TMI Blog2017 (6) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Assessment Year 2007-08 passed u/s 143 (3) r.w.s. 144C and 254 of the Income Tax Act, 1961[ in short The Act]. 2. The brief history of the present appeal for AY 2007-08 is that assessee filed its return of income on 30/10/2007 declaring total income of ₹ 666599500/ . Subsequently Assessee revised it on 30/06/2009 on same income. Assessee further revised it on 30/03/2009 at the same income. 3. As the assessee has entered into certain International Transactions with its Associated Enterprise [hereinafter referred to as the AE‟] , ld AO referred it to the Ld. Transfer Pricing Officer[ hereinafter referred to as The TPO‟] for determination of the Arm‟s Length Price [ hereinafter referred to as ALP‟] of those transaction. The Ld. Transfer pricing officer passed order u/s 92CA (3) of the Act on 26/10/2010 proposing an upward adjustment of ₹ 559965116/ . Ld. AO framed draft assessment order u/s 143(3) of the act on 29/12/2010. 4. The assessee filed objection before the Ld. Dispute resolution panel [hereinafter referred to as the DRP‟]. The Ld. Dispute Resolution Panel issued directions on 10/8/2011 and consequently the Ld. AO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der passed by the Deputy Commissioner of Income Tax. Circle 1(1). New Delhi and the final assessment order passed by the Deputy Commissioner of Income Tax, Circle 2(2). New Delhi ( the learned AO ), pursuant to the directions of the Hon'ble Dispute Resolution Panel ( the Hon'ble DRP ), are bad in law and void- ab-initio. 2. The learned AO following the order of the learned TPO and the Hon'ble DRP has erred in law and on the facts of the case in determining the total income of the Appellant at INR 1,260.528,760/- as against the returned income of INR 666,599,500/- and thereby made an upward adjustment of INR 593,929,260/-. Part - Transfer pricing grounds of appeal 3. That on facts of the case and in law, the TPO/AO/DRP have erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for international transaction pertaining to export of data processing and back office support services ( impugned transaction ). 4. That on facts of the case and in law, the TPO7A07DRP have erred in conducting a fresh economic analysis by using arbitrary filters for identifying companies comparable to the Appellant. The arbitrary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant vis-a-vis' the alleged comparables for impugned transaction 11. That on facts of the case and in law, the DRP has erred in law and in facts by not giving the finding on the facts submitted by the Appellant with respect to alleged comparable and relying on the finding given in the previous directions by their predecessor. 12. That on facts of the case and in law, the TPO/AO/DRP ignored the principle of natural justice by not giving due cognizance to the detailed analysis and technical arguments submitted by the Assessee. 13. The learned TPO/AO/DRP have erred in law by exercising his powers u/s 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes. 14. That on facts of the case and in law, the TPO/AO/DRP have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. 15. That on facts of the case and in taw. the AO/DRP has erred in confirming that TPO/AO has discharged his statutory onus b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by assessee that American Express group is engaged in the business of rendering travel related services of American Express card, travellers cheques and travel services, financial advisory services and international banking services throughout the world. Further regarding functional profile of the assessee, It was submitted that it is essentially a data processing and back-office support company engaged in manufacture and export of data management information analysis and control and providing tele servicing and transaction processing support. It only caters to the American Express group. It submitted that AE compensated assessee on a cost plus basis without regard to the success or failure of the activities. Assessee does not own any intangibles. It was submitted that it is a routine data processing and back-office support company, which bears significantly lower than normal risk with respect to its activities. It has three units, which are performing those functions. The unit wise functioning is shown by the assessee as under :- 1. FCE units (New Delhi and Gurgaon) a) input AEIPL receives raw data / raw information (''raw data ) in electronic form or in the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing; 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 2. AEGSC, Gurgaon This unit provides call centre services to Group companies, which involves answering incoming Amex card member calls for queries related to card member transactions. These queries include, iter alia, balance enquiry, product feature queries, change in personal information etc. The units also handles calls for AEFA participants (retirement services) to provide account related information/ account maintenance, and provides back office support in relation to resolving card member matter related to billing. This units also conducts certain data analysis to detect high risk account activity, and also supports initiates such as product redesign, consolidation/ migrations, organizational restructuring and project management support to implement recommendations. 