Income Tax Appellate Tribunal - Bangalore
Ocwen Financial Solutions Private ... vs Circle-3(1)(1), Bangalore on 31 March, 2023
I.T.A. No.718/Bang/2022
Assessment Year: 2017-18
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES, (A) BANGALORE.
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SH. ANIKESH BANERJEE, JUDICIAL MEMBER
I.T.(TP)A. No.718/Bang/2022
Assessment Year: 2017-18
Ocwen Financial Solutions Pvt. Vs. Addl./Joint/Dy/Asstt.
Ltd. Commissioner of Income
Pritech Park, Survey 51-64, Tax/ Income Tax Officer,
Block 12, Unit 2, 5th Floor 'B' National Faceless
Wing & 6th Floor 'A' wing, Assessment Centre, Delhi.
Bellanddur Village, Sarjapur
Marthahalli Ring Road,
Bengaluru.
[PAN: AAACO3764E] (Respondent)
(Appellant)
Appellant by Sh. Ankur Pai, Adv.
Respondent by Sh. K. Shankar Ganesh, JCIT.
DR
Date of Hearing 02.02.2023
Date of Pronouncement 31.03.2023
ORDER
Per: Anikesh Banerjee, JM:
The instant appeal of the assessee is directed against the order of the ld. Addl. /Joint/ Dy. Commissioner of Income Tax (Appeals), NFAC, Delhi, [in brevity the 'CIT (A)'] order passed u/s 143(3) r.w.s. 144C(5) r.w.s. 144C (13) r.w.s. 144B of the Income Tax Act 1961, [in brevity the Act] order dated 24.02.2022. The assessee has taken the following ground:
I.T.A. No.718/Bang/2022 2 Assessment Year: 2017-18 "1. The learned Assessing Officer ("AO") learned Transfer Pricing Officer ("learned TPO") and the Honourable Dispute Resolution Panel ("DRP") grossly erred in making an adjustment of INR 68,97,48,330/-
with respect to the international transaction rendered by the Appellant under section 92CA of the Income-tax Act, 1961 ("the Act").
2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the Transfer' Pricing ("TP") documentation maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the Act.
3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transaction thereby following a non-transparent approach.
4. The learned AO/ learned TPO/Hon'ble DRP erred in applying the core service income filter of 75% to sales instead of 50%, thereby leading to a narrower set of comparable companies.
5. The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of 75% of the total sales, leading to a narrower set of comparable companies.
6. The learned AO/ learned TPO/ Hon'ble DRP erred in selecting the companies only if the data pertaining to FY.2016-17 is available in the public databases.
7. The learned AO/ learned TPO/ Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials.
8. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting companies having employee cost filter less than 25% of total sales.
9. The learned AO/ learned TPO/ Hon'ble DRP erred in not appreciating the fact that since lower limit on the sales turnover has been universally accepted by both Appellant and TPO, similar filter should also be applied I.T.A. No.718/Bang/2022 3 Assessment Year: 2017-18 on the upper limit on turnover while carrying out the comparability analysis.
10. The learned AO/ learned TPO/ Hon'ble DRP erred in not considering provision no longer required/written back as operating in nature."
Additional ground:
2. The assessee has raised additional ground with regard to inclusion of following comparables:
1) ISN Global Limited &
2) Bhilwara Technology Ltd.
2.1 The ld. A.R. also filed petition for admission of additional ground. These two comparables were considered in the case of Global-e-business Operations Pvt. Ltd. in IT(TP)A No.174/Bang/2022 ("Global-e") dated 16.11.2022, which was not available to the assessee at the time of filing the appeal before this Tribunal and further submitted that these two comparables are considered by the Tribunal in this case and these comparables are to be included in ITeS segment and it qualifies all the filters adopted by the TPO.
3. We have heard the rival submissions and perused the materials available on record. In our opinion, there is a good and sufficient reason raised in this additional ground before us. As rightly pointed out by the assessee, the order of the Tribunal in the case of Global E-business cited (supra) and the assessee has no opportunity to go through this judgement and in that judgement, the Tribunal observed that the above two comparables to be included as comparables in the ITeS segment while determining the ALP as these comparables satisfy all the filters adopted by the TPO. Accordingly, in the interest of justice, we admit this additional ground for adjudication.
I.T.A. No.718/Bang/2022 4 Assessment Year: 2017-18
4. During hearing, the ld. counsel for the assessee has not pressed the ground nos. 1 to 10 and 13. The only ground nos. 11,12, 14 and 15 are taken for adjudication.
5. Brief fact of the case is that the assessee is a subsidiary of Ocwen Asia Holdings Limited I, Mauritius (Ocwen Mauritius) is engaged in providing IT enabled services (in short "ITES to Ocwen Mauritius Services Inc, USA). The assessee provides call centre services and certain other loan servicing operations as well as back office/Corporate support function such as accounting, risk management, human resources, audit, training and other corporate support functions. The functions, asset and risk analysis (in short "FAR") as per the TP study of the assessee. The assessee assumed lower than normal risk associated with business of providing ITES to its AE. The assessee was characterised as (captive service provider) in impugned assessment year assessee declared taxable income Rs. 90,86,94,250/-. The assessee subsequently revised the return and declaring the total income Rs.108,80,22,770/-. The assessee's case was selected for scrutiny. The assessee received Rs. 698,49,91,639/- from its AE in respect of ITES Provided. The assessee had selected TNMM as MAM and had computed margin at 15.06 on operating cost. The Transfer Pricing Officer (in short TPO) had conducted as fresh analysis the TPO agreed with the appellant that the TNMM was to be applied as MAM. The TPO applied certain filters and selected 13 comparable companies in ITES segment which included 3 comparable from TO study of the assessee while 10 new comparable were introduced by the TPO. The TPO passed order u/s 92CA and determine the adjustment of Rs.68,97,48,330/- in the ITES segment. The ld. AO passed the Draft Assessment Order (in short DAO) in corroborating the TP adjustment and determine the total income of the assessee amount of Rs.177,77,71,100/-. The assessee filed an objection before I.T.A. No.718/Bang/2022 5 Assessment Year: 2017-18 Dispute Resolution Panel (in short DRP). The DRP rejected the ground of the assessee. At the final assessment order was passed. The assessee had filed an appeal before the ITAT and challenged the adjustment of provisions in bad and doubtful debts in consideration as operating expenses, grant of working capital adjustment and exclusion and inclusion of the comparable. The matter is before the ITAT for adjudication.
Ground No. 11- The provision for Bad and Doubtful Debts as operating expenditure.
6. After hearing both the parties, we are of the opinion that this issue came for consideration before this Tribunal in the case of ACI Worldwide Solutions Pvt. Ltd. In IT(TP)A No.1893/Bang/2017 dated 27.9.2019 wherein held as under:
7. "We have considered the rival submissions and are of the view that in the light of the decision pointed out by the learned DR, the issue of comparability of this company should be sent back to the AO / TPO for fresh examination as was directed by the Tribunal in the case of CGI Information Systems and Management Consultants Pvt. Ltd., (supra). We hold and direct accordingly.
8. As far as the exclusion of provision of bad and doubtful debts from the operating cost of the comparable companies is concerned, the learned Counsel for the assessee brought to our notice that while considering the international transaction in the distribution segment, the TPO has himself considered provision for bad and doubtful debts as part of the operating expenditure and by the same logic he should have treated provision for bad and doubtful debts as part of the operating cost in the hands of the comparable companies also. As far as the software development segment of the assessee is concerned, there is no provision for bad and doubtful debts. The learned Counsel for the assessee filed before us copy of the decision of the Hon'ble Karnataka High Court in the case of Principal CIT Vs. Business Process Outsourcing India Pvt. Ltd., (2018) taxcorp (DT) 73195 (HC Karnataka) wherein in an appeal against the order of the Tribunal holding that provision for bad and doubtful debts should be considered as part of the operating expenditure, the Hon'ble High Court confirmed the order of the Tribunal and dismissed the appeal of the Revenue as one not giving rise to any substantial question of law.
