TMI Blog2019 (4) TMI 1726X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. DRP are hereby confirmed - Decided against revenue. - ITA No.1380/Del/2016 - - - Dated:- 15-4-2019 - SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The ASSESSEE : Shri Neeraj Jain, Advocate And Shri Abhishek Agarwal, Advocate For The REVENUE : Shri H.K. Choudhary, CIT DR And Ms. Nimita Pandey, Senior DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : The Appellant, ITO, Ward 19 (1), New Delhi (hereinafter referred to as Revenue ) by filing the present appeal sought to set aside the impugned order dated 22.01.2016 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short the Act ) qua the assessment year 2011-12 on the grounds inter alia that :- 1. On the facts and circumstances of the case, the Hon ble DRP-II has erred in allowing the appeal of the assessee by excluding M/s. EClerx Services Ltd. and M/s. Acropetal Technologies Ltd. as a comparable. 2. On the facts and circumstances of the case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. The taxpayer carried the matter before the ld. DRP by way of filing objections who has rejected 2 comparables viz. Acropetal Technologies Ltd. and Eclerx Services Ltd. from the final set of comparables and OP/OC of the comparable companies reduced to 26.24%. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal. 7. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 8. Undisputedly, TNMM as the MAM with OP/OC as the PLI applied by the taxpayer has been accepted by the TPO/DRP. Ld. TPO in order to select the comparable companies for benchmarking the international transactions of the taxpayer with its AE applied filters viz. (i) use of current year data; (ii) reject companies where turnover is less than ₹ 1 crores; (iii) select companies where the ratio of service income to total income is at least 75%; (iv) select companies where income from exports is at least 75% of total income; (v) companies that have employee cost th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment in order to compute the margin of the comparable companies and also ordered to restrict the adjustment, if any, to the margin retained by the AE. The Revenue has challenged the exclusion of Eclerx Services Ltd. and Acropetal Technologies Ltd. made by the DRP for benchmarking the international transactions. So, we would examine the comparability of aforesaid comparables vis- -vis the taxpayer qua ITES as under. GROUND NO.1 ECLERX SERVICES LTD. (ECLERX) 12. Ld. DR for the Revenue challenging the exclusion of Eclerx by the ld. DRP relied upon the order passed by the ld. TPO. However, on the other hand, ld. AR for the taxpayer by relying upon the order passed by the ld. DRP contended inter alia that Eclerx is functionally not comparable; that it has exceptional year of operation; and relied upon the decision rendered by the Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. v. CIT, 377 ITR 533 (Del.). 13. Undisputedly, the taxpayer is into providing BPO/Data Processing Services (ITES) to its AE whereas Eclerx is into providing outsourcing KP services as has been held by Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not find any ground to interfere into the findings of the ld. DRP. ACROPETAL TECHNOLOGIES LTD. (ACROPETAL) 15. Ld. DRP excluded Acropetal on the ground that it is a KPO and as such it is not a good comparables. However, on the other hand, ld. AR for the taxpayer contended that the ld. DRP has rightly excluded the Acropetal because it is functionally dissimilar and it also fails employee cost filter and relied upon the decision rendered by the coordinate Bench of the Tribunal in case of ACIT vs. Flextronics Technologies (India) (P.) Ltd. (2019) 101 taxmann.com 348 (Bangalore Trib.) . 16. Coordinate Bench of the Tribunal in ACIT vs. Flextronics Technologies (India) (P.) Ltd. (supra) excluded Acropetal on the ground that the engineering design services segment of Acropetal is functionally different and is not a good comparables to a company rendering ITES to its AE by returning following findings:- Acropetal Technologies Limited Having considered the submissions, on perusal of the annual report, it is noticed by us that the assessing officer has considered the revenue from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparison with the profit margins of the assessee company. The functions performed by the Engineering Design Services of this company are as follows:- Architectural, Structural, Electrical, Plumbing, Steel Detailing, External Utilities, Design Engineering. 