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TMI Blog2023 (6) TMI 506X X X X Extracts X X X X X X X X Extracts X X X X ..... y cannot be considered as comparable. Eclerx Services Ltd. is a KPO providing specialized services whereas the activities of the assessee are in the nature of routine BPO services. Assessee is providing only ITES services and whereas Eclerx Services Ltd. which provides data analytics and data processing solutions to some of the largest brands in the world and is recognized expert in chosen markets financial services, retail and manufacturing is a data analytic KPO service provider specialized in two verticals financial services and retail manufacturing, cannot be considered as a comparable company of that of the assessee and the ld. CIT (Appeals) rightly excluded Eclerx Services Ltd. from the final set of comparables selected by the TPO. Coral Hub (formerly known as Vishal Technologies Ltd.) we notice that this company has out-sourced its BPO activities and in the case of Rampgreen Solutions (P.) Ltd. [ 2015 (8) TMI 931 - DELHI HIGH COURT] held that a company which out-sourced its activities cannot be held comparable with a company which carries BPO activities as business model of both the companies are different. Thus we hold that the ld. CIT (Appeals) rightly excluded Cora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d., M/s Accentia Technologies Limited and M/s Cosmic Global Limited as a comparable companies and relying upon the concept of KPO Vs. BPO in comparability analysis, super normal profit and functional difference whereas in reality there is a seamlessness in ITES functions and the comparability analysis is based upon functions, assets and risks than on the outcome of the service. 4. Whether the Ld. CIT(A) was justified in rejecting M/s Vishal Information Technologies Ltd. a. By holding that this company follows different model of business without appreciating that the provisions of the law especially those laid down under Sub- sec.2 and Sub-sec.3 of Rule 10B, do not assign any role to difference in mode of engagement of employees whether by way of employing them in their own premises through a vendor or on their own rolls for purpose of comparability analysis. b. Without appreciating the fact that many of the comparables in ITESindustryprovide services through the employees of vendors and yet debit expenses under the head Employee Expenditure and thus, the same cannot be identified for the purpose of comparability. 3. The Revenue filed appeal against order of the ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Managerial Remuneration 13,824,027 Depreciation 14.10,9109 TOTAL OPERATING EXPENSES 301,987,103 OPERATING PROFIT 71,980,574 Non- Operating Income Interest on Fixed Deposit 5,453,381 Profit on Exchange Fluctuation 13,570,696 Non Operating Expense Donation 5,000 Interest Paid 251,905 Loss on Sale/Discard of assets 62,565 PROFIT BEFORE TAX 90,685,181 OP/OC 23.84% 5. The Arm s Length Price of the international transaction representing data processing services provided by the assessee to its Associated Enterprises (AE) had been determined by applying Transactional Net Margin Method (TNMM). The operating profit to total cost (OP/OC) ratio had been taken as the profit level indicator (PLI) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clerx Services Ltd. 4. Coral Hub Ltd. 9. Assessee also contended before the ld. CIT (Appeals) that the following comparables should be considered for computing the mean arm s length margin of the comparables:- 1. Datamatics Financial Services Ltd. 2. Motif India Infotech Pvt. Ltd. 3. Omega Healthcare Management Services Pvt. Ltd. 10. The ld. CIT (Appeals) considering the submissions and averments of the TPO excluded Eclerx Services Ltd., Accentia Technology Ltd., Cosmic Global Ltd. and Vishal Information Technology Ltd. (Coral Hub).The Revenue is in appeal before us in rejecting four comparables by the ld. CIT (Appeals) out of final set of comparables selected by the TPO. 11 . M/s. Cosmic Global Ltd .: With respect to this comparable, the ld. DR referring to page 31 of the assessment order submits that this comparable is selected by the assessee and he has not objected in inclusion of this comparable in the final set of comparables before the TPO, but the ld. CIT (Appeals) excluded the same. The ld. DR submits that since this comparable was picked up by the assessee and not by the TPO the ld. CIT (Appeals) should not have excluded this comparable. Therefore, ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee not challenged inclusion of a comparable either before the TPO or DRP the assessee can challenge for exclusion of such comparable before the Tribunal. The ld. Counsel submits that all these submissions were made before the ld. CIT (Appeals) and the ld. CIT (Appeals) considering the submissions rightly excluded Cosmic Global Ltd. from the comparables. 14. Accentia Technology Ltd .: The ld. DR referring to page Nos. 25 and 26 of TPO s order submits that the objections of the assessee were considered by the TPO and held that there is functional similarity between Accentia Technology Ltd. and the assessee, as both are engaged in providing ITES services. The TPO observed that the clients/subscribers to which they are catering to are not important as long as their functions remain the same. The ld. DR submits that since the observations of the TPO that the objection of the assessee that there are no segmentals, negated by the TPO since Accentia Technology Ltd., has one segment i.e. healthcare receivable management and the reporting of the segments does not arise. The ld. DR submits that the TPO has rightly rejected the contentions of the assessee to exclude Accentia Technology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the functional dissimilarity. The ld. Counsel for the assessee submits that the ld. CIT (Appeals) has rightly held that the activities of the assessee are routine activities and Eclerx is a KPO and hence is not a fit comparable. The ld. Counsel for the assessee submits that the ld. CIT (Appeals) also relied on the decision of M/s. Daksh Business Process Services (P.) Ltd. [(2016) 72 taxmann.com 44 (Del.)] in rejecting the Eclerx as not a comparable. The ld. Counsel also placed reliance on the decision of the Delhi High Court in the case of Rampgreen Solutions (P.) Ltd.Vs. CIT [377 ITR 533] wherein Eclerx Services Ltd., which was providing KPO services was rejected as a comparable as the Rampgreen Solutions (P.) Ltd. was engaged in Information Technology Enabled Services (ITES). 