TMI Blog2020 (1) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. In various grounds of appeal assessee has challenged transfer pricing adjustment of ₹ 10,82,46,897/- made on international transactions with the AEs for rendering of IT enabled services (ITeS). 3. Brief facts qua the transfer pricing adjustment are that the assessee company, i.e. E-valueserve.com Pvt. Ltd. is a wholly owned subsidiary of E-valueserve Ltd. Bermuda. It is engaged in the business of providing IT enabled services to its AEs and is also registered with Software Technology Parks of India (STPI). The assessee derives business from following segments: - a) Corporate and Professional services b) Financial Services c) Intellectual Property Research In the TP study report the assessee has given following analysis of these 3 segments in the following manner: - EVS India carries out IT enabled services inform of research activities according to the terms of the agreement with its AE. The research carried out by EVS India is driven by corporate and professional services, financial services and intellectual property research. Normally, the client executives (based in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... variety of research tools including web, databases and publications apart from analytics and forecasting. The industries covered include financial services (banking and insurance), hi-tech (software, electronics, engineering, nano-technology, networking, biomedical engineering), telecom equipment and operators, pharmaceuticals and biotech, chemicals, energy and consumer prodicts. c) Intellectual Property Research (IP): The intellectual property research includes research on patents, drafting of patent applications, prior art search etc. Essentially, EVS India offers the following kind of services to its AEs: d) Patent Assessment: This is concerned with evaluating whether a product can be patented or not. It involves finding out whether a patent exists for a similar product in the global market. e) Drafting of patent Applications: The AEs are responsible for end to end patent application filing through patent counsels in the relevant jurisdiction. EVS India prepares a draft and sends it either to the client or patent attorney associated with AEs, to be filed. Thereafter, lawyers, assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The tangible assets employed in EVS India are considered essential for running the business. EVS India being an ITES service provider does not have a significant tangible asset base or carrying out its operations, EVS India does not own any land and carries out its operations, EVS India does not own any land and carries out its operations on rented premises. Its tangible asset base comprises of computers, office equipment and furniture and fittings and lease improvements. Intangible Assets EVS India, being in the research field, human capital forms its core resource. The employees of EVS India comprise undergraduates, graduates, engineers and MBAs. The business of the E-valueserve group does not result in the development of any form of intellectual property rights. The copyrights relating to the reports, if any are held by the client only. The marketing intangible is owned by the associated Enterprise. EVS India does not own any non-routine intangibles and does not own trade secrets or undertake research and development activities on its account that would lead to the development of non-routine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensation 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 organization for carrying out its day-to-day operations. The increasing competition in the market place combined with other uncontrolled variables result in exposure to manpower risk. EVS India has skilled workforce and is accordingly exposed to this risk. EVS Indian has skilled workforce and is accordingly exposed to this risk. The ITES industry is characterized by a high level of attrition. The AEs are indirectly exposed to this risk for the Indian operations. 4. The total transaction value with its AEs on account of provision of ITeS was declared at 137,96,87,844/-.To benchmark the said international transaction, the assessee had adopted TNMM as the most appropriate method by adopting PLI as OP/OC, which resulted into profit margin of 18.94%. After carrying out various quantitative and qualitative analyses, assessee shortlisted listed 9 comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if 6 comparables were to be excluded on the ground that they are not comparable on FAR analysis to the assessee, then other comparables will become academic and infructuous. The six comparables challenged by the assessee for exclusion are: (i) E-clerx Services Ltd. (ii) Accentia Technologies Ltd. (iii) B N R Udyog Ltd. (iv) Excel Infoways Ltd. (v) Infosys BPO Ltd. (vi) TCS E-Serve Ltd. 6. Now we shall take up each of these 6 comparables herein below:- i) Eclerx Services Ltd. 6.1 Before the TPO the assessee has objected for the inclusion of this comparable on the grounds that; firstly , it is functionally not comparable because this company is into software development and design services; secondly , this company had extraordinary events resulting into abnormal margins; thirdly , unreliable data of this company in public domain; and lastly , this company has been rejected in various judicial ruling as a comparable with ITeS companies. Ld. TPO has rejected all the contention of the assessee on the ground that annual report of said company makes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the same very comparable has been rejected by the Tribunal in assessee s own case for A.Y. 2008-09 and also in the case of sister concern, E-valueserve.com Pvt. Ltd. SEZ whose functional profile is identical to the assessee. Tribunal has held that Eclerx not comparable. She also pointed out that the said Tribunal order in the case of E-valueserve.com Pvt. Ltd. SEZ passed in ITA No. 1467/Del/2015 ITA No. 5147/Del/ 2017, have been upheld by the Hon ble Delhi High Court in the appeal filed by the department vide judgment and order dated 26.02.2018 in ITA no. 241/2018 and 948/2018. Thus, this comparable should be excluded. 