TMI Blog2018 (8) TMI 592X X X X Extracts X X X X X X X X Extracts X X X X ..... d with transfer pricing adjustment on account of interest income short charged/uncharged. - the assessee’s contention that the ITAT erred in concluding that charging of interest on delayed receipt of receivables is a separate international transaction which requires to be benchmarked independently, is incorrect. Selection of comparable - revenue urged that a stringent application of the comparability test was unnecessary - Held that:- even if due consideration is given to a certain level of dissimilarity between the Assessee and the comparable companies, it can be observed that the nature of services provided by the abovementioned comparable companies do not demonstrate even a degree of similarity with the services rendered by the Assessee that would be sufficient to qualify under rule 10B(2) of the Income Tax Rules, since, as established above, the Assessee’s services under its R&I segment are in the nature of services provided by a KPO and they are functionally dissimilar from the comparable companies, in terms of their services as well as their risk profiles. Decided partly in favor of assessee and partly in favor of revenue. - ITA 461/2017, ITA 526/2017, ITA 590/2017, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offered include financial analysis. (b) Practice Research Group - focuses on domain specific research support. The services provided include sector data and analysis, capital market insights, perspectives and industry trends and (c) Analytics Group - focuses primarily on time intensive analysis requiring expertise and analytical tools and techniques. The services provided include data analysis, model/tool development, proprietary database management, practice specialized analytics. (b) IT Support Services Division The IT Support Division provides services which include data-based administration support for maintenance of application infrastructure, unloading and correction of data on servers. 5. ITA 461/2017 (by the assessee), challenges an order of the Income Tax Appellate (ITAT) dated 15.12.2016, for assessment year (hereinafter referred to as AY ) 2011-12. The revenue s appeal ITA No. 590/2017 questions the same order. By the impugned order dated 15.12.2016, the ITAT partly allowed the assessee s appeal and directed exclusion of four comparables, namely Aditya Birla Capital Advisors Pvt. Ltd., Birla Sunlife Asset Management Company Limited, ICRA Limited and La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O by its order dated 08.12.2015 revised the original adjustment down to ₹ 25,94,83,195/-. On 10.12.2015, the AO passed the final assessment order making an addition of ₹ 25,94,83,195/- on account of transfer pricing adjustment to the price determined by the Assessee. Aggrieved, both the assessee and the revenue appealed to the ITAT against the final assessment order passed by the AO. The ITAT by its order, dated 15.12.2015 directed the exclusion of the following comparables on the grounds of functional dissimilarity: (a) Aditya Birla Capital Advisors Pvt. Ltd. (b) Birla Sunlife Asset Management Company Ltd. (c) ICRA Ltd. (d) Ladderup Corporate Advisory Pvt. Ltd. 8. In its appeal the revenue impugns the ITAT s order on the ground that it erred by excluding (a) Aditya Birla Capital Advisors Pvt. Ltd., (b) Birla Sun life Asset Management Company Ltd., (c) ICRA LTD. and (d) Ladderup Corporate Advisory Pvt. Ltd. from the list of comparables on the grounds of functional dissimilarity by ignoring the fact that these companies were engaged in similar line of business and were functionally comparable under TNMM. Likewise, in ITA No. 82/2018, the revenue ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 31,91,40,070/- proposing a transfer pricing adjustment amounting to ₹ 34,34,30,020/-. Aggrieved, the assessee preferred appeal to the DRP. The DRP by its order dated 29.09.2016, rejected the assessee s objection with respect to exclusion of the three comparable companies namely Aditya Birla Capital Advisors Pvt. Ltd., Axis Private Equity Ltd., and Credit Information Bureau India Ltd. The DRP observed that the assessee had taken an objection before the DRP that the TPO had resorted to cherry picking of comparables, however, the assessee had failed to give any specific instance of in that regard. 12. Pursuant to DRP s directions, the TPO by its order, dated 10.11.2016 revised the original adjustment from ₹ 34,34,30,020/- down to ₹ 12,66,07,828/-. Consequently, the AO passed final assessment order under section 143(3) read with section 144C of the Act on 25.11.2016 wherein the returned income of the Assessee of ₹ 31,91,40,070/- was assessed at ₹ 44,57,47,898/- incorporating therein addition as per the transfer pricing adjustment of ₹ 12,66,07,828/-. Thus, being aggrieved, the assessee preferred an appeal before the Tribunal who by order date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent position that is unchanged in terms of facts, the Assessee avers that it should be considered as a BPO and not a KPO. 16. On behalf of the Assessee, the cases of Ameriprise India (P.) Limited vs. ACIT in ITA No. 2010/Del/2014 , where on similar facts the ITAT had held that collection and processing of data received/sourced and sending reports to the AE after analyses, evaluation and processing of such data into specific formats is providing back office support services, and Rampgreen Solutions (P) Ltd v. CIT 60 Taxmann.com 255 (Del) wherein the Delhi High Court, in the context of distinguishing BPO and KPO services, held that The expression KPO indicates the involvement of domain knowledge in providing ITeS. Typically, KPO includes involvement of advance skills; the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management etc..... , were also cited. The assessee further submitted that the definition of BPO services has been provided by the Central Board of Direct Taxes by Notification dated 18.09.2013 under Rule 10TA of the Income Tax Rules, 1962, based on which the activities performe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome', under preamended as well as post amended schedule VI to the Companies Act, which is duly taken into account into computation of PBIT. In a way PBIT is a misnomer, as while PBIT does not take into account interest expenditure, it does take into account interest income appearing in the other income. Once the profitability, as per PBIT, is found to be comparable, there cannot be a separate adjustment for interest income on delayed realization which is an integral part of the PBIT figure. 13. It is in this background that we may refer to the observations made by a coordinate bench of this Tribunal, in the case of Micro Ink Ltd (supra), as follows: '7. We find that, as evident from audit report on form 3CEB (pages 39 to 52 of the paper-book), the arm's length price of exports to the AEs, including Micro USA, has been determined on the basis of the transactional net margin method (TNMM). By way of a note at page 51, it is specifically stated that further, the said amount of ₹ 2428.26 millions has also been determined/ computed by the assessee having regard to the arm's length price on application of Transactional Net Margin Method (TNMM), on aggre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the assessment year 2013-14. In addition to this reason, in the light of Hon'ble Delhi High Court's guidance in the case of New Skies Satellite BV (supra) also, the amendment in the definition of international transaction under Section 92B, to the extent it pertains to the issuance of corporate guarantee being outside the scope of 'international transaction', cannot be said to be retrospective in effect. The fact that it is stated to be retrospective, in the light of the aforesaid guidance of Hon'ble Delhi High Court, would not alter the situation, and it can only be treated as prospective in effect i.e. with effect from 1st April 2012 onwards. 19. Ms. Vibhooti Malhotra, on behalf of the Revenue challenged the orders of the ITAT further, stating that it failed to appreciate that application of the TNMM does not require stringent standard of comparability analysis as required while applying the CUP method because under the TNMM methodology, net profit margin of the comparable are compared with the tested party. Accordingly, the method is more tolerant to small differences between comparable and tested party, thereby, not appreciating the relevant stipulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpretation of various data, and hence in no way different from each other in terms of their functional profiles. 21. The Revenue also argued that, the assessee being a knowledge center is engaged in the business of high skilled advisory services which requires not only analysis of specialized data but also involves analysis, processing, customization, interpretation of data and creation of knowledge bank. Similarly, it was submitted that the companies selected by the TPO as comparables, engaged in the business advisory services were in the form of knowledge centers which required not only analysis but interpretation of various data and therefore, the Tribunal erred in holding that the functional profile of the comparables excluded by the Tribunal were different from the assessee. Analysis and Conclusions 22. The assessee s primary contention is that it functions as, and hence seeks to be identified as a BPO and not as a KPO. Before examining this contention, it would be useful to look at the legislative history and purpose of introducing transfer pricing adjustment in the Income Tax Act, 1961 (the Act ), as highlighted in Rampgreen Sales Pvt. Ltd. v. CIT (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true income of an Assessee is brought to tax under the Act and there is no avoidance of tax by transfer of income from India to any other tax jurisdiction by virtue of the influence exercised by the associated enterprises. The aim of the provisions of Chapter X of the Act is to compute the income in relation to a controlled transaction between an Assessee and its associated enterprise having regard to ALP, in order to nullify the effect of transfer of income to a jurisdiction outside India, if any, in respect of the controlled transactions. 