11. The functions performed by the assessee, as we have already seen is back office services relating to finance and human resource functions, including accounts payable to assessee, remote server access, maintenance and management services, payroll processing, credit analysis, ledger maintenance, etc. for its affiliates worldwide. It is thus clear that the information technology services provided by the assessee cannot be compared with Engineering Design Services provided by Acropetal Technologies Ltd. Therefore, the conclusion that this company is not functionally comparable is found to be correct. We also find that this Tribunal in the case of Novo Nordisk (I) P. Ltd. in ITA 247/Bang/2016 has held that in the case of a company which was rendering similar ITeS as that of assessee it was held that Acropetal Technologies Ltd. cannot be considered as a comparable in ITeS segment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnologies Lid. could be taken as a good comparable. 23. We have perused the orders and heard the rival contentions. There is no dispute that M/s. Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Services that were being rendered by Acropetal Technologies Lid, appears at page 8 of its annual report. It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural healthcare, engineering design and enterprise solutions. In our opinion, the type of services that was being provided by Acropetal Technologies Ltd, was not at all comparable with the type of services that the assessee was providing. It is also mentioned in the annual report of the said company that it was providing high end services in the engineering design services. No doubt as mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not a BPO. So, following the decision rendered by the coordinate Bench of the Tribunal in the case of ACIT vs. Flextronics Technologies (India) (P.) Ltd. (supra), we are of the considered view that ld. DRP has rightly excluded the Acropetal from the final set of comparables. So, ground no.1 is determined against the Revenue. GROUND NO.2 18. Ld. DRP reached the conclusion that TP adjustment cannot exceed the amount of margin retained by the AE. Ld. AR for the taxpayer contended that this issue is covered in favour of the taxpayer by the decision rendered by the coordinate Bench of the Tribunal in the case of HCL Technologies BPO Ltd. vs. ACIT ITA No.3547/Del/2010 which is confirmed by Hon ble Delhi High Court and Hon ble Supreme Court. Operative part of which is as under :- 11. Without prejudice to the assessee company s contention that the adjustment made by the TPO in not sustainable, it was submitted that the adjustment at best could be made only to the extent of ₹ 11,960,457, being the amount which has been retained by the associated enterprise. 12. The Ld. CIT(A) in his order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, i.e., without the involvement of the AEs of the appellant. Thus, at the most the consideration received by the appellant from the AEs may be replaced by the consideration received by the AEs from its customers, for the services provided by the appellant; the price charged by AEs to the customers being the CUP. Reliance is placed in this regard on the decision of the Hon'ble Delhi High Court in the case of Sony India P. Ltd. vs. CBDT (Delhi) ; 288 ITR 52 has at pages 61-62, observed as under: The concept of transfer pricing leading to tax avoidance has been acknowledged in the Act only recently. It is a concomitant of the operations of multinational corporations (MNCs) that set up base by incorporating a local subsidiary in a country where they seek to operate. It is often seen that the MNC transfers goods and services to its local subsidiary at a price not reflective of the market price (or arm's length price as if is referred to in the present context) and in turn the subsidiary is able to avoid, partly or wholly, payment of the local tax, Alth9ugh the expression transfer price has not been defined in the Act,' it is 'understoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been held as under: 7. Ld. TPO erred in evaluating FAR (Functions performed, Assets. employed and Risk assumed) analysis which has been summarily confirmed by DRP. To support its case, assessee furnished split financials of the appellant and its AE. Whereas the appellant has been able to earn profit in India its counterpart the AE has continuously sustained losses. There being no element of profit in the hands of the AE, there is no case of shifting of profits, practicable or probable. Invoking a higher ALP on the appellant is only anticipatory and complete ignorance of fact. The facts and figures produced before the Ld. TPO establish that there is no commercial profit available in the hands of the AE. In absence of profit availability, the any enhancement of the ALP results in artificial profit anticipated by the Ld. TPO and not earned by the Appellant. The order of the LD, TPO in enhancing the ALP offered by the appellant is in ignorance of valid FAR and factual considerations and is bad in law and facts. 19. Reliance in this regard is placed on the recent decision of Delhi High Court in case of Sony Ericsson Mobile Communicati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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