6.3 On the other hand, Ld. CIT-DR submitted that assessee is also KPO and TPO has dealt assessee s similar objection in detailed manner and under TNMM broad comparability has to be seen. This company was also engaged in data processing activities and therefore, it is akin to ITeS. Further the effect of extraordinary event does not have much impact in the PLI because the margin of this company has always between 56% to 61 %. Thus, he strongly relied upon order of the TPO and DRP. 7. We have heard the rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Rampgreen Solutions (supra) qua Eclerx has observed as under :- 3 7. Applying the aforesaid principles to the facts of the present case , it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) (P. ) Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services. pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition. eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. 7.2 Following the same principle, the Tribunal in assessee s own case in A.Y. 2008-09 had made following observations: - 44.13 Eclerx Services Ltd.: The Ld. AR submitted that this comparable is functionally dissimilar. It is engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the Id 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 comparable. 14. We have carefully considered the rival contentions and perused the annual report of the comparable for AY 2010-11 at page No. 734 to 83.7 of the paper book. The functions of the company are described at page No. 23 of its annual report under management discussion and analysis. It provides that eClerx supports its clients through its two business units- Capital markets and sales and marketing support. Across both these units, the company supports and improves processes that are core of its customers day to day business operations. The company continues to focus on engagements where it can tap the largest percentage of client spend by leveraging its domain expertise and by bringing together consulting, project management and solution based service delivery. In the capital markets division, the company today provides end-to-end financial transaction support services such as trade booki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-Clerx Services Ltd. cannot be considered as comparable. 7.4 The said judgment has also been confirmed by the Hon ble High Court in the following manner: - 1. The Revenue challenges an order of the Income Tax Appellate Tribunal (ITAT) which accepted the assessee s contentions so far as comparison with six entities in the determination of Arm s Length Price (ALP) and Transfer Pricing adjustment under Section 93CA of the Income Tax Act, 1961 [hereafter the 1961 Act ], was concerned. 2. The assessee is engaged in IT-enabled services (ITeS) such as research activities in terms of agreements with its Associated Enterprise (AE). It primarily concerns itself with business information, market research and intellectual property research. 3. The Transfer Pricing Officer (TPO), while carrying out the ALP determination procedure took into account the profitability and margins often comparable entities. The assessee was aggrieved by the inclusion of six of them and approached the Disputes Resolution Panel (DRP). Its contentions were rejected and the draft assessment order was finalized by the Assessing Officer (AO). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs, this Court is of the opinion that no substantial question of law arises. The appeals are dismissed. 6. The ITAT noted that M/s. Accentia Technologies Ltd. was mainly performing medical transcription services. It was of the opinion that its service was similar to the one that the assessee was engaged in. However, it also noted that there was no segmented data and, on that account, directed the exclusion of that entity from the list of comparables. Likewise, in the case of M/s. ICRA Techno Analysis Ltd., it was found that the said entity was engaged in business intelligence and analytics supplies, software development, consultancy services, engineering services, web development and hosting services. Besides functional dissimilarity, the ITAT also noted that there was no segmented data to compare its activity with the assessee. Likewise, in the M/s. eClerx Services, the ITAT noted that its activity was functionally dissimilar because it performed KPO function whereas the assessee was classifiable as BPO. 7. All the reasons given by the ITAT, in the opinion of the Court, are justified and supported by the judgment in B.C. Managem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S, IAMS, IPMS. Apart from that, she submitted that there were extraordinary events in A.Y. 2012-13 in the form of amalgamation and acquisition, therefore, due to such extraordinary event this comparable cannot be included in this year. She further pointed out that in the assessment year 2008-09, the Tribunal in assessee s own case following the principle laid down by the Hon ble Delhi High Court in the case of CIT vs. Ameriprise India (P) Ltd. in ITA No. 461/2016 has upheld the exclusion of the said comparable. Apart from that, the Tribunal in case of sister concern, i.e., Evalueserve.com SEZ which has a similar function profile has directed to exclude the said comparable; and this judgment of the Tribunal has been upheld by the Hon ble Delhi High Court also. 8.2 On the other hand, Ld. CIT-DR strongly relied upon the order of authorities below and submitted that the activities carried out by Accentia Technologies Ltd. is nothing but ITeS services and all the three functions are