Income Tax Appellate Tribunal - Delhi
Utstarcom Inc., New Delhi vs Ddit, New Delhi on 25 October, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-2' : NEW DELHI)
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.1829/Del./2014
(ASSESSMENT YEAR : 2009-10)
UT Starcom Inc., vs. DDIT, Circle 2 (2),
49, First Floor, LSC No.1, International Taxation,
Plot No.13 & 14, DDA Market, New Delhi
Sector 6, Dwarka,
New Delhi - 110 075.
(PAN : AAACU5017A)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : S/Shri Rajan Sachdev, Maneesh Bawa and
Jitendra Singh, CAs
REVENUE BY : Shri H.K. Choudhary, CIT DR
Date of Hearing : 11.09.2017
Date of Order : 25.10.2017
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. UT Starcom Inc. (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 22.01.2014, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 2 ITA No.1829/Del/2014 (for short 'the Act') qua the assessment year 2009-10 on the grounds inter alia that :-
"1. Denial of claim under Section 10A of the Act On the facts and in the circumstances of the case and in law, the learned Deputy Director of Income- tax, Circle 2(2), International Tax, New Delhi ('Ld. AO') under directions issued by the Hon'ble Dispute Resolution Panel - II, New Delhi ('Hon'ble DRP'), erred in not allowing the claim of benefit under section 10A of the Income-tax Act, 1961 ('the Act') of Rs. 58,57,059 to the Appellant's total income.
1.1 That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in denying and the Hon'ble DRP has erred in confirming the action of the Ld. AO on the disallowance of the Appellant's claim of deduction under section 10A of the Act amounting to Rs. 58,57,059.
1.2 That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding and the Hon'ble DRP has further erred in confirming the action of the Ld. AO, that there is no export of software by the Branch in India to the Head Office.
1.3 That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding and the Hon'ble DRP has further erred in confirming the action of Ld. AO, that the Appellant is not a separate taxable entity and' as a consequence a person cannot earn profit from itself.
1.4 That on the facts and circumstances of the case and in law, the Ld. AO and the Hon'ble DRP has failed to appreciate that if the approach adopted by them is considered to be in accordance with law, no income could be said to result in the hands of the Appellant in India.3 ITA No.1829/Del/2014
1.5 That on the facts and circumstances of the case and in law, the Ld. AO and the Hon'ble DRP have reached to erroneous conclusion of disallowing the benefit claimed under section 10A of the Act by placing reliance on judicial precedents which are not applicable to the Appellant's case.
1.6 That on the facts and circumstances of the case and in law, the Ld. AO has erred in and the Hon'ble DRP has further erred in not following principle of consistency.
2. Transfer Pricing ('TP') adjustment On the facts and in the circumstances of the case and in law, the learned Additional Director of- Income-tax, Transfer Pricing Officer - II (4) (Ld. TPO') and Ld. AO under the directions issued by the Hon'ble DRP erred in making an addition on account of TP adjustment amounting to INR 49,10,761 in relation to Information Technology Enabled Services CITES') rendered by the Appellant to its Associated Enterprise ('AE').
2.1 That on the facts and in the circumstances of the case and in law, the Hon'ble DRP has grossly erred by summarily rejecting the Appellant's objections and not considering Appellant's arguments, contentions and material placed on record during the course of proceedings under section 144C of the Act.
2.2 That on the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO of disregarding, without citing any material defects, the benchmarking analysis and comparable companies selected by the Appellant in its TP study maintained as per section 92D of the Act read with rule 10D of the Income-tax Rules, 1962 ('the Rules') and various submissions made by the Appellant.
4 ITA No.1829/Del/20142.3 That on the facts and in the circumstances of the case and in law, the Ld. TPO and Hon'ble DRP has erred in adopting an arbitrary search strategy for selection of alleged comparable companies. Specifically, the Ld. TPO and Hon'ble DRP has grossly erred -
2.3.1 By adopting inappropriate filters in the process of selecting alleged comparable companies 2.3.2 By adopting companies as comparable to the Appellant having complete disregard to their functional comparability 2.3.3 By disregarding the multiple-year data approach and considering the data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements.
2.4 That on the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in not allowing appropriate adjustment(s) in accordance with the provisions of rule 10B of the Rules.
