TMI Blog2023 (4) TMI 841X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed Technologies Limited, (ii) Ace BPO Services Pvt. Ltd. and (iii) Crystal Voxx Limited - As per relevant finding of the Tribunal in the case of M/s.Global E-Business Operations Pvt. Ltd [ 2022 (11) TMI 1139 - ITAT BANGALORE] we restore the issue raised to the AO / TPO. The AO / TPO shall consider the issue afresh in accordance with law. - IT(TP)A No.342/Bang/2021 : - - - Dated:- 14-10-2022 - Shri George George K, JM Shri Laxmi Prasad Sahu, AM For the Appellant : Sri.Ankur Pai Sri. K.R.Vasudevan, Advocates For the Respondent : Sri.K.Sankar Ganesh, JCIT-DR ORDER Per George George K, JM : This appeal at the instance of the assessee is directed against final assessment order dated 30.03.2021 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2016-2017. 2. The brief facts of the case are as follows: The assessee is a company engaged in providing IT enabled services to Ocwen Mortgage Servicing Inc. USVI. The assessee is a wholly owned subsidiary of Ocwen Asia Holdings Limited, Mauritius. For the assessment year 2016-2017, the return of income was filed on 29.11.2016 declaring total income of Rs.93,31,44,80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales were excluded. 7. Companies with employee cost less than 25 percent of turnover were excluded. 4. The TPO selected 7 new comparable companies in the ITES segment. The TPO did not include any of the comparables, which were selected in the TP study of the assessee. The TPO determined 35th to 65th percentile at 19.27% to 26.44% with the median of 20.44% based on the weighted average operating profit/ total cost of the 7 comparable companies in the ITES segment. The details of the final set of comparables selected by the TPO and the median of 20.44% are detailed below:- Sl. No. Company name Financial Year wise OP/OC (%) 2014-15 2013-14 2012-13 Average 1. Bhilwara Infotechnology Limited (Seg) 12.32% 7.95% 20.57% 13.39% 2. One Touch Solutions (India) Private Limited 12.23% 14.87% 18.29% 15.33% 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting TP adjustment of Rs.18,42,02,360 determined by the TPO in the order passed u/s 92CA of the I.T.Act. Further, the A.O. made a disallowance of Rs.18,44,297 in relation to stamp duty incurred towards merger. The A.O. accordingly proposed the assessed income of the assessee at Rs.111,91,91,457 against the returned income of Rs.93,31,44,800. 7. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP rejected the objections of the assessee challenging the application of certain filters by the TPO. The DRP also rejected the objections of the assessee seeking to apply turnover filter and also rejected the claim for grant of working capital and risk adjustment. The assessee had also sought exclusion of following three companies as comparables:- (i) Infosys BPO Limited, (ii) SPI Technologies India Pvt. Ltd., and (iii) Eclerx Services Limited. 8. The DRP, further rejected the assessee s objection seeking inclusion of the following comparables:- (i) Allsec Technologies Limited (ii) Cosmic Global Limited (iii) Jindal Intellicom Limited (iv) BNR Udyog Limited (v) Informed Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble ITAT in Appellant's own case for immediately preceding AY i.e., AY 2015-16 in IT(TP)A No.2411/Bang/2019. The Appellant has filed a CHART with the relevant case law with appropriate references to the paragraphs containing the findings of the aforementioned exclusions sought Ground No.16 - Inclusion of comparables: The Appellant is seeking inclusion of the following companies as comparables: Ground No..16(e) - Informed Technologies Ltd Ground No..16(g) - Ace BPO Services Pvt Ltd Ground No.16(h) - Crystal Voxx Ltd The Appellant relies on the decision of this Hon'ble ITAT in the case of NTT Data Information Processing Services Pvt Ltd (supra) and the decision in Global e-Business Operations Pvt Ltd (supra) in support of its arguments for Inclusion of the companies as comparables. The Appellant submits that Crystal Vox x Ltd has been included by this Hon'ble ITAT in Appellant's own case for immediately preceding AY i.e., AY 2015-16 in IT(TP)A No.2411/Bang/2019. 12. The learned Departmental Representative supported the order of the AO / TPO. We shall adjudicate the above issues as under: Ground 13 (Grant of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: (3) An uncontrolled transaction shall be comparable to an international transaction if (i) 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 to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sys BPO offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. The nomenclature in the profit and loss account indicates that the income is earned from Revenue from business process management services which suggests that the company is engaged in consultancy and management services unlike the Appellant which is involved only in providing ITES as a captive service provider entity. 13.2 Further, Infosys BPO Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (He referred Page 162-163 of the Case Law Compilation, Para 11 - 21). Below is the relevant extract from the order for ready reference: 11. The ld. AR submitted that Infosys BPM Ltd. should be rejected as a comparable because it is functionally not comparable, has diversified activities and lack of segmental data, different business model, brand profits, various revenue models, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several clients and span across multiple indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctional comparability of a company and more so in the facts of this case, wherein the sub-contracting expenses are about 4.45% only. This objection was accordingly rejected. 