inter related and therefore, no separate segment is required to be seen. Under the TNMM, if a comparable company is carrying out similar functions which are in the category of ITeS, then sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Global which is into development of software related to EMR and SAAS. 9.1 Other important fact is that the Tribunal in the case of sister concern, i.e. Evalue SEZ which is having identical functional profile has directed to exclude the said comparable after observing as under :- 11. We have carefully considered the rival contentions as well as perused the annual accounts of the comparables. At page No. 1172, we have perused schedule 10 of the notes on account wherein it has mentioned that w.e.f. 01.04.2008 a company which was engaged in the business of medical transcription and coding has been amalgamated with the comparable. It is further stated figures for this year are related to amalgamating company also. The profit and loss account of the comparable shows that sales and services of the company are according to Schedule No. 8. There is no change in the income segment of the assessee after amalgamation as amalgamating company was also having the same business, hence, there is no impact of amalgamation on the company with respect to functions performed. Therefore, merely there is an amalgamation during the year it cannot be excluded as comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertains to 2 enterprises, both of which are independent enterprises. Before us, the Ld. Counsel submitted that, firstly, it is dissimilar like Accentia Technologies Ltd. as it is providing medical transcription services and has no segmental details. 10.1 On the other hand, Ld. CIT-DR submitted that this company has two streams of revenue and has segmental results, one, business support and other medical transcription. Medical transcription is different from medical coding and therefore, it cannot be at par with Accentia Technologies. TPO has only taken segmental result of medical transcription segment which is nothing but ITeS. 11. After considering the aforesaid submissions, we find that, first of all, on perusal of the annual report it is seen that apart from medical transcription activities, it is also into medical billing and coding services. The functional profile of the medical transcription segment is almost akin to functions of Accentia Technologies Ltd. and again for the various activities of medical transcription, medical billing and coding services there is no separate segment. In the case of Evalueserve SEZ, the Tribunal after detail analy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000) 2012-13 (INR 000) 2013-14 (INR 000) 2014-15 (INR 000) Revenue 204,161.34 203,526.39 79,096.95 76,098.54 52,792.12 22,994.38 Operating Cost 43,986.99 50,751.24 55,991.57 47,539.99 41,355.78 22,895.57 Operating Profit 160,174.35 152,775.14 23,105.38 28,558.55 11,436.34 98.81 OP/OC (%) 364.14% 301.03% 41.27% 60.07% 22.65% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) Delhi High Court-PCIT vs. New River Software Services P. Ltd. (ITA No. 924/2016) order dated 22.08.2017- 3) Delhi High Court-CIT vs. Agnity India Technologies P. Ltd. (2013) 219 taxman 26 (Del) 4) Delhi High Court-CIT vs. Agnity Indian Technologies P. Ltd. (ITA No. 447/2018) 5) Delhi High Courtin PCIT vs. Evalueserve SEZ (Gurgaon) P. Ltd. ITA No. 241/2018 order dated 26.02.2018 6) Delhi High Courtn in PCIT vs. Evalueserve SEZ (Gurgaon) P. Ltd. ITA No. 948/2018 order dated 29.08.2018. 15.1 From the perusal of the annual report of the said company it is seen that it is amongst the top ten BPO of the country and has around 18,383 employees with huge advertisement expenditure and marketing of ₹ 8.73 crores as compared to the assessee which has 1163 employees and undertakes no such expense; and the turnover of Infosys is more than ₹ 1312 crores as compared to assessee s turnover which is at ₹ 144 crores. Further, in assessee s own case as well as in the case of sister concern, this Tribunal has excluded Infosys BPO based on these comparability factors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. In a large number of decisions this Court has 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are likely to materially affect the price or cost charged or paid or the profit arising from 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO. 36. This Court holds that in the facts of the present case, the assessee was incorrect, both in its reliance placed upon previous years data as well 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness Process Outsourcing (BPO) services fall within the broad definition of ITES, companies engaged in KPO services cannot be used as comparables for the TP study of a company engaged in providing BPO services. In that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Avenue Asia Advisors Pvt. Ltd. v. Dy CIT (2017) 398 ITR 320 (Del) where this Court, inter alia, observed that though in the TNMM method there is sufficient tolerance, mere broad functionality is by itself insufficient. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluding both these very comparables. The ITAT itself appears to have taken a consistent view in a large number of cases excluding these two comparables and its decisions have been upheld by this Court. Illustratively reference may be made to the decision of the Tribunal in Vertex Customer Services India Private Limited v. DCIT (2017) 88 Taxmann.Com 286 (Del- Tri), 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assumed is deployed then brand and high economic upscale would fall within the domain of assets and this also would make both these companies as unsuitable comparables. 28. 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 recalibrate 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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