TMI Blog2016 (6) TMI 1309X X X X Extracts X X X X X X X X Extracts X X X X ..... ut providing any details. In this regard also, the TPO is directed to re-compute the working capital adjustment after giving a proper opportunity to the assessee to submit its working and objections - ITA No. 25/Del/2012 - - - Dated:- 30-6-2016 - SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER For The Appellant by: Ms Vandana Bhandari, CA For The Respondent by: Shri S.R. Senapati, Sr. DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER The present appeal has been preferred by the assessee subsequent to the directions dated 03.09.2011 of the DRP and the consequential orders dated 28.10.2011 passed by the TPO/AO. The relevant year is assessment year 2007-08. The facts of the case are as under:- 2. ICC India (ICCI), the assessee, was incorporated as an Indian Company on June 13, 1994 under the Indian Companies Act, 1956 as a wholly owned subsidiary of Interactive Composition Corporation (ICC) of USA. ICC is a book, journal and multimedia publishing services company and provides a range of services related to the publishing industry. ICCI provides valuable software services to ICC in the area of data processing, data ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing. When ICC India receives these electronic files, it first analyses them and then sends a pro-forma invoice for approval to ICC USA. Once it is approved by ICC USA, it starts the actual work and then bills this on a monthly basis to ICC USA. Usually to finish the above-mentioned process, ICC India takes between one to three months. The price depends on the schedule time given, complexity of the job, technical input required and level of quality assurance required. ICC India maintains and deploys necessary human resources and infrastructure for provision of services. However, ICC India does not own any valuable nonroutine intangibles. Further, all intangibles including discoveries, improvements, inventions and trade secrets are the sole and exclusive property of ICC USA. 4. During the FY 2006-07, ICCI has exported ITES to its AE amounting to ₹ 15,69,11,499/- . In the TP study, the assessee has adopted the TNMM as the most appropriate method for determining the ALP of the international transactions relating to the provision of IT Enabled Services (ITES). For the purpose of applying TNMM, the assessee has used operating profit/total cost (OP/TC) as the profit level in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed uncontrolled comparable companies based on a detailed Functional Asset and Risk ( FAR ) analysis following a methodical benchmarking process thereby rejecting the comparable company set/ data which had been provided by the appellant for benchmarking its transactions of provision of IT enabled services, without giving reasons that were cogent or backed by any sound evidence. d) disregarding multiple year/ prior years data as used by the appellant in its Transfer Pricing ( TP ) documentation report and holding that current year (i.e.FY 2006-07) data for comparable companies should be used despite the fact that the same was not available to the appellant at the time of preparing its TP documentation, and in interpreting the requirement of contemporaneous data in the Rules to necessarily imply only current/ single year (i.e. FY 2006-07) data. e) not appropriately considering the functions, assets and risk profile of the companies used for comparison with the IT enabled services provided by the appellant. f) by excluding certain companies on the basis of declining sales/ declining profitability. g) by including certain companies which are not comparable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atural justice have been violated. 5. That the appellant reserves its rights to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. 6. At the outset, the Ld. AR submitted that the assessee s operating mark-up has been wrongly taken at 1.73% instead of 12.58% by the TPO in the revised order. It was also submitted that the TPO has not given effect to the directions of the DRP to delete the addition of ₹ 89,74,100 made on account of prior period depreciation. The Ld. AR also submitted that the increase in stock of ₹ 38,80,875/- (i.e. work-in-progress) as well as ₹ 27,02,513/- on account of other income (provision written back) should be taken as operating income. The Ld. AR further submitted that in the revised order, the TPO has wrongly reduced the Working Capital Adjustment from 3.64% to 2.18% without providing any basis for the computation. 7. On comparables, the Ld. AR submitted at length as under:- (i) Accentia Technologies Ltd. (Seg) Functionally dissimilar Co. is into business of Healthcare Receivables Management which included developing of software products (Software as a service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial services and retail and manufacturing. