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2015 (5) TMI 301 - ITAT DELHI

2015 (5) TMI 301 - ITAT DELHI - [2015] 39 ITR (Trib) 415 (ITAT [Del]) - Transfer pricing adjustment - selection of comparable - Held that:- Coral Hub (Vishal Information Technologies Ltd.) this company cannot be included in the list of comparables, though it might be carrying on the similar functions which asesssee was carrying on. The functional profile no doubt is one of the major criteria but not the sole criteria for deciding whether the said company can be included in the list of comparable .....

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of comparables.

Eclerx Service Ltd. In the present case all the functions are carried out by assessee for its AEs and, there is no doubt it was a captive service provider. However, the important aspect which is to be considered is as to what functions were being performed by assessee. If assessee was merely providing data to its AE without any analysis and performing its functions only in a mechanical manner, then no doubt it would be comparable to BPO but when the results provided t .....

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uphold the findings of DRP on this count.

Infosys BPO and Wipro BPO keeping in view the huge turnover, economies of scale, brand value and other factors pointed out by ld. counsel in his submissions and also keeping in view the decision of Aginity India Technologies Pvt. Ltd. [2010 (11) TMI 852 - ITAT DELHI] & (2013 (7) TMI 696 - DELHI HIGH COURT) these two companies cannot be included in the list of comparables because the assessee’s turn over was only ₹ 11 crores.

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r law. We are in respectful agreement with the above observations. We direct the ld. TPO to allow working capital adjustment while determining the profit margins of comparables. - Decided partly in favour of assessee. - ITA no. 451/Del/2013 - Dated:- 27-3-2015 - Shri S.V. Mehrotra And Shri H.S. Sidhu JJ For the Appellant : Shri Tapan Gupta CA & Shri Manish Matta CA For the Respondent : Shri Judy James (Standing Counsel) ORDER Per S.V. Mehrotra, A.M:- This appeal, preferred by the assessee, i .....

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ad been claimed exempt u/s 10B. During the year under consideration the assessee company was engaged in the business of processing information and data through means of electronic and information technology enabled infrastructure. 3.1. The assessee had reported following international transactions in form 3CEB: S. No. Nature of Transaction Method used by assessee Amount(Rs.) 1. Processing information and data through means of electronic and information technology TNMM 119,755,134/- 3.2. The AO h .....

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volved in full fledged marketing, encompassing a wide range of other allied activities. The assessee had shown PLI of OP/OC at 10.33%, which had been benchmarked with the arithmetic mean of 8.45% in respect of 17 comparables selected by the assessee and, therefore, the assessee s contention was that the assessee s net margins were within the range of + 5%. 3.3. The TPO show caused the assessee and observing as under: The assessee contention as stated above was considered. However the comparables .....

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FY 2007-08 need to be excluded. e. Companies those are expansively functionally different from the taxpayer need to be excluded 3.4. Ld. TPO proposed 24 comparables for benchmarking the international transactions relating to provision of market support/ information services, the average PLI of which was computed at 28.05% as noted at pages 3 & 4 of TPO s order. 3.5. The assessee filed its reply, which is contained at page 5 of ld. TPO s order. Ld. TPO proposed following comparables to be se .....

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pital employed vis-a-vis the comparables. He further observed that the audited accounts of the assessee did not show that it had received any advance from its AEs. He observed that in the absence of reliable data no adjustment could be allowed. 3.7. Ld. TPO after considering the assessee s objection in detail used the comparables as tabulated earlier. He, accordingly, made an adjustment of ₹ 1,98,93,462/- as under: Total cost : ₹ 108,709,790/- ALP at a margin of 28.46% : ₹ 139, .....

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elopment services to them and, therefore, it should not have been compared with companies with very high margins due to difference in functional and risk profile. 4.2. Ld. DRP rejected the assessee s contention, inter alia, observing that the profit margins of any company is not an indicator of its functional profile. It was further pointed out that in a set of functionally comparable companies, there could be companies with low margin as well as high margins. What is material is the functional .....

