Income Tax Appellate Tribunal - Delhi
Evalueserve Sez (Gurgaon) Pvt. Ltd., ... vs Acit, New Delhi on 29 June, 2017
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-1": NEW DELHI
BEFORE BHAVNESH SAINI, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No. 1467/Del/2017
(Assessment Year: 2010-11)
Evalueserve SEZ (Gurgaon) Vs. Assistant Commissioner of
Private Ltd, Income Tax, Circle-8(2),
8th, 9th and 10th Floor, Building New Delhi
No. 04, Unitech Realty Projects
Ltd, SEZ, Tikri, Sector-48,
Gurgaon Harya-122002
PAN:AABCE8812A
(Appellant) (Respondent)
Assessee by : Ms. Ananya Kapoor, Adv
Revenue by: Shri. Amrendra Kumar, CIT DR
Date of Hearing 25/04/2017
Date of pronouncement 29/06/2017
ORDER
PER PRASHANT MAHARISHI, A. M.
1. This appeal is preferred by the assessee against the order of ld Deputy Commissioner of Income Tax -Circle-1, New Delhi [ Ld AO ] passed on 14.11.2014 u/s 143(3) read with section 144C of the Income tax Act {[The Act] incorporating therein the adjustment proposed by Additional CIT, TPO,-II, New Delhi [ The Ld TPO] vide order dated 09.01.2014 passed u/s 92CA(3) of the Act which was subjected to direction of the ld Dispute Resolution Panel [ ld DRP] dated 23.09.2014 u/s 144C(5) of the Act.
2. The assessee has raised the following grounds of appeal:-
1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab-initio
2. That on facts and circumstances of the case and in law, the Ld. AO/Ld. Transfer Pricing Officer ("TPO")/ Ld. Dispute Resolution Panel ("DRP") erred in making an addition of Rs. 54,014,130 to the returned income of the Appellant by re-computing, the arm's length price of the ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT international transactions under section 92 of the Income Tax Act, 1961 ("Act").
3. That on the facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was "expedient and necessary"
to refer the matter to the Ld. TPO for computation of the arm's length price, as is required under section 92CA(1) of the Act
4. That the Ld. AO/ Ld. TPO/ Ld. DRP erred on facts and in law in the assessment of the arm's length price of the Appellant's international transactions with associated enterprises by-
4.1 Rejecting on the basis of subjective grounds and presumptions, the comparability analysis conducted by the Appellant for determining the arm's length price in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ("Rules") as well as fresh search. Further, the Ld. AO/ Ld. TPO/ Ld. DRP erred in modifying the comparable companies set adopted by the Appellant on the basis of additional/ modified quantitative filters selected by him and arbitrary statements which lacked valid and sufficient reasoning 4.1.1 Rejecting companies whose export revenues are less than 75 percent of the total revenues without taking cognizance of the Appellant's submissions 4.1.2 Rejecting companies whose sales turnover is less than INR 5 crores 4.1.3 Rejecting companies with diminishing revenue for the period under consideration instead of being guided by functional comparability."
3. Brief facts of the case is that the assessee is a company incorporated on 17.12.2007 but begun its operation from August 2008. It carries on IT enabled services[ ITes] in the form of research activities according to the terms of its agreement with its AE which is driven by business information, market research and intellectual property research. It carries on precisely three activities and its functional profile, assets employed and risk assume are as under:-
a) Business Information : EVS SEZ India carries out business information research based assignments of the following nature:
Periodic Research: Periodic research projects are ongoing in nature. The projects include database content creation, management and updation of existing research.
Project Research: Project research involves research from secondary sources. It also makes use of forecasting, modelling 2 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT and financial analysis. Typically, it involves industry studies covering the market size, value chair analysis, growth rates and demand and supply projections. EVS SEZ India has conducted studies and prepared research reports for the sectors like the telecom sector, pharmaceutical sectors, etc. The intellectual property rights for the reports are owned by the end customer. Rapid Research: Rapid research assignments typically have 24 hours as tie turnaround time. These are mostly based on brief client requests received from AEs.
b) Investment Research and Financial Analytics: EVS SEZ India has a team of employees exclusively dedicated to tracking stocks and mutual funds. Typically, an investment research and financial analytics assignment as discussed above could also be periodic or project based.
