Income Tax Appellate Tribunal - Hyderabad
Hsbc Electronic Data Processing India ... vs Asst. Commissioner Of Income Tax, ... on 17 July, 2019
ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd
Hyderabad.
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' B ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri S.Rifaur Rahman, Accountant Member
ITA No.2388/Hyd/2018
(Assessment Year: 2014-15)
HSBC Electronic Data Vs Asstt. Commissioner of
Processing India P Ltd Income Tax, Circle 2 (2)
Hyderabad Hyderabad
PAN: AAACH8235M
(Appellant) (Respondent)
For Assessee : Shri Rajan Vora
For Revenue : Shri Y.V.S.T. Sai, CIT(DR)
Date of Hearing: 22.04.2019
Date of Pronouncement: 17.07.2019
ORDER
Per Smt. P. Madhavi Devi, J.M.
This is assessee's appeal for the A.Y 2014-15 against the order passed u/s 143(3) r.w.s. 92CA r.w.s. 144C of the I.T. Act dated 29.10.2018.
2. Brief facts of the case are that the assessee company furnished its return of income for the A.Y 2014-15 on 24.11.2014 electronically declaring a total income of Rs.423,01,96,430/-. The return was selected for scrutiny under CASS.
3. During the assessment proceedings u/s 143(3), the AO noticed that the assessee has entered into various international transactions with its Associated Enterprises (AEs) to the tune of Page 1 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
Rs.2671,51,51,628/-. The AO therefore, referred the matter to the file of the TPO u/s 92CA of the Act for determination of the Arm's Length Price (ALP) of the transaction.
4. The TPO observed that the assessee (HDPI in short) was set up in India as wholly owned subsidiary of HSBC Holdings BV Netherlands to meet the back office processing needs of the HSBC group. He classified the services rendered by HDPI (assessee) to the HSBC group entities under the following 4 heads;
(a) call center;
(b) data processing;
(c) data entry; and
(d) professional services.
He observed that the HSBC group entities are rendering the banking and financial services and have migrated some of the back office and call center activities to the assessee. After perusing the financial results of the taxpayer company for the financial year 2013-14, the TPO observed that OP/OC (%) of the assessee is 20.76%. As regards the international transactions entered into by the assessee, the AO observed that the assessee has earned a margin of 20.09% as against the margins of comparables taken by the assessee at 13.75% and has considered the transactions to be at ALP. Further, the TPO also observed that the assessee had trade receivables and short-term loans and advances from its AE which were not reported in Form No.3CED and no benchmark analysis has been done in the T.P. Study with regard to these transactions. Therefore, he conducted the FAR analysis and found certain defects in the TP analysis carried on by the assessee. The defects found are;
Page 2 of 22ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
(i) As per Rule 10B(4), it is mandatory for the current years financial data i.e. financial year in which the international transactions took place (financial year 2013-14);
(ii) Assessee has used earlier year data pertaining to financial year 2011-12 to financial year 2012-13 but no reasons were given as to how the earlier year data has influence over the process either of the taxpayer or of the comparables so as to target the proviso to section 10B(4);
(iii) 9 comparables have been selected for the financial year 2013-
14. Therefore, TPO rejected the comparables selected by the assessee and conducted a fresh analysis and arrived at 8 companies as comparable to the assessee whose average margin was 35.46%. A show-cause notice was accordingly issued to the assessee and the assessee submitted its objections and also requested for working capital adjustment and risk adjustment. The AO however, finalized at 9 companies as comparables whose margin was 32.04%. He also rejected the assessee's request for working capital adjustment and proposed the shortfall being adjustment of Rs.235,38,30,888/-. In accordance therewith, a draft assessment order was passed, against which the assessee raised its objections before the DRP. The DRP granted partial relief to the assessee and in accordance with the directions of the DRP, the final assessment order was passed against which the assessee is in appeal before us by raising the following grounds of appeal:
"A. Transfer Pricing matters Non-application of APA terms Based on the facts and circumstances of the case and in law, the learned AO/Hon'ble DRP grossly erred in:
1. Not applying the terms of the Advance Pricing Agreement entered by the Appellant with the CBDT wherein 1ay 2014-15 is a year prior to the covered Page 3 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
period under APA without any change in the facts and circumstances of the Appellant's business.
