TMI Blog2024 (1) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld.DR. However, the reason for it have excluded by the authorities below are not as per the principles of transfer pricing procedure. In the interest of justice, we remit this comparable to the Ld.AO/TPO to consider the FAR of assessee with that of this comparable and to consider the inclusion in accordance with law. Interglobe Technologies Pvt. Ltd. - AR submitted that this comparable was rejected by the Ld.TPO as it fails employee cost filter. On an objection being raised before the DRP, it was held that this company is not reflecting in the search matrix of the TPO - AR referred to the annual report and submitted that this company has an employee cost ratio of less than 25% and the objection of the TPO is therefore without any basis. In the interest of justice, we remand this comparable back to the Ld.AO/TPO to consider its inclusion in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee. Working capital adjustment denied - HELD THAT:- We are of the opinion that this issue is no longer resintegra as this issue is covered by the decision of Coordinate Bench of this Tribunal in case of Huawei Technologies India (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Services Pvt Ltd. 2.2 That on the facts and circumstances of the case and in law, the AO / TPO have erred in arbitrarily rejecting the comparable company, namely, R Systems International Ltd. (seg) on the ground that the same was not found in search matrix without appreciating that the same is functionally comparable. The DRP further erred in upholding the same basis the filter of different financial year ending. 2.3 That on the facts and circumstances of the case and in law, the AO / TPO have erred, in arbitrarily rejecting comparable company namely, Interglobe Technologies Pvt. Ltd. on ground that it fails the employee cost filter, without appreciating that the said company is functionally comparable and passed all the filters applied by TPO. The DRP further erred in upholding the same. 3. That on the facts and circumstances of the case and in law, the company namely Datamatics Financial Services Ltd. is not comparable to the Appellant as it has different functional, asset and risk profile. 4. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily rejecting the transfer pricing study of the Appellant and using ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional ground of appeal: 1. That on the facts and circumstances of the case and in law, the company namely Datamatics Financial Services Ltd. is not comparable to the Appellant as it has different functional. asset and risk profile. 2.2 The Ld.AR submitted that the above comparable was left out to be considered in the original grounds of appeal though it was not contested before the DRP seeking exclusion. It is submitted that this does not estop assessee from raising this comparable before this Tribunal. The Ld.AR placed reliance on the decision of Special Bench in case of DCIT vs. Quark Systems Pvt. Ltd. reported in 42 DTR 414 and decision of Coordinate Bench of this Tribunal in case of Sterling Commerce Solutions India Pvt. Ltd. vs. DCIT in IT(TP)A No. 1410/Bang/2015. The Ld.AR also placed reliance on the decision of Hon ble Supreme Court in case of Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688 and National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383. 2.3 The Ld.DR on the contrary opposed the admission of the additional ground as it has not been considered by the authorities below. We have perused the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.37%, the details of which are as under: No. Company Name F.Year wise OP/OC (%) Wt. Average 2016-17 2015-16 2014-15 1 Sundaram Business Services Ltd. 9.21 0.99 -3.95 2.08 2 Jindal Intellicom Ltd. 8.66 2.78 11.07 7.41 3 Fuzen Software Pvt. Ltd 15.07 16.06 16.98 15.93 4 Microland Ltd.(seg) 18.72 14.02 19.30 17.53 5 Tech Mahindra Business Services Ltd. 18.51 19.09 29.92 22.37 6 Datamatics Business Solutions Ltd. 6.21 33.46 36.22 22.64 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat assessee wish to argue only following 5 comparables raised in ground no. 2.1 for exclusion. a) Infosys BPM Ltd. b) SPI Technologies India Pvt. Ltd. c) Inteq BPO Services Pvt. Ltd. d) Manipal Digital Systems Pvt. Ltd. e) CES Ltd. Assessee has directed the Ld.AR not to press Vitae International Accounting Services Pvt. Ltd. and accordingly, the same has been not pressed by the Ld.AR. 4.2 In Ground nos. 2.2 and 2.3 , the assessee is seeking inclusion of two comparables being R Systems International Ltd. (seg) and Interglobe Technologies Pvt. Ltd. 4.3 The Ld.AR has submitted that Ground no. 4.1 has been raised by assessee seeking application of turnover filter which the assessee do not wish to argue. Accordingly, this ground has been not pressed by the Ld.AR. The additional ground raised by the assessee is seeking exclusion of Datamatics Financial Services Ltd. as functionally not similar. 