EVS SEZ India makes use of a variety of research tools including the Aveb, databases and publications apart from analytics and forecasting. The industries covered include financial services (banking and insurance), hi-tech (software, electronics, engineering, nono technology, networking, biomedical engineering), telecom equipment and operators, pharmaceuticals and biotech, chemicals, energy and consumer products.
c) Market Research: This segment caters to primarily market research firms based overseas. It focuses on primary research in the nature of business to business surveys only where data is collected via telephonic surveys. The surveys are carried out on a case to case basis and as per the specific client requirements. The employees comprise mainly graduates, undergraduates, and MBAJs^JThe surveys carried out by the market research segment include surveys like analyzing the trends in IT and telecom spending, etc. These surveys are normally carried out on the basis of a questionnaire received from the client. Depending on the work load at times, some employees may be shifted to the business research segment for short term projects.
d) Intellectual Property Research: The intellectual property research services includes research on patents, drafting of patent applications, prior art search, etc. Essentially, EVS SEZ India offers the following kind of services to its AEs:
Patent Assessment: This is concerned with evaluating whether a product can be patented or not. It involves finding out whether a patent exists for a similar product in the global market. Drafting of Patent Applications: The AEs are responsible for end to end patent application filing through patent counsels in the relevant jurisdiction. EVS SEZ India prepares a draft and sends it either to the client or patent attorney associated with AEs, to be filed .Thereafter, lawyers, associated with the AE vet the draft and file it.
Intellectual Property Asset Management: EVS SEZ India offers patent to product mapping, IP research and analysis and patent 3 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT consulting as part of Intellectual Property Research. It assists in maintaining a relevant portfolio of patents, offers consulting in overlap and infringement and helps in locating potential companies that may be interested in licensing a particular invention.
Marketing and After Sales: EVS SEZ India does not undertake any marketing and sales efforts as it carries out offshore research activities on behalf of its AE. The/AE is responsible for the business development, marketing activities and quality assurance for every project undertaken by EVS SEZ India. The AEs, based on the market and economic scenario prepares the general worldwide marketing strategy for the Group.
EVS SEZ India secures contracts owing to the brand name and goodwill enjoyed by its AEs.
For provision of the aforementioned services, AEs remunerate EVS SEZ India on an hourly basis. Additionally, AEs also reimburse EVS SEZ India at a cost plus 6% for expenses on telephone calls, translation charges, research reports purchased, web hosting and miscellaneous expenses.
Routine Functions: These business support functions are a part of the normal course of business and are indispensable in the economic environment.
Strategic Policies: All long-term policies are developed and formulated by EVS SEZ India in consensus with its AEs. The company's management personnel handle the corporate communications and deal with the direct customers, Associate Enterprises, etc. Finance and Accounting and IT: EVS SEZ India prepares its own financial statements.
Hunan Resource Management: EVS SEZ India performs recruitment, soft skills training, performance evaluation and other related functions.
The employee strength of EVS SEZ India was about 616 personnel including the corporate group as on March 31, 2010. 4.3 Assets Any business requires assets without which it cannot carry out its activities. The assets might be clearly recognisable i.e. tangible (plant and machinery, equipment, building etc) or they might be intangible assets (brand-name, trademarks, technical know-how, patents, etc).
Following is the list of assets used by EVS SEZ India:
Tangible Assets The tangible assets employed in EVS SEZ India are considered essential for running the business. They are described below:
EVS SEZ India being an ITES service provider does not have a significant tangible asset base for carrying out its operations. EVS SEZ India does not own any land and carries out its operations on rented premises. Its tangible asset base comprises computers, office equipment, furniture and fittings, etc. 4 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT Intangible Assets 'As EVS SEZ India operates in the research domain, human capital forms its core resource. However, the employees of EVS SEZ India typically only comprise undergraduates, graduates, engineers and MBAs.
The business of the Evalueserve group does not result in the development of any form of intellectual property rights. The copyrights relating to the reports, if any are held by the client only. Further, the marketing intangible is owned by the Associated Enterprise - Evalueserve Limited, Bermuda. Accordingly, EVS SEZ India does not own any non-routine intangibles ana does not own trade secrets or undertake research and development activities on its account that would lead to the development of non-routine intangibles.
4.4 Risk Analysis Risks are those business factors that may expose a company to the possibility of loss or damage. In other words, risk is the probability that a particular adverse event may occur during a stated period of time, or may result from a particular challenge. The following section discusses the risk borne by Company vis-a-vis Group Companies.
Customer Credit Risk When a company provides services to a customer in advance of customer payment, the company runs the risk that the customer will fail to make payment. This risk is known as customer credit risk. EVS SEZ India is engaged in the provision of IT enabled services to its AEs for which it gets remunerated on the basis of the service agreement. Accordingly, EVS SEZ India is not exposed to the customer credit risk.
The AEs cater to end customers and are responsible for recovery of payments. Accordingly, they are exposed to the customer credit risk.
Foreign Exchange Risk Exchange rate risk relates to the potential variability of profits that can arise because of changes in foreign exchange rates. Such risks arise when doing business in any market that is affected by international trade and can arise even if a company does not conduct actual transactions in a foreign currency.
