TMI Blog2022 (7) TMI 1382X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ld. CIT(A) does not call for any interference and the same is upheld. IT Enabled Services segment - Revenue wants exclusion of Jindal Intellicom Ltd., from the final set of comparables in IT Enabled Services segment - We find that the view taken by the learned T.P.O is taken to reject this company from the list of comparable due to foreign exchange less than 75%. In the case of this company, its export turnover ratio is 70.80% and it cannot be said that there is only a minor deviation from the percentage of filter of 75% as applied by the ld. T.P.O. Therefore, in the given facts and circumstances the reliance placed by the assessee on the decision of Mercer Consulting [ 2016 (8) TMI 1163 - PUNJAB AND HARYANA HIGH COURT] is misplaced. Even going by spirit by the aforesaid decision what is minor deviation and what is major deviation, it all depends on the facts of each case. In our considered view in this case, failure regarding export filter at 70.8% instead of 75% is not a minor deviation. Therefore, we uphold the order of the T.P.O directing rejection of this company as comparable. Ground No. 4 of the Revenue is allowed. Excluding MPS Ltd. from the final set of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred as the Act for short) were issued and served upon the assessee by the A.O. Further the case was also referred to the T.P.O u/s 92CA of the Act to determine the Arm s Length Price of the international transactions entered by the assessee. The T.P.O/DCIT, TP-2(2), Pune, had passed the Transfer Pricing Order u/s 92CA(3) of the Act on 31-10-2019 wherein the TPO made total adjustment of Rs. 13,48,29,893/- to the international transaction of the assessee which included, Rs. 7,05,77,623/- related to Software Development Services (SDS) and Rs. 6,42,66,270/- related to Technical Support Services (ITES). Further, the A.O incorporated this adjustment in the assessment order u/s 143(3) r.w.s. 144C(3) of the Act passed on 13-02-2020. With the result, the assessee s total income was assessed at Rs. 30,82,82,750/- by the A.O. 3. The ld. D.R submitted that the Revenue is disputing software development and software support services. At page 56, Vol. I, (refer 5.2), the nature of transaction in respect of software development support services are annexed. The ld. .D.R submitted that ground No. 1 is general. In Ground No. 2, the Revenue is aggrieved with the direction by the ld. CIT(A) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the T.P.O as per his order at para 11.9 at page 30. The ld. CIT(A) has dealt with this issue at page 64 in para 2.4.1 as follows: 2.4.1: ASPIRE SYSTEMS (INDIA) Pvt. Ltd. The appellant has raised objections that this comparable fails Related Party Transactions (RPT) filter. The appellant has submitted the computations as well as in the final submissions extracted above in page 53. As per the computation the RPT is 37% and above the 25% threshold adopted in the TP order. This objection was taken before the ld. TPO and he has discussed this in para 11., page 30 of his TP order. It is seen that he has segregated related party income and related party expenses and taken their ratio to operating income and operating expenses, computed separately two RPT ratios and concluded that this comparable passes the RPT filter. I am afraid this is not acceptable way of calculating RPT ratio. The RPT ratio calculated by the appellant is incorrect and thus the AO/TPO is directed to remove this comparable from the final set of comparables. 6. Further, the ld. A.R referred to paper book Vol. II a page 772 where the annual report of this company has been placed and he demonstrated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable. It is the contention of the assessee before us that the learned T.P.O has not disputed the functional comparability of this company. The T.P.O has accepted as functionally comparable company for the A.Y. 2014-15. This company was also accepted as functionally comparable by the learned CIT(A) in the A.Y. 2013-14 and 2011-12. There has been no change in the business profile and therefore, this company should be considered as comparable. Considering the totality of the facts and circumstances and the order passed by the subordinate authority, we find that the view taken by the learned T.P.O is taken to reject this company from the list of comparable due to foreign exchange less than 75%. In the case of this company, its export turnover ratio is 70.80% and it cannot be said that there is only a minor deviation from the percentage of filter of 75% as applied by the ld. T.P.O. Therefore, in the given facts and circumstances the reliance placed by the assessee on the decision of Hon ble Punjab Haryana High Court in the case of Mercer Consulting is misplaced. Even going by spirit by the aforesaid decision what is minor deviation and what is major deviation, it all depends on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this company i.e. MPS Limited specifically at Page No.1134 of the paper book wherein products of the company has been enumerated and submitted that they are functionally different with that of the assessee company. This fact was not disputed by the Ld. DR. The Ld. Counsel for the assessee also submitted that the high end activities performed by MPS Ltd. are akin to IT services and not ITes. 23. The Ld. Counsel for the assessee heavily relied on the decision of the Pune Bench of the Tribunal in the case of Symantec Software India Private Limited Vs. DCIT, ITA No.1824/PUN/2018 for the assessment year 2014- 15 dated 17.02.2020 wherein the Tribunal in respect of MPS Limited has held and observed as follows : 20. We have perused the case records and heard the rival contentions. We find from the annual report of MPS Limited is engaged in high end activity i.e. type-setting, data digitization, content and product development for learners which is in the nature of knowledge processing outsourcing services. From the various functions performed by MPS Limited, we find that the said comparable is predominantly in the business of digital publishing which cannot be treated at par with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess. The functional differences are likely to affect the profit marking capacity of both the companies. In view of the same, we are of the opinion that this company is also to be excluded from the list of comparables. 