4.3.1 Thus from the above, assessee is seeking following comparables for exclusion. 1. Infosys BPM Ltd. 2. SPI Technologies India Pvt. Ltd. 3. Inteq BPO Services Pvt. Ltd. 4. Manipal Digital Systems Pvt. Ltd. 5. CES Ltd. 6. Datamatics Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verable quality standards and procedures_ Nuance Inc. has its own prescribed set of QA process which checks the program for quality. The same is delivered to the client only after it meets with the prescribed quality standard. e) Customisation and after-sales services Product customisation and product installation services are rendered to the end clients by Nuance Inc. wherever applicable. f) Customer relationship Nuance Inc. is responsible for maintaining the customer relationship with respect to the work outsourced to NTS India. As mentioned above. NTS India is not directly involved in any frontending. g) Pricing policy with customers NTS India renders services to Nuance Inc_ under a fixed price arrangement. Pricing policy as regards end clients is determined by Nuance Inc.. and prices are to be negotiated with the end clients by Nuance Inc. only. h) Billing and collection Nuance Inc. being the contracting entity is responsible for invoicing to the end customers. It is Nuance Inc.'s responsibility to ensure that the payments are received from the customers as per the billing milestones agreed. i) Recruitment and training Nuance Inc. is involved in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NTS India's Gross and Net assets as at 31 March 2017 Particulars Gross Amount (INR) Depreciation (INR) Net Amount (INR) Computers 94,090,946 32,516,204 61,574,741 Furniture and fixtures 16,721,080 4,201,601 12,519,479 Office equipment 56,995,924 29,489,415 27,506,509 Leasehold Improvements 180,334,128 44,584,426 135,749,702 Computer software 31,627,096 17,180,951 14,446,144 Total 379,769,173 127,972,597 251,796,576 Nuance Inc. owns the intangible property rights in the products sold to customers. Thus, NTS India has no ownership right, legal or economic, on any intangible generated or on the outcome of any intangible generated or arising during the course of rendering of medical tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NTS India does not carry out any R D and therefore does not bear any such risk. Nuance Inc. bears all the research and development risk associated with the development of design. specification and final product. It is also responsible for conceptualising new product ideas based on the inputs received from marketing channels. 4. Technology risk This risk arises where the market in which the company operates is sensitive to technological changes resulting from new developments, compliance regulations etc. All technology and process know-how pertaining to this transaction is owned and maintained by Nuance Inc. Therefore. NTS India does not bear technology risk. Nuance Inc. actively utilises web enabled tools and technology platforms for the performance of its business. Hence, it assumes significant risk arising due to technological changes. 5. Credit risk This is the risk arising from non-payment of dues by customers. NTS India credit risk is mitigated as it exclusively services Nuance Inc., its AE and recovers within the cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance with legal/ contractual/ statutory provisions, etc. Conclusion of the FAR analysis for NTS India's international transaction pertaining to medical transcription services with Nuance Inc. NTS India performs all routine and normal functions undertaken by medical transcription service providers operating in India. NTS India faces limited business risks with respect to transactions with Nuance Inc. NTS India does not own any significant non-routine intangibles as the same are owned by Nuance Inc. Economic characterization The purpose of this section is to provide information on the economic characterisation of NTS India and its AE, based on the functional analysis of the inter-company transactions. This is an important step to enable the execution of the benchmarking analysis. Nuance Inc. performs critical functions of identification of projects, marketing and owns non-routine intangibles. It bears the entrepreneurial risks, being the contracting party. Accordingly, AE can be characterised as the principal/entrepreneurial risk bearing entity because of its ultimate responsibility for marketing, contractual risks and client ownersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The characterisation of the assessee has not been disputed by the authorities below and that the same has been upheld by Coordinate Bench of this Tribunal in assessee s own case for A.Y. 2016-17 in IT(TP)A No. 721/Bang/2021 vide order dated 16.02.2023. On perusal of the decision relied by the Ld.AR, we note that the above comparables have been excluded in case of Exxonmobil Services and Technology Pvt. Ltd. vs. DCIT (supra) by observing as under: (I) Datamatics Business Solutins Ltd. 6. The ld. A.R. submitted that Datamatics fails the export filter