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TMI Blog2021 (2) TMI 575X X X X Extracts X X X X X X X X Extracts X X X X ..... s length price ("ALP") of international transactions under section 92 of the Income-Tax Act, 1961 ("the Act"). 2. That on the facts and in the circumstances of the case and in law, the reference made by the AO suffers from jurisdictional error as the AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was "necessary and expedient" to refer the matter to the TPO for computation of the arm's length price, as is required under section 92CA(1) of the Act. 3. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 4. That on the facts and in the circumstances of the case and in law, DRP/AO/TPO erred in holding the functions performed by the Appellant to be in the nature of knowledge process outsourcing ("KPO") company without appreciating the facts on record and thereby accepting certain companies which were performing high end and different services as compared to the Appellant. 5. That on the facts and in the circumstances of the case and in law, DRP/AO/TPO erred in re-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at hand are : M/s. CPA Global Support Services India Pvt. Ltd., the taxpayer, incorporated in September 2003 is into rendering Information Technology Enabled Services (ITES) related to IP administration/renewal and data management services to its group companies including renewal support services, proof reading support, customer support services etc.. The taxpayer functions as a captive off-shore centre in India and supports its Associated Enterprises (AEs) in servicing customer contracts. During the year under assessment, the taxpayer entered into international transactions with is AEs: S. No. Type of International Transaction Method Selected Total value of transaction (Rs.) MAM PLI 1 Provision of IT Enabled Services TNMM OP/OC 871,922,767 2 Reimbursement of Expense to AEs TNMM OP/OC 12,304,322 3 Payment of interest on ECB CUP NA 1,002,818 4 Reimbursement of Expenses from AEs CUP NA 40,439,829 4. The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.31% 8. Infosys BPO Limited 39.04% 9. Acropetal Technologies Ltd. (segment) 19.91% 10. B N R Udyog Limited 50.72% 11. e4e Healthcare Business Services Pvt.Ltd. 23.52% 12. Microgenetics Systems Ltd. 10.19% Average 29.70% 9. Ld. TPO also computed the margin of taxpayer at 12.53% as against 17.20% computed by the taxpayer by considering foreign exchange as non-operating as under:- Particulars IT Enabled Services Operating revenues 871,922,767 Operating costs 774,809,131 Operating profit 97,113,636 OP/OC 12.53% 10. Since the method of benchmarking the international transactions is not in dispute, ld. AR for the taxpayer in order to compress the controversy at hand contended that the taxpayer is aggrieved with inclusion of 4 comparables out of 5 introduced by the TPO and is also aggrieved in considering foreign exchange fluctuation of bank charges as non-operating by the TPO while computing operating margin of the taxpayer. 11. First of all, we would discuss the suitability of four comparables viz. Eclerx Services Limited, TCS E-Serve Limited, Exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been described at page 767 of the annual report paper book, Eclerx provides web content management & merchandising execution, web analytics, social media moderation and analytics, search engine analytics & support, CRM platform support, lead generation, supply chain and channel analytics, price & catalogue competitive intelligence etc. 16. Coordinate Bench of the Tribunal in case of Ameriprise India Pvt. Ltd. in ITA No. 2010/Del/2014 held that Eclerx is having significant intangibles to provide KPO services whereas the taxpayer on the other hand is a captive ITES service provider on cost plus mark-up model with minimal risk. Operative part of the order of the coordinate Bench of the Tribunal is as under:- "14.2. After considering the rival submissions and perusing the relevant material on record, we find that it is a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to global clients. This company provides end to end support through trade life cycle including trade confirmations and settlements etc. It also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tica Travel Solutions Ltd. - - eClerx Private Limited 63.47 Total Subsidiaries Turnover 664.75 20. So, the financials of Eclerx available in the public domain, referred to above, are not reliable rather include turnover of its subsidiary companies. 21. Eclerx has been found to be not suitable comparable vis-à-vis captive service provider by the coordinate Bench of the Tribunal in Ariba India Pvt. Ltd. vs. DCIT ITA No. 5201/Del/2012. 22. So, in view of what has been discussed above, we are of the considered view that Eclerx is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. TCS E-SERVE LIMITED (TCS E-SERVE) 23. The taxpayer south exclusion of TCS E-Serve on grounds of functional dissimilarity; providing services predominantly to Citi Group; having high turnover and presence and payment for band; segmental information not available; having abnormal profitability trend and relied upon the decision of Hon'ble Delhi High Court in Avaya India Pvt. Ltd. vs. ACIT in ITA 532/2019, decisions of coordinate Bench of the Tribunal in case of Ariba India Pvt. Ltd. vs. DCIT ITA No. 876/Del/2015, and B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infosys BPO Limited with each of them employing 13,342 and 17,934 employees respectively and making Rs. 37 crores and Rs. 19 crores as contribution towards brand equity. When Rule 10(B) (2) is applied i.e. the FAR analysis, namely, functions performed, assets owned and risks 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 re-calibrate the PLI of the Assessee whose scale of operations was of a much lower order than the two impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less than 25% of the sales. 33. When we examine financials of Excel, available at page 1015 of the paper book, it shows that employee cost/net sales is 13.50% explained in the table below: Employee cost (amount in 000) Net Sales (amount in 000) Employee cost/ Net Sales INR 20,215.30 INR 154,921.03 13.05% 34. Furthermore, when we examine financials of Excel no doubt it is engaged in IT & BPO but segmental details of the same are not available as is evident from page 1029 of the paper book. When we examine page 1029 & 1025 of the paper book Excel is shown to have incurred significant cost on account of certain material related to infra activities amounting to Rs. 7,48,53,000/- which has been shown under the P&L account as purchase of stock but its segmental data is not available. Perusal of annual report at page 1190 of the paper book shows that Excel has started infrastructure activities during FY 2011-12, as is evident from Item No. 6 under the head "commencement of new activities", extracted as under:- "In view of the global recession in Information Technology (IT) and Business Processing Outsourcing (BPO), the Board of Directors of the Company consider it prudent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ES service provider working on cost plus mark-up business model. So, we are of the considered view that since BNR fails RPT filter of 25% applied by the TPO himself, having super normal growth, having functional dissimilarity vis-à-vis taxpayer is not a suitable comparable, hence ordered to be excluded. GROUND NO. 8 41. Ld. DRP/TPO/AO erred in treating foreign exchange loss as a non-operating item. Undisputedly, the taxpayer invoices its AEs for its services in US Dollars and bears foreign exchange risk qua movement in the exchange rate between US Dollar and INR. When the taxpayer drives its income from overseas AEs and the remuneration of support services provided to its AE is a major source of income. Ld. TPO/DRP have erred in applying the Safe Harbour Rule which is not applicable for AY 2012-13, the year under consideration being effective from 18.09.2013 having been made applicable prospectively. 42. So, when foreign exchange loss is to form part of the total base of the taxpayer for the purpose of charging a mark up to its AEs as it drives income from its overseas AEs and it being a cost plus entity, the taxpayer earns foreign exchange loss incurred if any, foreign e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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