I.T.A. No.718/Bang/2022 6 Assessment Year: 2017-18
9. In the light of the aforesaid decision, we are of the view that provision for bad and doubtful debts should be treated as operating expense while computing the PLI OP/OC of the comparable companies which ultimately remains for comparison. We hold and direct accordingly."
6.1 Further, Tribunal in the case of Evolving Systems Networks India Pvt. Ltd. In MP No.69/Bang/2021 in IT(TP)A No.2751/Bang/2017 vide order dated 24.9.2021 held as under:
10. "We have given a very careful consideration to the rival submissions. We find that the DRP in rejecting the plea of the assessee has placed reliance on the decision of Mumbai Bench of the Tribunal in the case of M/s. Telcordia Technologies India Pvt. Ltd., (supra) and the decision in the cae of Thyssen Krupp Industries India Pvt. Ltd., (supra).
Both these decisions have been considered in the Bengaluru Bench of the Tribunal rendered in the case of Maxim India Integrated Circuit Design Pvt. Ltd., (supra). The Tribunal, after noticing the fact that in the decision cited in the order of the DRP, the facts were different and would result in the same effect if the claim of the assessee is accepted. Besides the above, the Karnataka High Court has also taken a view in the case of Business Process Outsourcing India Pvt. Ltd., (supra) that provision for bad and doubtful debts should be taken as operating expenses while computing profit level indicator of the comparable companies. In the light of the aforesaid decisions which have been cited at the time of hearing of the appeal, we are of the view that the claim of the assessee deserves to be accepted. Accordingly, ground No.4(h) raised by the assessee has to be allowed and is hereby allowed.
11. Consequent to the aforesaid conclusion, portion of para 11 of the order of the Tribunal dated 24.06.2021 given in bold letters in the earlier part of this order will stand substituted by the observations made in Paragraph 6 to 10 of this order as paragraph 11.1 to 11.5 and the remaining part of paragraph 11 will stand substituted as paragraph 11.6." 6.2 In view of the above order of the Tribunal, we direct the AO/TPO that provisions for doubtful debts to be considered as operating expenses as indicated above.
Ground No. 12- Grant of Working Capital Adjustment
7. The ld. counsel submits that the assessee had made claimed for grant of working capital adjustment before the TPO and DRP. But the revenue authorities had discarded the claim of the assessee. The assessee relied on the I.T.A. No.718/Bang/2022 7 Assessment Year: 2017-18 order of the jurisdictional Coordinate Bench of the ITAT in case of Huawei Technologies India (P) Ltd. vs. JCIT reported in (2019) 101 taxmann.com 313 (Bangalore) and in another case of Altimetrix India Pvt. Ltd. vs. Assessing Officer, National e-Assessment Centre, Delhi in IT (TP) A No. 477/Bang/2021 order dated 27.07.2022.
8. In the argument, the AR has taken Ground No.12 is related to grant of working capital adjustment. The AR relied on the order of the Coordinate Bench in the case of Huawei Technologies India Pvt. Ltd.(2019) 101 taxmann.com 313 (Bang).
8.1. In our considered view the trade terms of payment of debtor is 60 days. So, the price of goods should equate to the price for immediate payment plus 60 days of interest on immediate payment price. For making working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparable for which is the work out the adjustment on account of working capital adjustment. Cost of capital is different for different companies. After working out the difference in the working capital employed between the tested party and the comparable companies, the cost of financing such working capital need to be adjusted to eliminate the impact of such difference in working capital on the profit margins of the tested party and comparable companies. To work out the cost of working capital, the rate of return/interest is an important factor. The cost of working capital for the tested party and each of the comparable / companies is different. The cost would depend on the source of funds and the credit standing of the borrower. The assumption of prime lending rate as the interest rate applicable for making the working capital adjustment suffers from risks of inaccuracy. The cost of capital for MNCs is determined more by the global I.T.A. No.718/Bang/2022 8 Assessment Year: 2017-18 interest rates rather than Indian prime lending rate. There is always difference between prime lending rate of India and that of international market rate of interest. Choosing one of these rates among multiple rates available in the market is as debatable as not allowing any working capital adjustment. Any change in the interest rate in the working capital adjustment will produce significantly different results making the results highly unscientific. Even though it is possible for the comparable companies to borrow in the world market the reality is entirely different. A company with global presence has a distinct advantage in terms of credit worthiness and ability to bargain based on its financial muscle. The issue is well settled by the coordinate bench. The DR was unable to produce any contrary order against the assessee.
8.2 In our opinion, this issue is already covered by the order of the Tribunal in the case of Altimetrix India Pvt. Ltd. In IT(TP)A No.477/Bang/2021 dated 27.7.2022, wherein held as under:
19. We have heard rival submissions and perused the material on record. In the view of the ruling in the case of M/s. Huawei Technologies India (P) Ltd. v. JCIT (supra), the basis of rejection of the relief by the DRP is no longer valid. The relevant findings of the Tribunal in the case of M/s.Huawei Technologies India (P) Ltd. (supra) read as follows:-
"15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons:
(i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year.
(ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made.
I.T.A. No.718/Bang/2022 9 Assessment Year: 2017-18
(iii) Disclose in the balance sheet does not contain break up of trade and non- trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed.
(iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results.
16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a I.T.A. No.718/Bang/2022 10 Assessment Year: 2017-18 commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable.
17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:
"(3) An uncontrolled transaction shall be comparable to an international transaction if--
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences."
18. In such a scenario there would remain no comparable uncontrolled transactions for 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."
20. We therefore direct the AO/TPO to consider the working capital adjustment in the light of the aforesaid ruling and allow appropriate adjustment in arriving at an arm's length price."
I.T.A. No.718/Bang/2022 11 Assessment Year: 2017-18 8.3 In view of the above order of the Tribunal, we direct the AO/TPO to grant working capital adjustment as indicated above.
9. Ground No.13 of the appeal of the assessee is not pressed and hence, this ground is dismissed as not pressed.
Ground No. 14- Exclusion of Comparables
10. The assessee wants exclusion of following comparables in ground No.14:
a. Infosys BPO Limited b. Datamatics Business Solutions Ltd.
c. Manipal Digital Systems Pvt. Ltd.
e. CES Ltd.
f. Ultra Mine Pigments Ltd.
g. SPI Technologies India Ltd.
10.1 The assessee has not pressed ground No.14(d) the company M/s. Vitae International Accounting Services Pvt. Ltd.
11. First we adjudicate following comparables":
a. Manipal Digital Systems Pvt. Ltd.
b. Datamatics Business Solutions Ltd.
c. Infosys BPO Limited
11.1 After hearing both the parties, we are of the opinion that these 3 comparables are considered in the case of M/s. Global e-business Operations Pvt. Ltd. In IT(TP)A No.174/Bang/2022 vide order dated 16.11.2022, wherein held as under:
"Manipal Digital Systems Private Limited
12.1.3 The contention of the Ld. A.R. is that it is not functionally similar to the assessee's case as no segmental details are available and advertisement & sales promotion expenses works out at 6.5% in assessment year under consideration, 7.19% in assessment year 2016-17 & 8.78% in assessment year 2015-16. Hence, he argued that this company be excluded from the list of comparables.
I.T.A. No.718/Bang/2022 12 Assessment Year: 2017-18 12.1.4 The ld. D.R. submitted that it is crystal clear from the annual report that the principal business activity of the company is given as IT enabled services which contributes 100% turnover of the company. On perusal of the breakup of the revenue given at page 41 of annual report, the revenue earned from IT enabled services is Rs. 23.63 out of total revenue of Rs.24.34 crores, which comes to around 97.08%. He submitted that 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, he noted 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. D.R. stated that the pleas raised based on information said to be available in the website are liable to be rejected is in limine in view of the information given in the annual report on the functional aspect.