2. Without prejudice to the above agreement on non- application of the APA terms, we wish to submit that based on the facts and circumstances of the case and in law, the learned AO/Hon'ble DRP erred in Ground No.2 to 13).
Rejection of TP documents.
2. Rejection of the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules 1961 (Rules) and undertaking a fresh economic analysis during the course of assessment proceedings and thereby making an adjustment of INR 305,33,05,656 to the international transactions.
Rejection of use of multiple year data in applying TNMM
3. Rejecting the use of multiple year data of the comparable companies for determining the arm's length margin under Transactional Net Margin Method (TNMM).
4. Use of additional filters Inter-alia use of the following additional/modified filters in undertaking the comparative analysis and rejecting the comparable companies having:
a) Diminishing revenue/persistent loss filter; and
b) Different financial year end;
5. Information obtained u/s 133(6) Selective use of information/documents obtained by exercising powers u/s 133(6) of the Act, which are not available in public domain Selection of uncomparable companies
6. Not undertaking an objective comparative analysis and inter-alia selecting the following companies as comparable:
a) Cross Domain Solutions P Ltd
b) E Clerex Services Ltd
c) Hartron Communications Ltd (entity level)
d) Infosys BPO Ltd
e) Microgenetics Systems Ltd
f) Microland Ltd
g) MPS LTd
7. Not following the directions of the Hon'ble DRP Not following the directions of the Hon'ble DRP to consider the office backup operations segment of Hartron Communications Ltd as comparable Rejection of comparable companies Page 4 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
8. Not undertaking an objective comparative analysis and inter-alia rejecting the following comparable companies:
a) ACE BPO Services P Ltd
b) Allsec Technologies Ltd
c) Caliber Point Business Solutions Ltd (seg.)
d) Cystel Hues Ltd
e) Datamatics Financial Services L:td
f) Judicial Intellicom Ltd
g) Accentia Technologies Ltd
h) Acrpetal Technologies Ltd Computation of operating margin of the comparables
9. Not considering provision for bad and doubetful debts and provision for loans and advances as operating in nature
10. Non-provision of adjustment for risk differences.
a) Not appreciating the fact that the Appellant operates as a risk free service provider and all the key risks associated with the functions performed are borne by the Associated Enterprises ("AEs").
b) Not providing adjustments taking into account the functional and risk differences between the international transactions of the Appellant and the comparable transactions under TNMM, in accordance with the provisions of Rule 10B(1)€ of the I.T.Rules, 1962.
11. Imputing interest on outstanding receivables as on 31st March, 2014 - Rs.17,31,66,150/-.
a) Not appreciating that the instant transaction is not covered in the definition of international transaction as defined u/s 92B of the Act in the facts and circumstances of the case.
b) Not appreciating the fact that the receivables are consequential/closely linked to the principle transaction of provision of IT enabled services and hence have been aggregated for determination of ALP under TNMM
c) Not appreciating the fact that the company has outstanding payables on which no interest has been charged by the AEs
d) Not appreciating the facts and circumstances surrounding the receivables and re-characterizing the outstanding receivables as unsecured loans advanced to AEs.
12. Without prejudice to the above, not undertaking an objective economic analysis to determine the arm's length price of the outstanding receivables by Page 5 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
a) Not appreciating that the receivables due from overseas AE's are in foreign currency and hence interest, if any, is to be benchmarked with the rates prevalent in the international market for foreign currency loans;
b) Determining the arm's length credit period as 35 days and imputing interest on credit period provided for the invoices raised relating to provision of services
c) Calculating interest on all the invoices outstanding as on 31st March, 2014 on an aggregate basis.
Not following the directions of Hon'ble DRP
13. Not following the directions of Hon'ble DRP to compute interest on invoice by invoice basis relating to invoices raised on AEs for the services rendered.