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ices in the nature of account reconciliation, trade order management services etc. (c) Rated as leading KPO Nelso Hall. 4.4. Ld. DRP rejected this contention for the following reasons: (i) The functions performed by the impugned comparables was data analysis and data process solutions which are very much in the nature of ITeS. (ii) As per assessee s own description in its TP report, it was stated that in addition to core categories of CIS, F&A, HRM, Knowledge services and procurement ITeS-BP .....

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cted. However, the TPO selected only 5 companies in his order as comparables for the computation of ALP. Ld. DRP after considering the assessee s contention directed that following 12 comparables be used to determine the ALP: Sl. No. Name of comparable OP/TC(%) 1. Aditya Birla Minacs -0.55 2. Asit C Mehta 9.1 3. Coral Hub (Vishal INF) 51.84 4. Cosmic Global 24.3 5. Crossdomain Solution P Ltd. 26.96 6. E4e(earlier known Nitanny) 17.5 7. Eclerx 66.25 8. ICRA(Seg) 11.22 9. Infosys BPO 20.03 10. I-s .....

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is based on outsourcing. In this regard he pointed out that data entry charges incurred by this company are 84.52% of total expenditure and there is negligible personnel cost incurred by it. Ld. counsel relied on following decisions in support of its contention for exclusion of this company from list of comparables: - Maersk Global Centers (India) Pvt. Ltd. (ITA no. 3774/Mum/2011 & CO 111/Mum/2011- order dated 9-11-2011); - United Health Group Information Services Pvt. Ltd. [2014] 50 Taxman .....

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se this company is carrying on KPO activities. Further, he submitted that as per the annual report, this company was engaged in providing high end services like data analytics and customized process solutions. He submitted that since the company s activities were specialized and complex, therefore, it is not comparable to BPO or an IT outsourcing company in which assessee is engaged. He pointed out that this company delivered data solutions to companies business needs through cost effect combina .....

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t this is not comparable to assessee for the following reasons: (i) the turnover of Infosys BPO Limited is 69 times of the assessee company. (ii) It is giant and has brand value. (iii) Brand building & advertisement expense (iv) Selling and marketing expenditure 6.17% of operating revenue. (v) Huge assets base of ₹ 130.89 crores (vi) Extraordinary events - acquisitions. 5.6. Wipro BPO:As regards Wipro BPO, ld. counsel submitted that this is also not comparable to assessee for the follo .....

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or carrying out processing, whereas BPO is low end service as compared to KPO. He referred to page 2 of TPO s order to point out that assessee in the relevant year was engaged in the services of online financial services, which included strategic advisory services, industry and operation expertise, compliance focus services, web marketing services, electronic commerce knowledge services, and intelligence and best practice services, IT enabled back office processing services to New River US, whic .....

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to take up calls and give informations to specified customers. In BPO No mastery is required e.g. insurance companies and manual is laid down for procedure. 6.3. Whereas in case of KPO, training is important, where the trained person has to use knowledge and accordingly specialists are required in case of KPO who deal with high end services. He submitted that KPO is the latest outsourcing process which involves application of training, expertise to research data analysis, other information based .....

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ices Pvt. Ltd. (supra), wherein the Tribunal has noticed from annual report that it was mainly engaged in e-publishing business and had more than, 10,000 classic books to its credit which were also converted into large font titles for visually challenged. He, therefore, submitted that functions performed by this company were akin to KPO and comparable to assessee s functions. 6.7. Ld. Standing counsel pointed out that the decision in the case of BNY Mellon International Operations (India) Pvt. L .....

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tanding Counsel referred to paras 5.3 & 5.4 of the order, as reproduced below: 5.3. However, we find from the Tribunal order for the assessment year 2007-08 that the case of Vishal Information Technologies Ltd. (now called as Coral Hub Ltd.) has been held to be not comparable because of different business model as it was outsourcing execution of contract from external vendors. The Tribunal has noted in para 13 of its order, a copy of which is available on record, that the employee cost in th .....