18. Coral Hub Ltd . (formerly known as M/s. Vishal Technologies Ltd.): The ld. DR referring to page Nos. 28 of TPO s order submits that the TPO rejected the contention of the assessee that Coral Hub should be excluded from comparables on the ground that in ITES sector the number of employees is not very important and the determining factor for doing business. The ld. DR supported the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim of the assessee for the exclusion of this company being incomparable for the various reasons cited before the Ld. CIT(A), is not sustainable in law. 8.2 The Ld. AR argued that this company was wrongly chosen by the assessee and that there can be no estoppel against the provisions of the Act. In support, the Ld. AR relied on the decision of the Special Bench of the Tribunal in Dy. CIT vs. Quark System (P.) Ltd. (2010) 38 SOT 307. So far as the comparability of this company viz-a-viz the assessee is concerned, the Ld. AR relied on the submissions of the assessee made before the Ld. CIT(A) for excluding this company as comparable and the findings of the Ld. CIT(A) in respect thereof. 8.3 We have heard the Ld. Representative of the parties and perused the material on record as well as the orders of the Ld. TPO/AO/CIT(A). The very first contention of the Ld. AR is that even if the assessee did not take up the issue of considering this company as comparable during the transfer pricing proceedings, the assessee cannot be prohibited from adopting a different stand later before the appellate authorities. We agree with the contention of the Ld. AR in view of the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction of provision of ITeS afresh in consonance with our above directions. 20.3 In view of the above we affirm the order of the ld. CIT (Appeals) in excluding Cosmic Global Ltd., from the final set of comparables selected by the TPO for the purpose of bench-marking international transactions. 21.1 With regard to the comparable, namely, Accentia Technologies Ltd. we find that the Hon ble Bombay High Court in the case of DCIT Vs. PTC Software India Pvt. Ltd. [101 taxmann.com 117] held as under:- (i) The impugned order of the Tribunal has excluded M/s. Accentia Technologies Ltd., from the list of comparables to determine the ALP of the Respondent s transactions. (ii) The impugned order renders a finding of fact that the nature of activities carried out by M/s. Accentia Technologies Ltd. are different from that carried out by Respondent M/s. Accentia Technologies Ltd. develops its own software and rendered Medical transcription services while the Respondent is providing BPO Services. Besides the impugned order of the Tribunal held that high profit margins of M/s. Accentia Technologies Ltd., was attributable to amalgamation which took place in the previous years rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S. No. Name of the Company Objections of the assessee Remarks of this office 1. Accentia Technologies Ltd. The assessee s arguments for rejection on the grounds that the company is not functionally comparable The objection is not acceptable as the services offered by the company are ITES services may be to a different sector in comparison to that of the assessee, but in TNMM so much of minor difference can be tolerated as TNMM allows some degree of flexibility and tolerance in the matter of selection of comparables because, under this method, Net Margins are compared and some amount of functional dissimilarity can be tolerated at the net margin level, i.e., to a certain extent, functional dissimilarities are subsumed and taken care of at the net margin level. Therefore, it is an appropriate comparable. 6.2 The Ld. AR submitted that there were certain extraordinary events that took place in this company in the form of mergers and acquisitions in the relevant financial year and hence this company should not be considered as a comparable com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remark that certain amount of functional dissimilarity is subsumed in TNMM at net margin level and hence this company is an appropriate comparable. We are unable to subscribe to this view of the Ld. TPO. In our opinion, this indicates that the Ld. TPO himself is somewhere convinced that functions performed by this company are different than that of the assessee. The Ld. CIT(A) has categorically recorded the finding that this company is functionally different than that of the assessee after looking at the annual report of this company and the information available in public domain submitted by the assessee before him. We notice that the Ld. CIT(A) directed to exclude this company as a comparable after recording cogent reasons backed with precedents. We, therefore do not find any reason to interfere with the findings of the Ld. CIT(A) and uphold his view. 21.3 Respectfully following the decision of the Hon ble Bombay High Court we hold that the functions of the assessee company and the comparable selected by the TPO with that of Accentia Technologies Ltd., are dissimilar and also since during the assessment year 2009-10 there were extra-ordinary events such as merger/amalgamatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. 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. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/sendee characteristics, functions undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company of that of the assessee and the ld. CIT (Appeals) rightly excluded Eclerx Services Ltd. from the final set of comparables selected by the TPO. 24.1 With regard to Coral Hub (formerly known as Vishal Technologies Ltd.) we notice that this company has out-sourced its BPO activities and the Hon ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. Vs. CIT (supra) held that a company which out-sourced its activities cannot be held comparable with a company which carries BPO activities as business model of both the companies are different. The Hon ble High Court observed as under:- 38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a busines ..... X X X X Extracts X X X X X X X X Extracts X X X X
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