TMI Blog2018 (8) TMI 1970X X X X Extracts X X X X X X X X Extracts X X X X ..... ly low-end ITES service provider in line of BPO services. KPO services normally carry out high end data analysis and data processing solutions which requires highly qualified and technical human resource and skilled persons to carry out such kind of activities. As compared to the BPO where focus is on processing and call service, the KPO requires specialize knowledge and ability to handle more complex activities thus companies functionally dissimilar with that of assessee need to be deselected from final list. E Clerx Services Ltd. cannot be held as comparable to assessee as functional different. Vishal Information Technologies Ltd has a different business model in as much as its outsourcing charges is 90.57%, which reflects that it has a different business model all together and outsourcing model is different from a company which carries out its work through its own resources as it reflects huge difference in employee cost ratio to turnover. The assets in the form of human resources and other intangible are completely different in such kind of companies. Further this company has been held to be non-comparable by the Hon ble Delhi High Court in the case of Rampgreen Solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (10) TMI 49 - ITAT DELHI] we direct the TPO to consider the quarterly results and work out the proportionate profit margin. CG-VAK Software Exports Ltd.company has been rejected for inclusion on the ground it has low turnover, which is less than ₹ 1 crore - We find that in the case of Chrys Capital Investment Advisors India Pvt. Ltd. Vs. DCIT [ 2015 (4) TMI 949 - DELHI HIGH COURT] after detailed analysis of rule 10B(3), has been reiterated the same principle that if the company is functionally comparable then same cannot be rejected on the basis of turnover. The Hon ble High Court in its very detailed judgment, wherein it was required to answer, whether the comparable can be rejected on the ground that they have high profit margin as compared to the assessee in TP analysis, has also dealt upon the turnover factor in detail and held that if the company is functionally comparable then same cannot be rejected on the basis of turnover. Thus, we hold that the company cannot be held to be incomparable simply on the ground of low turnover, unless it is demonstrated that the assets and risk are completely different and are incomparable. Thus, we direct the TPO to include CG Va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground that it has established a new unit - HELD THAT:- Once already deduction u/s 10A on the same unit has been allowed in the earlier years by the Tribunal, therefore, no different view can be taken for the same unit on similar set of facts for denying the deduction in A.Y. 2009-10. Accordingly, we direct the AO to allow deduction u/s 10A in respect to the said unit. Credit of the TDS denied as claimed in the return of income - HELD THAT:- Direct AO to verify the claim of the assessee and give credit of the TPS after verifying and in accordance with law. - ITA No. 1973/Del/2014, ITA No. 2577/DEL/2014 - - - Dated:- 3-8-2018 - SHRI R.K. PANDA ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER For the Appellant : Shri Nageshwar Rao Shri Sandeep Karhail, Advocates For the Respondent : Shri H.K. Choudhary, CIT -DR ORDER PER AMIT SHUKLA, J.M. The aforesaid cross appeals have been filed by the assessee as well as by the revenue against final assessment order u/s 143(3) r.w.s. 144C, dated 28.2.2014, passed by the AO in pursuance of directions given by the Dispute Resolution Panel, New Delhi, vide order dated 24.12.2013 for the assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation, financial charges, etc. Therefore, AEIPL is insulated from all key business risks. The functions performed by AEIPL were as under: - a) Input AEIPL receives raw data/raw information ( raw data ) in electronic form or in the form of paper-based inputs (documents, vouchers, reports etc.). The raw data is received through mail/courier, fax and electronic transmission from clients respective locations to AEIPL servers via data links. The raw data comprises unprocessed or semiprocessed accounting, financial and commercial information relating to the business of American Express locations worldwide. The various kinds of raw data received by AEIPL are as follows: Card member Data: Data pertaining to transactions executed by American Express card members. American Express Company Data: Data pertaining to day-to-day transactions undertaken within American Express companies which need to be recorded and reported to the respective American Express Companies ( customer country ) in different reports and accounting formats. Various types of inputs received for processing and recording in electronic or physical form are as follows: - Invoices: - Vouchers: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, technical data software, operating/ quality standards etc. developed and owned by the group companies. Thus, assessee is captive service provider, with no significant intangible assets and is a risk mitigated entity. However, its functions ranges from low end services like call centres and BPO services to preparation of ready to use business reports; financial reports like balance sheets, profit loss accounts, trial balances, etc.; bank account control reports and host of other reports from raw data. If entity like assessee is carrying myriad of such services, then it is very difficult to classify it as a simply low-end service provider company or pure high-end service provider or KPO. The distinction of low-end service and high-end service becomes very thin in such cases. Hence the comparability with the uncontrolled transactions has to be on deeper FAR analysis. 