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TMI Blog2019 (4) TMI 1726X X X X Extracts X X X X X X X X Extracts X X X X ..... I has erred in directing the TPO/AO that the Transfer Pricing adjustment, at best, could not exceed the amount of margin retained by the Associated Enterprises." " 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : Omniglobe Information Technologies India Pvt. Ltd., the taxpayer is a wholly owned subsidiary of Omniglobe International LLC, USA (Associated Enterprise/AE). The taxpayer is into the provision of BPO/Data Processing Services to its AE. It is also providing IT Enabled Services (ITES) relating to phone activation and local number portability to various clients for and on behalf of its parent company. 3. During the year under assessment, the taxpayer entered into international transactions with its AE as under :- Sl. No. International Transactions Associated Enterprises Amount (Rs.) (Receipt) Method Applied 1. Provision of BPO/Data Processing services Omniglobe LLC 33,98,09,045 TNMM 4. The taxpayer in its transfer pricing documentation to benchmark its international transactions applied Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with Operating Profit/Operating Cost (OP/OC) as Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technologies Limited (Seg.) 18.12% 3. E4e Healthcare Business Services Pvt. Ltd. 13.74% 4. Eclerx Services Limited 58.57% 5. Infosys BPO Limited 21.56% 6. Jindal Intellicom Limited 16.76% 7. T C S E-serve Limited 71.99% Average 32.84% 10. Ld. TPO accordingly proposed the ALP of international transactions qua provision of ITES as under :- Total Revenues Received (A) 339,809,045 Total Operating Cost (B( 311,012,913 Arm's Length Profit (C = 32.84% of B) 102,136,641 Arm's Length Price (D = B+C) 413,149,554 Difference (E = D - A) 7,33,40,509 11. It is also not in dispute that the ld. DRP has allowed working capital adjustment 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-à-vis the taxpayer qua ITES as under. GROUND NO.1 ECLERX SERVICES LTD. (ECLERX) 12. Ld. DR for the Revenue challenging the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eason that it was engaged in providing KPO Services and further that it had also returned supernormal profits." 14. In Rampgreen Solutions Pvt. Ltd. (supra), the Hon'ble Delhi High Court has also considered Special Bench decision of the Tribunal in case of Maersk Global Centers (India) Pvt. Ltd. wherein also Eclerx was ordered to be excluded because of KPO services which are high end services involving specialized knowledge and domain expertise. So, we are of the considered view that Eclerx has been rightly excluded by the ld. DRP. Consequently, we do 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur attention to the Annual Report of this company which is at page 492 of PB-II filed by the assessee. Perusal of the Annual Report shows that this company has 4 divisions viz., Engineering Design Services, Healthcare, Enterprise Solutions and Infrastructure Solutions. Perusal of the order of TPO at page 25 shows that the TPO has considered engineering design services segment profit margin of this company for the purpose of comparison 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 Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendering insurance support services. Though these services did not fit in the same mould, the level of expertise required stood more or less on the same pedestal. According to him, applying the yardsticks laid down by Hon'ble Delhi High Court in the judgment of Rampgreen Solutions P. Ltd (supra), Acropetal Technologies 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The ld. DR for the Revenue contended that healthcare segment of Acropetal should be taken as a comparable. However, balance sheet of Acropetal, available at pages 182 to 261 of the paper book, shows that its healthcare segment is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r services from the customers directly, 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 'u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med, 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 Communications India Pvt. Ltd. vs. CIT III (ITA No. 16/2014) where in it has been held that the arm's length seeks to correct di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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