14. The Ld. Transfer pricing officer out of the 16 comparables selected by the assessee accepted 10 comparables, introduced 16 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing officer and revenue is aggrieved by the order of the Ld. dispute resolution panel against direction that foreign exchange gain or loss should be part of operating profit. 18. Assessee has submitted a chart before us stating that assessee is contesting 11 comparables and has stated that most of the companies for which appellant is seeking exclusion are covered by the decision of AOL Online India Private Limited ( TS -156-ITAT-2016) (bang) for AY 2007-08 and Magma Design Automation India Private Limited V ACIT ITA NO 1214/Bang/2011. For claim of risk adjustments it relied up on the decision of DCIT V Hellosoft india P Ltd ITA No 645/Hyd/2009 and 1411 of 2010 and KOB medical Textiles Limited . In the end it was also mentioned that all the grounds of appeal are being pressed and this synopsis is only for ease of reference during hearing and is not a substitute to the grounds of appeal and other paper books submitted on record. 19. We have carefully perused the above-cited decisions. We are of the view that for deciding a comparability the only guideline is Rule 10B (2) of the Income tax Rules 1962 and it cannot be said that a comparable can be decided on the basis of judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25.69% 21. Firstly, we examine the grounds of appeal of the assessee. The assessee except contesting the comparable has not pleaded any other grounds of the appeal. Assessee is contesting only the exclusion of above 11 comparables. Therefore, we deal with the grounds only with respect to these aspects precisely. Before us no further arguments were advanced on any of the other grounds except for the exclusion of the above comparables, hence al other grounds of appeal except to the inclusion / exclusion of 11 comparables, all other grounds are rejected. 22. Before addressing the issue of exclusion or inclusion of a comparable, it is necessary that correct functional profile of the assessee is captured. 23. The Ld. authorized representative referred to the functional analysis of the company from the TP study report and from the order of the Ld. transfer pricing officer. 24. However, the Ld. departmental representative in fact objected to the functional profile of the company itself and submitted that assessee is not a low end IT service provider. He put a detailed written submission on this aspect wherein he has raised several issues. He fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the educational qualification of various employees was not given. He also harped up on the salary structure of the employees. He therefore held that assessee is not a business process outsourcing unit but a knowledge process outsourcing unit. In view of this, he submitted that earlier orders of the tribunal has not correctly appreciated the functions performed by the assessee. 25. In response to this, the Ld. authorized representative submitted written note on the functional profile of the assessee which is as under:- As directed by Hon'ble Tribunal at the hearing held on 27lh 28lh March 2017. This brief synopsis is being filed on the limited aspect profile of the company. We respectfully submit this brief note may kindly be considered in addition to and as supplementing the detailed oral and written arguments in support of inclusion and exclusion of various companies as comparable for the purposes of benchmarking. All such submissions are not being repeated herein in this present note in the interests of brevity as also to comply with direction of Hon'ble Tribunal. Services which are subject matter of benchmarking under Chapter X continue to be provided und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself. Further. Appellant had put on record the profile of AEIPL at page 989 of the paper book vol 2 of 2. The same is reproduced below for your Honour's kind reference AEIPL was Incorporated in India, in 1994 as a 100% subsidiary ofAEII. USA. AEIPL undertakes Data management, Information analysis and Control activities for export to various American Express affiliates worldwide. The exports are made to AEIPL customers mainly through telecom links. AEIPL receives inputs in the form of data mainly in electronic form to undertake business processing. The company is also engaged in providing tele servicing and transaction processing support to American Express Group entities. AEIPL can thus be characterized as a routine data processing and back office support company. Till FY 2003-04, AEIPL was organised into two units, one of which was a 100% Export Oriented Unit, namely FCE unit, engaged in data management, information analysis and control activities. The other unit was a 100% export unit under the Software Technology Park Scheme of India namely AEGSC unit and was engaged in providing tele-servicing and transaction processing support. During the year 2004-05 the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents, vouchers, reports etc.). The raw data is received through mail/courier, fax and electronic transmission from clients' respective locations to AEIPL servers through data links. The raw data comprises unprocessed or semi-processed accounting, financial and