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TMI Blog2017 (6) TMI 1318X X X X Extracts X X X X X X X X Extracts X X X X ..... he case and in law, the Ld. AO/Ld. Transfer Pricing Officer ("TPO")/ Ld. Dispute Resolution Panel ("DRP") erred in making an addition of Rs. 54,014,130 to the returned income of the Appellant by re-computing, the arm's length price of the international transactions under section 92 of the Income Tax Act, 1961 ("Act"). 3. That on the facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. TPO for computation of the arm's length price, as is required under section 92CA(1) of the Act 4. That the Ld. AO/ Ld. TPO/ Ld. DRP erred on facts and in law in the assessment of the arm's length price of the Appellant's international transactions with associated enterprises by- 4.1 Rejecting on the basis of subjective grounds and presumptions, the comparability analysis conducted by the Appellant for determining the arm's length price in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ("Rules") as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earch tools including the Aveb, databases and publications apart from analytics and forecasting. The industries covered include financial services (banking and insurance), hi-tech (software, electronics, engineering, nono technology, networking, biomedical engineering), telecom equipment and operators, pharmaceuticals and biotech, chemicals, energy and consumer products. c) Market Research: This segment caters to primarily market research firms based overseas. It focuses on primary research in the nature of business to business surveys only where data is collected via telephonic surveys. The surveys are carried out on a case to case basis and as per the specific client requirements. The employees comprise mainly graduates, undergraduates, and MBAJs^JThe surveys carried out by the market research segment include surveys like analyzing the trends in IT and telecom spending, etc. These surveys are normally carried out on the basis of a questionnaire received from the client. Depending on the work load at times, some employees may be shifted to the business research segment for short term projects. d) Intellectual Property Research: The intellectual property research services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement: EVS SEZ India performs recruitment, soft skills training, performance evaluation and other related functions. The employee strength of EVS SEZ India was about 616 personnel including the corporate group as on March 31, 2010. 4.3 Assets Any business requires assets without which it cannot carry out its activities. The assets might be clearly recognisable i.e. tangible (plant and machinery, equipment, building etc) or they might be intangible assets (brand-name, trademarks, technical know-how, patents, etc). Following is the list of assets used by EVS SEZ India: Tangible Assets The tangible assets employed in EVS SEZ India are considered essential for running the business. They are described below: EVS SEZ India being an ITES service provider does not have a significant tangible asset base for carrying out its operations. EVS SEZ India does not own any land and carries out its operations on rented premises. Its tangible asset base comprises computers, office equipment, furniture and fittings, etc. Intangible Assets 'As EVS SEZ India operates in the research domain, human capital forms its core resource. However, the employees of EVS SEZ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket demand, and 2) uncertainty regarding capability. The first type of uncertainty is characterised as "exogenous uncertainty" because it emerges as a state of nature. The second type of uncertainty is referred to as "endogenous" uncertainty because entrepreneurs realise that there is high risk of failure as it is tied to their capability. As EVS SEZ India is remunerated on an hourly basis by its AEs, it is exposed to this risk. The AEs are indirectly exposed to this risk for the Indian operations. Price Risk This risk arises due to the competitive pressures prevailing in the market, which lead to price undercutting thereby adversely impacting the profitability of the Company. EVS SEZ India is compensated for the services rendered by it to its AEs, on an hourly rate basis. As this compensation is subject to market dynamics, the Company is exposed to price risk. As the AEs compete in the open market, they are exposed