TMI Blog2018 (1) TMI 1413X X X X Extracts X X X X X X X X Extracts X X X X ..... . During the course of hearing before us the Authorised Representative (AR) stated that Grounds of appeal No. 1,2 and 3.2 were general in nature.Hence, we are not adjudicating the same. He did not press Ground No.3 and 4.Therefore,both the grounds stand dismissed as not pressed. He further stated that only Ground No.3.1 and 3.3 were to be decided. 2.2. The asessee has filed additional Ground of appeal. It was argued before us, that the additional Ground were legal in nature and did not require verification of facts. We find that assertion made by AR is correct, therefore, we admit the additional grounds. 3.Effective Ground of appeal(GOA-3.1 and 3.3)is about Transfer Pricing(TP)adjustment of ₹ 7.34 crores. During the assessment proceedings, the AO found that the assessee had entered into International Transactions (IT) with its Associated Enterprise (AE).Therefore, he made a reference to the TPO to determine the ALP of such transactions. After considering available material the TPO suggested upward adjustment of ₹ 9.41 crores. The AO accordingly issued a draft order proposing the additions. The assessee filed the objections before the DRP.As stated earlier, the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that terms of agreements with the AE and non-AE were not the same, that the share of the assessee out of the liquidated amount was 85% in the case of non-AE and 30-35% in the case of AE .He observed that the very basic ingredients of CUP method were absent. He directed the assessee to show cause as to why the CUP method should not be rejected and TNMM should not be applied. The assessee was provided a set of 20comparables having margin of 29.2% alongwith the working of margins and search process. The comparables were, as per the TPO, engaged in ITES sector. He further directed the assessee to explain as to why the adjustment should not be made at entity level. The assessee filed objections in that regard. After considering the same, the TPO computed the arm s length price as under: Operating Cost Rs.27,19,38,000 Arms Length Mean Margin 29.25% of oprating cost Arms Length Price(ALP) @129.25% of operating cost Rs.35,14,79,865/- Arms Length Price of Service rendered Rs.35,14,79,865/- Price received (excluding other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne the ALP of the ITES entered into by it, that the TPO applied TNMM for benchmarking the transactions, that TPO made TP adjustments at entity level, that he used 21 comparables, that DRP excluded 4 comparables, that the assessee had requested to exclude four more comparables. Now, we would deal with those comparables. 3.4. We find that in the case of IS Imaging Services(supra)the assessee was rendering ITES and BPO services to its AE, that while deciding the appeals the Tribunal has dealt with the four comparable objected to by the assessee. We are reproducing the relevant part of the order the Tribunal and it reads as follow: 14. With regard to assessee's contention that companies having extra ordinary events which had influenced its revenues during the relevant previous year were to be excluded, CIT (A) was of the opinion that M/s. Accentia Technologies Ltd, would go out of the list of comparables on account of this. According to him M/s. Accentia Technologies Ltd, not only failed to provide segmental data in relation to its ITES segment in its published accounts, but had in its relevant previous year acquired one Indian company and three foreign companies. By acceptin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the CIT (A) cannot be faulted. However out of these companies assessee states that M/s. Coral Hub Ltd, M/s. Eclerx Services Ltd, and M/s. Moldtek Technologies Ltd, were functionally different from that of the assessee. This contention of the assessee will be taken up by us while disposing the appeal of the assessee. 25. Vis-a-vis ground.3 raised by the Revenue, Ld. DR had argued that exclusion of the M/s. Accentia Technologies Ltd, was inappropriate. We find that Ld. AR has placed before us a decision of the coordinate bench in the case of Symphony Marketing Solutions India p. Ltd, [IT(TP)A.1316/Bang/2012, dt.14.08.2013]. Said company was also providing ITES services to its AE abroad and the list of comparables considered by the TPO for analysing the value of international transactions also included M/s. Accentia Technologies Ltd. Case before the Tribunal was also for the very same assessment year. Therefore in our opinion the decision of the Tribunal mentioned supra would apply here as well. In relation to M/s. Accentia Technologies Ltd, it was held as under at para 10 and 11 of the order dt.14.08.2013 as under : 10. This was considered as a comparable by the TPO and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having signi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is a routine ITES provider who does not require such highly skilled employees. Besides the above, this company also carries out R D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. We may also point out that the objection of the assessee in this regard has been disregarded by the TPO by mere observation that it cannot be rejected on the basis that it is into different functional line within ITES. In this regard, we may refer to the decision of the ITAT Bangalore Bench in the case of First Advantage Offshore Services Ltd. (supra), wherein it was observed as under:- 39. Having heard both the parties and having considered their rival contentions, we find that the assessee had raised elaborate objections to each of the comparables in group 3 before the TPO. The TPO has also reproduced the said objection in his order para 6.5.1. of page 178 of his order. He has rejected the contention of the assessee by holding that every function within BPO sector can be from low end to high end and the activities of the assessee such as accounting, web management, network management are BPO services using technology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng exclusion of this company as well. xxxxx 29. Now we take the cross objection of the assessee. Grounds taken by the assessee in its cross objection are reproduced hereunder : On facts and circumstances of the case and in law, the Ld. AO/Ld.TPO erred in objecting to the exclusion of Coral Hubs Limited ( Coral Hubs ) by the Hon'ble CIT(A). Without prejudice to the above, the Hon'ble CIT(A) ought to have adjudicated on the ground pertaining to functional non- comparability and application of employee cost greater than 25% filter for Coral Hubs. On facts and circumstances of the case and in law, the Ld. AO/Ld. TPO erred in objecting