TMI Blog2019 (7) TMI 1663X X X X Extracts X X X X X X X X Extracts X X X X ..... hich distorted the profitability thereby increasing the margin, cannot be characterized as unreasonable. Rejection of comparable not on the ground of functional dissimilarity, but only because of a different accounting period - As gone through the financials of this CG Vak Software the income from software development product and services is separately mentioned and was also at page 26, the segment revenue and segment results are also provided. In these circumstances, we are of the considered opinion that in the absence of any finding that this company is functionally dissimilar, ld. TPO should have considered these figures to identify whether CG Vak Software is a suitable comparable with the assessee. We, therefore, direct ld. TPO to consider this entity for benchmarking the international transaction. M/s Informed Technologies Ltd. and M/s Micro genetics Systems Ltd. Ld. TPO rejected the same on the ground that both the Companies sales are below ₹ 5 Crores - As relying on case of Chris Capital [ 2015 (4) TMI 949 - DELHI HIGH COURT] we hold that so long as a company is functionally similar to the assessee merely because it does not match with the turnover, it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of providing travel related services (Charge Cards, Credit Cards, Traveler s Cheques and Travel Agency Services). During FY 2007-08, the international banking business of American Express Group was sold off. American Express group is involved in strategic decision making and evolving standardized policies and procedures to run the business. It exercises management control and oversight. It also manages the marketing and corporate governance initiatives and integrates it with the overall business objectives. Assessee is compensated for services rendered with a fee that is equivalent to operating expenses plus 20% of the mark up. During the Financial Year 2009-10, the value of the international transaction i.e. export of data processing and back office support undertaken by the assessee was ₹ 714,56,74,755/-. 3. For the AY 2010-11, the assessee filed the return of income on 1.10.2010 declaring an income of ₹ 2,42,82,74,285/- and since the international transaction undertaken by the assessee with the Associate Enterprises was to the tune of more than ₹ 15 crores, in accordance with the provision of Section 92CA of the Act, the international transaction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the year ending not matching in case of R. Systems International Ltd. and turnover filter in respect of the other three companies. It has, therefore, become necessary for us to look into the functions performed and risks assumed as incorporated by them in their TP Report to be found from page nos.365 of the paper book: Functions Performed 4.02.2.1 Functions Performed by American Express Group American Express Group is engaged in the business of providing travel related services (charge cards, credit cards, traveler's cheques and travel agency services). During FY 2007-08, the international banking business of American Express Group was sold off. American Express Group is involved in strategic decision making and evolving standardized policies and procedures to run the business. It exercises management control and oversight. It also manages the marketing and corporate governance initiatives and integrates it with the overall business objectives. 4.02.2.2 Functions Performed by AEIPL AEIPL is a captive contract IT enabled service provider catering to the needs of the Group. As per the contractual arrangement that AEIPL has with its AEs for the provision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esses (i.e., reorganization, analysis and transformation and conversion of raw data) as per requirements of its customers to generate customized output. c) Output The Company s output includes the following items processed and prepared as per the customers' specifications: Ready to use business reports and computations; Financial statements such as balance sheets, profit and loss accounts, ledgers, trial balances, accounts payable analysis, accounts receivable analysis, and fixed assets registers; Payroll processing and reports; Account reconciliation reports; Payment instructions for payment to vendors; Card transaction process outputs; Travel business transaction reports; and Other MIS reports per customers specific requirements. Further, AEIPL also provides call centre services to Group Companies, which involves answering incoming American Express card member calls for queries related to card member transactions. These queries include, inter alia, balance enquiry, product feature queries, change in personal information, etc. 4.02.1 Risks Assumed The risk profile of AEIPL as compared to American Express Group for the above mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indirect exposure to this risk. Price Risk: This risk arises as a result of price pressures in the market resulting in price undercutting, and thereby adversely impacting profitability AEIPL does not have any exposure to this risk as its compensation from AEs is pre-agreed and is on a cost-plus basis. The data processing and back office support is rendered within