to this risk. Manpower Risk Manpower is one of the most valuable resources employed by an organisation for carrying out its day-to-day operations. The increasing competition in the market place combined with other uncontrolled variables result in e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Report) 1) Extraordinary events during AY 2010-11(acquisitions/ amalgamation) (pg. 1172)- hence fails TPO's own filter of peculiar economic circumstances 2) Functional dissimilarity - diversified business operations (pg. 1171- also Nta kindly refer TPO order pg. 27) 3) Different revenue recognition model (pg. 1171)- assessee's model at pg. 695 4) Significant intangible assets (pg. 1167)- assesse has no intangibles (pg. 692) 5) Abnormally high profit margins 1) 1.Delhi High Court- PCIT vs. Ameriprist India P. Ltd.- ITA No. 461/16- pg. 79A- 79 B CLC 2) United HealthGroup Information Services P. Ltd. (ITA No. 1038/D/15) (p 201-204 of CLC) 3) Equant Solutions India P. Ltd.(ITA No. 1202/D/2015)(pg.176-180 CLC) 4) Ameriprise India Pvt Ltd. (ITA No. 7014/Del/2014) (pg. 60-62 of CLC) 5) Bechtel India Pvt. Ltd. (ITA No. 1478/Del/2015) (pg. 95-96 of CLC) 6) Techbooks International Pvt. Ltd. (IT/ No. 240/Del/2015 for AY 2010-11) (pq. 119 of CLC) 7) Sun Life India Service Centre P. Ltd. (ITA No. 750/2015) (pg. 2. Eclerx services td.(pg. 734- 37- Vol. 3- Annual Report) 1) Functionally dissimilar (pg. 739, 740, 757, 758)- it is a KPO 2) Unreliable data- t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5) Exceptional year of operations (acquisitions) (pg. 950, 956)- hence fails TPO's own filter of peculiar economic circumstances 01. Delhi High Court- PCIT vs. Amen) India P. Ltd.- ITA No. 461/16- pg. 7 79B CLC 02. Equant Solutions India P. Ltd.(IT/1202/D/2015) (pg. 183-184 of CLC) 03. Techbooks International Pvt. Ltd. No. 240/Del/2015)(pg. 29-30 of CLC 04. Ameriprise India Pvt Ltd. (ITA No. 7014/Del/2014)(pg. 63 of CLC) 05. Sun Life India Service Centre P. L (ITA No. 750/2015) 6 TCS E-Serve lational '9- 1102- - Annual t) 01. Functional dissimilarity (pg. 1058) 02. No segmental data (pg. 1066) 03. Owns significant intangibles 04. Uses the 'TATA' brand- royalty is paid (pg. 1064) 05. Part of TATA group and benefits thereof (pg. 1035) v. 06. Primary client is Citigroup (pg. 10^8) 07. First full-year as step down subsidiary of TCS- which has led to substantial growth-Total income is 3 times higher as compared to last year (from 54 crores to 150 crores). Operating Income higher by 173% as compared to last year. From loss of 24 crores to profit of 44 crores this year, due to improved operational performance and increased utilization of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are Ltd (pg 1269-1284) Vol 4 Annual Report the TPO/DRP rejected the comparable only on the ground that the annual report is not available in the public domain. However, this is not true. 1) Bechtel India Pvt. Ltd. (ITA No. 1478/Del/2015) (pg. 96-97 of CLC) 7. The ld Departmental Representative vehemently objected the argument of the assessee for exclusion of various comparable which we will dealt with at the moment of its adjudication. He vehemently relied upon the decision of the Hon'ble Delhi High Court in case of Chrscapital Investment Advisor (India) Pvt. Ltd. Vs. DCIT 2015-TII-13-HC-DEL-TP and Rampgreen Solutions Pvt Ltd. Vs. CIT 2015-TII-33-HC-Del-TP. 8. Now we deal with each of the comparables. Various Judicial Precedents are cited by the ld AR before us seeking exclusion of the comparables. However we would be strictly going by the functional profile of the assessee, assets employed for performing those functions and risks assumed on that count as extracted by us and which is not disputed by the ld TPO/AO/DRP. If the Judicial precedents are having the similar functional profile in whose case the issues is decided then off course it deserves consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on vis-à-vis coding and billing activity. According to us the medical transcription itself cannot be said to be comparable with the functions performed by the assessee. However, the medical coding and billing activities are similar to the functions performed by the assessee. But , in absence of the segmental accounts with respect to medical coding and billing activities this comparable cannot be included. Hence, TPO is directed to exclude it. 12. The next comparable by the assessee is that eClarx Services submitting that it is