16. Regarding the lack of segment data to reject it as a comparable, the DRP was of the view that when it has been held that all the services being done by this company falls in the category of ITeS, then the absence of segmental information remains a theoretical argument. 14. The assessee has also argued that this company has significant intangibles and brand and hence not functionally comparable. The DRP noted that the expenditure incurred towards brand was just Rs. 19 crore which is meagre considering its operating revenue of Rs. 3050 crores. Further, the assessee could not point to any information from the annual report to indicate brand has contributed to the revenue growth or profitability. Therefore, the presence of brand, as such, has not affected comparability. Further, there is no information in the annual report to indicate that the company has undertaken any major R D initiatives own intangibles. Therefore, the presence of intangible in the form of goodwill, which is also insignificant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. D.R. relied on the order of Ld. DRP. 13.6 We have heard the rival submissions and perused the materials available on record. This company has been considered as in the case of ADP Pvt. Ltd. cited (supra and held that this company cannot be included by observing as under:- 16.1 Infosys BPO Ltd.: The ld. AR submitted that this company may be excluded from the final set of comparables for the reason that this company has incurred outsourcing costs for FY 2013-14, FY 2014-15 and FY 2015-16 and the outsourcing cost incurred by this company reflects a different operating model and hence cannot be compared with the assessee company. Further, he submitted that while this company operates under various revenue model as per the assignments i.e., proportional completion method on rendering services, whereas the assessee charges a mark-up on the cost incurred to provide the services. Further, he submitted that since the cost structure and revenue model of this company is different with that of the assessee, this company ought to be rejected as a comparable company. He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three comparables. 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS E-Serve Ltd., is concerned, the Coordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad TCS e-SERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is partly allowed. 8.1 Respectfully following the above decision of the Coordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables.' We observe from the financial statements of this company, that this company is functionally dissimilar and use robotics automation and diversified activities. Therefore, following the decision of the co-ordinate bench, we direct the AO/TPO to exclude this company as comparable for determining ALP. 13.7 In view of the above order of the coordinate bench of Hyderabad, we direct the AO/TPO to exclude this company viz. Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment. ii. SPI Technologies Pvt. Ltd. 14. The Ld. A.R. submitted that the company is into diversified business activities. The Company is engaged in data processing and related services, primarily in the typesetting business, including transformation of unedited manuscripts into final print-ready files, supply of structured data for electronic publishing and providing end-toend project management services. 14.1 SPI Technologies India Private Limited has been excluded in the case of E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt then such a company would cease to be comparable. This of course is subject to the Revenue being able to show that amalgamation/merger did not have any effect of the profitability of the company. This has not been shown by the Revenue either to the Tribunal or before us. Therefore, this issue stands covered by the decision of this Court in Aptara Technology (P.) Ltd.'s case (supra) and PTC Software (I) (P.) Ltd.'s case (supra) in favour of the respondent. This more particularly in view of the absence of the Revenue even attempting to show that the merger and amalgamation that took place in the case of comparable M/s. Keynote Corporate Securities Limited was such that it would not have any impact on its profitability. It is true that in case of PTC Software (I) (P.) Ltd. case (supra) this question has been admitted, however, the admission was on the facts and circumstances of that case. In any case the issue now stands concluded by final orders of this Court in case of Aptara Technology (P.) Ltd. (supra) and PTC Software (I) (P.) Ltd.'s case (supra) and it is being followed. (v) In view of the above, as the proposed question is covered by the decision of this Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase in assessment year 2008-09 in ITA No.2235/PN/2012, order dated 02.02.2015 had held that the said concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of assessee with its associate enterprises in assessment year 2009-10 in ITA No.267/PN/2014, order dated 29.04.2015. The Tribunal vide order dated 02.02.2015 had held that the concern Accentia Technologies Ltd. could not be included in the final set of comparables holding as under: 13. Next, assessee had contended that Accentia Technologies Ltd. has been wrongly included by the TPO as a comparable concern. As per the assessee, the said concern was engaged in functionally different activities. It was pointed out that the said concern is engaged in providing medical transaction, billing and coding services, application development customization (segmental data not available). Moreover, it was contended that the sales/turnover of the said concern was more than Rs. 50 crores for the year under consideration which did not meet with turnover filter applied by the assessee. On this point, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set of comparables. 