B. Corporate tax matters ESOP and ESPPO expense
14. Disallowance of expenditure on Employee Stock Option Scheme and Employee Stock Purchase Plan of INR 8,49,84,000
15. Unrealised bedging loss
a) Disallowing the unrealized hedging loss on forward contracts of INR 3,06,99,395;
b) Without prejudice to above, following an inconsistent approach by not excluding the unrealized forex gain of INR 9,90,18,250 from the taxable income;
16. Imposition of interest u/s 234B of the Act = Rs.89,62,80,825/-
17. Imposing penalty u/s 271(1)(c) of the Act.
18. The appellant carves to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.
Total Tax Effect: INR 197,34,20,204/-"
5. At the time of hearing, the learned Counsel for the assessee submitted that the assessee's ground No.2 is general in nature and Grounds 3, 4 and 5 are not pressed. They are accordingly rejected as not pressed.
6. As regards Ground No.6, it is submitted that though in the ground, 7 companies are mentioned, the assessee is now Page 6 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
seeking exclusion of only one company i.e. E Clerx Services Ltd and in Ground No.7, it is praying for consideration of only segmental level results of Hartron Communications Ltd as directed by the DRP and not the entity level result taken by the TPO.
7. As regards Ground No.8, it is submitted that the assessee is seeking inclusion of the companies, which were selected by the assessee but were rejected by the TPO. It is submitted that in the grounds, though 8 companies are mentioned, the assessee is seeking inclusion of only two companies i.e. ACE BPO Services Ltd and Altex Technologies Ltd in the final list of comparables and also of office back operations segment of Hartron Communications Ltd.
8. Ground No.9 & 10 are stated to be included in Ground No.6 and therefore, these two grounds need no separate adjudication. It is submitted all the that other grounds i.e. 11 to 18 are also pressed by the assessee.
9. Let us now therefore, proceed to dispose of the assessee's appeal ground-wise.
11. As far as Ground No.1 is concerned, it is submitted by the Learned Counsel for the assessee that the assessee had entered into Advance Pricing Agreement (APA) with the Department CBDT on 29.8.2016 for the period covering the A.Ys 2015-16 to 2019-20 and the international transactions covered, Page 7 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
functions performed and risks assumed by the assessee during the above period as well as A.Y 2014-15 are all the same as documented as under the APA. It is submitted that the agreed operating margin on operating cost for the provision of " I.T. enabled services" transaction and the other international transactions treated as closely linked, is 18% whereas the operating margin earned by the assessee during the A.Y 2013-14 is 20.76% which is of higher than the margin determined by the APA authorities. It is submitted that during the APA proceedings, it was considered and accepted by the authorities that the same TP methodology is consistently applied by the assessee throughout the APA period; that the FAR analysis remained materially the same during the APA period; and that the salary of employees working in the area of analytics would not be more than 20% of the total salary of the employees in any year. It is thus submitted that the APA has considered that the assessee followed a uniform method throughout the period for accepting the margin at 18% on costs. Since the A.Y before us is 2014-15, only one year prior to the APA period and the assessee has followed the same method, he sought application of the same margin to the assessee for this A.Y also and since assessee's margin was higher at 20.76% than 18% agreed during the APA proceedings. Thus, he prayed that the assessee's margin be accepted to be at ALP.