2.5 That on the facts and in the circumstance of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in not following the principle of consistency.
2.6 That on the facts and in the circumstance of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in making the adjustment without demonstrating that the Appellant had any motive to shift profits outside of India.
3. Interest under section 2340 and section 244A of the Act 5 ITA No.1829/Del/2014 3.1 That on the facts and circumstances of the case and in law, the Ld. AO has erred in withdrawing interest under section 244A and levying interest u/s 234D of the Act consequent to the above disallowances.
4. Penalty proceedings under section 271 (1 )(c) of the Act 4.1 That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act as per the impugned order consequential to the above disallowances."
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : UT Starcom Inc's India Branch is the Indian Branch of UTS US and is into providing software development services to UTS US and IT enabled customer support services to the group customers in the Asia-Pacific region. During the year under assessment, the taxpayer entered into international transactions with its AE as under :-
Nature of international Method Amount paid Amount transaction selected (INR) received (INR) Software Development TNMM - 75,869,700 Services IT Enabled Services TNMM - 30,994,717 Purchase of finished goods TNMM 2,308,785,581 -
Purchase of fixed assets TNMM 4,649,356 -
Sale of fixed assets CUP - 1,931,829
Cost Recharges TNMM 654,968,444 -
Reimbursement of expenses CUP - 822,465
6 ITA No.1829/Del/2014
3. Ld. TPO made the adjustment of international transactions entered in the Associated Enterprises (AE) in respect of provisions of information technology (ITES).
4. The taxpayer in order to benchmark its international transactions qua ITES has chosen 20 comparables out of which the TPO has proposed to select 10 comparables by treating 3 more comparables having average of 68.69%. The ld. TPO after disposing of the objections raised by the taxpayer qua the proposed comparables to be taken for benchmarking the international transactions finally selected 5 comparables having average OP/OC of 38.03% and accordingly computed the Arm's Length Price (ALP) of international transaction qua provisions of ITES as under:-
S.No. Comparables OP/OC
(%)
1. Accentia Technologies Ltd. 52.52
2. Cosmic Global Ltd. 50.70
3. Crossdomain Solution Pvt. Ltd. 25.63
4. Infosys BPO 24.28
5. Coral Hub 37.03
Average 38.03
5. The taxpayer carried the matter before the ld. DRP by way of raising objections and the ld. DRP has directed to eliminate one comparable, namely, Coral Hub Limited from the final set of comparables having average mean of 36.17% as against taxpayer's 7 ITA No.1829/Del/2014 net cost + margin (NCPM) of 15%. In compliance to the directions issued by the ld. DRP, AO made adjustment of Rs.49,10,761/- on account of ALP of international transaction qua ITES. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
6. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUND NO.1
7. Ground No.1 is general in nature and does not require any adjudication.
GROUND NO.2.1
8. Ground No.2.1 is not pressed, hence dismissed as not pressed.
GROUNDS NO.2.2, 2.3, 2.4, 2.5 & 2.6
9. Undisputedly, Transactional Net Margin Method (TNMM) and Net Cost Plus Margin (NCPM) as Profit Level Indicator (PLI) as most appropriate method adopted by the taxpayer for benchmarking its international transaction pertaining to ITES has 8 ITA No.1829/Del/2014 been accepted by the TPO/DRP/AO. Functional profile of the taxpayer is also not in dispute. Out of 6 comparables chosen by the TPO, 1 comparable - Coral Hub Limited has been eliminated by the ld. DRP and in compliance thereto, the AO recomputed the ALP in respect of international transactions qua provision of ITES at Rs.3,59,05,478/- (Rs.3,59,05,478/- minus Rs.3,09,94,717/- = ALP determined by the assessee - Rs.49,10,761/-).
10. The ld. AR for the taxpayer to cut short his arguments sought to exclude 4 comparables from the final set of comparables chosen by the TPO/DRP for benchmarking international transaction qua ITES viz. Accentia Technologies Ltd., Cosmic Global Limited, Crossdomain Limited and Infosys BPO Limited.