EVS SEZ India is remunerated by its AEs for services provided to it in US Dollars. However, in the case of third party domestic contracts, EVS SEZ India receivesits'jjaymsntm INR. Accordingly, EVS SEZ India is exposed to foreign currency risk for the AE services. The AEs do not bear this risk to any significant extent with respect to EVS SEZ India's operations.
Entrepreneurial Risk 5 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT There are two distinct sources of uncertainty in entrepreneurial ventures: 1) uncertainty regarding market demand, and 2) uncertainty regarding capability. The first type of uncertainty is characterised as "exogenous uncertainty" because it emerges as a state of nature. The second type of uncertainty is referred to as "endogenous" uncertainty because entrepreneurs realise that there is high risk of failure as it is tied to their capability. As EVS SEZ India is remunerated on an hourly basis by its AEs, it is exposed to this risk.
The AEs are indirectly exposed to this risk for the Indian operations.
Price Risk This risk arises due to the competitive pressures prevailing in the market, which lead to price undercutting thereby adversely impacting the profitability of the Company.
EVS SEZ India is compensated for the services rendered by it to its AEs, on an hourly rate basis. As this compensation is subject to market dynamics, the Company is exposed to price risk. As the AEs compete in the open market, they are exposed to this risk. Manpower Risk Manpower is one of the most valuable resources employed by an organisation for carrying out its day-to-day operations. The increasing competition in the market place combined with other uncontrolled variables result in exposure to manpower risk. As the ITES industry is characterised by a high level of attrition, EVS SEZ India is exposed to this risk.
The AEs are indirectly exposed to this risk for the Indian operations."
4. The assessee has shown international transaction provision of services through back office operations titled it as Research Services provided to its AE, EvalueServe Ltd, Bermuda of Rs. 480319168/- and some other reimbursement of expenses. To benchmark above international transaction the assessee adopted the Transaction Net Margin Method (TNMM) as the most appropriate method and also taking the PLI by OP/OC selected 10 comparables whose arithmetic mean of operating margins was derived at 13.60% and compared with assessee's margin of 20.36% submitted that its international transaction are at Arm's length. The comparable companies margins were adjusted for working capital also.
5. The ld AO referred the international transaction to ld Transfer Pricing Officer who vide order u/s 92CA(3) dated 09.01.2014 determine the arm's length price 6 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT of the international transaction and proposed an adjustment of Rs. 54014130/-. While passing the order the ld Transfer Pricing Officer out of the 10 comparables of the assessee accepted only 2 comparables and on its own search included further 10 comparables accepting the PLI of the OP/OC of the assessee determined the average margin of the comparables at 33.14%. Subsequently, the above adjustment was incorporated in draft assessment order dated 12.03.2014 against which the objections were filed before the ld DRP who issued direction on 24.06.2014 and consequent to those direction the adjustment proposed by the ld TPO were upheld. Based on the direction assessment order u/s 143(3) read with section 144C of the Act was passed on 14.11.2014 which is in challenge before us in the appeal. Though in the appeal assessee has raised almost 8 grounds, however, the main challenge of the assessee is with respect to the comparables selected by the ld TPO and also excluded by the ld TPO.
6. The ld Authorised Representative submitted a detailed chart contesting various comparables as under:-
S Comparable Reasons of rejection (our contentions) Case laws relied upon by the No appellant (Delhi ITAT and Delhi High Court) for same reasons and for same Assessment Year
1. 1) Extraordinary events during AY 1) 1.Delhi High Court- PCIT vs. 2010-11(acquisitions/ amalgamation) Ameriprist India P. Ltd.- ITA No. Accentia Technologies 461/16- pg. 79A- 79 B CLC (pg. 1172)- hence fails TPO's own Ltd.(pg. 2) United HealthGroup Information 1145-1184- filter of peculiar economic Services P. Ltd. (ITA No. Vol. 4- Annual circumstances 1038/D/15) (p 201-204 of CLC) Report)
2) Functional dissimilarity - diversified 3) Equant Solutions India P. business operations (pg. 1171- also Ltd.(ITA No. Nta kindly refer TPO order pg. 27) 1202/D/2015)(pg.176-180 CLC)
4) Ameriprise India Pvt Ltd. (ITA
3) Different revenue recognition model No. 7014/Del/2014) (pg. 60-62 of (pg. 1171)- assessee's model at pg.
CLC) 695 5) Bechtel India Pvt. Ltd. (ITA No.
4) Significant intangible assets (pg. 1478/Del/2015) (pg. 95-96 of 7 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT 1167)- assesse has no intangibles CLC) (pg. 692) 6) Techbooks International Pvt. Ltd.