12.1.5 Further, the ld. D.R. stated that this company operates under a single primary segment. The profit margins of various comparables will be averaged and a variation of 3% is also permitted. These aspects take care of some differences which are bound to be there between various comparables. In view of the above, he argued that 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. It is a fact that this company falls in the category of ITeS. Hence, he stated that the objection on the functional dissimilarity of the company is to be rejected.
12.1.6 As regards lack of segmental information, the ld. D.R.stated that the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the RTES activities only. This is further supported by the clarificatory note No. 27 at page 52 of the annual report that "the company was operating under one reportable geographical segment and one business segment. Therefore, disclosure as prescribed under AS 17- segment reporting is not applicable. Hence, he argued that the objection on lack of segmental information is not valid and not acceptable.
12.1.7 The ld. D.R. further stated that the assessee contended that this comparable has incurred significant selling, marketing expenses. From the perusal of the annual report, ld. DR noted that the expenses on this count is only 5.05% of the total sales and which is not at all significant to affect the I.T.A. No.718/Bang/2022 13 Assessment Year: 2017-18 profitability of the comparable. Accordingly, ld. D.R. stated that that this plea is rejected by the ld. DRP and selection of this company is upheld by ld DRP.
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 this company is engaged in provision of multiple high-end services including KPO activity like Design Services, Animation. It was submitted that no segmental details were available in the financial statements on the variety of services provided by this company like Design Services, Animation. Reliance was placed on the decision of the ITAT, Pune Bench in the case of Credence Resource Management Pvt. Ltd., (supra) wherein this company was excluded by the Pune Bench with the following observations:
"8. The assessee submits that the Manipal Digital Systems Private Limited is functionally different from the assessee which is involved in provision of ITes services. As per the annual report of the company, the activity undertaken by the company is in the nature of pre-press activities which is not comparable to the assessee. That further in the website of the company, it is engaged in the diversified set of activities which involves graphic solutions, packaging brand management, digital publishing and digital content solutions. Therefore, the assessee submits that this company should be rejected from the final set of comparables companies.
9. The TPO was of the opinion that in this company i.e. Manipal Digital Systems Private Limited, 90% of the revenue is earned from ITes which is similar to that of the assessee company. The TPO further observed that most of the information provided by the assessee was from website and it cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the I.T.A. No.718/Bang/2022 14 Assessment Year: 2017-18 contention of the assessee was rejected and the company was taken as comparable company.
10. That before the Ld. DRP, objections have been raised by the assessee which are at running Page No.34 of the appeal memo and therein, apart from reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions performed by the company. The Ld. DRP vide Para (c) of Page No.67 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and included Manipal Digital Systems Private Limited in 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 Ramp green Solutions Pvt. Ltd. Vs. CIT, ITA No.102/2015 dated 10.08.2015 copy of which is placed before us, the Ld. Counsel brought to our notice at Para 31 wherein the Hon 'ble Delhi High Court observed that the Tribunal had held that once a service falls under the category of ITes then there is no subclassification of segment. Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITes. The Hon 'ble Delhi High Court rejecting such view of the Tribunal had held that such a view, if upheld, would be contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITes encompasses a wide spectrum of services that use Information Technology based delivery. Such service could include rendering highly technical services by qualified technical personnel involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITes would also include voice based call centers that render routine customer I.T.A. No.718/Bang/2022 15 Assessment Year: 2017-18 support for their clients. The relevant portion of the judgment is extracted as follows for the sake of completeness:
" .......... Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous.
32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider.
33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench 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 specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability.
34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any I.T.A. No.718/Bang/2022 16 Assessment Year: 2017-18 other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently.
35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be 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 exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP."
13. The Ld. Counsel for the assessee further submitted therefore, it is clear that merely because two companies are doing ITes services, on general categorization comparability is not permitted and one has to look into the specific services rendered in the spectrum of ITes and for this reason, the said company i.e. I.T.A. No.718/Bang/2022 17 Assessment Year: 2017-18 Manipal Digital Systems Private Limited is not a comparable company with that of the assessee company since absolutely functionally different. The Ld. Counsel also submitted that the TPO should have specifically stated why he has selected this company as comparable with that of the assessee company since the onus is on him to give reason for such inclusion. The logic was shown from the decision of the Pune Bench of the Tribunal in the case of M/s. Tasty Bite Eatables Limited Vs. ACIT, ITA No.1823/PUN/2018 for the assessment year 2014-15 dated 03.06.2021 wherein it was held that since the comparable chosen by the assessee, the onus is upon it to prove the functional comparability of this company. Extending the same logic, the Ld. Counsel submitted that it was also for the TPO to explain the reasons for inclusion of this company i.e. Manipal Digital Systems Private Limited since it was chosen as comparable by him.
14. We are of the considered view on going through the order of the TPO, findings of the Ld. DRP and the various judicial pronouncements placed on record, first of all the Revenue has selected Manipal Digital Systems Private Limited as comparable to that of the assessee company based on the earning of the company from ITes. However, there is no segmental specification provided neither by the TPO nor by the Ld. DRP for the reason of such inclusion of this company in the final set of comparable companies with that of the assessee company. In the decision of the Hon'ble Delhi High Court (supra.), it is very much clear in the wide spectrum of ITes if two companies are to be comparable one has to look into the characteristic of service or business provided under ITes by them. This exercise was not done by the Department in this case. We also opine that as per Indian Council for Advertising, the online advertising has to be published on true and honest disclosure basis and therefore, when proper documentation of activities are not physically available, in such scenario, referring the website for information is correct option and the information therein cannot be doubted. These are all multinational 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.
I.T.A. No.718/Bang/2022 18 Assessment Year: 2017-18
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 comparability of Manipal Digital Systems Pvt. Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee and the assessees in the decisions cited by the learned AR remains the same in Assessment Year 2017-18 as it was in Assessment Year 2016-17."
12.1.10 Accordingly, the above comparable i.e. Manipal Digital Systems Pvt. Ltd. is directed to be excluded from the list of comparables.
Datamatics Business Solutions Limited 12.1.11 The ld. A.R. submitted that the TPO erred in computing export revenue percentage. The correct percentage are 76%, 72% & 66%, respectively for FY 2016-17, FY 2015-16 & FY 2014-
15. This company is functionally dissimilar - BPM services of the company essentially involves high- end KPO services, like business research, analytics, etc., which requires skilled labour. No segmental financials were given and without prejudice to the fact that the above functionality counter, margins for last two years should not be considered as they are failing export revenue filter. Hence, the ld. A.R. requested for exclusion of this company from the list of comparables.
12.1.12 The ld. D.R. submitted 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%. In this case the difference in various segments i.e. low end to high end in ITES services is mainly on account differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that 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 high end segments of ITES services is high compared to low end services. Therefore, ld. DRP did not 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. He stated that 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, ld. DR objected the plea of the assessee. Therefore, he stated that the company is functionally similar to the assessee as it is being predominantly into ITES company.
12.1.13 The ld. DR further stated that as regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As regards, the export revenue as given in Note No. 18, the I.T.A. No.718/Bang/2022 19 Assessment Year: 2017-18 revenue is around Rs.50.43 crores as on 31.03.2017 as against total revenue of Rs.62.70 crores, which comes to 80.43%. As the company is functionally similar and satisfies the filters adopted by the TPO including export revenue filter of more than 75%, the company is considered as comparable. Therefore, he stated that the action of the TPO considering the company is upheld by the Ld. DRP.