13. Following the same parity of reasoning as in Aptara Technologies Pvt. Ltd. v. ACIT (supra) and Cummins Turbo Technologies Ltd. v. DCIT (supra), we hold that Accentia Technologies Ltd. cannot be compared as comparable because of extraordinary events of acquisition and amalgamation during the year. Accordingly, we direct the Assessing Officer/TPO to exclude Accentia Technologies Ltd. from final list of comparables. 10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the assessee in ITes segment. 14.5 In view of the above order, we direct the AO/TPO to exclude SPI Technologies Pvt. Ltd. from the list of comparables selected for ITeS segment. iv. Eclerx Services Ltd. 15. Ld. A.R. submitted that the company offers solutions in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. It is observed that the profit margin of this company has been consistently at the same level during the last few years. The ALP margin is determined with reference the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. The DRP was of the opinion that it will not be proper to reject a comparable only on account of inorganic growth of top line, which otherwise is functionally comparable. 26. The DRP further observed that it was consistently held that high profit margin as such cannot be reason for exclusion when it is otherwise functionally comparable. Accordingly, there is no need to reject a functionally comparable company on account of having super profits. 27. The Assessee submitted that Eclerx suffers business concentration risk unlike the Assessee, who operates as a risk-free entity. The DRP observed that as far as the limited risk in the case of captive service providers is concerned, if this argument is accepted then it cannot be compared to any company as most of the companies will be independent companies. Rather it should be compare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable from the final set of comparables as this company is engaged in providing KPO services, different to low end BPO services provided by the assessee. He submitted that Safe Harbor Rules recognizes ITeS activities under tow distinct categories i.e., BPO and KPO and activities of this company falls under KPO services. He submitted that the services provided by this company of following: (a) Contract Risk Review, (b) Margin Exposure Management, (c) Online Operations and web analytics, (d) CRM and business intelligence, (e) Content creation, (f) business process consulting. 17.1 He further submitted that as per NIC code provided in the annual report, this company has been classified as KPO and has been awarded as leading KPO's in India, basis award and accolades received. He submitted that this company has undertaken the following extraordinary transactions thereby impacting the operating margins: (a) Acquisition of CLX Europe (b) Amalgamation of Agilest consulting (P.) ltd. 17.2 He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the co-ordinate bench exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS e-Serve Ltd., is concerned, the Coordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad TCS eSERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.1 Respectfully following the above decision of the Co-ordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables. We observe from the financial statements that this company is functionally dissimilar and engaged in KPO and BPO services and amalgamation of Agilest Consulting Pvt. Ltd., vide page No. 23 of paper book volume -1 para 8 and acquisition of CLX Europe which impacts on the profits of the company. From the financial statements of the Chairman's message placed at page No. 18 of paper book volume - 1, it has been categorically stated that after acquisition of CLX Europe, the revenue has grown by 30%, which clearly shows that it impacts on the profitability of the company. These are extraordinary events. Therefore, If an extraordinary event has taken place by way of amalgamation in a company, that company cannot be considered as a comparable as held by the co-ordinate bench of ITAT, Pune, in the case of Entercoms Solutions (P.) Ltd. (supra). Accordingly, we direct the AO/TPO to exclude this company as comparable from the list of comparables. 15.6 In view of the above order of the Tribunal, we direct the AO/TPO to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in providing ITeS and is comparable to the Assessee. (He referred page 2062 of the paper book). Also, the comparable qualifies all the quantitative filters applied by the learned TPO. 16.1 Further, Informed Technology has been included in the case of Ocwen Financial Solutions (P.) Ltd. [2019] 108 taxmann.com 306 (Bangalore - Trib.) AY 2014-2015 (He referred Page 178-179 of the Case Law Compilation, Para 10). The company has the same functional profile in AY 2014-15 and AY 2016-17. The Ld. A.R. therefore requested to include this company. 