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2016 (6) TMI 790 - ITAT AHMEDABAD

2016 (6) TMI 790 - ITAT AHMEDABAD - TMI - Transfer pricing adjustment - selection of comparable - determination whether the assessee has to be categorized as a Knowledge Process Outsourcing Services Provider (KPO) or BPO service provider - Held that:- As observed earlier, agreement with the AE for providing service was executed on 1.10.2004. It was valid upto 30.12.2012. In the year for which an order under section 10TE(6) was passed by the TPO, this agreement was relevant for the period 1.4.201 .....

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e, and himself collected information regarding nature of services. Thus, there is a conflict in the stand of the Revenue in different assessment years on one agreement. Considering this aspect, we are of the view that impugned orders are not sustainable on this issue, therefore, we set aside the assessment order including that of DRP and restore this issue to the file of the AO for fresh adjudication. The ld.AO shall take into account, the TPO’s order passed in subsequent period i.e. dated 26.2. .....

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d from undertaking’s business eligible for deduction u/s.10A? - Held that:- DRP has recorded a finding that foreign exchange fluctuation gain was directly linked with the export business carried out by the assessee, hence, it is to be treated as income derived by an undertaking. The ld.DR was unable to point out any significant error in the proposition canvassed by the ld.DRP for granting the deduction under section 10A of the Income Tax Act. - ITA.No.770/Ahd/2014, ITA.No.1082/Ahd/2014 - Dated:- .....

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grounds along with their subgrounds, but at the time of hearing, ld.representative for the assessee basically confined their arguments to one issue for determination whether the assessee has to be categorized as a Knowledge Process Outsourcing Services Provider (KPO) or BPO service provider. If it is treated as a BPO, then comparables considered for determining the arm s length price (ALP) of international transaction would not be relevant comparable, and then exercise has to be carried out afre .....

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e and industry. It has filed its return of income on 2.9.2009 declaring total income at ₹ 26,252/-. The ld.AO has noticed that the assessee had entered into international transaction with its associate enterprise, and therefore, ALP of that transaction has to be determined. A reference under section 92CA(1) of the Act was made by the AO to the TPO vide letter No.ACIT(OSD)/Cir.8/TP/SNLFIPL/2011-12 dated 16.8.2011. The details of the international transaction with the AE are as under: Nature .....

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4C(13) of the Income Tax Act contended that agreement for providing the services to AE was executed on 1/10/2004 and it was valid upto 30.12.2012. Copy of the inter-company agreement is filed at page no.64 of the paper book. He took through the clause (3) of the agreement on page no.65. It reads as under: 3. AGREEMENT TERM: Contractor shall provide services to the Company pursuant to this Agreement for a term beginning on 1wst October, 2004 and ending on December 30th, 2012 (the Agreement Term ) .....

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By virtue of those option assessee has exercised its discretion to cover itself under Safe Harbour Rules. The application of the assessee referred by the ITO to the TPO was examined by the TPO and decided vide order dated 26.2.2014. The ld.TPO has considered the assessee as a low- end service provider i.e. BPO. Copy of this order has been placed at page no.228 of the paper book. The ld.counsel for the assessee on the strength of this order coupled with the judgment of Hon ble Delhi High Court i .....

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aside and the issue deserves to be remitted back to the file of the AO for re-adjudication. 6. On other hand, the ld.CIT-DR, filed written submissions and contented that this plea was raised before the DRP, but the DRP has rejected this plea on the ground that the assessee has categorised itself as KPO. Therefore, in this year, it cannot be pleaded that it be treated as BPO. He placed reliance on the orders of the TPO as well as DRP on this issue. 7. We have considered rival contentions and gone .....

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iew in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression BPO and KPO 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 ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO .....

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ty of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider .....

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ra), there may be cases where an entity may be rendering a mix of services 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 dis .....

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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/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP. 37. Applying the aforesaid principles to the fact .....

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lso offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that .....

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dia) (P.) Ltd. v. Additional Commissioner of Income-tax (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits. 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 proport .....

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ss model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity. 39. It is also relevant to note that in the case of Maersk Global Centers (India) Pvt. Ltd. (supra), the DRP itself had accepted the objection of the Assessee and had excluded Vishal as a comparable for the reason as quoted below:- … that it had a very low employment cost and very high cost on a .....

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es were in the range of 2.2% to 24%. In our view, it would not be apposite to exclude comparables only for the reason that their profits are high, as the same is not provided for in the statutory framework. The OECD Guidelines suggest that a quartile method be adopted which excludes entities that fall in the extreme quartiles for comparability. However, neither Chapter X of the Act nor the Rules made by CBDT provide for exclusion for such statistical reason. 41. Having stated the same, it may be .....

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ative that the comparables selected are either materially dissimilar or the data used is not reliable. The Tribunal proceeded on the basis that an adjustment could be made only in cases where supernormal profits resulted from the factors indicated in Rule 10B of the Income Tax Rules, 1962. In our view, the factors mentioned in Rule 10B are not exhaustive. The principal object of benchmarking international transactions against uncontrolled transactions is to impute an ALP to those transactions. T .....

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tity. 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 functional dissimilarities pointed out by the Assessee did not warrant rejection of eClerx and Vishal as comparables. 43. In our view, the aforesaid approach would not be apposite. Insofar as identifying comparable transactions/entities is concerned .....

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en the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable ALP. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in PLI must trigger further investigations/analysis. 44. Consideration for a transaction .....

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nctionally dissimilar, but ignored the same relying on an assumption that the functional dissimilarity would be subsumed in the profit margin. As noted, the content of services provided by the Assessee and the entities in question were not similar. In addition, there were also functional dissimilarities between the Assessee and the two entities in question. In our view, these comparability factors could not be ignored by the Tribunal. While using TNMM, the search for comparables may be broadened .....