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals - financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk. It provides services in banking, finance, manufacturing, retain, travel and hospitality verticals. It provides pricing analytics, building optimisation, content operations management, revenue management services. To retail and manufacturing clients it provides sales and marketing support, product data management, revenue management services. To financial services clients it provides real time capital markets, middle and back office support, portfolio risk management, various critical data management services. Solutions offered include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 940 cr and operating assets employed in the BPO business is 781 cr. The co s heavy investments in operating assets results into different functional and risk profile. It has incurred huge expenditure on Research Development. During the year, its R D efforts have contributed nearly 8.5% of total revenue. It was submitted that the BPO segment has employee base of 17,464 personnel. Wipro enjoys economies of scale due to huge capital investment, huge volume of business, diversified business functions and global client base. It is a giant in its area of business and has huge brand value and goodwill. It is one of the leading BPO service providers to giant corporations across the globe as acknowledged by it in its Annual report.It owns significant intangibles. Further intangibles are acquired through acquisitions in the year under consideration. It has presence across the globe and follows inorganic method of growth through which it acquires goodwill/ brand-value and presence in the global market. It was submitted that between Mar 2006 Mar 2007, WIPRO acquired mPower services Inc. subsidiaries, cMango, and 3D Network which have resulted in expansion of BPO services. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. is into providing Structural Engineering design services to high rise buildings. It was further submitted that during the year there was a merger with Teck-men Tools Pvt. Ltd. and acquisition of Crossroads Inc, USA. It was also submitted that the accounts of company were revised for FY 2006-07 after amalgamation. During the year revenue and contracts of company have grown exponentially. The CIT (A) excluded this Co. from the list of comparables in AY 2008-09. (xi) Triton Corp. It was submitted that the company is functionally different. The Co. is into call centre services, support services and trading in IT Peripherals. There were Mergers and Acquisitions during the year. Triton acquired 100% shares of E maple Solutions Ltd. Therefore, both Triton and Maple should be rejected due to peculiar economic circumstances. Promoters were involved in fraud for earlier years; therefore, financials of this Co. are distorted and unreliable. The CIT (A) excluded this Co. from the list of comparables in AY 2008-09. (xii) Maple Esolutions It was submitted that there were Mergers and Acquisitions during the year. Triton acquired 100% shares of E maple Solutions Ltd. Promotes wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced from 3.64% to 2.18% without providing any details. In this regard also, the TPO is directed to re-compute the working capital adjustment after giving a proper opportunity to the assessee to submit its working and objections. 10. Coming to the objections of the assessee on the comparables, the same are disposed of as under:- (i) Accentia Technologies Ltd. (Seg) : The assessee is objecting to the aforesaid company being treated as a comparable on the ground that during the year Geosoft Technologies (Trivandrum) Ltd. and Indian Technologies (India) Pvt. Ltd. amalgamated with Accentia during the year resulting in abnormal rise in profits. The Delhi Bench of the Tribunal in Cienna India (P) Ltd. vs DCIT 57 taxmann.com 329 ( Delhi-Trib) as well as the Mumbai Bench in Petro Araldite (P) Ltd Vs. DCIT 144 ITD 625 (Mumbai-Trib) have held that a company cannot be considered as comparable because of financial results become distorted due to mergers, demergers etc. Similar view has also been taken by the Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd vs ACIT in ITA No. 5654/Del/2011. As there were amalgamations in Accentia Technologies Ltd. during the financial yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntre services to its AE. The fact Eclerx Services Ltd. is providing high end services involving special knowledge and domain expertise is evident from the company's own reply to the notice u/s 133(6) which is placed at pages 976 to 979 of the paper book filed by the assessee. The Hon'ble Special Bench of the Tribunal in case of Maersk Global Centre (India) (P.) Ltd. v. Asstt. CIT [20141 147 ITD 83/43 taxmann.com 100 (Mum.) had excluded Eclerx Services Pvt. Ltd. from the list of comparables for the reason that it is providing high end services involving specialised knowledge and domain expertise and same cannot be compared with companies which are mainly engaged in providing low end services to group companies. The relevant finding of the Hon'ble Tribunal read as follows :- In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007- 08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is