(IT/ No. 240/Del/2015 for AY
5) Abnormally high profit margins 2010-11) (pq. 119 o f C L C)
7) S un L i fe I n d ia Se rv ic e Ce ntr e P. L td . ( IT A N o .
75 0 /2 0 15) ( pg .
2. Ec le rx 1 ) Fu nc t i on a l ly d is s im i l ar (p g. 73 9, 1) A mer i pr is e In d ia Pv t L td .
s erv ic es (IT A No .
74 0 , 75 7 , 75 8) - it is a K PO
td .(p g . 73 4 -
70 1 4/ De l /2 0 14 )(p g . 69 - 70
37- V ol . 3- 2 ) Unr e l ia b l e da t a - th e s t an d a lo n e
of C LC)
A nn u a l fi n anc i a ls i nc lu d e th e t urn ov er
Re p or t) 2) Ra m pgr e en S ol u ti o ns v s .
of t h e s ubs i d ia ri es a ls o ( p g.
CIT (I TA N o . 1 02 /2 0 15 ) -
78 4 , 80 8 , 82 7) 37 7 IT R 5 33 (D e l)
3 ) S ig n if ic a nt in ta n g ib l e as s e ts . -
( c o mp ut er s o ft w are - p g. 7 8 7) '
4 ) Ins uf f ic ie nt Se g m en ta l d et a i ls
Ig at e g l ob a l 1) De l h i Hi g h C our t - P CI T
s o lu t io ns v s . A mer i pr is e In d ia P .
3 td .(p g . 83 8 - 1. Ex c e pt i o na l y e ar o f op er at i o ns Lt d.- I T A No . 4 61 /1 6 - pg .
42- V ol . 3- ( a ma l ga m at i o n) ( p g. 8 88k he nc e 79 A- 79 B C LC
mn u a l v e por t)
fa i ls T PO 's o wn f i lt er of p ec u li ar 2) Un i te d H ea l thG ro u p
ec o n om ic c irc u ms ta nc es In for m at i o n S erv ic es P .
Lt d. (I T A No . 1 03 8/ D/ 1 5)
2 ) Fu nc t i on a l ly d if fer e nt an d
(pg . 2 04 - 2 0 5 O f CL C)
Ins uf f ic ie nt s eg m en t al
3) Tec hb o ok s In t ern at i o n a l
i nf or ma t io n (IT a n d IT E S Pv t . L td . ( IT A N o.
s er v ic es ) ( pg . 8 88 an d 8 9 3, 9 0 4, 24 0 /D e l/ 20 1 5 fo r A Y
91 0) 20 1 0- 11) ( pg . 2 8 - 2 9 o f
3 ) Hi gh t ur nov er (Rs . 93 2 .1 8 CL C).
c r or es ) ( p g. 8 7 9) ( as s es s e e's 4) A mer i pr is e In d ia Pv t L td .
(IT A No .
tur n ov er is a bo ut 50 c r ores -
70 1 4/ De l /2 0 14 )( p g . 62 - 63
tur n ov er is a bo ut 18 t i mes mor e
of C LC) .
th a n th at of t he as s es s e). 5) S un L i fe I n d ia Se rv ic e
Ce ntr e P. L td . ( IT A N o .
75 0 /2 0 15)
ICRA Techno 1. Functionally dissimilar- it is 1) DC IT vs. Ik a nos
Analytics Ltd. Co m mu n ic at i on I nd i a (P. )
4. engaged in business
(pg. 1209- Lt d ( B a ng - IT AT - fo r A
1234-Vol. 4- intelligence and analytics (pg. Y 20 1 0- 1 1) [2 0 15 ] 64
Annual Report) 1210, 1226, 1232). tax mc 4 3 6 ( Ba n ga l or e -
Tri b.)
2. No segmental details 2) ID CIT vs. Ap p l ie d
Ma t er ia ls In d i a ( P.) L t d2 0
tax m an n.c o m 16 0
(B an g a lor e - Tr ib . F or A Y
2 11)-
8
ITA No. 1467/Del/2017 (AY: 2010-11
Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT
5. 1) High brand value and intangibles 01. Delhi High Court- PCIT vs. (goodwill) (pg. 981)- assesse Amen) India P. Ltd.- ITA No. Infosys BPO has no goodwill- pg. 692 461/16- pg. 7 79B CLC
2) Benefits from being part of 02. Equant Solutions India P. Ltd.(pg. 943- 'Infosys' group (pg. 952, 950) Ltd.(IT/ 1202/D/2015) (pg. 1026- Vol 4- 3) Substantial selling and marketing 183-184 of CLC) expenses -substantial employee 03. Techbooks International Pvt. Annual Report) salary under this head and also Ltd. No. 240/Del/2015)(pg.
brand building and 29-30 of CLC advertisement expense (about 04. Ameriprise India Pvt Ltd. (ITA Rs. 78 crores- approx. 6.96 No. 7014/Del/2014)(pg. 63 of percent) (pg. 977, 978)- assesse CLC) has no "§och expenditure- In the 05. Sun Life India Service Centre TP Study at pg. 599 and 603, it P. L (ITA No. 750/2015) is clearly mentioned that market risk lies with AE and hence assesse is not liable for marketing, sales promotion and business development.