15. The exercise of determining the ALP in respect of international transactions between the related enterprises is aimed to determine the price, which would have been charged for products and services, as nearly as possible, in case such international transactions were not controlled by virtue of them being executed between related parties. The object of the exercise is, thus, to remove the effect of any influence on the prices or costs that may have been exerted on account of the international transactions being entered into between related parties. It is, at once, clear that for the exercise of determining ALP to be reliable, it is nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions 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 orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 25. Therefore, it becomes crucial to see that the entities chosen as comparables are functionally similar to the assessee, in order to ensure a correct estimation of the ALP that serves the true purpose of transfer pricing legislation. This was also highlighted in Rampgreen (supra) [and further laid down in Li Fung India Private Limited v. CIT 361 ITR 85 (Delhi)] as follows: 20. In order for the benchmarking studies to be reliable for the purposes of determining the ALP, it would be essential that the entities selected as comparables are functionally similar and are subject to the similar business environment and risks as the tested party. In order to imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Knowledge management systems and infrastructure issues which would encompass infrastructure support, application support, application operations group and survey development center . Further, in context of assessing whether the Assessee is characterized as a KPO or a BPO, the ITAT observed as follows: 16. Now coming to the functional profile of research and information services provided by assessee, which is divided into 3 broad subgroups of knowledge on-call, practice research, and analytics. This is in terms of agreement dated 01/04/2010 titled as Master service agreement dated 01/04/2010 between assessee and its associated enterprise wherein assessee is responsible for providing research and information services to its associated enterprises. i. In first subgroup of knowledge on-call assessee provides research and information reports. The services offered includes financial analysis, fact packs, press search, document search etc by employing around hundred personnel with experience scale of 0 to 2 years. ii. In practice research group assessee is focused on domain specific research support with team size of over 240 people, which provides sector data and analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. The distinction elucidated in Safer Harbour Rules is also in same lines. 30. Likewise, in Maersk Global Centres (India) Private Limited v. ACIT [2014] 161 TTJ 137 , the term knowledge process outsourcing services has been examined as follows: 71. The term knowledge process outsourcing services is defined in clause (g) of10-TA (the Notification No. SO 2810(E) issued by the CBDT on 18th September, 2013 making Rules 10TA to Rule 10-TG as Safe Harbour Rules) as under:-- (9) knowledge process outsourcing services means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely: (i) geographic information system; (ii) human resources services; (iii) engineering and design services; (iv) animation or content development and management; (iv) business analytics; (v) financial analytics; or (vi) market research, but does not include any research and development services whether or not in the nature of contract research and development services. 31. Thus, a comparison of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to its ALP. The expression 'debt arising during the course of business' in common parlance encompasses, inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on account of interest income short charged or uncharged. Under such circumstances, the contention taken by the assessee before the TPO that it is not an international transaction, turns out to be bereft of any force. ****************************************************************** 25. The foregoing discussion discloses that non-charging or undercharging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) published in 2010, that indicates the comparability factors which are important while considering the comparability of uncontrolled transactions/entities with the controlled transactions/entities. The relevant OECD Guidelines (which are not conclusive, but are only to be seen as guiding factors) as quoted in Rampgreen are as follows: 1.36 As noted above, in making these comparisons, material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm's length transactions. Attributes or comparability factors that may be important when determining comparability include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n practice, it has been observed that comparability analyses for methods based on gross or net profit indicators often put more emphasis on functional similarities than on product similarities. Depending on the facts and circumstances of the case, it may be acceptable to broaden the scope of the