12.1.14 The ld. D.R. further stated that at the outset, it is pertinent to note, that the assessee has challenged the selection of some comparables, relying on some decisions of Tribunal either in assessee's own case or in some other case, holding that certain companies are to be excluded as comparable for some other years. The comparability of a company cannot be determined with regard to decisions of the appellate bodies rendered for some other year, as the business and economic factors are dynamic and different in each year both in the case of tested party and comparables. The issue is well settled that simply because a comparable has been included or excluded in some year that action or inaction by itself in transfer pricing issues on comparability cannot constitute a precedent to be blindly followed ad infinitum. Whether a particular company is a comparable or not is an exercise, which has to be carried out every year in the case of an assessee considering the facts of that specific year and not blindly following the precedent, which has been laid down in earlier or subsequent year. A comparable is a comparable on facts and not because a precedent makes it so. Neither can the tax payer insist that a comparable be included nor can it be insisted that it be excluded only on the ground of it having been included or excluded in some other previous assessment year.
12.1.15 The ld. D.R. further submitted that in case of Agnity India Technologies Pvt. Ltd vs Assessee, the Coordinate Bench of New Delhi Tribunal in 1.T.A.No.6485/De1/2012 for assessment year 2008-09 observed that precedents cannot be blindly followed. The relevant observations made are extracted as under: -
"Para 7.3,,, .3. Having heard the rival submissions and perused the material available on record we find that in the peculiar facts and circumstances of the case where the Hon'ble High Court has not approved of the approach of the ITAT in relying upon the precedent available in assessee's own case for the immediately preceding assessment year which precedent stood approved by the Hon'ble High Court itself we find that the prayer of the Ld. DR that decision be made first on facts on record and thereafter precedence be considered is not only a settled legal position but in the facts of the present case following this settled position the issue has been remanded despite the fact that the Co- ordinate Bench had followed the precedence in assessee's own case.
Para 13 ............ We find on facts that the prayer of the tax payer for exclusion of the said comparable cannot be ousted on the ground that it was not objected to in the previous assessment year. Whether 5 particular comparable is accepted or rejected in a previous assessment year I.T.A. No.718/Bang/2022 20 Assessment Year: 2017-18 consciously or inadvertently by the assessee or the authorities is not the basis on which the issues can be decided. As and when challenge is posed of the inclusion or exclusion of a comparable the challenge has to be considered on the basis of facts and evidence on record for that year. It is after the facts and evidences are taken into consideration that the relevance of applying a precedent would come into play. In the facts of the present case, we find that the revenues from the software development segment of this comparable constituted 96% and this finding of fact has not been assailed by the assessee."
12.1.16 Therefore, the ld. DR submitted that inclusion or exclusion of a comparable has to be necessarily justified on the basis of facts available on record, the FAR analysis and the information in the annual reports submitted for each year and not on the basis of judicial precedent.
12.1.17 We have heard the rival submissions and perused the materials available on record. The main contention of the ld. AR is that segmental financials are not available and also TPO has not considered the correct percentage of export revenue in the earlier 3 assessment years and also margin of last 2 assessment years cannot be considered in view of the export revenue filter. In our opinion, these facts are required to be examined by the AO/TPO. Accordingly, we remit this issue to the file of AO/TPO for reconsideration of this comparable and include this comparable i.e. Datamatics Business Solutions Limited in the list of comparables if it satisfies the export revenue filter.
Infosys BPO Limited:
12.1.18 The ld AR submitted that in assessee's own case in earlier assessment year, it was not considered as comparable and he relied on the order of the Tribunal in the assessee's own case in ITA No.212/Bang/2021 dated 27.9.2022 in the assessment year 201617. 12.1.19 The ld. D.R. submitted that on perusal of the annual report, it was noted that 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 is 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, primary business activity of this company is business process management services, in various verticals such as FSI, MFG, RCL, ECS. The ld DR further submitted that at page 81 of annual report, Note 2.24, the report clearly states that as per function wise classification it has income from business process management services. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas. In view of the above information in the annual report, ld. D.R. stated that there is no merit in the plea that this company is I.T.A. No.718/Bang/2022 21 Assessment Year: 2017-18 functionally different, and that it has diversified activities, and hence stated that this plea be rejected.
12.1.20 We have heard the rival submissions and perused the materials available on record.
We have considered the arguments of both parties. In the assessment year 2016-17, in the assessee's own case in IT(TP)A No.212/Bang/2021 dated 27.9.2022, the Tribunal has considered this company as not comparable wherein held as under:
"10. As mentioned earlier, the limited 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 solutions to its global clients by leveraging process, domain and people management expertise. The nomenclature in the profit and loss account indicates that the income is earned from 'Revenue from business process management services' which suggests that the company is engaged in consultancy and management services unlike the Appellant which is involved only in providing ITES as a captive service provider entity.
13.2 Further, Infosys BPO Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (He referred Page 162-163 of the Case Law Compilation, Para 11 -
21). Below is the relevant extract from the order for ready reference:
I.T.A. No.718/Bang/2022 22 Assessment Year: 2017-18
11. The ld. AR submitted that Infosys BPM Ltd. should be rejected as a comparable because it is functionally not comparable, has diversified activities and lack of segmental data, different business model, brand profits, various revenue models, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several clients and span across multiple industry segments. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas.
12. The DRP was of the view that just because the company is providing cloud based services over various mainframe computers, the company would not be functionally different as claimed by the assessee and rejected this plea of the assessee.
13. Regarding the plea of the assessee that this company is into high end ITES service provider, and hence not comparable, the DRP held that under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard the DRP relied on the Bangalore Tribunal decision in the case of GE India Technology Centre (P.) Ltd. v. Dy. DIT [2013] 30 taxmann.com 249/141 ITD 245 and other decisions wherein it was observed that TNMM requires only broad comparability.
14. The contention of the assessee that Infosys BPO has various Revenue Models and its revenues are generated principally on time and material basis, transaction basis and fixed price 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 sub-contractors 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 so in the facts of this case, wherein the sub-contracting expenses are about 4.45% only. This objection was accordingly rejected.
I.T.A. No.718/Bang/2022 23 Assessment Year: 2017-18
16. Regarding the lack of segment data to reject it as a comparable, the DRP was of the view that when it has been held that all the services being done by this company falls in the category of ITeS, then the absence of segmental information remains a theoretical argument.
17. The assessee has also argued that this company has significant intangibles and brand and hence not functionally comparable. The DRP noted that the expenditure incurred towards brand was just Rs. 19 crore which is meagre considering its operating revenue of Rs. 3050 crores. Further, the assessee could not point to any information from the annual report to indicate brand has contributed to the revenue growth or profitability. Therefore, the presence of brand, as such, has not affected comparability. Further, there is no information in the annual report to indicate that the company has undertaken any major R&D initiatives & own intangibles. Therefore, the presence of intangible in the form of goodwill, which is also insignificant, as the value is only Rs. 19 crore compared to the revenue from operations of Rs. 3050 crores do not have any impact on the profits of the company. Hence, these pleas were rejected by the DRP.
18. The assessee's contention that this comparable has incurred significant selling and marketing expense was also not accepted by the DRP, since from the perusal of the annual report, the DRP noted that the expenses on this count is only 4.56% of the total expenditure and which is not at all significant to affect the profitability of the comparable.
19. Thus, in view of the discussions held above, all the grounds raised by the assessee were rejected and the action of the AO/TPO was upheld by the DRP.
20. We have heard both the parties and perused the material on record. This comparable has been considered as not comparable in SwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 (Bang. - Trib.) wherein it was observed as under :--
"We have perused submissions advanced by both sides in light of records placed before us. We note that this company is providing services in various areas of sourcing and procurement, customer services, finance and accounting legal process outsourcing, 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 I.T.A. No.718/Bang/2022 24 Assessment Year: 2017-18 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 final list of ITeS Segment.