4) Significantly large scale of operations (turnover is 22 times more than that of the assesse)
5) Exceptional year of operations (acquisitions) (pg. 950, 956)-
hence fails TPO's own filter of peculiar economic circumstances 6
01. Functional dissimilarity (pg. 1058) 1) United HealthGroup Information Services P.
02. No segmental data (pg. 1066) Ltd. (ITA No. TCS 03. Owns significant intangibles E-Serve 1038/D/15)(pg. 208-210 of lational 04. Uses the 'TATA' brand- royalty is CLC) '9- 1102- - paid (pg. 1064) 2) Equant Solutions India P. Annual t) 05. Part of TATA group and benefits Ltd.(ITA No. 1202/D/2015) thereof (pg. 1035) v. (pg. 184-187 of CLC)
06. Primary client is Citigroup (pg. 3) Ameriprise India Pvt Ltd.
10^8) (ITA No. 7014/Del/2014)
07. First full-year as step down (pg. 63-66 of CLC)
subsidiary of TCS- which has led to 4) Bechtel India Pvt. Ltd. (ITA
substantial growth-Total income is 3
times higher as compared to last No. 1478/Del/2015) (pg. 95
year (from 54 crores to 150 crores). of CLC)
Operating Income higher by 173% 5) Techbooks International
as compared to last year. From loss Pvt. Ltd. (ITA No.
of 24 crores to profit of 44 crores
this year, due to improved 240/Del/2015 for AY 2010-
operational performance and 11) (pg. 19-24 of CLC)
increased utilization of 6) Sun Life India Service
infrastructure capacities, (pg. 1034) Centre P. Ltd. (ITA No.
750/2015)
9
ITA No. 1467/Del/2017 (AY: 2010-11
Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT
7. 01. Functional dissimilarity (pg. 1122) 1. United HealthGroup Information Services P. Ltd.
TCS E-Serve 02. No segmental details are available (ITA No. 1038/D/15) (pg.
1103-1144- (pg. 1134) 208-210 of CLC)
Vol -4 Annual
03. Owns significant intangibles 2. Equant solutions India Pvt
Report
Ltd (ITA No. 1202/Del/2015
04. Uses the TATA brand royalty is paid (pg 184-187 of CLC)
(pg 1131)
3. Ameriprise India Pvt Ltd
05. High turnover-27 times more than (ITA No. 7014/Del/2014 (pg
that of the assessee 66-69 of CLC
4. Bechtel India Pvt Ltd (ITA
No. 1478/Del/2015) Pg 95 of
CLC
5. Sun Life India Service
Centre P ltd (ITA No.
750/2015
S
No.l
Name of the Reasons for acceptance Case laws relied upon by the appellant
comparable
1 1. Techbooks international pvt. Ltd
(ITA No. 240/Del/2015) pg 30-33
R Systems of CLC)
1. different financial year ending cannot be the (page 1285- sole basis for excluding a 2. United Healthcare Group 1374 Vo4 of Information Services P Ltd (ITA annual report comparable No. 103.8/Del/2015 page 210- 211 of CLC
3. Ameriprise India Pvt Ltd (ITA No. 7014/Del/2014 (pg 66-69 of CLC
4. Sun Life India Service Centre P ltd (ITA No. 750/2015 Recently, the Delhi High Court (ITA No. 217/2014) in the case of CIT vs. Mckinsey Knowledge Centre India Ltd. has held that different financial year ending cannot be the sole basis of rejection of a comparable, (pg.
145-158 ofCLC) Even otherwise, the following cases have held for the same comparable, that different financial year ending cannot be the sole basis of excluding a comparable, which otherwise 10 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT passes all the filters and is functionally comparable-
5) Macquarie Global Services Private Limited- ITA No. 6803/DEL/2013
6) Ameriprise India Pvt. Ltd. vs. ACIT- ITA No. 2010/Del/2014 Mercer Consulting India P. Ltd. ITA 966/Del-
2. Omega 1) the TPO/DRP rejected the comparable 1) Bechtel India Pvt. Ltd. (ITA Healthcare Ltd only on the ground that the annual No. 1478/Del/2015) (pg.
(pg 1269-1284)
Vol 4 Annual report is not available in the public 96-97 ofCLC)
Report domain. However, this is not true.