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swered in the affirmative and against the Revenue. The impugned order dated 22nd March, 2013 of the Tribunal and the final assessment order dated 9th October, 2012 are hereby set aside. The appeal is allowed. 8. At this stage, it is pertinent to note TPOs order dated 26.2.2014. It reads as under: 3. In order to examine the valid claim of exercise of safe harbour provisions in the case of the assessee, it needs to be seen if the assessee is covered under the definition of "eligible assessee& .....

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standardising, storing the relevant corporate, financial, market and other data, news and analysis for various industries such as banking, financial services, insurance, real estate et cetera on the servers maintained by the associated enterprise .The provision of services by the assessee to its associated enterprise included the following steps: i. Data collection- In this step, the data is collected from basic financial and non-financial information available from various public sources, ii. D .....

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rrors. v. Data Delivery. In this final step, the reviewed data is uploaded on servers maintained by the associate enterprise in US. 3.1.1 Upon analysis of the above functions being carried out by the assessee, it can be found that the services being rendered by the assessee were mainly and generally in the nature of "data processing", ''data mining" and "data search integration and' analysis" which are covered under the definition of "Information technol .....

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rprise. In order to be considered as "eligible assessee", it needs to be seen if it is operating with "insignificant risks", The factors to be kept in mind in relation to such determination are provided in rule 10TB(2). The analysis of the same is made as below; Factors Remarks The foreign principal performs the most of economically significant functions involved including the critical functions such as conceptualisation and design of the product and providing the strategic d .....

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w activity be introduced. The assessee carries out the work related to feeding of data in the database, as per the fields and specifications provided by the associate enterprise in the database software. The capital and funds and other economically significant assets including the intangibles required, are provided by the foreign principal or its other associated enterprises, and the eligible assessee is only provided a remuneration for the work carried out by it. From the financial statements, .....

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ible assessee works under the direct supervision of the foreign principal or its associated enterprise which not only has the capability to control or supervise but also actually controls or supervises the activities carried out through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis.________ The assessee works on the specifications for the data feeding, provided by the j associate enterprise and it is subject to ' monitoring in respec .....

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does not bear the risk related to marketing, utilization, of employees, service liability, credit and collection risk et cetera. As per the terms of cdntract and the conduct also, it was not found that the assessee was bearing any such risk, even though, the assessee is bearing single customer risk. The eligible assessee has no ownership right, legal or economic, on any intangible \ generated or on the outcome of any intangible generated or arising during the course of rendering of services, whi .....

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d in the Safe harbour provisions in relation to the determination of "insignificant risk". As identified above, even though the assessee is bearing "single customer risk", in view of the nature of transactions and the overall requirements of safe harbour provisions, the existence of such risk is not being considered as significant so as to take the assessee out of the purviewof the being "eligible assessee" with" insignificant risk". 4. Consequently, it is .....

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, it is held that the claim made by the assessee has been validly exercised, subject to the provisions of rule 10TE(10) in respect of assessment years other than AY 2013-14. 5. The attention of the Assessing officer is drawn to the provisions of rule 10TE(10) and subject to the same, the claim of the assessee is being held to be validly exercised. The provisions of the rule are reproduced below: "(10) Where the facts and circumstances on the basis of which the option exercised by the assess .....

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is sub-rule the facts and circumstances include:- (a) functional profile of the assessee in respect of the international transaction; (b) the risks being undertaken by the assessee; (c) the substantive contractual conditions governing the role of the assessee in respect of the international transaction; (d) the conduct of the assessee as referred to in sub-rule (2) or subrule (3) of rule 10TB; or (e) the substantive nature of the international transaction," In case the "facts and circu .....

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was valid for the period of 9 months i.e. 01.04.2012 to 31.12.2012 and the new agreement is valid For a period of only two years commencing from. 01.01.2013.Therefore,in respect of the period from 01.01.2015 onwards which corresponds to part period of AY 2015-16 and subsequent assessment years, unless the same agreement -is continued and there is no change in the "facts and circumstances" as provided in rule 10TE(10),the Assessing officer has to take action in accordance with the provi .....

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e nature of services would be different ? In other words, same agreement cannot be give rise two types of services, merely on the basis of providing at different times. The TPO in the proceedings for the purpose of Safe Harbour Rules paid a visit in the office of the assessee, and himself collected information regarding nature of services. Thus, there is a conflict in the stand of the Revenue in different assessment years on one agreement. Considering this aspect, we are of the view that impugne .....

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ed. Considering all these aspects, we allow the appeal of the assessee for statistical purpose. The observation made by us will neither impair the case of the AO nor will cause any prejudice to the defence/explanation of the assessee. 10. Now we take, the appeal of the Revenue. 10. First ground of the Revenue s appeal reads as under: 1. The DRP, Ahmedabad has erred in law and on facts in AO/TPO in accepting the economic analysis undertaken by the assessee is in accordance with the provisions of .....

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appeal is rejected. 12. The ground nos.4 and 5 are general grounds of which do not call for recording any specific finding, hence, they are rejected. 13. The ground no.2 reads as under: 2. The DRP, Ahmedabad has erred in law and on facts to hold that Foreign exchange fluctuation gain of ₹ 28,21,403/- is directly linked with export business carried on by the undertaking, and hence, deemed to be derived from undertaking s business eligible for deduction u/s.10A of the Act. 14. ld.DRP has mad .....

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ay be. Hence such gain in the present case cannot be treated as part of export/sale proceeds as claimed by the assessee, but the same need to be treated as separate income. For the purpose of claiming deduction under section 10A of the Act, the assessee is not only required to establish that It was business profit of an undertaking, but also to establish that this was a profit derived from the business activity of an undertaking. The mere fact, that such income was, a business income would not e .....

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