11. Undisputedly, the taxpayer is a low risk captive ITES provider to its AE and its functional profile of the taxpayer is not disputed by the Revenue as is evident from the order passed by the ld. TPO as well as DRP. The taxpayer claimed to have remunerated at cost + mark-up of 17.55% as against margin of comparables computed by the TPO/DRP at 36.17% for provision of ITES. It is also not in dispute that functional profile of the taxpayer has not undergone any change during the year under assessment.
9 ITA No.1829/Del/2014
12. However, the ld. DR contended that the taxpayer is not a low end service provider as its major clients are BSNL, MTNL, etc. and drew our attention towards page153 Vol.I of the paper book. In para 8(a) of Form No.3CD, available at page 153 of the paper book, shows that the taxpayer is engaged inter alia in the business of development and export of telecommunication software, services and marketing of telecom related equipment and planning, engineering, supply, installation, commissioning, testing, operation and maintenance of telecommunication turnkey projects. Further, the taxpayer also deals in supply of ADSL CPEs. Ld. DR for the Revenue further drew our attention towards Agreement between the taxpayer and UT Starcom Inc. US wherein taxpayer is shown to have set up an 'Escalation Centre' in India for rendering IT Enabled services in connection with telecommunication network and providing Remote Maintenance Services. Ld. DR also drew our attention towards para 2.3 of ld. DRP wherein the taxpayer is shown into the business of software development services and IT enabled customer support services to UTS US's Customer in Asia- Pacific region. Ld. DR further contended that the taxpayer's escalation centre is not merely a call centre, it is rather resolving the problems of the customers network and it is not a routine BPO. 10 ITA No.1829/Del/2014
13. However, the ld. DR has merely relied upon preamble of the Agreement so as to differentiate the functional profile of the taxpayer to treat it as high end service provider. But when we examine para 4.3.17 of Transfer Pricing document, available at page 99 of the paper book Vol.I, it is categorically mentioned that, "As and when customers of US encounter any difficulty with the operation of their UTS network, they contact with Escalation Centre for repair/maintenance/trouble shooting. In the Escalation Centre, UTS India Branch personnel open a trouble ticket, allocate engineers, and use simulation techniques (i.e. replicate the problems faced by the customers using the equipment at the Escalation Centre) to try and resolve the problem. UTS India Branch personnel then guide the customers step-by-step to resolve the problem on their (customers') network".
14. Furthermore para 4.3.18 of Transfer Pricing document goes to prove that escalation centre has a team of approximately ten people, comprising mainly postgraduates/engineers and its activities are essentially in the nature of IT enabled back office support services. Customer problems are mostly resolved off-site and in case the problem is not resolved, it escalates the problem to the UTS office in the region. So, merely by relying upon the preamble, we cannot call the taxpayer per se high end service 11 ITA No.1829/Del/2014 provider. Moreover, ld. TPO/ DRP have never challenged the profile of the taxpayer and the entire Agreement along with TPO documentation has to be read in entirety. So, in these circumstances, the contentions raised by the ld. DR are not sustainable and we are of the considered view that the assessee is a low end risk free captive ITES provider to its AE. Moreover functional profile of the taxpayer has been accepted by the Revenue in the preceding assessment years and during the year under assessment, there is no change in its business model as the taxpayer is still working for its AE on the basis of its Agreement dated 01.01.2004, available at page 225 of the paper book.
15. Now, we will examine comparables sought to be excluded by the taxpayer from final set of comparables for benchmarking the international transactions one by one.
ACCENTIA TECHNOLOGIES LTD. (ACCENTIA)
16. The taxpayer sought the exclusion of Accentia on the grounds inter alia that there was extra ordinary events which have impacted its PLI; that there is functional dissimilarity in the Accentia vis-à-vis the taxpayer as it is into health care receivables management services. However, ld. TPO/DRP brushed aside the objections raised by the taxpayer by observing that the acquisition 12 ITA No.1829/Del/2014 by Accentia is situated in USA and has no bearing on its business in India and has also not impacted the revenue in the current financial year.