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fortified this contention on the strength of the order passed by the Hyderabad Bench of the Tribunal in the case of DCIT Vs Deolite Consulting India Pvt. Ltd. (a copy of order placed on record) in which it has been held that such a filter does not impact the overall profitability and the specific case of VITL has been held to be comparable. 6.9. He submitted that Tribunal did not follow the contrary view taken in the case of Deolite Consulting India Pvt. Ltd. (supra) on the ground of consistency .....

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ll of lading etc. Therefore, this decision is not applicable to assessee which is primarily carrying on strategic advisory services which are high end financial services, whereas M/s Maersk global Service Center (India) P. Ltd. was carrying on low end services. 6.11. As regards Eclerx Services Ltd., ld. Standing Counsel submitted that the reliance placed by assessee on the Tribunal s decision in the case of M/s Calibrated Healthcare Systems India Pvt. Ltd. (ITA no. 5271/Del/2012 - order dated 4- .....

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ivulges the nature of business carried on by it. It is seen that this company is a Knowledge Process Outsourcing (KPO) company providing data analytics and data processing solution to its clients. It is a recognized expert in Financial services and Retail and Manufacture. It provides consulting services and also process outsourcing. The above details have been pointed out by the Id.AR from the Annual accounts of this company for the Financial year 2007- 08. Nothing has been brought on record by .....

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al held that Eclerx Services Ltd. is not comparable to M/s Calibrated Health Care Systems India Pvt. Ltd. In the present case assessee is dealing in financial services like Eclerx Services Ltd. and, therefore, rightly selected as comparable. 6.13. As regards the assessee s reliance on Tribunal s decision in the case of Hyundai Motors India Engineering P. Ltd. (ITA no. 1850/Hyd/2012 - order dated 21-02-2014) is concerned, ld. Standing Counsel submitted that the said company is also functionally d .....

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RP. There is no dispute about functional similarity and only objection is with respect to turn over of the assessee. As regards assessee s reliance on the decision of the Tribunal in the case of Aginity India Technologies Pvt. Ltd. (ITA no. 3856/Del/2010) and that of Hon ble Delhi High court in CIT Vs. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Delhi), he submitted that the decision of Hon ble Delhi High court in the case of Agnity India Technologies Pvt. Ltd. was not dealing with .....

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oral Hub was TPO s comparable and not of assessee. Therefore, it cannot be argued at this stage that the functional profile of the same was not available. He pointed out that business model of coral hub is different and, therefore, in the case M/s Techbooks International Pvt. Ltd., it was rejected as comparable. 7.1. As regards Infysys BPO and Calibrated Healthcare Systems India Pvt. Ltd. are concerned ld. counsel pointed out that the decision of Hon ble Delhi High court is squarely applicable b .....

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ee is not in financial advisory service and is only in IT enabled service and BPO service. 7.8. In this regard he referred to page 376 of the PB to demonstrate that assessee is carrying on following operations: - Tagging - Association of Supplements - Association of Supplements - Categorization of Supplements - Level O- Tagging of Average Annual Return Bar Chart - Level 10- Tagging of $ 10,000 Line Chart - Tagging the Data related to 529 plans viz. Plan Documents, Plan performance and NASD - Cre .....

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assessee s profile is completely different from KPO. Ld. Standing counsel submitted that safe harbor rules were not applicable in the assessment year under consideration. 8. We have considered the rival submissions and perused the record of the case. Keeping in view the foregoing discussion, the short controversy before us is now confined to inclusion of following four companies, being included in the list of comparables by TPO, whether justified in the facts and circumstances of the case or not .....

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stinction between BPO and KPO as we have noticed in the detailed arguments advanced by ld. Standing counsel. If we examine the services imparted by assessee on the touch stone of the distinction highlighted by the ld. Standing counsel, we find considerable substance in his submissions. Admittedly assessee was engaged in the service of online financial services, which included strategic advisory services, industry and operation expertise, compliance focus services, web marketing services, electro .....