applied by the learned TPO, lacks segmental data and therefore, should be rejected. Fails export earnings filter proposed to be applied by the learned TPO for the two previous years, i.e. FY 2015-16 and FY 2014-15 Functionally different - Engaged in KPO services No segmental details are provided 7. The ld. D.R. submitted that the Ld. DRP observed in his report that as per the Form No. MGT-9 forming part of the annual report, the principal activity of the company is described as IT enabled Services and BPM Service providers deriving income around 87.29%. Therefore, the company is functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usal of the annual report, the ld. DRP noted that the expenses on this count is only 4.57% of the total sales and which is not at all significant to affect the profitability of the comparable. Further, during the previous year 2015-16 the assessee has incurred more selling and marketing expenses amounting Rs. 326.33 lakhs as against total sales of Rs. 6314.04 lakhs whereas the company has incurred Rs. 299.46 lakhs during the previous year 2016-17 as against total sales of Rs. 6544.60 lakhs. Thus, that though expenses are less this year the revenue has slightly gone up. This shows that there is no correlation between the expenses and the revenue. The assessee has failed to establish that such differences have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas were rejected by the ld. DRP. 7.5 The ld. D.R. submitted that as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reject the same. He did not specify as to which of the comparables is being rejected for which specific reasons thereof. Thereafter, the transfer pricing officer mentioned his own criteria and proceeded to select comparables and accordingly made the transfer pricing adjustment. 11. Upon the assessee's appeal, the ld. CIT(A) has accepted that the characterization by the transfer pricing officer of the assessee's functions as knowledge process outsourcing was not correct. Thereafter, the ld. CIT(A) contradicted himself by stating that the functions of the assessee are in alignment with the knowledge process outsourcing comparable dealt with by the transfer pricing officer. In this regard, the learned CIT appeals relied upon the ITAT decision in the case of Maersk Global Centers (India )(P) Ltd . Thereafter, the learned CIT (A) upheld the assessing officer s action of selection of four of the comparables and accepted the assessee s contention in rejection of two the comparables. 12. Now in appeal before us, the submission of the learned counsel of the assessee is that assessee's functions are that of ITES which has been duly accepted by the revenue as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sourcing its significant part of its operation as evident from its low employee cost and have substantial different business model compared to assessee and prayed for exclusion. The ld. DR has supported the inclusion. The TPO while making benchmarking taking his view that this comparable company is in the business of IT enabled services to overseas markets and included in the list of comparable. The Id. CIT(A) confirmed the action of TPO holding that the TPO conducting benchmarking after calling information under section 133(6) and is benchmarking analysis are correct. We have noted that, though the Id. AR has relied upon a number of decisions of Tribunal/coordinate bench. We have noted that in a recent decision of Tribunal in Wills Processing Services (I) Pvt. Ltd. (supra) on comparability, the Tribunal held as under: We though in light of our aforesaid observations had partly disagreed with certain grounds as had been averred by the Ld. A.R to facilitate exclusion of the aforesaid comparable, however as observed by us hereinabove that the aforesaid comparable viz. Coral Hub Limited (earlier known as Vishal Information Technology Limited) had a business model where servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss Solutions Ltd. from the list of comparables. (II) Infosys BPM Services Pvt. Ltd.: 9. The ld. A.R. submitted that Infosys BPO Limited should be rejected as a comparable company as this company is functionally different and therefore ought to be rejected. Further, Infosys BPO had presence of intangibles, brand value, subcontracting expenses as compared to the Assessee who did not possess the same. Functionally dissimilar - business process management Ownership of intangible assets IPs Brand Value/ Marketing expenses Consultancy expenses in the nature of Sub-contracting charges 10. The ld. D.R. submitted that the ld. DRP in his report observed that on perusal of the annual report, this company offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. Further, at Page 31 and 32 under Note 11 Segment Reporting, it was clearly stated that the company's operations primarily relate to providing business process management services, and accordingly revenues represented along with industry classes comprise the primary basis of segmental information. Thus, primar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) method is used for arms' length pricing; the resale price, cost-plus methods generally require a lesser degree of products or services comparability and may be appropriate if functional comparables are available. The TNMM requires only broad functional and product/services comparability. In many instances, it will be possible to use 'imperfect' comparables, e.g., comparables from another industry sector, possibly adjusted to eliminate or reduce the differences between them and the controlled transaction.' 