commercial information relating to the businesses of American Express locations worldwide. The raw data is used as an input for the processing carried out by AEIPL. The various kinds of raw data received by AEIPL are as follows: Card member Data Data pertaining to transactions done by American Express card. members. American Express Company Data: Data pertaining to day-to-day transactions undertaken within American Express companies which need to be recorded and reported to the respective American Express companies ('customer country') in different reports and accounting formats. Various types of inputs received for processing and recording in electronic or physical form are as follows: Invoices Vouchers Vendor Purchase Orders Employees Travel Expense Vouchers Airlines / SES / Hotels Data: These pertain to data on transactions done for American Express travel business and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raw data is received through mail/courier, fax and electronic transmission from clients' respective locations to AEIPL servers through data links. The raw data comprises unprocessed or semi-processed accounting, financial and commercial information relating to the businesses of American Express locations worldwide. The raw data is used as an input for the processing carried out by AEIPL. The various kinds of raw data received by AEIPL are as follows: Card member Data Data pertaining to transactions done by American Express card members. American Express Company Data: Data pertaining to day-to-day transactions undertaken within American Express companies which need to be recorded and reported to the respective American Express companies ('customer country') in different reports and accounting formats. Various types of inputs received for processing and recording in electronic or physical form are as follows: Invoices Vouchers Vendor Purchase Orders Employees Travel Expense Vouchers Airlines / SES / Hotels Data: These pertain to data on transactions done for American Express travel business and include data on: Sale of air ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious categories of ITES services is not required because of the reason that each comparable is required to be tested on the functional comparability and assets used and risk assumed to perform those functions. The testes are laid down u/r 10B(2) of the Income tax Rules 1962 which provides as under :- (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely :- (a) the specific characteristics of the property transferred or services provided in either transaction ; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entative submitted that the earlier order of the coordinate bench did not deal with the details obtained by ld AO u/s 133 (6). He therefore invited reference to page No. 217 of the appeal paper book wherein Vishal information technologies Ltd is discussed as comparable. He submitted that in assessment year 2008 09, the taxpayer has raised the similar objection on this comparable. 33. We have carefully considered the rival contentions. It is contested by the assessee that employee cost in case of the comparable is 5.52% and outside vendor cost is 65.36%, whereas in case of the assessee total employee cost is 59.05%. During the course of assessment proceedings, the Ld. transfer pricing officer issued notice u/s 133 (6) of the income tax act to seek information about the expenses of data entry and vendor payments. This was replied by the company stating that during the financial year 2007 -08 the company had infrastructure with a seating capacity of 475 seats for 3 shifts combined together, whereas the utilised capacity for the period was around 225 seats for 3 shifts combined. Looking to the various steps of the process, it was submitted that the vendor‟s personnel were oc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k technologies Ltd it is submitted that the comparable is a knowledge process outsourcing unit, which provides high-end engineering consulting services and employs engineers to provide such services. Therefore, it is a KPO and the business of the assessee is BPO. Further, reliance was placed on the decision of the Hon‟ble Delhi High Court in case of ITA No. 102/2015 Rampgreen solutions private limited versus CIT, dated 10th of August 2015 wherein it has been held that KPO cannot be taken as a comparable with BPO. 35. The Ld. departmental representative submitted that assessee is also engaged in to the business of high-end service provider and therefore it is only the difference of verticals hence, according to him this comparable company cannot be excluded. He further submitted that this company was part of the companies considered by the taxpayer. In it‟s accept reject matrix and there were no reasons given for rejection of this company on functionality ground. He further referred to page No. 374-379 of the appeal paper book to submit that Ld. assessing officer is given all the consideration of careful thought. 36. We have carefully considered the rival contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO has correctly applied the filter and also this company is functionally similar. He therefore submitted that above comparable has rightly been included in the comparability analysis. 