a knowledge process outsourcing (KPO) unit and therefore cannot be compared with the ITES service provider like assessee. The assessee has relied on the decision of Hon'ble Delhi High Court of Ramgreen Solutions Pvt. Ltd Vs. CIT. 13. The ld DR submitted that the assessee is also a knowledge process outsourcing unit as it employs 616 personnel. He referred to page No. 6 of the order of the ld Transfer Pricing Officer for this. He submitted that assessee's case falls into all three horizontal segments of ITES industries such as call centre and technical support, payment supply chain and analytics. He therefore, stated that eClarx is the right com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it tool and process automation. From the above discussed nature of business carried on by e- Clerx Services Ltd., it is patent that the same being a KPO company, is quite different from the assessee, providing only IT enabled services to its AE, which fall in the realm of BPO services. Apart from that, it is further observed that this company has significant intangibles which it uses in rendering KPO services, against which the assessee does not have any intangibles. The Hon'ble jurisdictional High Court in Rampgreen Solutions (P.) Ltd. v. CIT [2015] 234 Taxman 573/60 taxmann.com 355 (Delhi), has held that e-Clerx Services Ltd., being engaged in KPO, cannot be treated as comparable of an assessee engaged in rendering BPO services. In view of the direct judgment of the Hon'ble jurisdictional High Court on the point, we direct to eliminate e-Clerx from the list of comparables. As such, e-Clerx Services Ltd. cannot be considered as comparable. 15. The nextt comparable challenged by the assessee is Igate Global Solutions Ltd for which the annual accounts are available at page 838 to 942 of the paper book. The assessee has claimed that it has an extra ordinary events during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has been considered by the ld TPO. 21. We have carefully considered the rival contentions and also verified the annual accounts of Infosys BPO Ltd from page No. 943 to 1026, undoubtedly the Infosys BPO is driving leverage from the client of Infosys Technologies Ltd for cross selling the BPO services of this company. The assets of the comparable company shows that it has a goodwill of approximately Rs. 19 crores. The income stream of comparable was Rs. 1126.63 crores whereas, the assessee's income stream was Rs. 50.90 crores. Hon'ble Delhi High Court in case of Pr. CIT Vs. Actis Global Services Ltd in TS-417-H.C--2017(DEL)(TP) has held that even the size and scale of operation can make the comparable inapposite. In the present case the size of this comparable with the size of the assessee is more than 20 times. Therefore, in view of this respectfully following the decision of the Hon'ble Delhi High Court we direct exclusion of this comparable on the size and scale of its operation. 22. TCS eServe International Ltd The ld AR contested it on the issue of functional dissimilarity, Tata Brand and ownership of intangibles. 23. Ld DR referred to page No. 39 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val contentions and perused the annual report of the company placed at Page No. 1185 to 1082. However, before analyzing the balance sheet it is very important to note that above comparable was selected by the assessee and hence it was accepted by the TPO as FAR analysis is similar to the assessee. The assessee has selected this comparable based on the functional profile and applying its own filter. This comparable was also not contested before the ld DRP. Before us no reasons were given that why the assessee is now withdrawing the above comparable which was selected by the assessee itself. It is very unfortunate that despite preparing its transfer pricing documents for FY 2009-10 in 2010 the assessee did not contest this comparable or even admitted its mistake either before AO or DRP that how it was originally selected, before us it is contesting for exclusion of this comparable after almost 7 years. We are conscious of the decision of the Hon'ble Special bench in case of Quark Systems Ltd wherein the assessee was allowed to withdraw one of the comparable selected by assessee because of intial years of Transfer pricing laws and in that comparable the FAR was not in dispute but erro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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