the American Express Group, and the inter company prices are typically determined based on arm's length principle. Thus, price' risk associated with intercompany prices charged in respect of such support would depend upon the nature of arrangement/ agreement between Group Companies and would lie with . Group Foreign Currency Risk: The risk arises from any adverse revaluation of assets and liabilities due to fluctuation in exchange rates, which would eventually have a negative impact on the profitability of the enterprise. AEIPL does not bear this risk since it incurs expenses in local currency and also invoices its customers in local currency. AEs have an exposure to this risk. Capacity U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pective of the extent to which AElPL's actual costs vary from its budgeted costs. 4.02.4 Characterization Based on the facts as presented in the above analysis of functions performed, assets employed and risks assumed by AEIPL, AEIPL can be characterized as a back officer support service provider operating in a limited risk environment. 6. Keeping in view these functions performed and reasons assumed, we shall now proceed to deal with the comparability of different entities included and excluded by the ld. TPO not to the liking of the assessee. As could be seen from the record, the bone of contention in this matter relates to the service of export of data processing and back office support undertaken by the assessee to the tune of ₹ 714,56,74,755/-. 7. For benchmarking this service characterized by the assessee as a back office support service operating in a limited risk environment i.e. ITeS segment, the assessee adopted TNMM method as the most appropriate method with PLI as Operating Profit/Operating Cost with a PLI arrived at 17.98%. 8. Assessee initially selected ten comparables by rejecting six in the matrix. Out of 10 comparables selecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice Provider and not a KPO. 12. On this aspect, we have gone through the functional profile of the assessee as contained in the TP study report for this year with the functional profile of the assessee as incorporated in the order dated 7.6.2017 for the AY 2007-08 in ITA No.1865/Del/2015. We do not find any change in the functions performed, reasons assumed or the assets deployed by the assessee in these years. Vide Para Nos. 21 to 29, a Coordinate Bench of this Tribunal dealt with this issue in detail and reached a conclusion that definitely the services rendered by the assessee falling in the category of Business Process Outsourcing, but not Knowledge Process Outsourcing. When the facts permeating all through the years are same, we do not find any reason to take a different view. We, therefore, hold that the services rendered by the assessee are only back office operations falling in the category of ITES and not KPO. 13. Now coming to the first comparable eClerx Services Ltd., learned AR submitted that on the ground of functional dissimilarity in the assessee s own case for AY 2007-08 and 2009-10, a coordinate bench of this Tribunal rejected this company as a comparable i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and revenues of the companies. The Company thus clearly bears significant entrepreneurial business risks such as market, price, service liability, credit, foreign exchange fluctuation, technology obsolescence and owns intangibles constituting 11.65% (Annual report 2010-11) of its total fixed assets which enable it to earn a higher margin. ThuseClerx is not only functionally different, but has a different asset and risk profile, has developed value added services as a KPO. In this segment, the Taxpayer is essentially providing back-office support services to parent while EClerx does not report segments. eClerx is one of, India's first KPOs to be appraised for and rated at maturity level 3 of people Capability Maturity Model (PCMM) (Annual report 2010-11 page 31). One of the key issues when analysing transfer prices is to refine the comparability analysis after matching the functional profile carefully. Further margins are earned as a result of functions performed, assets utilized and risks borne (FAR) wherein there lie considerable differences particularly in the outsourcing model it employs as laid down in jurisdictional HC decision in Rampgreen Solutions (P) Ltd V CIT ITA 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar, but ignored the same relying on an assumption that the functional dissimilarity would be subsumed in the profit margin, As noted, the content of services provided by the Assessee and the entities in question were not similar, In addition, there were also functional dissimilarities between the Assessee and the two entities in question. In our view, these comparability factors could not be ignored by the Tribunal. While using TNMM, the search for comparables may be broadened by including comparables offering services/products which are not entirely similar to the controlled transaction/entity However this can be done only if (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the risks assumed; and (h) the difference in services/products offered has no material bearing on the profitability Thus on the basis of functional differences from taxpayer and it cannot serve as a valid comparable for the ITeS segment in the case of taxpayer. TPO is thus directed to exclude eClerx from the list of comparables 17. We have gone through the annual report of this company incorporated from page 649 of the Paper Boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok place during the relevant previous year i.e. Financial Year 2009-10. 