7. The ld Departmental Representative vehemently objected the argument of the assessee for exclusion of various comparable which we will dealt with at the moment of its adjudication. He vehemently relied upon the decision of the Hon'ble Delhi High Court in case of Chrscapital Investment Advisor (India) Pvt. Ltd. Vs. DCIT 2015-TII-13-HC-DEL-TP and Rampgreen Solutions Pvt Ltd. Vs. CIT 2015-TII-33-HC-Del-TP.
8. Now we deal with each of the comparables. Various Judicial Precedents are cited by the ld AR before us seeking exclusion of the comparables. However we would be strictly going by the functional profile of the assessee, assets employed for performing those functions and risks assumed on that count as extracted by us and which is not disputed by the ld TPO/AO/DRP. If the Judicial precedents are having the similar functional profile in whose case the issues is decided then off course it deserves consideration.
9. Accentia Technologies is selected by the ld TPO but is challenged now by the assessee submitting that it has an extra ordinary event during the year, functionally dis-comparable as it is engaged in medical transcription, has significant intangibles and abnormally high profit margin. For this proposition 11 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT the ld AR relied upon several judicial precedents. The ld DRP rejected all the above contention of the assessee with respect to this comparable at page No. 23 to 26 of its order.
10. The ld DR reiterated the same facts as stated by lower authorities.
11. We have carefully considered the rival contentions as well as perused the annual accounts of the comparables. At page No. 1172, we have perused schedule 10 of the notes on account wherein it has mentioned that w.e.f. 01.04.2008 a company which was engaged in the business of medical transcription and coding has been amalgamated with the comparable. It is further stated figures for this year are related to amalgamating company also. The profit and loss account of the comparable shows that sales and services of the company are according to Schedule No. 8. There is no change in the income segment of the assessee after amalgamation as amalgamating company was also having the same business, hence, there is no impact of amalgamation on the company with respect to functions performed. Therefore, merely there is a an amalgamation during the year it cannot be excluded as comparable as it does not change the functional profile of the comparable company. However, at page No. 27 the ld TPO has confirmed that this company is engaged in the business of healthcare cycle management which comprises of medical transcription, coding and billing and collection. The medical transcription business require special skill and also employs medical professional who finally vet the actual transcription. Further medical coding is related to procedure of financial assessment. Medical billing is maintenance of financial accounts on insurance company etc for the purposes of recovery of sums by Doctors. Therefore, medical transcription is a service which requires employment of medical professional also. However, the medical coding the billing may not require higher technical skill. In annual report the company has mentioned that it has only one segment and therefore it does not have segmental results pertaining to medical transcription vis-à-vis coding and billing activity. According to us the medical transcription itself cannot be said to be comparable with the functions performed by the assessee. However, the medical coding and billing activities are similar to the functions performed by the assessee. But , in absence of the segmental accounts with respect to 12 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT medical coding and billing activities this comparable cannot be included. Hence, TPO is directed to exclude it.
12. The next comparable by the assessee is that eClarx Services submitting that it is a knowledge process outsourcing (KPO) unit and therefore cannot be compared with the ITES service provider like assessee. The assessee has relied on the decision of Hon'ble Delhi High Court of Ramgreen Solutions Pvt. Ltd Vs. CIT.
13. The ld DR submitted that the assessee is also a knowledge process outsourcing unit as it employs 616 personnel. He referred to page No. 6 of the order of the ld Transfer Pricing Officer for this. He submitted that assessee's case falls into all three horizontal segments of ITES industries such as call centre and technical support, payment supply chain and analytics. He therefore, stated that eClarx is the right comparable
14. We have carefully considered the rival contentions and perused the annual report of the comparable for AY 2010-11 at page No. 734 to 83.7 of the paper book. The functions of the company are described at page No. 23 of its annual report under management discussion and analysis. It provides that eClerx supports its clients through its two business units- Capital markets and sales and marketing support. Across both these units, the company supports and improves processes that are core of its customers day to day business operations. The company continues to focus on engagements where it can tap the largest percentage of client spend by leveraging its domain expertise and by bringing together consulting, project management and solution based service delivery. In the capital markets division, the company today provides end-to- end financial transaction support services such as trade booking, trade confirmation, asset servicing cash settlements, client servicing risk management and reference data integrity across all asset classes, and its services span both sell side ( the large banks) and buy side ( the funds and assets managers) Furthermore, the company provides strategic and process consulting services helping clients devise solutions to improve efficiency, 13 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT reduce risk and meet regulatory and market demands. Similarly in the sales and marketing support division, the company today supports clients in all elements of product and services marketing and sales with a focus on online support to include content development and management, search engine management, web operations, pricing and customer analytics, product database management and catalog audits. The company is also pursuing a strategy of creating a portfolio of platform attached services, by creating a suite of services that are complementary to industry standard it platforms. A glance at the functional profile of this company divulges that it is basically 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 its pricing and profitability services. Further this company has also developed it tool and process automation. From the above discussed nature of business carried on by e- Clerx Services Ltd., it is patent that the same being a KPO company, is quite different from the assessee, providing only IT enabled services to its AE, which fall in the realm of BPO services. Apart from that, it is further observed that this company has significant intangibles which it uses in rendering KPO services, against which the assessee does not have any intangibles. The Hon'ble jurisdictional High Court in Rampgreen Solutions (P.) Ltd. v. CIT [2015] 234 Taxman 573/60 taxmann.com 355 (Delhi), has held that e-Clerx Services Ltd., being engaged in KPO, cannot be treated as comparable of an assessee engaged in rendering BPO services. In view of the direct judgment of the Hon'ble jurisdictional High Court on the point, we direct to eliminate e-Clerx from the list of comparables. As such, e-Clerx Services Ltd. cannot be considered as comparable.