17. When we examine the annual report, available at pages 1 to 67 of the paper book, highlights of the achievement of the Accentia in the year 2008-09 are given as under :-
• Opened a production centre in Kolkata; • Opened a production centre in Chandigarh; • Consolidated the operations of the existing three production units in Hyderabad, and added on more production centre in this city;
• Consolidated the operations of GSR Physician's Billing Service, specialized in Billing and Collections, based in Florida, USA;
• Consolidated the operations of GSR Systems, a software Company specializing in HRCM, based in Florida, USA;
• Completed the acquisition of Oak Technologies Inc., USA and has rapidly increased its customer base from New Jersey and neighbouring areas. High growth potential since we are now offering medical coding and billing services as well;
• Consolidated the operations of Denmed Inc., the acquired Medical Transcription Company based in Salem, Oregon, USA, serving the Portland area; • Streamlined the production operations at the new facility at the Technopark campus, Trivandrum, including the billing operations;
• Started initial work for setting up of an IT Park at SEZ, Visakhapatnam, where the Company owns land.13 ITA No.1829/Del/2014
18. Furthermore, at page 32 of the annual report, performance of Oak Technologies Inc. is highlighted as under :-
"During the current year the Company completed the acquisition of 96% of M/s Oak Technologies Inc., a Healthcare Back Office Processing Company engaged in Medical billing, Coding and Transcription activities and having a global work force of over thousand employees in India, Philippines and USA. In the financial Year 2008, Oak Technologies Inc. achieved a turnover of 10.3 Million USD, Oak Technologies is having its head quarters in New Jersey."
19. Comparability of the Accentia has been examined by the coordinate Bench of the Tribunal in case of Xchanging Technology vs. DCIT in ITA No.1897/Del/2014 order dated 24.04.2015, copy available at pages 20 to 30 of the compendium of case laws, with Accentia which was also providing to its AE Information Technology Enabled Services and has directed to be excluded from the final set of comparables by returning following findings :-
"9.2. We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company for the year in question, which has been placed in the paper book. It can be noticed from page 31 of the Annual report that during the year under consideration this company completed the acquisition of 96% of M/s Oak Technologies Inc., a healthcare back-office processing company engaged in medical billing, coding and transcription activities and having substantial global work force. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ 14 ITA No.1829/Del/2014 (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been taken by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact that there was merger of some entity with Accentia Technologies Ltd., we hold that this company cannot be considered as comparable.
Accordingly, the same is directed to be excluded from the final list of comparables."
20. Accentia has also been ordered to be excluded from the final set of comparables for benchmarking international transactions in case of Ameriprise India Pvt. Ltd. vs. DCIT in ITA No.7014/Del/2014 order dated 19.01.2016 and the said order has already been upheld by the Hon'ble jurisdictional High Court in ITA No.461/2016 dated 19.10.2016 by making following observations :-
" The assessee reported international transactions for the relevant year, with its AE. In its transfer pricing report, it included certain details and data of certain comparables. The TPO and thereafter the DRP included certain other comparables; the assessee's grievance with respect to the inclusion of the three comparables was accepted in the appeal by the impugned order. The comparables so excluded were M/s Accentia Technologies, iGate Global Consultants Ltd and Infosys BPO. The exclusion was on the ground that in respect of each comparable, certain extraordinary events had occurred during the previous periods which distorted the profitability thereby increasing the margin."15 ITA No.1829/Del/2014
21. Even functional business model of Accentia vis-à-vis the taxpayer is dissimilar as the Accentia is one of the very few companies that have expertise in all the areas of Transcription, Coding, Billing and Collections. It has over a decade of experience in this field, and is the only company in this segment listed in the Bombay Stock Exchange. It has Offshore Development Centers (ODCs) in different cities of the country and has over 3000 trained professionals working round the clock, all 365 days of the years. Furthermore, Accentia is a giant company having 3000 trained professionals as against 12 employees working with the taxpayer.
22. So, in view of what has been discussed above, we hereby direct to exclude Accentia from the final set of comparables for benchmarking the international transactions qua ITES. COSMIC GLOBAL LIMITED (COSMIC)
23. The taxpayer sought to exclude Cosmic from the final set of comparables on ground of different business model, abnormal profit and have been providing other services like medical transcriptions and its BPO services is very insignificant i.e. 5.11%. When we examine profit & loss account, available at page 76 of the annual report, Cosmic has paid translation charges of Rs.3,00,25,326/- and BPO services is very insignificant to the tune 16 ITA No.1829/Del/2014 of 5.11%. The taxpayer outsourced significant portion of its services i.e. translation services as is evident form profit & loss account discussed above.