20. He further submitted that M/s Infosys BPO Ltd is into a wide array of services, customer service outsourcing, finance and accounting, knowledge services, human resources outsourcing, legal process outsourcing, sales and fulfillment, sourcing and procurement outsourcing, banking and capital outsourcing, media outsourcing, energy outsourcing, retail etc with the significant large scale of operations to the tune of ₹ 1,126.63 crores. He further submitted that during this financial year there took place the acquisition of McCamish Systems LLC besides this Infosys BPO limited commanding huge brand value. 21. In respect of M/s Accentia Technologies Ltd he submitted that this company is also into diversified services which includes HRCM (using SaaS model), also into KPO and LPO. With reference to the annual report of this company, Ld. AR submitted that this entity owns significant intangible assets at 57% and undertaken extraordinary activities (amalgamation) during the year. Ld. AR submitted that the extension technologies Ltd also falls in the category of KPO providing high end services and, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable, certain extraordinary events had occurred during the previous periods which distorted the profitability thereby increasing the margin, cannot be characterized as unreasonable. 26. In the case of M/s Agilent technologies (international) private limited vs. ITO, ITA Nos.1620/Del/2015 and batch for the Assessment Years 2010-11 to 2012-13, a coordinate Bench of this Tribunal found that M/s TCS E-Serve is engaged in providing IT services primarily to Citi group entities globally and it also provides technical services involving software testing, verification and validation of software at the time of implementation and data management activities which cannot be characterized as back office support services. It was further observed that there is no segmental bifurcation between the transaction processing and technical services. 27. Apart from this, though the Revenue preferred appeal to the Hon ble High Court against the findings of the Tribunal in respect of M/s AccentiaTechnologies, M/s iGate global consultants Ltd and M/s Infosys BPO Ltd. in the case of Ameriprise India P. Ltd. (supra), Revenue did not seem to have preferred any appeal against the findings of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re available in the public domain wherein the figures for the relevant quarter are also available, there cannot be any difficulty to work out the proportionate margin. While placing reliance on the decision of this Tribunal in the case of Cadence Design Systems India Ltd., the Tribunal directed the TPO to consider the quarterly results and work out the proportionate margin results. 31. We have gone through the order and also the facts involved in this matter. The rejection of this comparable is not on the ground of functional dissimilarity, but only because of a different accounting period. Facts being similar, we are of the considered opinion that it is a fit case to direct the ld. AO to consider the quarterly results and work out the proportionate profit margin for this purpose, we remand the matter to the file of the ld. TPO/AO for compliance of our direction. 32. In respect of CG Vak Software, observations of the ld. TPO for rejecting this company is that under ITeS segment, sale was only just ₹ 82.78 lakhs and on that ground this company was rejected. Assessee contended that inappropriateness of the turnover filter has not been considered by the ld. TPO. Ld. DRP on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -05 to 2006-07 and also in the light of the decision of the Hon ble jurisdictional High Court in the case Chris Capital (supra) accept the contention of the assessee and direct ld. TPO to consider these two companies as good comparables with the assessee to benchmark the international transactions. 37. Now coming to Ground No.14, this is to the effect that the interest of credit period granted by the company under normal trade practices was unjustly charged,having heard both the counsel, we are of the considered opinion that if working capital adjustment is granted, then no separate adjustment or interest receivables is required.We are fortified in our decision by the decision of the Hon ble Delhi High Court in ITA No.765/2016 in the case of Kusum Healthcare P. Ltd. 38. In Ground No.16, the grievance of the assessee is that ld. TPO/AO has erroneously interchanged operating profit/operating cost margin of the companies, namely, eClerx Services Ltd. and Omega Healthcare Management Services P. Ltd. and it requires rectification. Since it is not a part of adjudication but only a mistake that had crept in the order, we are of the opinion that the same could be rectified by the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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