equally applicable to the facts of the assessee case as is evident from the functional profile of the assessee company. For the aforesaid reasons, we direct that Eclerx Services Ltd. be excluded from the final list of comparables. (v). HCL Comnet Ltd. (Seg.). : The assessee has objected to the inclusion of this company on the ground that the company is into remote IT infrastructure management services, data centre management and user computing services, managed security services, networking services, tools and process consulting services and is therefore functionally dissimilar. The other objections to the inclusion are that the company runs a highly capital-intensive industry, it operates 24/7 in 3 shifts, it has a significant brand value and a huge assets base. It is also the assessee s plea that the company is a full risk bearing entrepreneur whereas the assessee is a Captive Service Provider to its AE. Having considered all the aspects, it is our considered opinion that the assessee s contention about being functionally dissimilar is correct. The Hon ble Delhi High Court in Rampgreen Solutions (P) Ltd vs. CIT (A) (2015) 60 taxman.com 355 (Delhi) has opined as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ategorization 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/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. Accordingly, we direct for the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business 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. Drawing strength from the ratio laid down by the Hon ble Delhi High Court, we direct the exclusion of Vishal Information Technologies Ltd. from the final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumption. Drawing our strength from the above decision of the Hon ble Delhi High Court, we direct that this company be excluded from the list of comparables. (ix). Informed Technologies India (Pvt.) Ltd. - It is the assessee s objection that the company is functionally dissimilar. Another objection is that there is a wide fluctuation in the margins on YOY basis and the same would lead to skewed results. ITAT Pune Bench in Cummins Turbo Technologies Ltd. Vs. DDIT (International Taxation) (2015) 53 taxman.com 492 (Pune-Trib) while adjudicating a similar issue referred to the decision of the Special Bench of the Tribunal in the case of Maersk Global Centers (India )(P) Ltd Vs. ACIT (2014) 147 ITD 83 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. C/7T20141 147 ITD 83/43 taxmann.com 100 (Mum. Trib). The relevant observations of the Bench are as under:- In generality, we are of the view that the answer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of Toluna India Pvt. Ltd vs ACIT in ITA No. 5654/Del/2011. As there were amalgamations in Mold-tek during the financial year in question, this fact makes it incomparable with the assessee company. In view of the aforesaid, we direct to exclude this company from the list of comparables. (xi) Trinton Corp . : The assessee s objections include that the company is functionally different. The Co. is into call centre services, support services and trading in IT Peripherals. There were Mergers and Acquisitions during the year. Triton acquired 100% shares of E maple Solutions Ltd. Therefore, both Triton and Maple should be rejected due to peculiar economic circumstances. Promoters were involved in fraud for earlier years; therefore, financials of this Co. are distorted and unreliable. (xii)- Maple Esolutions Ltd. : It was submitted that there were Mergers and Acquisitions during the year. Triton acquired 100% shares of E maple Solutions Ltd. Promotes were involved in fraud for earlier years therefore, financials of this Co. are distorted and unreliable. The Delhi Bench of the Tribunal in Cienna India (P) Ltd. vs DCIT 57 taxmann.com 329 ( Delhi-Trib) as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubtful debts of ₹ 5.08 crores and miscellaneous balances of ₹ 3.39 crores written off as operating expenses. It is seen that the assessee had not raised this particular issue before the DRP and is agitating the issue from the first time before us only. The ITAT Delhi Bench in Sony India Pvt. Ltd vs DCIT in ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007 has held that there is no justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the tax payer. In the interest of justice we restore the issue of writing back of provision for doubtful debts to be verified and treated as an operating expense by the TPO after proper verification in this regard. As far as the issue of writing off of miscellaneous balances is concerned we restore the issue of adjudication itself to the file of TPO as the relevant details of the balances written off and their nature are not before us. (xiv). Flextronics Software Systems Ltd (Seg). : It is the assessee s submission that in the revised order, the TPO has included 5.4 crores of foreign exchange gain at entity level whereas segment information has been used by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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