TMI Blog2019 (1) TMI 1689X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Eclerx Services Ltd provided high value finan cial services relating to consultancy business and solution testing besides the web content management merchandising execution, web analytics, etc. This functional dissimilarity, and absence of segmental data led to its exclusion as a comparable. Those are findings of facts based upon record. Consequently, exclusion of E-Clerx was in order and cannot be interfered with. - I. T. A. Nos. 142 and 25 of 2018. - - - Dated:- 22-1-2019 - Ajay Kumar Mittal And Mrs. Manjari Nehru Kaul JJ. For the Appellant : Tajender K. Joshi , Senior Standing Counsel For the Respondent : Vishal Kalra , Advocate JUDGMENT AJAY KUMAR MITTAL J. - 1. This order shall dispose of two appeals bearing I. T. A. Nos. 142 and 25 of 2018 as according to learned counsel for the parties, identical questions of law and facts are involved therein. For brevity, the facts are being extracted from I. T. A.-No. 142 of 2018. 2. I. T. A. No.142 of 2018 has been preferred by the Revenue under section 260A of the Income-tax Act, 1961 (in short the Act ) against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of transfer pricing adjustments. Feeling aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal vide order dated March 17, 2017 (annexure A-III) partly allowed the appeal of the assessee. Hence the present appeals by the Revenue. 4. Learned counsel for the Revenue submitted that the Tribunal had erred in law in excluding M/s. Accentia Technologies Limited, M/s. Coral Hub (previously known as Vishal Information Technologies) and M/s. Eclerx Services Ltd. used as comparables for determining the arm's length price in the case of the assessee-company when the assessee-company and comparable company are providing similar nature of services. 5. On the other hand, learned counsel for the assessee besides supporting the order passed by the Tribunal has submitted that the Tribunal had rightly excluded M/s. Accentia Technologies Limited, M/s. Coral Hub (previously known as Vishal Information Technologies) and M/s. Eclerx Services Ltd. from comparables for determining the arm's length price. In support of his contentions, he has placed reliance upon the following judgments : (i) Pr. CIT v. Aptara Technology (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnologies Ltd. had held to be a comparable case because its revenue from ITES is more than 75 per cent. of total revenue as is clear from the reply furnished by the company. The said finding reads as under : The taxpayer says that the company is into software products and medical transcription. In this regard, it is very pertinent to mention here that the Transfer Pricing Officer considered the company as comparable because its revenue from the information technologies enabled services (ITES) is more than 75 per cent. of total revenue. This fact is clearly revealed in the reply furnished by the company. 10. However, the Tribunal after considering the material on record held this company to be not a valid comparable case in the line of industry similar to the assessee for determining the arm's length price and, therefore, excluded the said company from the set of comparables with the following observations : 8.5. In view of the above discussion and the finding of the Tri bunal (supra) in above cases, we are of the opinion that M/s. Accentia Technologies Ltd. being functionally different and having extraordi nary events during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is very pertinent to mention here that the company was issued notice under section 133(6) to clarify the nature of expenses under the head 'Data entry and vendor payments' and also to clarify whether these payments are made to third parties or made to persons engaged in the premises of the company. It was seen from the reply that data conversion services (ITES) ren dered by the taxpayer involves 9-10 steps of this process, stages 1 to 5 are performed by manpower vendors' personnel in the office prem ises of the company and stages 6 to 9 are performed by the employees of the company. The expenses incurred for vendors' personnel are debited to data entry charges, vendor payment, etc. Thus, as clarified by the company, the expenses under the head 'Data entry and vendor payments' are towards personnel of vendors' working from the pre mises of the company. Hence, the taxpayer's argument that the com pany outsources its major work is incorrect and also clarified by the company as above. The company is thus rendering IT enabled ser vices using its own assets and human resources (may not be on the roll of the company), and is function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken 25 per cent. of RPT for rejection of any company and retained the company as comparable. The Transfer Pricing Officer had considered forex revenues as part of operating revenues. The margin of the company computed by the Transfer Pricing Officer at 66.50 per cent. was correct and does not require recomputation. Thus, the company was considered as comparable with a margin of 66.50 per cent. by the Transfer Pricing Officer. 14. The Tribunal had excluded the company from the set of comparables by noticing that the Eclerx Services Ltd. being functionally different and having extraordinary events during the relevant year, cannot be considered as comparable to the assessee-company. The Tribunal directed the Transfer Pricing Officer to compute the average margin of comparables after excluding three comparables above and compute the arm's length price of the international transaction accordingly. The relevant findings of the Tribunal read as under : 8.14. In view of the above discussion and the finding of the Tri bunal (supra), we are of the opinion that the 'Eclerx Services Ltd.' being functionally different and having extraordinary even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ministrative set up of such enter prises would be different. An entity that outsources most of its work is not required to maintain a large establishment. For instance, it would be necessary for such an enterprise to have large premises and a large number of employees. Even the material it uses and the equipment that it installs from minor items such as stationery and tel ephones to electrical fittings and even machinery are bound to be far less than the material and equipment that an enterprise which con ducts its activities itself would of necessity be required to maintain. This in turn would also have consequences upon the legal require ments to be fulfilled by the two enterprises. There are several enact ments that bring within its ambit, establishments or undertakings that employ a certain number of persons. There are enactments that also bring within their ambit enterprises that use power. This in turn would require an enterprise carrying on its own activities to maintain staff along with attendant facilities to ensure compliance with such legislation. The financial difference between such enterprises is bound to be enormous. 17. The Delhi High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The Dispute Resolution Panel and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where ser vices are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity. 18. The Delhi High Court in B. C. Management Services (P.) Ltd.'s case (supra) while upholding the decision of the Tribunal in excluding M/s. Accentia Technologies Pvt. Ltd. and M/s. Eclerx Services Ltd. from the list of comparables in the line of assessee's industry had held as under (page 48 of 403 ITR) : The assessee provides IT enabled services in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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