10.2 Reliance was also placed in the case of PinoBisazza Glass Pvt. Ltd. Vs. ACIT C-5,Ahmedabad 2005-06 2007-08, ITA No.1690 ^ 1622/Ahd/2010 3201/Ahd/2011 wherein acceptance of broad comparables was upheld. The relevant extract has been reproduced below: 12 - Although the selection of Industry Segment is the start point but it is a broad selection, particularly if a finer or more close selection is available. We are aware about Para 1.41 of OECD guidelines which prescribes that it is acceptable to broaden the scope of the comparability analysis to include uncontrolled transaction involving products that are different, but where similar functions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted submission of the assessee before the Tribunal as per ground 1.12 is seeking exclusion of three companies from the list of comparable companies, namely, (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited. We find in the case of assessee s group company namely EIT Services India Pvt. Ltd. v. DCIT (supra), the above three companies were excluded from the list of comparables on account of functional dissimilarities. We find that profile of the assessee in the instant case and that of the assessee in case of EIT services India Pvt. Ltd. are identical. Moreover, the assessment year is the same. The relevant finding of the Tribunal in the case of EIT Services India Pvt. Ltd. v. DCIT (supra) reads as follows (For exclusion of (i) Infosys BPO Limited, (ii) SPI Technologies India Pvt. Ltd. and (iii) Eclerx Services Limited) :- 13. Further, the assessee wants exclusion of following comparables in IT enabled services. i. Infosys BPO Ltd. ii. SPI Technologies Pvt. Ltd. iii. Eclerx Services Ltd. i. Infosys BPO Ltd. 13.1 The Ld. A.R. submitted that that Infosys BPO offers business process outsourcing soluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce contracts and therefore, it should not be compared with the assessee, the DRP observed that as the assessed failed to demonstrate as to how the different methods of billing would affect the Functional comparability or impact the profitability. Unless the same is demonstrated with credible evidence, it remains a theoretical argument without any backing with facts and figures and hence rejected it. 15. The assessee pointed out that this company has reported an amount of Rs. 136 crore as 'cost of Technical sub-contractors' which constitutes about 4.45% of total revenue of the company during the year. The DRP observed that the annual report mentions that these subcontractors are used for operational activities. This is a common practice in almost all the companies to give a small portion of the work to some other subcontractors for a variety of reasons. This may allow the company to focus on its core activities. Sometimes it may be to meet the mismatch in certain skill-sets that are required in various projects. These expenses are incurred in the routine course of business. This cannot be held to be a criteria to affect the functional comparability of a company and more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcing, sales and fulfilment, analytics, business platforms, business transformation services, human resource outsourcing and technology solution optimisation. It is noted that this comparable also provides services in financial services and insurance, manufacturing, energy utilities communications and services and retail, consumer packaged foods, logistics and life services. Further in the annual report it has been mentioned that this comparable provides services that are different from routine back-office services. This noting itself makes this comparable not functionally similar with that of assessee. Accordingly we direct this comparable to be excluded from finalist. 21. In view of the above order of the Tribunal, we are inclined to hold that this company should be excluded from the list of comparables. 13.3 The company has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 13.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the f inal l ist of ITeS Segment. 13.5 Ld. D.R. relied on the order of Ld. DRP. 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s vide array of services and has high brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld.DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Coordinate Benches in excluding the above three comparables. 