40. We have carefully considered the rival contentions and noted that stand alone annual financial statement provided of this company for year ended March 2007 shows that revenue model of this company is medical transcription, coding and software development. Out of the total revenue of ₹ 287231664/-, ₹ 165433967/- consist of medical transcription, ₹ 27600281/- is from coding and ₹ 94197416/- from software development. Interestingly on reading note 6 at page No. 634 of the paper book wherein in significant accounting policy it is stated that this company is also engaged in production of a movie titled Love in India.‟ Furthermore, pursuant to the order of the Bombay High Court the erstwhile subsidiaries of the companies Geosoft Technologies and Iridium Technologies have merged with the company w.e.f. 1st April 2006. Therefore, naturally the profit and loss account and balance sheet also incorporate the financial results of those companies, which makes this year an ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y comparable and now the above cited order of the tribunal cannot be used as a precedence. 46. We have carefully considered the rival contentions. The main contention of the assessee is that the owner of the company have committed a fraud and therefore the financial of this company cannot be compared. We have carefully perused vide para No. 70 of that decision of the coordinate bench this comparables are considered. The coordinate bench held as under:- 17. Ground nos. 5 to 9 are against inclusion of Galaxy Commercial, Maple E Solutions, Triton Corporation, and Nucleus Netsoft and GIS (India) Ltd. as comparable cases by the TPO. In regard to Galaxy Commercial, the objection of the assessee before the TPO has been that it has diversified activities while the assessee is carrying on the business of voice based call centre only. The TPO mentioned that the company is carrying on BPO operation and transport operation. The results of only BPO operation are being considered for the purpose of determining arm's length price. In this regard, the functions are more or less similar. 17.1 Before us, it is submitted that the aforesaid company is engaged in customized BPO services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted party transactions worked out to only 6.07% which is within the permissible range. The working of PLI at 44% is also correct. 17.4 In regard to inclusion of all these companies, the ld. CIT, DR relied on the order of the AO. 17.5 We have considered the facts of the case and submissions made before us. The admitted facts in respect of Galaxy Commercial are that it is carrying on three lines of businesses and segment profitability is not available. Obviously, overall profitability of the company cannot be applied in the case of the assessee as it will amount to comparing incomparable cases. Further, the business reputation of Rastogi group, owning Maple E Solutions and Triton Corporation, is under serious indictment. They are also carrying on the businesses of data processing services and ITES services apart from BPO services. In view of a question mark on the reputation of the owner, albeit for earlier years, it would be unsafe to take their results for comparison of the profitability of the assessee. Similarly, it has not been contested by the ld. CIT-DR before us that related party transaction in case of Nucleus Netsoft GIS (India) Ltd. amounted to 22.28% against the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany is engaged in the developing software products and mainly concentration of stabilization of the tools for the e-paper solution. It was further submitted that this comparable is also engaged in software development services. The ld AR referred to page No. 359 to 363 of the appeal set wherein, several arguments are raised for exclusion. In the end the AR relied upon the decision of the coordinate bench in case of NTT Data India ITA No. 1862/Hyd/2012. The ld AR further referred to reply dated 5.02.2010 of the company u/s 133(6) of the Act which shows that the comparable is also engaged in software development. Therefore, he pleaded for its exclusion. 49. The ld DR vehemently objected to the same. 50. We have carefully considered the rival contentions and we have perused the annual account of the company at Page 1 to 34 of the paper book. According to the financial information available, this company is engaged in providing open and end-to-end web solutions, software consultancy, design, and development of solution. In response to queries u/s 133(6) enquiry letter of the TPO that it is engaged in the data cleansing services which are provided to a client for whom the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain type of expenditure which is business development expenditure it cannot be said that its functions become different. Further, the claim of the assessee that it is a persistent loss making company also cannot be considered because during the year the company has earned profit of ₹ 20740984/- against a loss in the previous year of ₹ 4488926/-. It is further submitted that for AY 2004-05 and FY 2005-06 the assessee has incurred loss of 59.07% and 44.21% and in current year the profit is 34.30%. Therefore, this company has fluctuating profits. On the identical reasons the coordinate bench in Cummins Turbo Technologies Ltd Vs. DCIT (supra) considering the decision of the special bench in case of Maersk Global Centers India Pvt. Ltd Vs. ACIT (supra) has excluded this comparable holding as under:- 8. We have carefully considered the rival stands on this aspect. In the context of the controversy relating to the exclusion of abnormal profit making concerns, a reference has been made to the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 83/43 taxmann.com 100 (Mum. - Trib.). The relevant o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. Notably, for the financial year under consideration, the margin of the said concern is 34.71% whereas for the preceding three financial years of 2003-04, 2004-05 and 2005-06 it is -6.47%, -69.07% and -44.21% respectively and for the subsequent financial year of 2007-08, the margin is 3.67%. The aforesaid clearly suggests a wide fluctuation in the margins earned by the said concern over a period of time. In-fact, a further analysis of the financial data for the aforesaid years suggest that there is a wide fluctuation in the revenue generation of the said concern during the financial year under consideration as compared to the past three financial years. For the subsequent financial year, the revenue generation has taken a downward trend which again reflects a wide fluctuation. At the time of hearing, the learned counsel for the assessee has referred to the Annual Report of the said concern for the financial year under consideration to point out that the company has acknowledged a growth of 132.86% in its revenue generation as compared to the immediately preceding financial year. In our considered opinion, there is no material to say that the high profit margin of 34.71% declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven if such an exercise involved examination of data of the comparables for more than one financial year. In the present case, as our discussion in the earlier paras reveal, the profit margin of 34.71% for the year under consideration is an abnormal business trend, and, accordingly the said concern is liable to be excluded. Therefore, we do not find any force in the plea of the Revenue to retain the said concern in the final list of comparables. 54. In view of the above decision of the coordinate bench, respectfully following it , we direct for exclusion of Informed Technologies India Ltd respectfully following the above decision of the coordinate bench. 55. The next comparable objected to by the assessee was HCL Comnet Services Ltd contesting that it is functionally dissimilar, follows different financial year, has different policy of revenue recognition and only segmental information received by the TPO u/s 133(6) of the Act was provided. 56. The ld DR submitted that it is also engaged in business of ITES Service provider therefore, it is functionally most comparable. 57. We have carefully considered the rival contentions. The companies accounting year-ends on June 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l account of the above company at page No. 179 to 281 of the paper book. According to that, this company is engaged in CRM, Finance and Accounting, knowledge services, order management and procurement and human resources for various vertical business undertaking. Further, the ld DRP at page No. 8 of its direction has noted that all the information were provided by the TPO to the assessee obtained u/s 133(6) of the Act and therefore, there is no objection about the functional dissimilarity with the company. Further, it was submitted by the ld AR that this company has operating revenue of ₹ 649 crores whereas the assessee gross revenue is only ₹ 55.94 lakhs, therefore, by mere size this company is required to be excluded. Hon'ble Delhi High Court in case of Pr CIT Vs. Actis Global Services finds merit that size and scale of the operations makes it inapposite comparable. In the present case the difference in the gross revenue from ₹ 649 crores of the comparable itself which is more than 1200 times of the turnover the assessee company. In view of this we direct the exclusion of the Infosys BPO ltd from the comparability analysis. 61. The next comparable is Wipr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices and Products and consumer care and lighting. However, on the basis of the working submitted by the ld TPO it shows that segmental revenue of ₹ 9797767937/- which is for the reasons stated with respect to exclusion of Infosys BPO squarely applies to this comparable also. In view of this, we direct to exclude Wipro from the comparability analysis. 65. In view of the appeal of the assessee is partly allowed. 66. Now we come to the appeal of revenue which has only one ground that the ld DRP has erred in directing to compute the margin of the assessee as well as that of the comparable by treating foreign exchange gain and loss as operating expenditure. The ld Dispute Resolution Panel vide para No. 5.5 while dealing with ground No. 10 of the objection of the assessee as held that from the previous order of the ld DRP it was noted that while disposing ground No. 8 of objection the previous DRP has held that foreign exchange gain and losses are operating in nature both for the taxpayers as well as for the comparables and therefore, it directed the ld TPO to treat foreign exchange gain or loss as operating. Furthermore, looking at the order of the ld DRP dated 10.08.2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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