13.5 Ld. D.R. relied on the order of Ld. DR 13.6 We have heard the rival submissions and perused the materials available on record. This company has been considered as in the case of ADP Pvt. Ltd. cited (supra and held that this company cannot be included by observing as under:-
"16.1 Infosys BPO Ltd.: The ld. AR submitted that this company may be excluded from the final set of comparables for the reason that this company has incurred outsourcing costs for FY 2013-14, FY 2014-15 and FY 2015-16 and the outsourcing cost incurred by this company reflects a different operating model and hence cannot be compared with the assessee company. Further, he submitted that while this company operates under various revenue model as per the assignments i.e., proportional completion method on rendering services, whereas the assessee charges a mark-up on the cost incurred to provide the services. Further, he submitted that since the cost structure and revenue model of this company is different with that of the assessee, this company ought to be rejected as a comparable company. He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the coordinate bench excluded this company as comparable.
16.2 The ld. DR, on the other hand, submitted that presence of outsourcing cost/subcontracting cost does not affect functional comparability. Further, it reduces the operating margin of the company, which is beneficial to the assessee. He, therefore, submitted that the TPO/DRP has rightly included this company as comparable.
16.3 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) has excluded this company as comparable by observing as under:
I.T.A. No.718/Bang/2022 25 Assessment Year: 2017-18 '38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under:
"6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS E-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the objection was that the said company renders 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 rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS E-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under:
ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS e-SERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the I.T.A. No.718/Bang/2022 26 Assessment Year: 2017-18 assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also.
11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record.
However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court 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 the above decision of the Coordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables.' I.T.A. No.718/Bang/2022 27 Assessment Year: 2017-18 We observe from the financial statements of this company, that this company is functionally dissimilar and use robotics automation and diversified activities. Therefore, following the decision of the coordinate bench, we direct the AO/TPO to exclude this company as comparable for determining ALP.
13.7 In view of the above order of the coordinate bench of Hyderabad, we direct the AO/TPO to exclude this company viz. Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment.
ii. SPI Technologies Pvt. Ltd.
14. The Ld. A.R. submitted that the company is into diversified business activities. The Company is engaged in data processing and related services, primarily in the typesetting business, including transformation of unedited manuscripts into final print- ready files, supply of structured data for electronic publishing and providing end-to- end project management services.
14.1 SPI Technologies India Private Limited has been excluded in the case of Entercoms Solutions Private Limited [TS-548-ITAT-2021(PUN)-TP] Page 10 of the order - AY 2015-2016.
Below is the relevant extract from the order for ready reference:
"10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the Assessee in ITes segment.
14.2 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment.
14.3 Ld. D.R. relied on the order of Ld. DRP.
14.4 We have heard the rival submissions and perused the materials available on record. This company has been considered as not a comparable in the case of Entercoms Solutions Pvt. Ltd. in assessment year 2015-16 in ITA No.1826/Pune/2019 dated 25.10.2021 wherein held as under:-
I.T.A. No.718/Bang/2022 28 Assessment Year: 2017-18
8. We find the Hon'ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax Vs. PTC Software (I) (P) Ltd. (2019) 101 taxmann.com 117 (Bombay) has held that in case the assessee rendering ITES services to AE, a company in whose case extraordinary event of amalgamation took place during relevant year, could not be accepted as comparable and was decided in favour of the assessee. Similarly in the case of Pr. Commissioner of Income Tax Vs. J.P Morgan India (P) Ltd. (2019) 102 taxmann.com 335 (Bombay) , the Hon'ble Jurisdictional High Court on the same issue has held as follows:
"(iv) Mr. Percy Pardiwalla, learned senior counsel appearing on behalf of the respondent invited our attention to the final decision of this Court in Pr. CIT v.
Aptara Technology (P.) Ltd. [2018] 92 taxmann.com 240 and Pr. CIT v. PTC Software (I) (P.) Ltd. [2019] 101 taxmann.com 117 (Bom.). In both the above decisions this Court has taken a view that merger/amalgamation is an extra ordinary event and would have an impact /effect on the financial results of the company. Thus, in both the aforesaid decisions, this Court upheld the view of the Tribunal that where merger/amalgamation have taken place and it is not a normal event then such a company would cease to be comparable. This of course is subject to the Revenue being able to show that amalgamation/merger did not have any effect of the profitability of the company. This has not been shown by the Revenue either to the Tribunal or before us. Therefore, this issue stands covered by the decision of this Court in Aptara Technology (P.) Ltd.'s case (supra) and PTC Software (I) (P.) Ltd.'s case (supra) in favour of the respondent. This more particularly in view of the absence of the Revenue even attempting to show that the merger and amalgamation that took place in the case of comparable M/s. Keynote Corporate Securities Limited was such that it would not have any impact on its profitability. It is true that in case of PTC Software (I) (P.) Ltd. case (supra) this question has been admitted, however, the admission was on the facts and circumstances of that case. In any case the issue now stands concluded by final orders of this Court in case of Aptara Technology (P.) Ltd. (supra) and PTC Software (I) (P.) Ltd.'s case (supra) and it is being followed.
(v) In view of the above, as the proposed question is covered by the decision of this Court, no substantial question of law arises. Thus, not entertained."
9. That even the Pune Bench of the Tribunal in the case of Brintons Carpets Asia (P) Ltd. Vs. Deputy Commissioner of Income Tax, ITA No.1312 & 1349/PN/2015 dated 29th March, 2019 observed that the assessee before the Tribunal had first claimed that Accentia Technologies Ltd. cannot be selected in the final list of comparables as during the year under consideration, there was an extraordinary event of amalgamation. Thereafter, the Tribunal has analyzed how and what extraordinary event took place in that case and in such scenario, the company I.T.A. No.718/Bang/2022 29 Assessment Year: 2017-18 cannot be considered as comparable one and the relevant extracts in this regard are as follows:
"13. The learned Authorized Representative for the assessee has pointed out that though the CIT (A) says that there is no such amalgamation but his finding is totally incorrect. In this regard, reliance was placed on the ratio laid down by Pune Bench of Tribunal in Dover India (P.) Ltd. v. Dy. CIT [2017] 88 taxmann.com 115 (Pune - Trib.), wherein for assessment year 201011 itself, the said concern Accentia Technologies Ltd. was excluded being high end KPO service provider. Further, the Tribunal in BNY Mellon International Operations (India) (P.) Ltd. (supra) have noted the extraordinary event of acquisition and also amalgamation of another concern and held that the said concern could not be selected as comparable. The relevant findings of Tribunal are in paras 12 and 13, which read as under:--
'12. The next concern against which the assessee has raised objections is Accentia Technologies Ltd. on the ground of extraordinary events during the year under consideration. The said concern had acquired IQ group of companies in the United Kingdom and there was amalgamation of Asscent Infoserve Pvt. Ltd. with the said concern and because of these extraordinary events, the margins of said companies should not be included in the final set of comparables. The Pune Bench of Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (2016) 72 taxmann.com 352 (Pune - Trib) and Cummins Turbo Technologies Ltd. v. DCIT (2017) 79 taxmann.com 260 (Pune - Trib) has held that the said concern cannot be accepted as comparable. The Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (supra) held as under:--
"14. We find that the Tribunal in assessee's own case in assessment year 2008-09 in ITA No.2235/PN/2012, order dated 02.02.2015 had held that the said concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of assessee with its associate enterprises in assessment year 2009-10 in ITA No.267/PN/2014, order dated 29.04.2015. The Tribunal vide order dated 02.02.2015 had held that the concern Accentia Technologies Ltd. could not be included in the final set of comparables holding as under:--
"13. Next, assessee had contended that Accentia Technologies Ltd. has been wrongly included by the TPO as a comparable concern. As per the assessee, the said concern was engaged in functionally different activities. It was pointed out that the said concern is engaged in providing medical transaction, billing and coding services, application development & customization (segmental data not available). Moreover, it was contended that the sales/turnover of the said concern was more than Rs. 50 crores for the year under consideration which did not meet with turnover filter applied by the assessee. On this point, it was pointed out that the assessee had selected I.T.A. No.718/Bang/2022 30 Assessment Year: 2017-18 sales/turnover filter of 1-50 crores i.e. any concerns having a turnover exceeding Rs. 50 crores were excluded. Thirdly, it was pointed out that the activities of the said concern were not comparable to the activities of the assessee.