9.3. In view of the above, we hold that the comparable chosen by the ld. TPO, M/s. MPS Ltd., is functionally not comparable with that of the assessee and accordingly, we direct the ld. TPO to exclude the same from the list of comparables. 21. We further observe in the case of United Health Group Information Services Pvt. Ltd. Vs. ACIT (supra.) wherein with regard to Vishal Informatics which is engaged in e-publishing business like the company in the instant case i.e. MPS Limited, on same issue, the Coordinate Bench of the Tribunal, Delhi has held as follows: Vishal Informatics 12.1. The TPO included this company in the list of comparables by noticing that it was engaged in providing BPO services. The assessee failed to convince him and the DRP that it was incomparable. 12.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it is mainly engaged in e-publishing business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entioned hereinabove, we are of the considered view, high end activities of the MPS Limited is akin to IT services and not ITes. The activities of the MPS Limited i.e. typesetting, data digitization, content development and product development are in the nature of Knowledge Processing Outsourcing Services (KPOs) and not BPO. Accordingly, MPS Limited cannot be treated as comparable company and the AO/TPO is directed to exclude MPS Limited from final list of comparable companies with regard to its technical support service segment. 24. Having gone through the annual report of the company, findings of the Subordinate Authorities and the submissions of the assessee placed on record along with judicial pronouncements, it is evident that MPS Limited is functionally different from that of the assessee company in more-so that high end activities of MPS Ltd is akin to IT services and not ITes. Respectfully following the decision of the Co-ordinate Bench of the Tribunal (supra.) we direct the AO/TPO to exclude MPS Limited from final list of comparable companies. 10. The ld. D.R could not bring out any contrary decision of these facts and could not demonstrate any relevant evidences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company i.e. Domex EData Pvt. Ltd. being KPO company, the Ld. DRP was of the opinion that since information was available in the website that cannot be relied on since the company has provided information in website which they intend to carry out but however at the present moment they may not be dealing with those activities. 27. Per contra, the Ld. Counsel for the assessee took us through the annual report, P L account and reiterated the submissions placed before the Revenue Authorities. Here again as per facts placed on record, this company is primarily a KPO company as per Note-II of Annexure to Auditor‟s report for FY 2014-15. Here again the Revenue Authorities have not specifically stated the reason why this company is made comparable to that with the assessee company. That as per the logical principle following from the decision in the case of M/s. Tasty Bites Eatables Limited Vs. ACIT(supra.), it is for the TPO to explain the reason for inclusion of this company since it was chosen as comparable by him. That even the Ld. DRP had emphasized on the revenue earning of this company from ITes. Here also, the decision of the Hon‟ble Delhi High Court (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s report, the Ld. DRP observed that they have only made reference in the ITes segment only and whether it is BPO or KPO services has nowhere been referred to. That further, the Ld. DRP also observed that most of the information was gathered from website of the company which may not always be reliable and relevant. 18. The Ld. Counsel for the assessee at the time of hearing reiterated the submissions made in respect of exclusion of Manipal Digital Systems Private Limited, for this company also. He took us through the annual report of the 12 ITA No. 133/PUN/2021 A.Y.2016-17 company, P L account, notes of financial accounts and segmental information and therein, it is evident that companies operations predominantly relate to providing IT services in two primary business segments viz. IT services and IT Enables Services (ITes). The company considered the business segment as the primary segment and Geographical segment based on the location of the customers as the secondary segment. 19. Having perused the relevant documents on record, analyzing the facts and circumstances, we find that the Revenue Authorities have not clearly stated regarding involvement of BPO/KPO ITes service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the contention of the assessee was rejected and the company was taken as comparable company. 10. That before the Ld. DRP, objections have been raised by the assessee which are at running Page No.34 of the appeal memo and therein, apart from reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions performed by the company. The Ld. DRP vide Para (c) of Page No.67 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and included Manipal Digital Systems Private Limited in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider. 33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , findings of the Ld. DRP and the various judicial pronouncements placed on record, first of all the Revenue has selected Manipal Digital Systems Private Limited as comparable to that of the assessee company based on the earning 10 ITA No. 133/PUN/2021 A.Y.2016-17 of the company from ITes. However, there is no segmental specification provided neither by the TPO nor by the Ld. DRP for the reason of such inclusion of this company in the final set of comparable companies with that of the assessee company. In the decision of the Hon‟ble Delhi High Court (supra.), it is very much clear in the wide spectrum of ITes if two companies are to be comparable one has to look into the characteristic of service or business provided under ITes by them. This exercise was not done by the Department in this case. We also opine that as per Indian Council for Advertising, the online advertising has to be published on true and honest disclosure basis and therefore, when proper documentation of activities are not physically available, in such scenario, referring the website for information is correct option and the information therein cannot be doubted. These are all multi-national companies and ce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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