TMI Blog2017 (9) TMI 1823X X X X Extracts X X X X X X X X Extracts X X X X ..... ffice segment which can only be characterised as a routine ITeS service provider. Therefore, it is evident that this company is functionally dissimilar to the assessee company. Infosys BPO Limited - Hon'ble Delhi High Court in Actis Global Services Pvt. Ltd. [ 2016 (8) TMI 1197 - DELHI HIGH COURT] rejected this comparable on the ground of high turnover wherein the comparable had a turnover of 66 times of the taxpayer. In the assessee s case, it is seen that the assessee s turnover from back office segment amounts to ₹ 4.35 crores whereas, as per the annual report of Infosys BPO, the turnover was ₹ 1129.11 crore which is approximately 260 times more than that of the assessee s turnover. Therefore, we are inclined to agree with the contentions of the ld. AR and deem it fit to remit this comparable to the file of the Assessing Officer/TPO with the direction to delete this company from the final set of comparables after due verification of the figures of turnover of the assessee as well as of the comparable. Hence, this company stands excluded for statistical purposes. R Systems international Limited - The Hon'ble High Court has held in Mckinsey Knowledg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applications already developed by the Associated Enterprises (AE). The services also include fixing of bugs. With respect to technical support services, the same include addressing the queries raised by the customer on AEs. The queries addressed by the assessee are in the nature of configuration issues, data corruption issues and bug issues. With respect to hosting services, the assessee provides monitoring, help desk, incident response, change and release management, asset tracking and reporting. The nature of hosting services includes technical administrative maintenance, troubleshooting and support for all servers. Further, the assessee is also engaged in monitoring the cloud so developed by the AE to ensure that the application is functioning as per the requirements. ITA No. 1685/Del/2016 for Assessment Year 2011-12: 3. During the captioned year, the return declaring income of ₹ 3,03,72,440/- was filed. The assessee company was engaged in the business of provider of software services and back office support. The assessee company had entered into international transactions with AEs and on a reference to the Transfer Pricing Officer (TPO) u/s 92C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mean 29.53% 3.2 The TPO also did not include economic adjustments like working capital adjustment and risk adjustment while computing the arm s length margin in the back office support services segment of the assessee company. The TPO determined the arm s length margin in the back office support services segment of assessee company at 29.53% as against the assessee s margin of 16.02% and proposed an adjustment of ₹ 50,74,969/- . On the assesseee approaching the Hon ble DRP, the Hon ble DRP accepted the approach and the comparables considered by the TPO and directed the TPO to provide working capital adjustment and also to re-compute the margins of the assessee as well as the of the comparables by removing computational errors. The Hon ble DRP while rejecting the aseeseee s claim for excluding comparables held that the functional profile of the assessee with reference to the back office support segment was akin to a Knowledge Processing Outsourcing (KPO) service whereas the assesse s contention was that it was not a KPO but only a back office service provider. However, the TPO did not provide the working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pricing documentation on the basis of additional/ modified quantitative filters which lacked valid and sufficient reasoning; 1.2 Accepting companies which were functionally not comparable to the Appellant; 1.3 Not considering the correct computation of operating margins of certain comparables; 1.4 Denying the benefit of economic adjustment on account of difference in risk profile in arriving at the arm s length margin; 1.5 Accepting high turnover companies as comparables and thereby ignoring the impact of economies of scale; and 1.6 That on facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP erred in selecting the current year (i.e. financial year 2010-11) data for comparability despite the fact that at the time of preparation of transfer pricing documentation by the appellant, the complete data for financial year 2010-11 was not available within the public domain. 2. That the Ld. AO / Ld. TPO erred in not following the directions of the Ld. DRP that comparability adjustment (working capital adjustment) should be provided to appellant while determining the arm s length profit margin. 3. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not include any research and development services. Ld. AR further submitted that as far as KPOs are concerned, they provide business process outsourcing services, mainly with the assistance of information technology requiring application of knowledge and advanced analytical and technical skills. It was submitted that KPOs usually provide services in the nature of geographical information system, human resource services, engineering and design services, animation or content development and maintenance, business analytics, financial analytics and market research. It was submitted that the functions performed by the assessee were not at all related to the services covered by the definition of a KPO and the TPO did not consider the assessee as a KPO but the Hon ble DRP, without analysing the functional profile of the assessee and without providing any cogent reasoning, held the assessee s functions as akin to a KPO. It was reiterated that the functions of the assessee were more akin to ITeS services provider and not a KPO. 5.1 Coming to the comparables, the ld. AR advanced his arguments as under:- i) TCS E-Serve Limited It was submitted that TCS E-S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rx Services Limited 5.3 Ld. AR submitted that this company was also functionally dissimilar as this company was a KPO engaged in financial services and sales and marketing services. He referred to the annual report of the company Eclerx Services Limited and pointed out that under sales and marketing functions, the company provided web content management and merchandising execution, web analytics, social media moderation, analytics, search engine analytics and support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price and catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting. It was submitted that as per the definition of KPO, the functions performed by Eclerx Services Limited fell within the meaning of a KPO for providing high end services