12. The learned DR, on the other hand, submitted that the relevant A.Y is not falling within the APA period and therefore, it should be considered independently as done by the TPO and the DRP.Page 8 of 22
ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
13. The Ground No.6 is that E Clerx Ltd is not comparable to the assessee due to functional dissimilarity and also various other reasons. The learned Counsel for the assessee submitted that the assessee has been considered as a low end ITeS service provider, whereas the E Clerx Ltd provides financial analytics to its group companies and such services are recognized as KPO services. He submitted that E Clerx provides wide range of activities under the gamut of financial services as well as marketing services, cable and video services; and E Clerx has described itself as a specialized knowledge and business process outsource company. To argue that it is a KPO company, the learned Counsel for the assessee submitted that E Clerx Services Ltd is engaged in the providing high end IT enabled services such as Consultants, Business Analytics, Solution Testing, Data Management etc., which require much advanced skills in comparison to the assessee, which is engaged in provision of routine IT enabled Services to its AEs. He also referred to the APA agreement wherein the operations/activities carried on by the assessee, salary cost of the employees in the analytics division being less than 20% of the cost were considered and, the APA authorities have agreed for a markup of 18% on cost because of the nature of the services rendered by the assessee. Therefore, he submitted that care is taken so that even small portion of the analytical work carried on by the assessee should not affect the whole outcome of the APA which is the very reason as to why any taxpayer opts for an APA. With regard to the specific argument that E Clerx Services Ltd is a KPO company and cannot be Page 9 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
considered as IT enabled service company, the assessee relied upon the following case law:
i) Assessee's own case for the A.Y 2007-08 in ITA No.1826/2011 dated 24.10.2014.
ii) Hon'ble Delhi High Court in the case of Rampgreen Solutions (P) Ltd (ITA No.102 of 2015 dated 10.08.2015).
iii) IGH IT Services India (P) Ltd in ITA No.397/Del/2017 dated 30.06.2017
iv) Special Bench of the Mumbai Tribunal in the case of Maersk Global Centers (India) Pvt. Ltd (ITA No.7466/Mum/2012, dated 7-
3-2014).
v) C3i Support Services P Ltd (ITA No.503/Hyd/2017 dated 25th July, 2018.)
vi) Cognizant Services Technologies Pvt Ltd in ITA No.495/Hyd/2015 dated 29.01.2016
14. Another distinction pointed out by the learned Counsel for the assessee is that E Clerx Ltd has outsourced substantial portion of its operations to its subsidiaries i.e. E Clerx Services Ltd and E Clerx (P) Ltd for services amounting to Rs.111.104 crores which is about 58% of the other expenses and 27% of the total operating cost. It is submitted that the outsourcing cost of the assessee is "nil" and therefore, the company like E Clerx, whose operations primarily comprises of outsourcing its business, cannot be compared to the assessee's business which is operating as 100% captive service provider. In support of this contention, the learned Counsel for the assessee placed reliance upon the following decisions:
a) Hon'ble Bombay High Court in the case of Aptara Technology Ltd (ITA No.1206 of 2015 dated 26th March, 2018.
b) Hon'ble Bombay High Court in the case of Pfizer India Ltd (ITA No.1731 of 2016 dated 4th March, 2019.
c) Hon'ble Delhi High Court in the case of Rampgreen Solutions (P) Ltd (Supra).
d) Maersk Global Centers India P Ltd in ITA No.7466/Mum/2012 dated 7th March, 2014.Page 10 of 22
ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
Thus, the learned Counsel for the assessee tried to establish the functional difference between the assessee and E Clerx Services Ltd and prayed for exclusion of the same from the final list of comparables.
15. The learned DR, however, argued that both the assessee as well as E Clerx Services Ltd are discharging similar functions and therefore, the assessee also should be considered as a KPO and E Clerx Ltd should be considered as a comparable for the purpose of TP Study. The learned DR also relied on the decision of the Hon'ble Delhi High Court in the case of McKinsey Knowledge Centre India (P) Ltd wherein it was held that the research and development services rendered by McKinsey are KPO services and support the order of the TPO. A copy of the Delhi High Court judgment is also filed before us.
16. In rebuttal, the learned Counsel for the assessee has filed the letter making the following submissions:
" A) Characterisation of services as 'KPO' in nature
1. The learned DR during the hearing placed reliance on the decision of Hon'ble Delhi Tribunal in case of McKinsey Knowledge Centre Private Ltd (ITA No 154/De1/20 16) dated 15 December 2016 affirmed by Delhi High Court in ITA 461/2017 dated 9 August 2018 wherein it was held that research & development services rendered by McKinsey are 'KPO' services and supported the order of TPO, wherein he has held that services being rendered by Appellant's analytic division are 'KPO' in nature. In the rejoinder, learned Counsel for the Appellant based on news flash mentioned that the High Court order in case of McKinsey Knowledge Centre Private Limited (Supra) has been recalled, however the copy of the order was not available during the hearing.