8. We have considered the riva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of CIT v. Agnity India Technologies (P.) Ltd., [2013] 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e- Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS EServe Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No. 6 is partly allowed. 8.1 Respectfully following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .34 crores which comes to around 97.08%. The other activities like pre-media work, e-distribution contributes around Rs. 0.70 crores which is a minor revenue. The assessee, based on the website information, argued that the company is into diversified activities that can be classified as KPO services as per the definition of safe harbour rules. At the outset, the ld. DRP observed that the information put in website cannot be given complete credence, as they are mere forward-looking information and statements with the motive of advertisement and other promotional gains. The functional aspect has to be determined by the information in the annual report which is based on audited financial statements and management reports, for qualitative analysis of comparability. The fact that the company is into ITES segment is corroborated by the corporate information given at page 45 of the annual report where it is lucidly stated that the main business of the company is to provide information technology enabled services that means pre-press activities mainly to overseas as well as domestic customers . Therefore, the ld. DRP observed that the pleas raised based on information said to be available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: 12.1.8 We have heard the rival submissions and perused the materials available on record. As per the annual report of the company, it is also in end-to-end content services across the value chain. From the website and annual report, it is clearly evident that the company is also engaged in web development, mobile application development. The company also provides publishing editorial composition services, which includes creating layout artwork for advertisements and brochures, typesetting services and proof reading. As per revenue from operations, it includes Revenue from web development and other services (INR 2.18 Cr) and income from e-book Distribution (INR 69 lakhs), without providing the segmental revenue and profitability with respect to ITES segment. Advertising and sales promotion expenses at 6.50%, 7.19% 8.78% of total expenditure in FY 2016-17, FY 2015-16 FY 2014-15 respectively. 12.1.9 Further, the Tribunal in the case of Iron Mountain Services Ltd. in IT(TP)A No.307/Bang/2022 dated 20.9.2022 has held as under:- 16. The next company the assessee seeks to exclude is Manipal Digital Systems Pvt. Ltd. In this regard, it was submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the final set of comparables companies. That again the prime observation of the Ld. DRP in this regard was that more than 90% of the total revenue of the operation of the company comes from ITes. 11. At the time of hearing, the Ld. Counsel for the assessee took us through the annual report of the company at Volume II, Page 1279 onwards, Page 1302 having notes of accounts. The Ld. Counsel vehemently submitted that on perusal of the annual report, notes of accounts, nothing can be stated whether at all this company i.e. Manipal Digital Systems Private Limited is engaged in the business of call center or not. The realm of ITes involves various activities and on general principle the Revenue cannot say that since majority of the earning of the said company comes from ITes, it is comparable company with that of the assessee company. 12. Placing strong reliance on the decision of the Honble Delhi High Court in the case of Rampgr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal 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 of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hysically 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 certain amount of honesty has to be attributed to them since all are functioning as per relevant rules and laws. With these observations and respectfully, following the judgment of the Hon ble Delhi High Court (supra.) we direct the AO/TPO to exclude this company i.e . Manipal Digital Systems Private Limited from the final set of comparables with that of the assessee company. 17. Learned DR submitted that the aforesaid decision was in relation to Assessment Year 2016-17 whereas the case of the assessee in this appeal is in reference to Assessment Year 2017-18. Learned Counsel for the assessee submitted that the functional profile of the comparable company as well as the assessee remains the same for both Assessment Years 2016-17 and 2017-18 and therefore the decisions cited above are applicable to Assessment Year 2017-18 also. 18. We have given a careful consideration to the rival submissions and are of the view that it would be just and appropriate to set aside the question of comparabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eas raised based on information said to be available in the website are liable to be rejected is in limine. In view of the above, factual information, the contention of the assessee that the comparable company is functionally different is not correct. Therefore, the selection of the comparable by the TPO on the functional aspect was upheld by the ld. DRP. 16. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of Eurofins IT Solutions India Pvt. Ltd. for the AY 2017-18 in IT(TP)A No.186/Bang/2022 dated 5.1.2023, wherein held as under: 11. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration in the case of Transperfect Solutions India Pvt. Ltd in ITA No.331/Pun/2021 dated 29.7.2022 for the AY 2016-17 wherein held as under: 8.1 This comparable was also chosen by the TPO. The assessee s objection that this company was engaged in rendering KPO services as well was not approved by the TPO, who went with its inclusion. 8.2 The Annual report of this company shows that it is engaged in both the IT and IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities are in the nature of ITES. On page 100 of the annual report while giving the additional information it is mentioned that the total revenue of Rs. 391.54 crores is derived from information technology services. In the same page while giving the description of accounting policy for recognition of revenue it is stated that revenue from data processing and related services is recognised based on the proportionate completion method with profit margins . Further, the company is in single segment of ITES as per segmental reporting reported in the Annual Report at page no. 75. In addition there is no indication from the annual report that the company is activities are more akin to KPO services. Nevertheless, the ld DRP observed that that there is a thin line of difference between BPO and KPO services. KPO is termed as an upward shift of the BPO industry in the value chain. Thus, BPO trying to upgrade itself as KPO is likely to render both BPO as well as KPO services in the process of evolution and therefore, such an entity cannot be considered strictly as either BPO or KPO. The comparability of transaction or the selection of comparables in our view has to be examined in terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat margins in different segments of ITES services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly qualified/skilled also goes up steeply and, therefore, the margins are not much affected. In fact, no evidence has been produced before us to show that margins in the highend segments of ITES services is high compared to low end services. Therefore, the ld. DRP was unable to accept the argument advanced by learned AR that the comparables belonging to high end segments such as KPO etc. should be excluded from the comparability list on this ground alone. In fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. In view of the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM functional similarity is more relevant than product similarity. Accordingly, the ld. DRP reject this plea of the assessee. 17.3 In view of the above factual information available in the annual report regarding the ITES activities performed by the company the contentions of the assessee that it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DRP further observed that the assessee has also argued that this company has significant intangibles and cannot be compared to the assessee which is a routine ITES service provider which does not holding non-routine intangibles and is not involved in development of intangibles. The company's annual report on page 20 gives the details of intangible assets amounting to Rs. 5.50 crores and intangible assets under development or work in progress amounting to Rs. 2.11 crores. The total of intangible assets is around Rs. 7.62 crores as against total revenue of Rs. 391.54 crores which comes to around 1.94% of the total revenue. This is a very insignificant compared to the turnover of the company and will not influence the profit margin. Further, the intangibles are internally developed intangible which have not been seem to have any potential deriving any substantial benefit. The company, as per information does not own any significant IPRs. Further, the ld. DRP observed that the assessee has failed to demonstrate its significant positive impact on the financials of the company. Further the ALP margin is determined with reference to the average profit margin of a comparable for thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable in respect of the same. He placed reliance on the annual report of this company placed in the paper book at page 377 of the paper book wherein this company has been identified to be carrying out a business process outsourcing that includes computer programming, consultancy and related services. 5.5.1 The Ld.AR submitted that based on the above, this comparable has been excluded by this Tribunal in case of Mindteck (India) Ltd. vs. DCIT (supra). He thus prayed for exclusion of this comparable from the final list as it is not functionally similar with that of assessee. 