which was way beyond the realm of services performed by the assessee company as the assessee s company only provided back office services which were more in the nature of ITeS services. Reliance was placed on a number of judgements wherein Eclerx Services Limited had been excluded as a comparable on the ground of being a KPO and cateri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... study but that inclusion was being sought to be rejected because of functional dissimilarity and incomparable scale of operations. The ld. AR submitted that the assessee cannot be prevented from rejecting a comparable solely on the ground that the same had initially been included in its TP documentation or submitted during the course of assessment proceedings. Reliance was placed on the order of ITAT Chandigarh (Special Bench) in the case of Quark Systems Pvt. Ltd for the proposition that the taxpayer should be given an opportunity rectify the bona fide mistake in its TP analysis if it is based on facts on record. Reliance was also placed on another order of ITAT Mumbai Bench in the case of UCV India Pvt. Ltd. wherein it was held that the assessee is not pinned down to his statement in the first round of his transfer pricing proceedings. It was submitted that the Infosys BPO Ltd. was engaged in high end integrated services by assisting its clients in improving their competitive positioning by managing their business processes in addition to providing increased value. It was further submitted that this company had a turnover 260 times more than that of the assessee company. Reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies and, therefore, this comparable was also a good comparable for the assessee company. On the issue of exclusion of Infosys BPO, it was submitted that the arguments were similar to that in case of TCS. It was also submitted that the assessee has not been able to bring out the nature of mistake in selecting this comparable as a comparable. It was submitted that this comparable should be retained in the final set of comparables. 6.2 On the issue of assessee s plea for including R systems in the set of comparables, the ld. CIT DR placed reliance on the observations of the TPO and submitted that when other comparables were available, then there was no justification introducing a new comparable. 6.3 The ld. CIT DR read out extensively from the order of the TPO and the Hon ble DRP and vehemently argued that no alteration should be made in the final set of comparables. ITA 6386/Del/2016 Assessment Year 2012-13: 7. For this year, the return of income was filed declaring income of ₹ 73202670/-. On a reference being made to the TPO, the TPO disregarded the approach followed by the assessee in the TP Study and with reference to back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the comparable companies by removing computational errors. The final set of comparables post the DRP directions are as under:- S. No. Company Name Working capital adjusted OP/TC 1 Accentia Technologies Limited 8.49% 2 Informed Technologies India Limited 5.59% 3 E4e Healthcare Business Services Private 20.42% 4 Eclerx Services Limited 56.17% 5 Infosys BPO Limited 33.39% 6 T C S E-serve Limited 61.66% 7 Acropetal Technologies Limited (Segmental) 18.30% 8 Jindal Intellicom Limited -0.37% 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g documentation by the Appellant, the complete data for FY 2011-12 was not available within the public domain. 2. That the Ld. AO / Ld. TPO erred in not computing the margin of the Appellant for the back office support services segment as per the directions of the Ld. DRP, thereby following an inconsistent approach for margin computation of the Appellant vis-a-vis the comparables. 3. That the Ld. AO erred in charging interest under section 234B and 234C of the Act amounting to INR 11,25,999 and INR 317,219 respectively. 4. That on the facts and in the circumstances of the case and in law, Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of appeal either before or during the course of the proceedings before the Hon ble Income Tax Appellate Tribunal in the interest of the natural justice. The aforesaid grounds are mutually exclusive and without prejudice to each other. 8. At the outset, the ld. AR submitted that the assessee was challenging the inclusion of Eclerx Services Limited, TCS E-serve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA 94/2017 had upheld the order of ITAT Delhi directing the deletion of this comparable from the final set of comparables on the ground that TCS was involved, both in transaction processing and technical services, and was, therefore, not a comparable company with respect to a company engaged only in BPO activities. Therefore, we deem it appropriate to exclude this company from the final set of comparables and direct the TPO/Assessing Officer accordingly. ii) Eclerx Services Limited As per the annual report of this company, it is seen that this company is engaged in financial services, web content management and merchandising execution, web analytics, social media moderation and analytics, search engine analytics and support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price and catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting whereas the assessee s impugned segment is a back office segment which can only be characterised as a routine ITeS service provider. Therefore, it is evident that this company is functionally dissimilar to the assessee company. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ologies vs ITO in ITA No. 1204/2011 on the ground of high turnover wherein the comparable had a turnover of 58 times of the assessee. Similarly, the Hon'ble Delhi High Court in Actis Global Services Pvt. Ltd. in ITA 94/2017 rejected this comparable on the ground of high turnover wherein the comparable had a turnover of 66 times of the taxpayer. In the assessee s case, it is seen that the assessee s turnover from back office segment amounts to ₹ 4.35 crores whereas, as per the annual report of Infosys BPO, the turnover was ₹ 1129.11 crore which is approximately 260 times more than that of the assessee s turnover. Therefore, we are inclined to agree with the contentions of the ld. AR and deem it fit to remit this comparable to the file of the Assessing Officer/TPO with the direction to delete this company from the final set of comparables after due verification of the figures of turnover of the assessee as well as of the comparable. Hence, this company stands excluded for statistical purposes. iv) R Systems international Limited It is seen that the TPO/Hon ble DRP had rejected this company on account of different financial year ending. However, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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