2. In view of the same, we now wish to file the copy of the Hon'ble Delhi High Court in case of McKinsey Knowledge Centre Pvt Ltd (Review Petition 360/2018) dated 16 April 2019 (Refer Annexure 1) and submit that the observations Page 11 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
of the High Court with regards to classification of services as 'KPO' in nature by relying on Special Bench ruling in case of Maersk Global Centres (India) Pvt Ltd (161 TTJ 13
7) which had been disagreed by the decision of Hon 'ble Delhi High Court in Rampgreen Solutions Pvt Ltd (60 Taxmann.com 255) have been negated by the High Court in review petition and order to that effect is recalled for fresh hearing and hence, the reliance placed by the learned DR on the same is misplaced.
3. In view of the above, the Appellant, once again reiterates that as submitted during the course of the hearing and our submissions dated 30 April 2019, the Analytics work carried out by the Appellant is characterised as low end BPO services provider engaged 'Back office operation' as per terms of Advance Pricing Agreement (' AP A') entered into with Central Board of Direct taxes ('CBDT') dated 29 August 2016 and hence, Companies engaged in 'KPO' services like Eclerx Services Ltd be excluded from list of comparable in view of decision relied on by the Appellant".
17. Having regard to the rival contentions and the material on record, we find that during the APA proceedings, the assessee as well as the Revenue authorities are required to go into the functions performed, risks undertaken and assets employed by the assessee during the relevant period to finally arrive at the acceptable margin. The assessee has also filed copies of the documents furnished for APA proceedings which included annual compliance report in Form 3CEF, copy of signed APA and documents required to be filed as per Appendix-2 to APA. From the copy of the form 3CEF, it is seen that the nature of the covered transactions is reported as "provisions for IT enabled Services" and other transactions namely payment of bank charges, centralised services, common facilities and reimbursement by AEs have been aggragated under the Principal transactions. Agreed transfer pricing method was TNMM and the accrued profit level indicator was operating profit margin of 18% on cost. Thus, it is seen that the assessee has been treated as Page 12 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
ITeS company both by the assessee as well as APA authorities and even the TPO in the TP study for the relevant A.Y has treated the assessee to be a ITeS company and therefore, it is not open to the learned DR to take a different stand and argue that the assessee is also a KPO. Even otherwise, as seen from the Annual Report of the assessee, it is performing the following functions:
a) Electronic Data Processing; b) Call Centre; c) Professional services; d) Other support functions
18. Whether these functions can be categorized as KPO functions?. The Special Bench of the Tribunal in the case of Maersk Global Centre (India) Pvt. Ltd was considering the distinction between a KPO and BPO and in this process, has listed out the services/functions which can be considered as KPO services as defined in clause (g) of the Rules 10TA.
"72. The term "knowledge process outsourcing services" is defined in clause (g) of 10-TA as under:
(9) "Knowledge process outsourcing services" means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely;
(i) geographic information system;
(ii) human resources services;
(iii) engineering and design services;
(iv) animation or content development and
management;
(v) business analytics;
(vi) financial analytics; or
(vii) market research"
Thus, it can be seen that the assessee is not performing any of these services and for this reason also, the assessee cannot be considered as a KPO Services provider. As regards the reliance of the learned DR on the decision of the Hon'ble Delhi High Court in the case of McKinsey, as rightly pointed out by the learned Page 13 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
Counsel for the assessee, the decision of the Hon'ble Delhi High Court in the case of McKinsey Knowledge Centre India (P) Ltd is no longer applicable as the said order has been recalled by the Hon'ble High Court for reconsideration.