5. Though assessee had entered as many as 26 transactions with its AEs, however the main dispute in this appeal relates to export of data processing and office support services for the value of ₹ 782,63,63,57,677/-; and for purchase of fixed assets ₹ 41,67,500/-. For benchmarking the margin of ITES s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected four comparables, namely, i) Allsec Technologies Limited; ii) CG VAK Software Exports Limited; iii) R system International Ltd. (Segmental); and iv) Cepha Imaging Private Limited. In final five comparables from the assessee s search process was accepted by the TPO, that is,: - S. No. Name of the Company 1. Aditya Birla Minacs Worldwide Limited 2. Cosmic Global Limited 3. Informed Technologies Limited 4. ICRA Online Ltd. 5. Vishal Information Technologies Limited (Not known as Coral Hub Ltd.) 7. The TPO then after detailed discussion, further added two more comparables from the reject matrix of the assessee; i.e., E Clerx Services Ltd.; and Microgenetics Systems Ltd. The average margin of the seven comparables chosen by the TPO was arrived at 29.91 which were as under: - S. No. Name OP/OC (%) 1. Aditya Birla Minaacs Worldwide Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by the TPO): 10. Before us the Ld. Counsel, submitted that this company cannot be held to be comparable, because this company was into high end KPO services which provides data analytics, operation and management and audit reconciliation services. It is engaged in end to end support through the trade lifecycle, including trade confirmation, settlement, transaction maintenance, risk analytics and reporting. It has different skills of employees and has very high significant intangibles. He pointed out that the Tribunal in assessee s own case for the assessment year 2007-08 (order dated 7.6.2017) has held that assessee is not into a high-end service provider in view of our specific attention to para 27 to 29 of the order. He further submitted that Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs CIT In ITA No. 102/Del/2015 has held that KPO service provider company cannot be taken as comparable for a company which providing simple low-end ITES services i.e. BPO services. He also strongly relied upon the decision of the coordinate bench in the case of Cadence Design system India Ltd. In ITA No. 2071/Del/2014 order dated 4.9.2017, wherein the company has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, accounts payable analysis, accounts receivable analysis, bank account control reports etc. cannot said to be a simple lower ITES services provider. Though, other different services may be reckoned to be a routine ITES services, but not the entire functions. Before us, Ld. Counsel has strongly relied upon the decision of the Tribunal for A.Y. 2007-08, wherein the Tribunal had observed as under: - 28. On analysis of the functions of the assessee it is noted that it provides back office operations, revenue accounting, call centre services, support centre is naturally and ITES services and is definitely different from the Knowledge process outsourcing services. Further merely for the reason that AEGSEC services at Gurgaon unit provides certain data risk analysis services to detect high risk account activity does not make the services provided as high end services Provider. Tribunal noted that the services provided are different from KPO services provider and it was only in respect of AEGSCI services at Gurgaon Unit where certain data services were taken, it was held that it does not make high end service provider. Though the cumulative services as provided by the assessee m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le with the assessee by the Tribunal in A.Y. 2007-08. Moreover, it is an undisputed fact that this company operates on outsourcing model as more than 90% of employees have been outsourced. Before us, Ld. Counsel submitted not only it has a different business model of outsourcing activities, but it also functionally different; and in assessee s own case, right from the assessment year 2005-06 to 2007-08 this company has been held to be non-comparable with the assessee company. On the other hand, Ld. DR submitted that its main work continues to be the IT segment only and functionally it is comparable and whether it is outsourcing the employees, it will not make much difference in the functionality. 15. After considering the aforesaid submissions and considering material placed on record, we find that it has a different business model in as much as its outsourcing charges is 90.57%, which reflects that it has a different business model all together and outsourcing model is different from a company which carries out its work through its own resources as it reflects huge difference in employee cost ratio to turnover. The assets in the form of human resources and other intangible are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices, but in the case of the assessee also, from the functions performed it can be seen that it receives raw data / raw information in the electronic form for which assessee carries out detailed process and preparation ready to use business reports and computation, financial statements such as balance sheet profit and loss account, ledgers, trial balances and account payable and receivable analysis fixed assets register, bank account control reports and preparation of various other accounts of reports based on the inputs. Preparation of such reports and financial statements from a raw data cannot be held to be simple low end ITES services. 