TMI Blog2019 (7) TMI 1279X X X X Extracts X X X X X X X X Extracts X X X X ..... ed entity is a factor that requires to be kept in view. TCS E-Serve has a turnover of ₹ 1359 crores and has no segmental revenue whereas the Assessee s entire segmental revenue is a mere 24 crores The Director s report of TCS E-Serve Limited bears out the contention of the Assessee that both entities have been leveraging TCSs scale and large client base to increase their business in a significant way. The submission that the two comparables offer an illustration of an identical transaction being conducted in an uncontrolled manner overlooks the effect of the Tata brand on the performance of the impugned comparables. The question was not merely whether the margins earned by the Tata group in providing captive service to the Citi entities were at arm s length. The question was whether they offered a reliable basis to re-calibrate the PLI of the Assessee whose scale of operations was of a much lower order than the two impugned comparables. The mere fact that the transactions were identical was not, in terms of the law explained in the above decisions, either a sole or a reliable yardstick to determine the apposite choice of comparables. For all of the aforementioned reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 010, the Assessee filed its return of income for the AY in question declaring a total income of ₹ 29,83,98,593/-. The return was picked up for the scrutiny. The Assessing Officer ( AO ) noticed the international transactions carried out by the Assessee with its AEs and referred the matter to the Transfer Pricing Officer ( TPO ) for determination of Arm's Length Price ( ALP ) of those international transactions. 7. The Assessee had in its transfer pricing (TP) study disclosed, inter alia, six types of international transactions, which included provision of CSD, ITES, MSS etc. For benchmarking its international transactions, the Assessee selected the Transactional Net Margin Method ( TNMM ) as the most appropriate method ( MAM ) applying the operating profit ( OP )/total cost ( TC') as the appropriate profit level indicator ( PLI ). For the ITES segment, the Assessee selected ten comparables having an average OP/TC percent of 14.5%, whereas the Appellant s OP/TC percent was 18%. As regards the provision of MSS, the Assessee picked up seven comparables with an average OP/TC by 9.95% whereas the Appellant s OP/TC was 6.48%. This Court is not referring to the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l before this Court against the decision of the ITAT so far as it accepted the plea of the Assessee and directed exclusion of the other comparables picked up by the TPO both in the ITES and MSS segment transactions. Submissions on behalf of the Assessee 12. Dr. Shashwat Bajpai, learned counsel appearing for the Assessee made the following submissions: (i) Both the comparables i.e. M/s TCS E-Serve Limited and M/s TCS EServe International Limited had a high brand value and operated on a huge economic upscale and were therefore able to command and generate better profits. (ii) On both parameters, viz., high-economic upscale and high brand value both comparables were rendered functionally dissimilar to the Assessee and, therefore, ought to have been excluded for the purpose of determination of the ALP. In fact, this was the very reason that the ITAT had excluded Infosys BPO Ltd. as a comparable. (iii) In doing so, the ITAT followed this Court s judgment in PCIT v. EValueserve SEZ P. Ltd. (decision dated 29th August, 2018 in ITA 948/2018) which decision also upheld the exclusion of M/s TCS E-Serve International Limited as a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the two comparables unequal to the Assessee. (vii) A reference was made to the Director s report of M/s TCS E-Serve Limited in the first year of acquisition by TCS of the company by the Citi Group. The total income had increased from ₹ 1299 crores to ₹ 1441 crores @ 11%, the profit before the tax was higher over the previous year figure of 226%, it was noted that M/s TCS E-Serve Limited along with its subsidiary M/s TCS E-Serve International Limited and M/s TCS E-Serve America, Inc. maintained its leadership position in providing ITES and business process outsourcing ( BPO ) in the banking and financial services industry domain ( BFSI ) with the City Group entities being its largest customers since 1998. (viii) The report also referred to the the company finding the scope of its operations by commencing services of Non-Citi Accounts in the BFSI Sector and this was done by leveraging the client base of M/s TCS using its brand. It is further pointed that prior to 31st December 2008, TCS E-Serve was part of Citi group. With effect from 1st January 2009, Tata Consultancy Services Ltd. acquired the entire holding of this entity. As a prearrangement/sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emphasized, that for there to be reliable benchmark studies for determining ALP not only the comparables have to be functionally similar but should have similar business environment and risks as the tested party. A detailed exposition of the legal position with specific reference to Rule 10 B (2) of the Income Tax Rules, 1962 is found in this Court s decision in Chryscapital Investment Advisors (India) Pvt. Ltd. v. DCIT 376 ITR 183 (Del) as under: 30. The reasoning adopted in various judgments noticed above, shows that functional analysis seeks to identify and compare the economically significant activities and responsibilities undertaken, assets used and risks assumed by the parties to the transaction. Quantitative and qualitative filters/criteria have been used in different cases to include or exclude comparables. The intuitive logic for excluding big companies from the list of comparables while undertaking the FAR analysis of a smaller company is attractive, given that such big companies provide services to diverse clientele, perform multifarious functions, often assume risks and employ intangible assets which are specially designed, unlike in the case of smaller ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom such transaction in the open market or reasonably accurate adjustment can be made to eliminate the effects of such difference. 