19. Now coming to the comparability of E Clerx Services Ltd to the assessee, we have to first verify whether the services rendered by McKinsy can be considered as BPO services or KPO services as claimed by the assessee. The learned Counsel for the assessee has referred to page 380 of the Paper Book filed by the assessee, which is the Annual Report of E Clerx Services Ltd for the financial year 2013-14 wherein E Clerx has described itself as India's first publicly listed KPO Company. At page 391 of the Paper Book, the details of other expenses are mentioned, wherein the expenses for contract services are shown at Rs.1,11,01,000/-. At page 397 of the Paper Book are listed out the services rendered by the company which included Customer Experience Solutions, Technical Operations, Analytics and Advanced Automation and Digital Care Services. Thus, it can be seen that this company is into niche KPO services. We find that the comparability of this company to ITeS companies has been considered by varius Benches of the Tribunal and also the Hon'ble Delhi High Court in the case of Rampgreen Solutions (P) Ltd. The Hon'ble Delhi High Court in ITA No.102/2015 dated 10.8.2015 has considered that Rampgreen Solutions renders call centre services falling within the broad description of ITeS and cannot be compared to E Clerx Services Ltd which is a KPO service provider. The relevant paras of the Hon'ble High Court decision are as under:
"22. In the facts of the present case, it is not disputed that Vishal and eClerx are entities engaged in Knowledge Process Outsourcing Services Page 14 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
(KPO Services). Thus, the principal question to be addressed is whether a KPO Service provider could be considered as a comparable for benchmarking international transactions entered into by an entity rendering voice call services - such as the Assessee -with its associated enterprise by using TNMM and taking operating profit margin as the PLI .
23. In this case, the Tribunal noted that eClerx was engaged in data processing and analytics services and held that the activities of the Assessee were functionally similar to those of eClerx. The Tribunal concluded that voice call services and KPO services were essentially ITeS and, therefore, entities rendering the aforesaid services could be considered as comparables for the purpose of benchmarking international transactions by using TNMM. The Tribunal held that further sub-division of ITeS was not permissible. The Tribunal followed its earlier decision in Willis Processing Services (India) (P.) Ltd. v. Dy. CIT [2014] 148 ITD 678/41 taxmann.com 33 (Mum.).
24. It is not disputed that voice call services are considered to be the lower-end of ITeS. KPO on the other hand are ITeS where the service providers have to employ advanced level of skills and knowledge. Notification No. SO2810(E) dated 18th September 2013 issued by the CBDT notifying Safe Harbour Rules also indicates the above. Rule 10TA(g) of the said Rules defines KPO Services as under:-
'(g) "knowledge process outsourcing services" means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:-
(i) geographic information system; (ii) human resources services; (iii) engineering and design services; (iv) animation or content development and management; (v) business analytics; (vi) financial analytics; or (vii) market research,
but does not include any research and development services whether or not in the nature of contract research and development services;'
25. Whilst Voice Call Center represents the lower-end of ITeS, KPO represents services involving a higher level of skills and knowledge.
India has vast human resources and a large number of highly -skilled technical professionals. The expression "KPO" indicates the involvement of domain knowledge in providing ITeS. Typically, KPO includes involvement of advance skills; the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management etc. On the other hand, Voice Call Centers are normally involved in customer support and processing of routine data. In the case of Maersk Global Centers (India) (P.) Page 15 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
Ltd.(supra) a Special Bench of the Tribunal had referred to a report prepared by National Skill Development Corporation (NSDC) on Human Resource and Skill Requirements in IT and ITES Sector (2022) and noted that the KPO sector has been described as "a value play". The said report also indicates that KPO services are likely to span activities such as "patent advisory,high -end research and analytics, online market research and legal advisory".
26. A Knowledge Process is understood as a high value added process chain wherein the processes are dependent on advanced skills, domain knowledge and the experience of the persons carrying on such processes.
27. The Government of Rajasthan (Department of Information Technology & Communication) has also floated a scheme on 12th December, 2011 known as "The Rajasthan Incentive Scheme for BPO Centers and KPO Centers, 2011". The said scheme is for providing incentives to promote ITeS and to generate further employment opportunities. In terms of the said scheme, "Business Process Outsourcing (BPO)" is defined to mean "the transfer of an organization's entire non-core but critical business process/function to an external centre which uses an IT-based service delivery" and "Knowledge Processing Outsourcing (KPO)" has been defined to mean "allocation of relatively high-level tasks to an outside organization or a different group (possibly in a different location) within the same organization. KPO is, essentially high -end Business Process Outsourcing (BPO)".