15. The nextt comparable challenged by the assessee is Igate Global Solutions Ltd for which the annual accounts are available at page 838 to 942 of the paper book. The assessee has claimed that it has an extra ordinary events during the year as w.e.f. 01.04.2009 Iget, Malaysia was amalgamated with the company. It is also mentioned that operations of amalgamating company are similar to that 14 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT of the comparable. As the functional profile of amalgamating company and amalgamated company are similar the mere fact of amalgamation during the year does not make a company otherwise comparable on FAR as non- comparable. On looking of the functional profile of Igate Global Solution it is found that it is engaged in provision of contract sample services and IT enables services. On the income revenue stream of the assessee is also with respect to ITES services. It is also engaged in BPO activities. In view of this we do not find that the functional profile of this company differs from assessee. In view of this we do not find any merit in the argument of ld AR for exclusion of this comparable. Hence, the order of the ld TPO in retaining this comparable is upheld.
16. The next comparable contested by the ld AR is ICRA Techno Analytics Ltd stating that this company is functionally not comparable as it is engaged in business intelligence and analytics.
17. The ld DR contested the argument of the assessee and submitted that the assessee is engaged in such high end services.
18. We have carefully considered the rival contentions. This company as per its annual accounts placed at Page NO. 1210 shows that it is engaged in the business intelligence and analytics space. It is also engaged in software development and consultancy, engineering services, web development and hosting services. It is also noted that it has two income segments of services and sales and it does not have the complete segmental information with respect to both the segments of services and sales as fixed assets and services are used inter-changeability. In view of this we find that this company is functionally not comparable as well as it does not have complete segmental information with respect to the sales and service segments. In the result we direct the Transfer Pricing Officer to exclude the above comparable.
19. The assessee has challenged the inclusion of Infosys BPO Ltd. the main reason seeking its exclusion was high brand value, intangibles, benefit of Infosys branch and large scale operation.
20. The ld DR objected to this and relied upon the order of the ld Transfer Pricing Officer submitting that all these arguments of the assessee has been considered by the ld TPO.
15 ITA No. 1467/Del/2017 (AY: 2010-11Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT
21. We have carefully considered the rival contentions and also verified the annual accounts of Infosys BPO Ltd from page No. 943 to 1026, undoubtedly the Infosys BPO is driving leverage from the client of Infosys Technologies Ltd for cross selling the BPO services of this company. The assets of the comparable company shows that it has a goodwill of approximately Rs. 19 crores. The income stream of comparable was Rs. 1126.63 crores whereas, the assessee's income stream was Rs. 50.90 crores. Hon'ble Delhi High Court in case of Pr. CIT Vs. Actis Global Services Ltd in TS-417-H.C--2017(DEL)(TP) has held that even the size and scale of operation can make the comparable inapposite. In the present case the size of this comparable with the size of the assessee is more than 20 times. Therefore, in view of this respectfully following the decision of the Hon'ble Delhi High Court we direct exclusion of this comparable on the size and scale of its operation.
22. TCS eServe International Ltd The ld AR contested it on the issue of functional dissimilarity, Tata Brand and ownership of intangibles.
23. Ld DR referred to page No. 39 of the order of ld Transfer Pricing Officer and submitted that all these aspects have been considered by the lower authorities and has given their reasons.
24. We have carefully considered the rival contentions and also perused annual accounts of this submitted at page No. 201 onwards. The revenue stream of the company is transaction processing charges and during the year it has earned Rs. 150 crores. It is mainly engaged in the business of software testing, verification and validation of software at the time of implementation of the software and data centre management activities. The coordinate bench in case of ITA No. 2536/Pn/2012 dated 11.02.2015 has discussed the profile as to what amounts to verification and validation in context of software. It was held that ostensibly verification and validation are broadly speaking a parcel of the process of software development. This company also contributes to Tata Brand Equity from this year and according to Schedule M of the financial statement during the year it has contributed Rs. 37 crores towards the brand. In view of this the functional profile of the assessee as well as the assets employ are not comparable. In view of this ld Transfer Pricing Officer is directed to exclude it.