24. Not only this, Cosmic is having volatile profits over the years which is tabulated as under :-
FY 2006-07 23.40%
FY 2007-08 24.30%
FY 2008-09 48.20%
FY 2009-10 18.28%
(relevant FY)
FY 2010-11 8.06%
25. Hon'ble High Court of Delhi in case of Rampgreen Solutions Pvt. Ltd. vs. CIT in ITA 102/2015 order dated 10.08.2015 affirmed the decision rendered by the Tribunal excluding the Vishal on the ground that Vishal's expenditure on employment cost during the relevant period vis-à-vis tested party apparently for the reason that most of its work was outsourced to other vendors viz. service providers. So, in the instant case also, substantial work has been outsourced by the Cosmic which makes it unfit as comparable vis-à-vis assessee company.
26. Furthermore in case cited as The Pr. CIT vs. Xchanging Technology Services India P. Ltd. in ITA 813/2015 order dated 20.10.2015, Hon'ble High Court upheld the findings returned by 17 ITA No.1829/Del/2014 coordinate Bench of the Tribunal to exclude Cosmic from the final set of comparables on the ground that it has outsourced its major activities whereas the taxpayer was doing the business in-house.
27. Furthermore the Tribunal in case of Schlumberger Global Support Centre Ltd. vs. DDIT (Intl.Taxn.-II), Pune in ITA No.86/PN/2013 order dated 30.10.2015 ordered to exclude Cosmic for comparability with Schlumberger Global Support Centre Limited, an ITES service provider, on ground of volatile profit by determining following findings :-
"50. In view of the above decisions and considering the fact that Cosmic Global Ltd. had abnormal profit in the F.Y. 2008-09 as compared to 2 preceding and 2 succeeding years we are of the considered opinion that Cosmic Global Ltd. cannot be considered as a comparable and has to be excluded from the list of comparables.
51. Even otherwise also, we find merit in the submission of the Ld. Counsel for the assessee that Cosmic Global Ltd. and the assessee are in opposite sides of the value chain. From the details furnished by the assessee, we find the employee cost of Cosmic Global Ltd. is Rs.1,57,11,463/- on a turnover of Rs.7,37,02,584/- and thus the employee cost to turnover ratio comes to 21.32%. In the case of the assessee as against the total employee cost of Rs.5,86,15,132/- the turnover is Rs.11,02,81,913/- and the ratio of employee cost to turnover comes to 53.15%. Further, Cosmic Global Ltd. has paid translation charges of Rs.3,00,25,306/- to third parties which is to the tune of 40.74% of its turnover which indicates outsourcing of work. Therefore, we find merit in the submission of the Ld. Counsel for the assessee that functionally Cosmic Global Ltd. is incomparable to the assessee.18 ITA No.1829/Del/2014
The various decisions relied on by the Ld. Counsel for the assessee to the proposition that companies with low employee cost/sales ratio outsourcing substantial portion of work has to be rejected. The Delhi Bench of the Tribunal in the case of Xchanging Technology Services India Pvt. Ltd. (Supra) at para 8 of the order has observed as under :
"8. The TPO considered Cosmic Global Ltd. as comparable with the assessee company on entity level. We have examined the Annual report of this company for the year in question, which is available in the paper ITA No.1897/Del/2014 book. It can be noticed that its revenue from operations stands at Rs.7,37,02,584/-, which consists of three amounts, namely, Medical transcription and consultancy service charges amounting to Rs.9,90,737/-; Translation charges amounting to Rs.6,99,35,756/-; and Accounts BPO charges amounting to Rs.27,76,090/-. This company outsourced the activity of Translation. 57.31% of total operating expenses incurred by this company are outsourcing charges. Admittedly, outsourcing is confined to Translation, for which it paid charges at Rs.3.00 crore. In our considered opinion, this company cannot be considered as comparable with the assessee company for the reason of its major activity, namely, Translation, with revenue of Rs.6.99 crore (out of total revenue of Rs.7.35 crore), being dissimilar with the assessee's activities under this segment. The second reason for considering this company as incomparable on entity level is the business model adopted by it. It can be seen that this company has outsourced major activities in comparison with the assessee doing its business in- house. It goes without saying that these two business models, namely, outsourcing services and providing in-house services, cannot be ITA No.1897/Del/2014 compared with each other because of their inherent differences. Since the TPO has considered this company as comparable on entity 19 ITA No.1829/Del/2014 level, we hold that the same cannot be so treated.