32. Now, the sequitur of Rule 10B (2) and (3) is that if the comparable entity or entity s transactions broadly conform to the assessee s functioning, it has to enter into the matrix and be appropriately considered. The crucial expression giving insight into what was intended by the provision can be seen by the use of the expression: none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, .. such transactions in the open market. The other exercise which the TPO has to necessarily perform is that if there are some differences, an attempt to adjust them to eliminate the material effects should be made: (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 33. Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile - in respect of the activity in question can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the manner of such reliance. First, the assessee s justification for relying on such data is the volatility in the comparables profit margins and the consequent inability to transact at a consistent ALP. However, this is not warranted herein. Whilst there may be a wide fluctuation in the profit margins of comparables from year-to-year, this by itself does not justify the need to take into account previous years profit margins. The transfer pricing mechanism provided in the Act and the Rules prescribes that while determining the ALP, the arithmetic mean of all comparables is to be adopted. This is to offset the consequence of any extreme margins that comparables may have and arrive at a balanced price. Similarly, the wide fluctuations in profit margins of the same entity on a year-to-year basis would be offset by taking the arithmetic mean of all comparables for the assessment year in question. In any case, in the event that the volatility is on account of a materially different aspect incapable of being accounted for, the analysis under would Rule 10B (3) would exclude such an entity from being considered as a comparable. Secondly, as regards the manner of using previous years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process, it was observed by this Court as under: 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 impute an ALP to a controlled transaction, it would be essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in all material aspects that have any bearing on the value or the profitability, as the case may be of the transaction. Any factor, which has an influence on the PLI, would be material and it would be necessary to ensure that the comparables are also equally subjected to the influence of such factors as the tested party. This would, obviously, include business environment; the nature and functions performed by the tested party and the comparable entities; the value addition in respect of products and services provided by parties; the business model; and the assets and resources employed. It cannot be disputed that the functions performed by an entity would have a material bearing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. On the aspect of exclusion of comparables that have a high economic upscale viz., Infosys, TCS and Wipro, particular reference may be made to the decision of this Court in PCIT v. BC Management Services Pvt. Ltd. (supra) where a particular reference was made to TCS E-serve as under: 13. ...The third comparable that the AO/TPO excluded is TCS E-serve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value: that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld. 19. The same decision also noted that one reason for exclusion was the unavailability of the segmental data for the above comparable. 20. In M/s. Oracle (OFSS) BPO Services Pvt. Ltd. (decision dated 5th February 2018 in ITA 124 of 2018) while up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services India Private Limited v. DCIT (2017) 88 Taxmann.Com 286 (DelTri), Stryker Global Technology Centre Private Limited v. DCIT (2017) 87 Taxmann.com 43 (Del-Tri), Samsung Heavy Industries Private Limited v. DCIT (2017) 84 Taxmann.com 154 (Del-Tri) and Equant Solutions India Private Limited v. DCIT (2016) 66 Taxmann.com 192 (Delhi-Tribunal). 24. All of these decisions pertained to AY 2010-2011. What weighed invariably is the fact that both companies had huge turnovers when compared to the tested entity. Both entities had close connection of the Tata Group of Companies and TCS E-Serve International had given a huge amount to TCS towards brand equity. Further there was no segmental bifurcation between the transaction processing and technical services. The assets employed by TCS E-Serve along with huge intangibles in the form of brand value were found to have a definite considerable effect on its PLI. These factors vitiated its comparability under the FAR analysis with the tested company, which could be a capital service provider without much intangible and risks. 25. In this context it requires to be noted that the ITAT also referred to the decision of this C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncrease their business in a significant way. The submission that the two comparables offer an illustration of an identical transaction being conducted in an uncontrolled manner overlooks the effect of the Tata brand on the performance of the impugned comparables. The question was not merely whether the margins earned by the Tata group in providing captive service to the Citi entities were at arm s length. The question was whether they offered a reliable basis to re-calibrate the PLI of the Assessee whose scale of operations was of a much lower order than the two impugned comparables. The mere fact that the transactions were identical was not, in terms of the law explained in the above decisions, either a sole or a reliable yardstick to determine the apposite choice of comparables. 29. For all of the aforementioned reasons, the Court finds merit in the contention of the Assessee that both the impugned comparables viz., TCS EServe Limited and TCS E-Serve International Limited ought to be excluded from the list of comparables for the purposes of determining the ALP of the international transactions involving the Assessee and its AEs. Conclusion 30. For ..... X X X X Extracts X X X X X X X X Extracts X X X X
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