16.2 The relevant extract from the Tribunal s order is reproduced below for ready reference: 10. Informed Technologies Ltd., ('Informed') 10.1 This company 'Informed' was selected by the assessee as a comparable company in its TP study. The TPO in his order rejected this company stating that since 'Informed' is being primarily engaged in the business of Business Process Outsourcing, it fails the service income filter. On the objections filed by the assessee, the DRP concurred with the finding of the TPO by observing that the Annual Report shows that the sale of services is Rs. 2,58,53,362/- as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect. It is evident from a perusal of the profit and loss account of 'Informed' that the service income is Rs. 2,58,53,362/- which is entirely the revenue from operations and therefore in our considered view, the service income filter of 75% of service income to be from ITES as applied by the TPO, is satisfied in this case. In view of this factual finding rendered in the matter, we hold that this company 'Informed Technologies Ltd.,' satisfies the service income filter and is therefore to be included in the final set of comparables. We hold and direct the AO/TPO accordingly. 16.3 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of ITeS Segment. 16.4. Ld. D.R. relied on the order of Ld. DRP. 16.5 We have heard the rival submissions and perused the materials available on record. The contention of Ld. A.R. is that this has been considered in the case of Ocwen Financial Solutions Pvt. Ltd. (2019) 108 Taxmann.com 36 (Bang- Trib.) for the AY 2014-15, wherein it was held as under:- 10. Informed Technologies Ltd., ('Informed') 10.1 This company 'Informed' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;other income' of Rs. 1,22,85,303/-. As can be seen from Schedule 19 on page 40 of the Annual Report, the 'other income' comprises of non-operating income, interest, dividend, sale of current investments and miscellaneous income and evidently these incomes cannot be considered as operating income. The percentage of 67.7% worked out by the TPO is after considering these other income as service income; which is factually incorrect. It is evident from a perusal of the profit and loss account of 'Informed' that the service income is Rs. 2,58,53,362/- which is entirely the revenue from operations and therefore in our considered view, the service income filter of 75% of service income to be from ITES as applied by the TPO, is satisfied in this case. In view of this factual finding rendered in the matter, we hold that this company 'Informed Technologies Ltd.,' satisfies the service income filter and is therefore to be included in the final set of comparables. We hold and direct the AO/TPO accordingly. 16.6 In view of this, we remit this issue to the file of AO/TPO to examine this issue in the light of above findings of the Tribunal cited (supra) to dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent from a perusal of the Annual Report of this company 'Crystal' that the income in foreign currency amounting to Rs. 3,23,08,386/- is out of export of services. In support of this contention, the learned AR took us through the relevant pages of the Annual Report of this company, 'Crystal', which is placed at pages 474 to 497 of the paper book. 11.3 Per contra, the learned DR for Revenue supported the orders of the authorities below in not including this company, Crystal Voxx Ltd., in the final set of comparables. 11.4 We have considered the rival contentions/submissions and perused the material on record. We have carefully perused the Annual Report of this company, 'Crystal'. At Note 3 of the Notes forming part of the accounts, at page 491 of the paper book, it is stated that the operations of the company predominantly relate to a single segment, namely BPO Activity . At note 6, the income in foreign currency is shown as Rs. 3,23,08,386/-. In the Director's Report, at page 480 of the paper book, the foreign exchange earnings is given as Rs. 3,23,08,386/-. In the factual matrix of the matter, as laid out above, we are of the considered opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e orders of the authorities below in not including this company, Crystal Voxx Ltd., in the final set of comparables. 11.4 We have considered the rival contentions/submissions and perused the material on record. We have carefully perused the Annual Report of this company, 'Crystal'. At Note 3 of the Notes forming part of the accounts, at page 491 of the paper book, it is stated that the operations of the company predominantly relate to a single segment, namely BPO Activity . At note 6, the income in foreign currency is shown as Rs. 3,23,08,386/-. In the Director's Report, at page 480 of the paper book, the foreign exchange earnings is given as Rs. 3,23,08,386/-. In the factual matrix of the matter, as laid out above, we are of the considered opinion that the reason ascribed by the TPO and DRP for exclusion of this company, 'Crystal' is factually incorrect. Taking into consideration that the company 'Crystal' is otherwise comparable to the assessee in the case on hand as it is operating as a BPO company which is a provider of ITES, we direct that this company, Crystal Voxx Ltd., be included as a comparable company in the final set of comparables in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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