16 ITA No. 1467/Del/2017 (AY: 2010-11Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT
25. The next comparable is TCS eServe Ltd. The assessee has contested it on the similar line as TCS Eserve International Ltd.
26. The ld DR relied on the order of the ld Transfer Pricing Officer and ld DRP.
27. We have carefully considered the rival contentions and also perused the annual report of the company for year ended 31.03.2010. The company is mainly engaged in IT enabled services and business process outsourcing. It is also providing technical services which involve software testing, verification and validation. It also contributes similarly to Tata Brand Equity and for this year the contribution was Rs. 42 crores. Therefore, following the same reasoning given by us for exclusion of TCS eserve International Ltd we also direct the ld TPO to exclude this comparable.
28. The next comparable contested by the assessee is e4e Healthcare Ltd contesting that it is engaged in software development services and owns its own intangibles. The ld Departmental Representative contested relying upon the order of the ld TPO and DRP and submitted that this comparable is assessee's own comparable.
29. We have carefully considered the rival contentions and perused the annual report of the company placed at Page No. 1185 to 1082. However, before analyzing the balance sheet it is very important to note that above comparable was selected by the assessee and hence it was accepted by the TPO as FAR analysis is similar to the assessee. The assessee has selected this comparable based on the functional profile and applying its own filter. This comparable was also not contested before the ld DRP. Before us no reasons were given that why the assessee is now withdrawing the above comparable which was selected by the assessee itself. It is very unfortunate that despite preparing its transfer pricing documents for FY 2009-10 in 2010 the assessee did not contest this comparable or even admitted its mistake either before AO or DRP that how it was originally selected, before us it is contesting for exclusion of this comparable after almost 7 years. We are conscious of the decision of the Hon'ble Special bench in case of Quark Systems Ltd wherein the assessee was allowed to withdraw one of the comparable selected by assessee because of 17 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT intial years of Transfer pricing laws and in that comparable the FAR was not in dispute but error was of filter. On identical facts and circumstances in EvalueServe.com Pvt Ltd TS390-ITAT-2017-(DEL)TP, it has been held that those were the initial years of the transfer pricing law but the year before us is almost a decade after the transfer pricing laws were introduced. In view of this we reject the contention of the assessee of withdrawing of its own comparable for the reason that the assessee could not demonstrate before us that how the original comparable was selected when the same functional profile of the company was available at the time of preparing TP documentation. In view of this, we reject the argument of the assessee for exclusion of this comparable.
30. The next comparable is R Systems Pvt. Ltd which was included by the assessee but excluded by the ld TPO for the reason that it follows different financial year compared to the assessee. It is apparent that R Systems Ltd is having the January to December as an accounting period. Therefore, the ld Transfer Pricing Officer did not consider the same. It is held in several decisions that if the assessee can demonstrate with publicly available authentic information for the remaining period and exclusionary period and further produces the tabulated data for the similar accounting year as followed by the assessee then if the FAR analysis of that company is comparable, it may be included. Therefore, it is now the duty of the assessee to satisfy the Assessing Officer/TPO with such information. Hence, we direct the ld Transfer Pricing Officer to verify the information with respect to this comparable in accordance with the law and then decide inclusion or exclusion.
31. The next comparable is Omega Healthcare Ltd, which were selected by the assessee but rejected by the ld Transfer Pricing Officer and ld DRP for the reason that the annual report of the relevant year is not available in the public domain. The ld AR stated that same is available in public domain and further same is also produced before us at page No. 1269 to 1284 of the paper Book. In view of this we direct the ld TPO to verify the annual report and decide the issue about inclusion of this comparable.
32. In this appeal ground Nos. 1 to 6 is on transfer pricing issues, however except the exclusion or inclusion of the comparables no other issues were agitated therefore, other than the issue of comparability which has already been 18 ITA No. 1467/Del/2017 (AY: 2010-11 Evalueserve SEZ (Gurgaon) Private Ltd, Vs. ACIT adjudicated by us in earlier paras we reject all other contentions in other grounds of appeal.
33. The ground No. 7 and 8 are with respect to charging of interest as well as initiation of penalty proceedings. At this stage, both these grounds are premature and hence, we dismiss them.
34. In the result, the appeal of the assessee is partly allowed with above direction.
Order pronounced in the open court on 29/06/2017.
-Sd/- -Sd/-
(BHAVNESH SAINI) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 29/06/2017
A K Keot
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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