18. We have already discussed in the earlier part that the Tribunal in A.Y. 2007-08 has noted that back office operations, call centre services, revenue accounting is different from KPO. To that extent there could not be any quarrel that such services are simple ITES services. However, preparing of financial reports from a raw data and preparation of balance sheet and profit and loss account and data analytics cannot be held purely as low end ITES service. If the assessee is carrying out various kinds of functions which involve both high-end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d export revenue is less than 75% of the total turnover. However, on perusal of the annual report, we find that operating revenue has increased in the financial year 2008-09 from the previous year and hence such a contention of the TPO is contrary to the facts and records. In so far as the export filter of 75% applied by the TPO, we find that the export turn over to the total turnover was at 74.45% and since it was assessee s comparable and the assessee at the time of search process has applied the filter of excluding the cases where export revenue is less than 25% of the total revenue, therefore this company was thrown in the search analysis. There is no rule or mechanism for putting specific ceiling of limit in a particular filter. These are only used for quantitative analysis while the selecting comparables by applying filter. The TPO cannot suo moto apply the filter later on for selecting or rejecting the comparable of the assessee, because that amounts to cherry picking. There is no dispute with regard to otherwise functional or FAR comparability with that of the assessee. Therefore, the reasons assigned by TPO of putting such a ceiling for exclusion of this company cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period is available then it cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Ld. Counsel before us submitted that the audited accounts of R-Systems for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.3.2009 can easily be deduced. If there are no major incident of factors disturbing the profit margin in that quarter, whose results are being worked out and the transactions of the Company are carried out in the normal course of business, then we do not find any reason to reject the comparable out rightly on the aforesaid ground. The working of PLI based on audited accounts as incorporated above clearly clinches the point. The Hon ble P H High Court in CIT Vs. M/s. Mercer Consulting I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the international transaction has been entered into. 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analysing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus, so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R-System International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, the same cannot be held as not passing the test of sub-rule (4) of Rule 10B. Thus, following the same ratio we direct the TPO to consider the quarterly results and work out the proportionate profit margin. vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is shown that turnover or huge profit is on account of factor leading to a different results in FAR analysis. We find that the Hon ble Delhi High Court in the case of Chrys Capital Investment Advisors India Pvt. Ltd. Vs. DCIT (supra) after detailed analysis of rule 10B(3), has been reiterated the same principle that if the company is functionally comparable then same cannot be rejected on the basis of turnover. The Hon ble High Court in its very detailed judgment, wherein it was required to answer, whether the comparable can be rejected on the ground that they have high profit margin as compared to the assessee in TP analysis, has also dealt upon the turnover factor in detail and held that if the company is functionally comparable then same cannot be rejected on the basis of turnover. Thus, following the ratio laid down by the Hon ble Delhi High Court, we hold that the company cannot be held to be incomparable simply on the ground of low turnover, unless it is demonstrated that the assets and risk are completely different and are incomparable. Thus, we direct the TPO to include CG Vak Software and Export Ltd. as a comparable company. vii) Cepha Imaging Limited; 26. This com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP s direction could not have been made. On the other hand Ld. DR submitted that though this issue was referred by the TPO in his order but no adjustment was made and that is why the TPO has passed order u/s 154, whereby he made the adjustment on purchase of fixed assets. 31. From the perusal of the impugned TPO order, we find that though there is a reference on account of purchase of fixed assets from the AE, but no adjustment was made by the TPO on this score. The TPO in the original order has stated that the assessee purchased assets amounting to ₹ 44,34,339/- from AE for which TPO asked the assessee to furnish the WDV of the aforesaid assets in the books of the AE. The WDV of the assets books was ₹ 25,28,872/- whereas assessee has purchased at a higher price. The assessee s contention has been that it has purchased the fixed assets on a fair market value determined by the valuer and WDV of assets cannot be the same as fair market value which may be lower and higher. The TPO made the observation that in arm s length scenario WDV of assets should be taken at arm s length price. Though he has made the discussion but has not made any adjustment. It is for this reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X
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