Similar view has been taken by the Tribunal in the case of United Health Group Information Services Pvt. Ltd. Vs. ACIT (ITA No.6312/Del/2012) vide its order dated 28.8.2014. Respectfully following the precedent, we direct the exclusion of this company from the list of comparables. Accentia Technologies Ltd."
52. Following the decision cited (Supra), we hold that even on this issue also Cosmic Global Ltd. cannot be considered as comparable. We accordingly direct the AO to exclude Cosmic Global Ltd. from the list of comparables. Ground of appeal No.2 is accordingly allowed."
28. So, in view of what has been discussed above, we are of the considered view that Cosmic is not a suitable comparable for benchmarking the international transactions of the taxpayer qua ITES.
CROSSDOMAIN LIMITED (CROSSDOMAIN)
29. The taxpayer sought to exclude Crossdomain on two grounds : (i) that it is functionally dissimilar; and (ii) that its complete financials are not available and relied upon the decision rendered by Hon'ble High Court as well as coordinate Bench of the Tribunal cited as Rampgreen Solutions Pvt. Ltd. (supra), Vertex Customer Services vs. DCIT ITA No.572/Del/2014, Market Tools vs. DCIT - (2013) 40 taxmann.com 390 and OKS Span Tech vs. ITO ITA No.481/Del/2014.
20 ITA No.1829/Del/2014
30. However, ld. TPO accepted this company as ITES company of the ld. DRP without deciding the merits of the objections raised by the taxpayer rejected the objections raised by the taxpayer and accepted the logic of the TPO and consequently proceeded to retain this company as comparable.
31. Crossdomain come up for scrutiny for its comparability with Vertex Customer Services India Pvt. Ltd. (supra), a low end ITES BPO before coordinate Bench of the Tribunal, which has ordered to exclude the same from the list of comparable by returning following findings :-
"20. This comparable has been included by the TPO having 25.63% margin and rejected the contention of the assessee that it is engaged in high end services in the area of payroll mater file employee query management and tax calculation. The same contentions reiterated before us and these two decision were cited before us:-
a. Global E:Business Operations Pvt. Ltd. Vs. DCIT (IT(TP)A No.1678/Bang/2012 b. Flextronics Technologies (India ) Pvt. Ltd. Vs. DCIT ITA 1559/Bang/2012
21. The ld. DR relied on the orders of the TPO and DRP.
22. We have carefully considered the rival contentions and also perused schedule No.13 of annual report for FY 2008-09. We have also perused the decision of coordinate bench cited before us wherein the functional profile of this comparable is discussed.
In Global E: Business Operations Pvt. Ltd. vs. DCIT 21 ITA No.1829/Del/2014 (IT (TP) A No.1678/Bang/2012. The functional profile of the company is as under:-
"(4) Crossdomain Solutions Ltd.
24. This company was considered as a comparable and listed at Sl.No.8 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. As observed in the case of Coral Hubs Ltd., the TPO rejected the plea of the assessee on the basis of a nonexistent TP order passed for the A.Y. 2007-08. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. These activities are totally different from the activities of the assessee which perform very Limited/low end functions back office services. The review and business functions of Cross Domain are as follows:-
"With a decade of experience in Payroll Outsourcing, Crossdomain has created a re- engineered payroll service EFFIPAY - that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours*. With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000." "Cross domain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn-around-time for business critical processes."
Source: http://www.cross-domain.com As can be seen from the above, the business of Cross Domain ranges from high end KPO 22 ITA No.1829/Del/2014 services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider.
25. We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable; this company should be excluded from the list of comparables, accepting the plea of the Assessee. We hold accordingly."
