvt. Ltd. v. CIT (2015) 374 ITR 118 (Del.) and subsequently in Maruti Suzuki India Ltd. v. CIT (2016) 328 ITR 210 (Del.) has categorically held that BLT is not a valid basis for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts turnover is from the sale of its manufacturing in India. Moreover, without prejudice, it is the case of the taxpayer that despite the directions issued by the ld. DRP, the TPO has wrongfully proceeded to consider selling and distribution expenses as part of the AMP expenses for the purposes of applying the bright line test. 26. In view of what has been discussed above, we are of the considered view that since the taxpayer is a full-fledged manufacturer as 87% of its turnover is from the sale of its manufactured goods in India and the entire AMP expenses have been incurred by it to enhance its sale in India and not for promoting the brand of its AE and for creating intangibles for its AE, the alleged excess AMP expenditure does not fall in the category of international transactions. Moreover, the Revenue has not brought on record any cogent evidence to prove these facts. So, following the law laid down by the Hon'ble Delhi High Court in case cited as Maruti Suzuki India Ltd. v. CIT (supra), we are of the considered view that adjustment made by the Revenue on account of incurrence of AMP expenses are not sustainable in the eyes of law. 27. Learned DR for the Revenue, although ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average OP/OC of 23.82%. However, after ld. DRP's order, TPO selected 10 comparables to benchmark the international transactions qua ITES which are as under :- S.No. Name of the Company OP/TC % 1. Accentia Technologies Ltd. 28.89% 2. Acropetal Technologies Limited (Seg) 14.26% 3. e4e Healthcare Business Services Pvt. Ltd. 9.77% 4. Eclerx Services Ltd. 56.82% 5. ICRA Techno Analytics Limited 24.83% 6. Infosys B P O Ltd. 17.86% 7. Jindal Intellicom Ltd. 13.70% 8. Microgenetic Systems Ltd. -3.20% 9. TCS E - Serve Ltd. 69.23% 10. Jindal Intellicom Ltd. 11.20% Mean 24.34% 32. It is the case of the taxpayer that the adjustment made by the TPO is not sustainable as the TPO has selected comparables engaged in provision of KPO services and sought to exclude - (i) Accentia Technologies Ltd.; (ii) Acropetal Technologies Limited (Seg); (iii) Eclerx Services Ltd.; (iv) ICRA Techno Analytics Limited; (vi) Infosys B P O Ltd.; and TCS E - Serve Ltd., from the final set of comparables on the ground hat the same are not valid comparable for benchmarking the international transactions. 33. Undisputedly, the ld. DRP has accepted the contentions raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company with thousands of talented professionals and operations in Trivandrum, Kochi, Bangalore, Hyderabad and Bhubaneswar in India; Fort Lauderdale, Portland, Oregon, Chicago and New Jersey in the US, London in the UK and Raz AI Khaima in the Middle East." 36. Perusal of page 31 of the annual report further goes to prove that Accentia owns numerous software products viz. (i) instakare, (ii) instaweb, (iii) instaPMS, (iv) instaScribe etc.. Furthermore, perusal of the profit & loss account, available at page 43 of the annual report, paper book, goes to prove that segmental financial of this company to work out profitability with respect to ITES segment and software development segment is not available. 37. Hon'ble Delhi High Court in case cited as Pr.CIT vs. B.C. Management Services (P.) Ltd. - (2018) 403 ITR 45 (Delhi) has affirmed the findings returned by the Tribunal excluding Accentia as a comparable vis-à-vis routine ITES provider on ground of being engaged in KPO services in health care sector. Moreover, Accentia owns various software products, as discussed in the preceding paras. Even, segmental financials to work out the profitability of Accentia qua ITES segment a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve intelligence etc.. 42. Perusal of the annual report of Eclerx shows that it is into providing high end KPO services. Services being provided by the Eclerx are highlighted at page 172 of the paper which are extracted as under :- " eClerx powers the operations of the Sales & Marketing divisions of some of the largest Fortune / Financial Times / Internet Retailer 500 scale companies globally, augmenting bandwidth to drive greater quality and control to their digital operations, data management and analytics needs. Some of the key Sales & Marketing functions we support include web content management & merchandising execution, web analytics, social media moderation and analytics, search engine analytics & support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price & catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting. We work with over 30 Global Fortune 500 scale clients including any of the world's leading High Tech and Industrial Manufacturing & Distributors, Online Retail, Interactive Media & Entertainment, Software Vendors, Travel and Leisure and Financial Services compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is taxpayer which is extracted for ready perusal as under :- Parameters Infosys Ltd. Assessee Risk profile Operates as full fledged risk taking entrepreneurs Operates as a captive service provider Nature of services Provides business process management services as part of the highly integrated strategy followed by the Infosys Group Provides routine transaction processing services under the guidance Revenue ₹ 1129.11 crores ₹ 2.60 crores Ownership of brand/ proprieta4ry software / R&D Exploits the brand 'Infosys' for soliciting business Operates as a captive service provider, not undertaking marketing activity 48. So, when we examine the functional profile of Infosys BPO, it is dis-similar to the taxpayer because Infosys BPO is into providing business process management services as against routine ITES being provided by the taxpayer. Moreover, Infosys BPO is operating as a full-fledged risk bearing entrepreneur as against taxpayer which is a captive service provider. So, keeping in view the turnover of Infosys BPO which is ₹ 1129.11 crores against ₹ 2.60 crores of the taxpayer and Infosys BPO is having a huge brand value with considerable R&D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paper book, shows that TCS E-serve partially bears the cost of development of brand TATA by making contribution to Tata Brand Equity Fund in consultation for the right to use the said brand. So, it is apparently clear that TCS E-serve exploited the brand TATA which is a giant company, and is exploiting the goodwill and recognition of the established TATA brand leading to the high volume business and from time to time pricing. 54. So, by applying the ratio laid down by Hon'ble Delhi High Court in Rampgreen Solutions P. Ltd. vs. CIT (supra), TCS Eserve being into providing KPO cannot be taken as a valid comparable vis-à-vis the taxpayer. 55. Coordinate Bench of the Tribunal in case cited as Bechtel India Pvt. Ltd. vs. DCIT (ITA No.1478/Del/2015) has ordered to exclude TCS E-serve as a valid comparable vis-à-vis routine ITES provider by returning following findings :- " This company has been selected by the ld. TPO as a comparable. This company undertakes, customer service, transaction processes, collections, risk management, and analytics, and has created a lot of applications which are in the nature of intellectual property in terms of reconciliation software, fun ..... 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