comparability analysis to include uncontrolled transactions involving products that are different, but where similar functions are undertaken. However, the acceptance of such an approach depends on the effects that the product differences have on the reliability of the comparison and on whether or not more reliable data are available. Before broadening the search to include a larger number of potentially comparable uncontrolled transactions based on similar functions being undertaken, thought should be given to whether such transactions are likely to offer reliable comparables for the controlled transaction. D.1.2.2 Functional analysis 1.42 In transactions between two independent enterprises, compensation usually will reflect the functions that each enterprise performs (taking into account assets used and risks assumed). Therefore, in determining whether controlled and uncontrol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions; risks of loss associated with the investment in and use of property, plant, and equipment; risks of the success or failure of investment in research and development; financial risks such as those caused by currency exchange rate and interest rate variability; credit risks; and so forth. xxxxxxxxxxxxxxxx 1.51 In some cases, it has been argued that the relative lack of accuracy of the functional analysis of possible external comparables (as defined in paragraph 3.24) might be counterbalanced by the size of the sample of third party data; however quantity does not make up for poor quality of data in producing a sufficiently reliable analysis. See paragraphs 3.2, 3.38 and 3.46. 35. The Revenue had asserted that in the exercise of TNMM, the ITAT erred by concluding on the dissimilarity of the comparables, since this particular method of computing the ALP allows for a broader application as opposed to the stringent level of exactitude that the ITAT applied, while comparing the functional similarity of the Assessee with the (excluded) comparable companies. The revenue asserted that the ITAT erred by applying stringent standards of comparability analysis for selecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the risks assumed. Thus, comparison of activities undertaken/functions performed is important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be apposite to ignore functional dissimilarity only for the reason that its impact may be reduced on account of using arithmetical mean of the PLI. The DRP had noted that eClerx was functionally 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 by including comparables offering services/products which are not entirely similar to the controlled transaction/entity. However, this can be done only if (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the risks assumed; and (b) the diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable. It might of course be possible to adjust results for minor functional differences, provided that there is sufficient comparability to begin with. The standard of comparability for application of the transactional net margin method is not less than that for the application of any other transfer pricing method. 38. The ITAT s conclusions with respect to each of the comparables, in brief, is as follows: Company ITAT Verdict on Comparability Aditya Birla Capital Advisors This comparable is not engaged in business of raising of funds but is engaged in advising functions of raising of funds and deploying same. Based on the work profile of Assessee and details of services provided, it cannot be stated that functions performed by the Assessee in research and information services are anywhere similar to functions of a fund manager. Axis Private Equity Ltd. It is apparent that this company has a different risk profile too. As per the balance sheet abstract of the company, services of the company are classified as asset management services. Based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requester and then organized into templates in excel, power point, etc., before transmitting outside India. There being no closeness with the functions performed by the assessee, this company is directed to be excluded from the list of comparables. Ladderup Corporate Advisory Pvt. Ltd. This company provides a one-stop financial advisory and fund raising solutions in Investment Banking, Capital Markets, Wealth Management Project Finance and Growth stage investing. On an overview of the nature of business carried out by this company, it is manifest that the same is absolutely different from the Assessee s. 39. The revenue urged that a stringent application of the comparability test was unnecessary as was also provisioned in Chapter-6 of United Nations Practical Manual on Transfer Pricing, Edition 2013, and some flexibility in conducting this comparison was urged to be allowed. However, from the above analysis, in the present appeals, even if due consideration is given to a certain level of dissimilarity between the Assessee and the comparable companies, it can be observed that the nature of services provided by the abovemen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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