11. The TPO has noted the aforesaid objections of the assessee in para 18.1 of his order and has rejected the same by merely noticing that 75% of the revenue/income of the said concern is from ITES and therefore it is to be considered as a comparable. Before us, the Ld. Representative for the assessee has reiterated the submissions put-forth before the TPO in order to justify exclusion of the said concern from the list of comparables. In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. v. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited v. DCIT, (2013) 32 taxmann.com 21 (Hyd.).
15. We have considered the submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable."
15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from the final set of comparables."
13. Following the same parity of reasoning as in Aptara Technologies Pvt. Ltd. v. ACIT (supra) and Cummins Turbo Technologies Ltd. v. DCIT (supra), we hold that Accentia Technologies Ltd. cannot be compared as comparable because of extraordinary events of acquisition and amalgamation during the year. Accordingly, we direct the Assessing Officer/TPO to exclude Accentia Technologies Ltd. from final list of comparables."
I.T.A. No.718/Bang/2022 31 Assessment Year: 2017-18
10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the assessee in ITes segment."
14.5 In view of the above order, we direct the AO/TPO to exclude SPI Technologies Pvt. Ltd. from the list of comparables selected for ITeS segment.
iv. Eclerx Services Ltd.
15. Ld. A.R. submitted that the company offers solutions in the nature of Knowledge Process Outsourcing (KPO) Services. The Appellant submits that the nature of the high end KPO services demanding presence of different skillsets performed by the Company cannot be compared to the low end ITES functions performed by the Appellant.
15.1 Further, Eclerx Services Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (Refer Page 163 of the Case Law Compilation, Para 22-30). Below is the relevant extract from the order for ready reference:
22. Regarding exclusion of Eclerx Services Ltd., the assessee argued that this company is a KPO company and hence, it is not a good comparable. The DRP observed 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. In view of the above, ITeS service's 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. The DRP noted that the functional profile of this company was similar to the assessee.
23. Regarding the amalgamation of wholly owned subsidiary Agilyst Consulting Pvt. Limited has taken place with effect from 1-4-2015, the DR observed that the assessee has not demonstrated any increase in profits due to this amalgamation.
Therefore, this amalgamation has no impact on comparability. Accordingly, the plea was rejected.
24. With regard to acquisition resulting in inorganic growth, the DRP noted that the company has acquired entire shareholding of CLX Europe SPA, Italy, as on 22nd April 2015 and this acquisition was made by the company's overseas subsidiary e-
I.T.A. No.718/Bang/2022 32 Assessment Year: 2017-18 Clerx Investments (UK) Ltd. Therefore, there is no merit of the objection, as the standalone financials of this company are considered for comparability.
25. The assessee also raised the objection that there is increase in revenue, but according to the DRP, it has failed to bring on record any evidence to suggest that this abnormal inorganic growth has impacted the profit margin of the company. It is observed that the profit margin of this company has been consistently at the same level during the last few years. The ALP margin is determined with reference the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. The DRP was of the opinion that it will not be proper to reject a comparable only on account of inorganic growth of top line, which otherwise is functionally comparable.
26. The DRP further observed that it was consistently held that high profit margin as such cannot be reason for exclusion when it is otherwise functionally comparable. Accordingly, there is no need to reject a functionally comparable company on account of having super profits.
27. The Assessee submitted that Eclerx suffers business concentration risk unlike the Assessee, who operates as a risk-free entity. The DRP observed that as far as the limited risk in the case of captive service providers is concerned, if this argument is accepted then it cannot be compared to any company as most of the companies will be independent companies. Rather it should be compared to independent companies only as the price received for the services by them will be determined by market forces, which is not the case of the assessee. The assessee itself can be characterized as a contract service provider, which means that it operates on a cost plus model. Therefore, this argument was also rejected.
28. Thus, the DRP upheld the rejection of this company as a comparable.
29. We have heard both the parties on the issue. This company has also been considered as not comparable in assessee's own case for A.Y. 201415 in IT(TP)A No. 3181/Bang/2018 dated 21-5-2020 wherein it was observed as under :--
"It is noted that this company is involved in high-end KPO services whereas assessee is providing IT enabled services by rendering remote data processing in the field of reinsurance. In our opinion functions performed by this company is not similar to that of assessee even though assessee before us also carries out certain services on contract basis. Ld. AR has placed reliance upon decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573/377 ITR 533 Hon'ble Court had held that once a company I.T.A. No.718/Bang/2022 33 Assessment Year: 2017-18 falls into the category of high-end KPO, it cannot be functionally comparable with a BPO service provider like that of assessee.
Applying this reissue in the present case, we direct Ld.AO to eliminate this comparable from final list."
30.In view of the above order of the Tribunal, we are inclined to direct that Eclerx Services Ltd. be excluded from the list of comparables.
15.2 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.
15.3 In view of the above-mentioned reasons, the Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment.
15.4. Ld. D.R. relied on the order of Ld. DRP 15.5 We have heard the rival submissions and perused the materials available on record. This company is not considered as comparable in the case of ADP Pvt. Ltd. cited (supra) in assessment year 2016-17, wherein they excluded the comparable ground No.7 of that order vide para 17 to 17.4 wherein held as under:-
"17. Eclerx Services Ltd.: The ld. AR of the assessee submitted that this company may be excluded as comparable from the final set of comparables as this company is engaged in providing KPO services, different to low end BPO services provided by the assessee. He submitted that Safe Harbor Rules recognizes ITeS activities under tow distinct categories i.e., BPO and KPO and activities of this company falls under KPO services. He submitted that the services provided by this company of following:
(a) Contract Risk Review,
(b) Margin Exposure Management,
(c) Online Operations and web analytics,
(d) CRM and business intelligence,
(e) Content creation,
(f) business process consulting.
17.1 He further submitted that as per NIC code provided in the annual report, this company has been classified as KPO and has been awarded as leading KPO's in India, basis award and accolades received. He submitted that this company has undertaken the following extraordinary transactions thereby impacting the operating margins:
I.T.A. No.718/Bang/2022 34 Assessment Year: 2017-18
(a) Acquisition of CLX Europe
(b) Amalgamation of Agilest consulting (P.) ltd.
17.2 He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd.
(supra) wherein the co-ordinate bench excluded this company as comparable.
17.3 The ld. DR, on the other hand submitted that this company is engaged in rendering ITeS, therefore, functionally comparable to assessee. He submitted that amalgamation has no impact on the profits of the company. He, therefore, submitted that TPO/DRP has rightly included this company as comparable to assessee company.
17.4 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the coordinate bench in assessee's own case for AY 2014- 15 cited supra has excluded this company as comparable by observing as under:
38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under:
"6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS e-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the objection was that the said company renders 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 Co-ordinate Benches in excluding the above three comparables.
8. We have considered the rival submissions and perused the order of the DRP and Co- ordinate Benches. As far as M/s. TCS e-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 I.T.A. No.718/Bang/2022 35 Assessment Year: 2017-18 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under:
ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS eSERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule- N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009- 10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also.
11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT vs. 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 e-Serve 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 the above decision of the Co-ordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables.