28. In our view, the definition of KPO provided under the aforementioned scheme also indicates that KPO services are understood as the higher-end of ITeS in terms of value addition.
29.................
30................
31.................
37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) (P.) Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back- office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers(India) (P.) Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is Page 16 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in Capital IQ Information Systems (India) (P.) Ltd. (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits".
20. As regards the income from outsourcing of some of its activities by E Clerx is concerned and whether it can be a point for exclusion of E Clerx Ltd from the final list of comparables, the Hon'ble Delhi High Court has also considered the same and held as under:
"38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity.
21. Further, we find that the Coordinate Benches of the Tribunal, in various cases referred to and relied upon by the learned Counsel for the assessee, has gone into this aspect and have held E Clerx Ltd to be a KPO company and not comparable to a BPO Co. The Special Bench of the Tribunal in the case of Maersk Global Centers (India) Pvt Ltd (Supra) has also brought out the distinction between the KPO and the BPO particularly in accordance with the term "knowledge process outsourcing"
services as defined in Cl.(g) of Rule 10TA of the I.T. Rules.Page 17 of 22
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Respectfully following the same, we direct the AO to exclude E- Clerx Services Ltd from the final list of comparables.
22. As regards comparability of Hartron Communications Ltd, we find that the DRP has directed the TPO to consider only the operating margin of office back up operation segment of Hartron Communications to the assessee to determine the ALP, but the TPO has not followed the directions of DRP and have retained Hartron Communications at the entity level in the final assessment order. We find that the DRP directions are binding on the AO and therefore, we direct the AO to follow and implement the directions of the DRP on this issue. Thus, the assessee's ground of appeal No.6 is partly allowed and Ground No.7 is allowed.
23. As regards assessee's prayer for inclusion of ACE BPO Services and APE Technologies (P) Ltd, in the final list of comparables, the learned Counsel for the the assessee has tried to demonstrate that the AO and the DRP have held that these two companies fails the RPT filter and POL filter whereas actually these findings are factually incorrect. He referred to the relevant documents to demonstrate that these two companies did not fail the filters adopted by the TPO and are comparable to the assessee.
24. The learned DR was also heard and on consideration of the relevant material, we deem it fit and proper to remand this issue to the file of the AO/TPO to reconsider the same and only if it is found that these companies do not fail the relevant filters Page 18 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
adopted by the TPO, then these companies should be included in the final list of comparables. Thus, Ground Nos. 6, 7 & 8 are partly allowed for statistical purposes.
25. As regards Ground Nos. 9 & 10 for considering the provision for bad and doubtful debts and provision for loans and advances as operating in nature and allowing risk adjustment, since the assessee has sought exclusion of only Eclerx and we have held it to be not comparable to the assessee, the adjudication of these grounds would only result in an academic exercise at this stage. Therefore, we are not inclined to adjudicate the same at this stage. Similarly, adjudication of Ground No.1 also is not required as by exclusion of E Clerx Services Ltd from the final list of comparables, the margin of the assessee falls with the + or - 3% of the margin of the comparables and the adjudication of this issue also is academic in nature.
26. As regards Ground No.11, on imputing interest on outstanding receivables as on 31st March, 2014, it is submitted by the learned Counsel for the assessee that average credit period allowed by the assessee is 92.7 days as against the period of 90 days usually allowed by various Benches of the Tribunal in various other cases. He further submitted that the international transactions were bundled transactions and the interest on trade receivables is included while computing the ALP, therefore, no further adjustment is to be made. In support of his contention that credit period of one year should be allowed, he placed reliance upon the decision of the Coordinate Bench of this Tribunal dated 27.05.2018 in the case of C3i Support Services Page 19 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
Pvt. Ltd in ITA No.503/Hyd/2017 wherein the Tribunal held that the assessee therein was providing 180 days credit period on the amount receivables and is consistent with the RBI guidelines on Foreign Exchange receivables, as RBI allows a period of 1 year for the amounts to be realized if they are in foreign exchange. He also placed reliance upon the decision of the Coordinate Bench of the Tribunal at Delhi in the case of Bechtel India Pvt Ltd in ITA No.1478/Del/2015 dated 21.12.2015, wherein it was held that in the case of a debt free company, it is not justifiable to presume that borrowed funds have been utilized to pass on the facility to its AEs.