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ces, requiring strategic decision making before arriving at final conclusion. We, therefore, are not inclined to accept the assessee s submissions that it was mere a BPO. The various decisions relied upon by ld. counsel for the assessee are primarily with reference to BPO and not KPO. The distinction elucidated in Safer Harbour Rules is also in same lines. 8.2. Now we proceed to examine the impugned companies included as comparables by TPO. 8.3. Coral Hub (Vishal Information Technologies Ltd.) : .....

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ost. When the business operations are out sourced, the profit margins are bound to increase substantially as compared to a business which is carried on through employees. Therefore, this company cannot be included in the list of comparables, though it might be carrying on the similar functions which asesssee was carrying on. The functional profile no doubt is one of the major criteria but not the sole criteria for deciding whether the said company can be included in the list of comparables or no .....

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parables. 8.4. Eclerx Service Ltd.: Ld. counsel for the assessee has, inter alia, relied on the decision of Tribunal in the case of M/s Calibrated Healthcare Systems India Pvt. Ltd. (supra). In this decision we note that the Tribunal has observed that this company was a knowledge process outsourcing KPO company, providing data analytic and data processing solutions to its clients. It is further observed that it is a recognized expertise in financial services and retail manufacturing and provide .....

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be considered is as to what functions were being performed by assessee. If assessee was merely providing data to its AE without any analysis and performing its functions only in a mechanical manner, then no doubt it would be comparable to BPO but when the results provided to AE are after detailed analysis after employing skills of highest standards, then it would come within the ambit of BPO. Therefore, merely on the ground that assessee is a captive service provider, it cannot be said that thi .....

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. (supra), deals primarily with software development services. Be that as it may, we are in agreement with ld. counsel for the assessee that keeping in view the huge turnover, economies of scale, brand value and other factors pointed out by ld. counsel in his submissions and also keeping in view the decision of Hon ble Delhi High Court in the case of Aginity India Technologies Pvt. Ltd. (supra) these two companies cannot be included in the list of comparables because the assessee s turn over was .....

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sake of ready reference, the case of the ld. counsel for excluding the case of Infosys Technologies Lted. Is shown in tabular form as under:- Basis/ Particular Infosys Technologies Ltd. Agnity India Risk Profile Operate as full fledged risk taking entrepreneurs Operate at minimal risk as the 100% services are provided to AEs. Nature of Services Diversified- consulting, applicationdesign, development, re-engineeringand maintenance, systemintegration, package evaluation andimplementation and busin .....

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bles assetsworth approx. ₹ 69,500 crores forthe period ended March 31,2006 Onsite Vs. Offshore As much as half of the softwaredevelopment services rendered byInfosys are onsite (i.e. servicesperformed at the customer s locationoverseas). Revenue Split Onsite(49.80%) and offshore (50.20%)(Refer page 117 of the paper book)Typically, onsite services commandhigher billable rates andconsequently it would not beappropriate to compare the appellant which earns its entire income from offshore serv .....

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bunal did not discuss Infosys BPO and was confined only to software service development. 8.8. Accordingly, we direct the AO to exclude following three companies from the list of comparables. (i) Coral Hub (Vishal Information Technologies Ltd.) (ii) Infosys BPO (iii) Wipro BPO 9. The assessee has taken one more ground regarding working capital adjustment, which had been denied to the assessee on the ground that there are no means to ascertain the working capital deployed by the comparables throug .....

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. Ltd. (supra), the Tribunal in para 13.2 of its order has observed as under: 13.2. Having heard the rival submissions and perused the relevant material on record, it is manifest that the working capital adjustment is required with reference to stock, trade receivable and trade payables. By carrying the high trade receivables, a company allows its customers a relatively longer period to pay their accounts, which results into higher interest cost and lower profit. By carrying high trade payables, .....

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