I.T.A. No.718/Bang/2022 36 Assessment Year: 2017-18 We observe from the financial statements that this company is functionally dissimilar and engaged in KPO and BPO services and amalgamation of Agilest Consulting Pvt. Ltd., vide page No. 23 of paper book volume -1 para 8 and acquisition of CLX Europe which impacts on the profits of the company. From the financial statements of the Chairman's message placed at page No. 18 of paper book volume - 1, it has been categorically stated that after acquisition of CLX Europe, the revenue has grown by 30%, which clearly shows that it impacts on the profitability of the company. These are extraordinary events. Therefore, If an extraordinary event has taken place by way of amalgamation in a company, that company cannot be considered as a comparable as held by the co-ordinate bench of ITAT, Pune, in the case of Entercoms Solutions (P.) Ltd. (supra). Accordingly, we direct the AO/TPO to exclude this company as comparable from the list of comparables."
15.6 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company viz. Eclerx Services Ltd. from the list of comparables."
11 In view of the above order of the Tribunal, which is a group company of the assessee, and having same profile of the assessee, we direct the TPO to exclude (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited from the list of comparables and recompute the ALP of the international transaction."
12.1.21 In view of the above order of the Tribunal in assessee's own case and having same profile of the assessee, we direct the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables.
11.2 In view of the above, we direct the AO/TPO to exclude these 3 comparables.
14(e) CES Limited:
12. This issue came for consideration in ITA No.133/Pune/2021 dated 18.6.2021 in the case of Credence Resources Management Pvt. Ltd., wherein the Tribunal has held as under:
"15. The contention of the assessee are that as per the annual report of CES Limited for FY 2015-16, the company is engaged in providing IT and ITes services. The Director's report has further provides the detailed disclosure of activities carried out under ITes segment which describes that the revenue under this segment is generated from BPO as well as KPO activities for which the bifurcated information is not available. Therefore it cannot be comparable to the business of the assessee which is engaged in BPO services. Further the assessee contended that I.T.A. No.718/Bang/2022 37 Assessment Year: 2017-18 as per the website of the company the BPO segment is engaged in providing varied activities which includes fraud prevention and process automation. Thus, CES Limited is engaged in high end activities which are distinguished from low end back office activities of the assessee.
16. The TPO has observed that CES limited is engaged in the business of ITes only. The TPO even referred the annual report of this company at Page 39 where IT enabled services are comprising of BPO and KPO and still the TPO was of the opinion that since at Page 12 of the annual report of this company, there are ITes activities which formed 79% of the revenue and therefore, it is functionally comparable with that of the assessee company and hence, it was retained.
17. The Ld. DRP while upholding the observation of the TPO at running Page 70 of its order observed that the company derives revenue mainly from provision of ITes which works out to 79.75% of its total operational revenue for the year. Therefore, this company is very much functionally comparable with that of the assessee company. In respect of the submissions of the assessee that ITes comprises two services i.e. BPO & KPO services, referring to the Director‟s report, the Ld. DRP observed that they have only made reference in the ITes segment only and whether it is BPO or KPO services has nowhere been referred to. That further, the Ld. DRP also observed that most of the information was gathered from website of the company which may not always be reliable and relevant.
18. The Ld. Counsel for the assessee at the time of hearing reiterated the submissions made in respect of exclusion of Manipal Digital Systems Private Limited, for this company also. He took us through the annual report of the company, P & L account, notes of financial accounts and segmental information and therein, it is evident that companies operations predominantly relate to providing IT services in two primary business segments viz. IT services and IT Enables Services (ITes). The company considered the business segment as the primary segment and Geographical segment based on the location of the customers as the secondary segment.
19. Having perused the relevant documents on record, analyzing the facts and circumstances, we find that the Revenue Authorities have not clearly stated regarding involvement of BPO/KPO ITes services as evident from Page 39 of the annual report of the company where principal business activities of the company has been given. Both the Revenue Authorities TPO as well as DRP have gone into the revenue generation aspect from ITes which is at around 79%. That however, they have not specifically given reasons why this company should be included in the final set of comparables. The inclusion of KPO along with BPO is also not disputed by the Department and in respect thereof, following the decision of the Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT, ITA No.102/2015 I.T.A. No.718/Bang/2022 38 Assessment Year: 2017-18 dated 10.08.2015, it is an undisputed fact therefore that the assessee in the present case is involved in ITes services which is primarily a call center. However, CES Ltd is doing both BPO and KPO services. The principle involved in the judgment of the Hon'ble Delhi High Court (supra.) is crystal clear that segregation of ITes services has to be categorically conducted before classifying as functionally comparable with another. In this case Revenue Authorities have only looked into the revenue earning from ITes segment and included this company as comparable. The facts remains both these companies are functionally different. We therefore, direct the AO/TPO to exclude CES Limited from the final set of comparables with that of the assessee company."
12.1 Accordingly, in view of the above we direct the AO/TPO to exclude CES Limited from the list of comparables.
14(f) Ultramine Pigments Ltd.
13. Regarding exclusion of this comparable, the ld. DRP observed that on perusal of the annual reports, it is seen that it fails service income filter at entity level. It is not a correct approach to apply filters at segmental level. The filters are applied to select a group of similar companies and hence, all the filters are to be applied at entity level only. Then the functional comparability is seen with respect to specific companies. So, if this company fails at entity level in application of the service income filter, then this cannto be taken as a comparable. It is seen that from the Annual Report submitted before us, the figures of earnings in foreign exchange through BPO and its operational income is as under as perpage 79 of the annual report:
Earnings from ITES and BPO activities is Rs.31,36,30,189/-
Total revenue Rs.256,08,95,877/-
13.1 Thus, the ld. DRP observed that the BPO earning comes to only 12.24% and thus, that it fails the service income filter adopted by the TPO. We are of the opinion that this is the initial filter on the basis of which the comparables are selected. So if a company falls this filter, then it will not be selected as a comparable at the first place. Therefore, the service income has to be seen at the entity level in all the cases. Hence, the TPO is directed to exclude the I.T.A. No.718/Bang/2022 39 Assessment Year: 2017-18 company as comparable. As it fails the service income filter adopted by the TPO, we do not find it contingent to discuss on the other allegation of the assessee on exclusion of this filter. The intangibles referred in the Asset Schedule represent the computer software. For any software company, it is essential to have rights of software for coding purposes. Therefore, such intangibles cannot be equated with the intangibles acquired/created by the assessee to provide specific enduring benefit. We also note that intellectual property referred to, as per the annual report, is amortized over its estimated useful life of 2 years. As a result, the fixed asset schedule for the year ended 31.3.2017 does not show any intellectual property. Also, 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.
14. In our opinion, the above findings of the ld. DRP are self-contradictory. This should be re-examined at the end of AO/TPO. Accordingly, this issue is set aside to the file of AO/TPO for reconsideration.
14(g) SPI Technologies Ltd.
15. After hearing both the parties, we are of the opinion that this has been considered in assessee's own case in assessment year 2016-17 in IT(TP)A No.342/Bang/2021 vide order dated 14.10.2022 wherein it has been excluded by observed as under:
I.T.A. No.718/Bang/2022 40 Assessment Year: 2017-18 "18. Since the profile of the assessee in the instant case and the assessee in the case of M/s.Global E-Business Operations Pvt. Ltd. are the same and the assessment year also being 2016-2017, following the above order of the Tribunal, we direct the TPO to exclude (i) Infosys BPO Limited, (ii) SPI Technologies Pvt. Ltd., and (iii) Eclerx Services Limited from the list of comparables and re-compute the ALP of the international transaction." 15.1 In view of this, we direct the AO/TPO to exclude this company from the list of comparables.
Ground No. 15 - For Inclusion Comparable.
16. In ground no. 15, the assessee pressed only following 3 comparables:
a) BNR Udyog Ltd.
b) Crystal Voxx Ltd.
c) RS Systems Ltd.
16.1 The assessee has not pressed Allsec Technologies Ltd. & Cosmic Global Ltd. Which are dismissed as not pressed.
Ground No. 15 a- BNR Udyog Ltd.