27. The learned DR, on the other hand, referred to the Agreement between the assessee and its AE wherein 35 days period is fixed for realization of the consideration. Therefore, according to him, 35 days credit period only should be allowed and interest on receivables should be computed accordingly.
28. Having regard to the rival contentions and the material on record, we find that "interest on receivables" is an international transaction during the relevant financial year. The decisions relied upon by the learned Counsel for the assessee are in relation to the A.Ys prior to the amendment to section 92B of the Act and therefore, are not applicable ipso facto to the case of the assessee. Further, when the credit period is clearly mentioned in the Agreement between the parties, then the same only should be allowed and interest on trade receivables after such credit period should be computed. Therefore, the computation of interest on trade receivables is remitted to the file of the AO with these Page 20 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
directions. Ground of appeal No.11 is accordingly treated as allowed for statistical purposes.
29. As regards ground 14 against disallowance of expenses on ESOP and ESPP, the learned Counsel for the assessee placed reliance upon the decision of the Special Bench of the Tribunal at Bangalore dated 17.02.2013 in the case of Biocon Ltd in ITA No.368/Bang/2010 and others, wherein such expenditure has been held to be revenue in nature. The learned DR, on the other hand, relied upon the decision of the Hon'ble Supreme Court in the case of Brooke Bond India reported in (1997) 225 ITR 798 (SC) . The learned Counsel for the assessee pointed out that this decision also was considered by the Hon'ble Special Bench in the case of Biocon Ltd.
30. Having regard to the rival contentions and the material on record, we find that this issue is covered in favour of the assessee and therefore, we direct the AO to grant relief to the assessee by following the directions of the Special Bench in the case of Biocon Ltd. This ground is accordingly allowed.
31. As regards ground No.15 against the disallowance of forex loss on forward contracts, the learned Counsel for the assessee placed reliance upon the decision of the Hon'ble Supreme Court in the case of Woodwand Governor, reported in (2009) 312 ITR 254 (S.C). The learned DR, on the other hand, relied on the CBDT Circular No.03/2010 dated 23.3.2010.
32. Having regard to the rival contentions and the material on record, we find that the Hon'ble Supreme Court in the case of Page 21 of 22 ITA No 2388 of 2018 HSBC Electronic Data Processing India P Ltd Hyderabad.
Woodwand Governor India (P) Ltd has held that the loss suffered by an assessee on account of foreign exchange difference as on date of Balance Sheet is an item of expenditure u/s 37(1) of the Act. Respectfully following the same, this ground of the assessee is allowed.
33. Ground No.16 is against imposition of interest u/s 234B of the Act and the AO is directed to allow consequential relief, if any, to the assessee.
34. Ground No.17 is against initiating of penalty u/s 271(1)(c) of the Act and it is rejected as premature at this stage.
35. In the result, appeal filed by the assessee is partly allowed.
Order pronounced in the Open Court on 17th July, 2019.
Sd/- Sd/-
(S.Rifaur Rahman) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 17th July, 2019.
Vinodan/sps
Copy to:
1 HSBC Electronic Data Processing India P Ltd, Plot No.08, HSBC House, Survey No.64 (Part) Madhapur, Hyderabad 500081 2 ACIT, Circle 2(2) Signature Towers, Kondapur, Hyderabad 500084 3 Add. CIT (T.P) Hyderabad 4 DRP-1 Bengaluru 5 Pr. CIT - 2 Hyderabad 6 The DR, ITAT Hyderabad 7 Guard File By Order Page 22 of 22