to the exclusion of Eclerx Services Limited ( Eclerx ) by the Hon'ble CIT(A). Without prejudice to the above, the Hon'ble CIT(A) erred in not adjudicating on the grounds pertaining to extraordinary circumstances (amalgamation during the year), application of related party transaction greater than 10% filter, abnormal growth in CAGR and significant advertisement expenditure incurred by the Eclerx. Further, the learned CIT(A) also erred in concluding that Eclerx is functionally comparable to the Respondent. xxxxx 4. On facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd in ITA No.3774/Mum/2011 by order dt.9.11.2011 has held that since Vishal Information Technologies Ltd is outsourcing most of its work it has to be excluded from the list whereas the assessee in the cited case was carrying out the work by itself. In the instant case of the assessee also the assessee was carrying out its work by itself whereas in the case of VITL, it is outsourcing most of its work. We are therefore of the considered opinion that the decision of the ITAT, Mumbai in the cited case on the issue of excluding VITL as a comparable squarely applies. This decision was followed by the decision of the co-ordinate bench of this Tribunal in the case of Netlinx India(P) Ltd in ITA No.454/Bang/2011 dt.19.10.2012 wherein it was held that Vishal Information Technologies Ltd cannot be considered as a comparable. We, therefore, respectfully following the decision of the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd, direct the Assessing Officer / TPO to exclude Vishal Information Technologies Ltd. from the list of comparables. 15.Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- 18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped form the final list of comparables. In case of Maersk Global service Centre India (P.) Ltd. (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded. In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable. 16. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- 14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services. 15. On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent appeal and framed the following questions of law:- 1. Did the ITAT fall into error in the given circumstances of the case in confirming the transfer pricing adjustment to the extent of ₹ 5,92,07,428/- upholding the inclusion of two comparable, i.e., e-Clerx Services Limited and Vishal Information Technologies Limited, now called as Coral Hub Ltd.? 2. Did the ITAT fall into error in not appreciating the terms of Rule l0B (2) of the Rules in respect of the analysis of functionally comparable companies? xxxxx 11. We have heard the counsel for the parties. 12. At the outset, it is necessary to bear in mind that the object and purpose of introducing provisions relating to transfer pricing adjustment in the Act. By virtue of Finance Act, 2001, Section 92 of the Act was substituted by Sections 92 to 92F of the Act with effect from 1st April, 2002. Section 92 of the Act, as was in force prior to 1st April, 2002, enabled the AO to bring the correct profits to tax in relation to certain cross-border transactions. However, with a large number of multi-national companies establishing operations in India, either through their subsidiaries or through other related ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... call services and KPO services were essentially ITeS and, therefore, entities rendering the aforesaid services could be considered as comparables for the purpose of benchmarking international transactions by using TNMM. The Tribunal held that further sub-division of ITeS was not permissible. The Tribunal followed its earlier decision in Willis Processing Services (I) (P.) Ltd. v. Dy. CIT 30 ITR (Trib)129 (Mumbai) 2014. 24. It is not disputed that voice call services are considered to be the lower-end of ITeS. KPO on the other hand are ITeS where the service providers have to employ advanced level of skills and knowledge. Notification No. SO2810(E) dated 18th September 2013 issued by the CBDT notifying Safe Harbour Rules also indicates the above. Rule 10TA(g) of the said Rules defines KPO Services as under:- (g) 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion) within the same organization. KPO is, essentially, high-end Business Process Outsourcing (BPO) . 28. In our view, the definition of KPO provided under the aforementioned scheme also indicates that KPO services are understood as the higher-end of ITeS in terms of value addition. 29. It is apparent from the above that while entities rendering Voice Call Center services for customer support and a KPO service provider may be employing IT-based delivery systems, the characteristics of services, the functional aspects, business environment, risks and the quality of human resource employed would be materially different. It plainly follows that benchmarking international transactions on the basis of comparing the PLI of high-end KPO service providers with the PLI of Voice Call Centers would be unreliable and possibly flawed. 31.In the present case, the Tribunal noted that Vishal and eClerx were both engaged in rendering ITeS. The Tribunal held that, once a service falls under the category of ITeS, then there is no sub-classification of segment . Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITeS. We find it difficult to acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. We have reservations as to the Tribunal s aforesaid view 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable 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. 37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason as quoted below:- that it had a very low employment cost and very high cost on account of venture payment, which suggested that its business model was that of an outsourcing company and in view of this functional difference, Vishal Ltd. could not be considered as a comparable. 40. The Assessee had also sought the exclusion of eClerx and Vishal on the ground that both the companies had returned supernormal profits. Whereas the operating margins (operating margin over total cost) in case of Vishal and eClerx were 50.68% and 65.88% respectively, the PLIs of all other comparables 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 necessary to bear in mind that supernormal profits may in certain cases indicate a functional dissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between 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 would reflect the functions performed, the significant activities undertaken, the assets or resources used/consumed, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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