5.5.2 The Ld.DR on the contrary relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 5.5.3 We note that this company has been excluded in Mindteck (India) Ltd. vs. DCIT (supra) by Coordinate Bench by observing as under: (f) Inteq BPO Services Pvt. Ltd. 27. The Ld. A.R. for the assessee submitted that this company is engaged in providing services in the nature of Revenue Cycle Management, Claims processing services and document data processing. The information available in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Insurance, Finance Banking, and so forth. These soft skills are mainly utilized in KPO (Knowledge Process Outsourcing) and BFO (Business Process Outsourcing) and LPO (Legal Process Outsourcing), rear office job and phone centres. Therefore, the functional profile of the comparable company is very much in the domain of ITES only. Therefore, the contention of the assessee that the functional profile of the company is dissimilar is that of company is not acceptable to the ld DRP. 27.5 We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this comparable came for consideration in the case of Vee Technologies Pvt. Ltd. cited (supra), wherein held that this company is involved in business process management services and cannot be considered as a comparable to a company providing ITeS such as the assessee. Being so, we direct the AO/TPO to exclude Inteq BPO Services Pvt. Ltd. from the list of comparables. Directed accordingly. 5.5.4 Nothing contrary to the above has been brought on record by the Ld.DR. We therefore do not find any reason to interfere with the above observations. Respectfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd.: The Ld.AR submitted that this comparable was rejected by the Ld.TPO as it fails employee cost filter. On an objection being raised before the DRP, it was held that this company is not reflecting in the search matrix of the TPO. The Ld.AR referred to the annual report placed at page 649 of the paper book and submitted that this company has an employee cost ratio of less than 25% and the objection of the Ld.TPO is therefore without any basis. He prayed for this comparable to be remanded for necessary verification in respect of the same. 6.2.1 On the contrary, the Ld.DR though objected however could not controvert the submissions of the assessee. 6.2.2 In the interest of justice, we remand this comparable back to the Ld.AO/TPO to consider its inclusion in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly, ground nos. 2.2 and 2.3 raised by assessee stands allowed for statistical purposes. 7. Ground no. 4 is general in nature and therefore do not require any adjudication. 8. Ground no. 5 is raised by assessee for not granting working capital adjustment. 8.1 After hearing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore, in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the assessee should be allowed. We hold and direct accordingly. 19. In the result, the appeal of the assessee is allowed. 8.2 In view of the above order of the Tribunal, we inclined to remit the issue to the file of AO/TPO to determine the correct working capital adjustment. Accordingly, ground no. 5 raised by assessee stands allowed for statistical purposes. 9. Ground nos. 6-9 are in respect of the disallowance made u/s. 14A of the Act. The Ld.AR submitted that disallowance of 1% of the average value of the investment was disallowed by the Ld.AO. The Ld.AR submitted that assessee had made investment in its associated companies by purchasing compulsory convertible preference shares and that, there was no income earned from such investments. He placed reliance on the decision of Hon ble Karnataka High Court in case of Biocon Ltd. vs. DCIT reported in 431 ITR 326, wherein it was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd current investments as per Notes 12 and 16 forming part of financial statements. As per Note 23 under the head other income the assessee has disclosed dividend income of Rs. 93,93,564 deriving from both current and noncurrent investments that include mutual funds and shares under current investments ant investments in equity shares of subsidiaries, joint ventures and associated companies. The assessee has nut provided any details with regard to dividend income from shares as well as from mutual funds. 9.6 The above observations are therefore being expunched holding it to be not pertaining to the present assessee before us. 9.7 On merits of the case, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. It is noted that admittedly there is no exempt income earned by assessee during the year under consideration. Hon ble Delhi High Court in case of Cheminvest Ltd. vs. CIT reported in (2015) 61 taxmann.com 118 has held that in such circumstances, no disallowance u/s. 14A could be made. The disallowance therefore cannot be made in the hands of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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