17. Regarding this issue, the ld. DRP observed that the TPO has applied the filter-that minimum 75% of operating revenue should be from exports. We find that the Indian Law supports the use of export sales/ total sales as a filter vide Rule 10B(2)(d} which provides that 'comparability of an international transaction shall be judged with respect to conditions prevailing in markets in which respective parties to the transactions operate, including the geographical location and size of the market.....,'. Further, para 4.43 of the OECD Transfer Pricing Guidelines 2010 provide 'foreign sales/total sales' as one of the quantitative filter. When tested party's international transaction is compared, then it is implicit that comparison should be made with the entity having sjmilar transaction: Therefore, if two transactions were to be substantially similar, the export sales should be substantially similar if not same. The amount of I.T.A. No.718/Bang/2022 41 Assessment Year: 2017-18 substantial similarity by convention is accepted as 75% export sales to total sales. In this connection, it is presumed that net margin from export sales irrespective of market it is exported to, is similar. Therefore, market differences do not make significant impact as far as export transactions are concerned. Therefore, the ld. DRP agreed with the TPO on this filter. Moreover, export revenue filter is impliedly approved in the following cases:
1. Cisco Systems (India) P Ltd v DCIT(2014) 50 taxmann.com 280 (bang) para 27.4 Motorola Solutions Pvt Ltd (TS-240-ITAT-(2014) (Dei)-TP)
2. Hyundai Motors India Engg (P) Ltd vs ITO (2014) 44 taxmann. com 34 (Hyd) para 7(x)
3. 24/7 Customer.com Pvt Ltd v DCIT(2013) 140 ITD 344
4. Genisys Integrating Systems (India) Pvt Ltd vs DCIT(2011) 64 DTR (Bnag) (Trib) 225
5. Exxon Mobil company India Pvt Ltd vs DOT ITA 8311/Mum/2010 dated 10.06.2011 17.1 On perusal of the annual report, the ld. DRP observed that from disclosure in notes on additional information of statement of profit and loss account of the Annual Report for the F.Y. 2015-16 that earnings in foreign exchange is Rs.24.77 crore whereas the total revenue from operations is R$.34.99 crore, Therefore, ithas an export revenue of70.79% of total revenue from operations and hence it is rightly rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO. As a result, this objection is found unacceptable by the ld. DRP. 17.2 As seen from above findings of ld. DRP, the assessee has passed through the foreign exchange filter and it should be considered as a comparable.
Accordingly, this issue is remitted to AO/TPO for fresh consideration. Ground No. 15 b- Crystal Voxx Ltd.
18. The ld. A.R. submitted that this comparable passed throuigh the search matrix followed by the TPO and qualifies all filters and may go back to the TPO for reconsideration.
I.T.A. No.718/Bang/2022 42 Assessment Year: 2017-18 18.1 We accede to the request of the assessee's counsel and remit it back to the file of AO/TPO for fresh consideration to examine whether assessee passed through all the filters adopted by the TPO or not. The issue is remitted to the file of AO/TPO for fresh consideration.
Ground No. 15 c- R System International Ltd.
19. After hearing both the parties, we are of the opinion that this has been considered by the Tribunal in the case of Global e-Business in IT(TP)A No.174/Bang/2022 cited (supra) wherein held as under:
"13.3 The ld. DR submitted that the Ld. DRP given findings that the above companies do not figure in the search matrix of the TPO. The ld. DRP has already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted by the TPO. Based on the fresh search, the TPO has identified the comparables. The assessee can only ask those companies out of the TPO's search matrix which have been wrongly rejected by the TPO. As these companies do not figure in the TPO's search matrix, ld. DRP opined in his report that the functionality is not required to be seen at all, as it amounts to cherry picking.
13.4 We have heard the rival submissions and perused the materials available on record. The ld AR submitted that this comparable may go back to file of AO/TPO to verify whether it satisfies all the filters adopted by AO/TPO. We accede to the request of the ld. AR. Accordingly, these two comparables i.e. Bhilwara Infotechnology Ltd. and R. Systems International Limited are remitted to the file of AO/TPO for fresh consideration to verify whether they satisfy all the filters adopted by AO/TPO while selecting comparables. Ordered accordingly."
19.1 In view of the above order of the Tribunal, the issue is remitted to the file of AO/TPO for fresh consideration.
Additional ground:
20. The assessee has raised additional ground with regard to inclusion of following comparables:
1) ISN Global Limited &
2) Bhilwara Technology Ltd.
I.T.A. No.718/Bang/2022 43 Assessment Year: 2017-18 20.1 Regarding Bhilwara Technology Ltd., as discussed in immediate earlier para in paras 13.3 & 13.4 of the order of this Tribunal in the case of Global e- Business in IT(TP)A No.174/Bang/2022 cited (supra), wherein held as under:-
"13.3 The ld. DR submitted that the Ld. DRP given findings that the above companies do not figure in the search matrix of the TPO. The ld. DRP has already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted by the TPO. Based on the fresh search, the TPO has identified the comparables. The assessee can only ask those companies out of the TPO's search matrix which have been wrongly rejected by the TPO. As these companies do not figure in the TPO's search matrix, ld. DRP opined in his report that the functionality is not required to be seen at all, as it amounts to cherry picking.
13.4 We have heard the rival submissions and perused the materials available on record. The ld AR submitted that this comparable may go back to file of AO/TPO to verify whether it satisfies all the filters adopted by AO/TPO. We accede to the request of the ld. AR. Accordingly, these two comparables i.e. Bhilwara Infotechnology Ltd. and R. Systems International Limited are remitted to the file of AO/TPO for fresh consideration to verify whether they satisfy all the filters adopted by AO/TPO while selecting comparables. Ordered accordingly."
20.2 In view of the above, this issue is also remitted back to the file of AO/TPO for similar consideration.
20.3 Regarding inclusion of ISN Global Ltd., after hearing both the parties, we are of the opinion that as held by the Tribunal in Global e-Business Operations Pvt. Ltd. In IT(TP)A No.174/Bang/2022 cited (supra), wherein held as under:
"13.5 The ld. DR stated that the Ld. DRP has observed in his order that this comparable do not figure in the search matrix of the TPO. The ld. DR stated that the ld. DRP has already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted by the TPO. Based on the fresh search, the TPO has identified the comparables. The assessee can only ask those companies out of the TPO's search matrix which have been wrongly rejected by the TPO. As these companies do not figure in the TPO's search matrix, the ld. DRP opined in his observation that the functionality is not required to be seen at all, as it amounts to cherry picking. Against this assessee is in appeal before us and submitted that this company is functionally comparable to assessee and passes through all filters adopted by the AO/TPO.
13.6 We have heard the rival submissions and perused the materials available on record. This company is considered as not comparable by Ld. DRP itself in next assessment year i.e. 2018-19 and I.T.A. No.718/Bang/2022 44 Assessment Year: 2017-18 he observed that on perusal of the annual report on record no doubt the company is engaged in business of business process outsourcing and data processing. As per the information in the annual report, the company is into ITES services and functionally comparable to the assessee. Hence, the ld. DRP directed the TPO to verify the financials and consider the company for inclusion if satisfies all the filters.
13.7 In view of the above, we are of the opinion that for this assessment year 2016-17, the ld. DRP is not justified in excluding this comparable from the list of comparable. Accordingly, we direct the AO/TPO to include this company ISN Global Solutions Ltd. in the list of comparables."
20.3 Accordingly, in view of the above order of the Tribunal, we direct the AO/TPO to include this company in the list of comparables.
21. In the result the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 31.03.2023
Sd/- Sd/-
(CHANDRA POOJARI) (ANIKESH BANERJEE)
Accountant Member Judicial Member
AKV/VG/SPS
Copy of the order forwarded to:
(1)The Appellant
(2) The Respondent
(3) The CIT
(4) The CIT (Appeals)
(5) The DR, I.T.A.T.
True Copy
By Order