23. Further Honourable Delhi high court has also held in Rampgreen solutions Pvt Ltd V CIT in 60 taxmann.com 355 as under :-
"25. Whilst Voice Call Center represents the lower-end of ITeS, KPO represents services involving a higher level of skills and knowledge. India has vast human resources and a large number of highly-skilled technical professionals. The expression "KPO" indicates the involvement of domain knowledge in providing ITeS. Typically, KPO includes involvement of advance skills; the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management etc. On the other hand, Voice Call Centers are normally involved in customer support and processing of routine data. In the case of Maersk Global Centers (India) (P.) Ltd.(supra) a Special Bench of the Tribunal had referred to a report prepared by National Skill Development Corporation (NSDC) on Human Resource and Skill Requirements in IT and ITES Sector (2022) and noted that the KPO sector has been described as "a value play". The said report also indicates that KPO services are likely to span activities such as "patent advisory, high-end research and analytics, online market research and legal advisory".23 ITA No.1829/Del/2014
26. A Knowledge Process is understood as a high value added process chain wherein the processes are dependent on advanced skills, domain knowledge and the experience of the persons carrying on such process."
24. Therefore respectfully following the decision of honourable Delhi high court in Rampgreen Solutions P Ltd where the functional profile of company is very high end KPO services it cannot be compared with the assessee and hence we direct exclusion of this comparable."
32. Hon'ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. (supra) explained the functional dissimilarity between BPO and KPO as under :-
"25. Whilst Voice Call Center represents the lower- end of ITeS, KPO represents services involving a higher level of skills and knowledge. India has vast human resources and a large number of highly-skilled technical professionals. The expression "KPO"
indicates the involvement of domain knowledge in providing ITeS. Typically, KPO includes involvement of advance skills; the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management etc. On the other hand, Voice Call Centers are normally involved in customer support and processing of routine data. In the case of Maersk Global Centers (India) Pvt. Ltd. v. ACIT(supra) a Special Bench of the Tribunal had referred to a report prepared by National Skill Development Corporation (NSDC) on Human Resource and Skill Requirements in IT and ITES Sector (2022) and noted that the KPO sector has been described as "a value play". The said report also indicates that KPO services are likely to span activities such as "patent advisory, high-end research and analytics, online market research and legal advisory".
24 ITA No.1829/Del/2014
26. A Knowledge Process is understood as a high value added process chain wherein the processes are dependent on advanced skills, domain knowledge and the experience of the persons carrying on such processes."
33. From the profile of the company available in public domain brought on record by the taxpayer at pages 59 & 60 of the paper book goes to prove that Crossdomain is one of the leading KPO (Knowledge Process Outsourcing) providers, rendering a wide range of value based quality services in the area of Payroll & HR, Finance and Accounting, Administration and Tax Processes, Insurance process for leading companies in US, Europe and Indian market. Furthermore it is categorically mentioned that Crossdomain is an Insurance KPO and payroll KPO having decade of experience in payroll outsourcing. Crossdomain has created reengineered payroll service. It analyze salaries and retrials amounting to more than 75000 record.
34. In view of what has been discussed above, we are of the considered view that Crossdomain is high end KPO services, development of product suits and routine low end ITES services and its bifurcation available for such verticals of services is not available makes it functionally incomparable with the taxpayer which is into providing low end BPO services. Moreover, 25 ITA No.1829/Del/2014 Crossdomain is into reengineering payroll services, development of information system and these activities are also different from the activities performed by the taxpayer which are very limited low end function. So, consequently we order to exclude Crossdomain from the final set of comparables for benchmarking the international transactions.
INFOSYS BPO LIMITED (INFOSYS)
35. The taxpayer sought exclusion of Infosys on grounds inter alia that it is functionally dissimilar; that it has gone into merger and acquisitions; that it is a giant company having excellent profile of its employees.
36. Ld. DRP retained Infosys as comparable by merely stating that the TPO has given sufficient reasons to accept Infosys as a comparable company.
37. However, functional dissimilarity of Infosys with the taxpayer has already been examined by coordinate Bench of the Tribunal in case of Omniglobe Information Technologies (India) Pvt. Ltd. in ITA No.1052/Del/2014 order dated 07.09.2016 and directed to exclude this company by following the decision rendered by the coordinate Bench of the Tribunal in case of Equant Solutions India Pvt. Ltd. vs. DCIT in ITA 26 ITA No.1829/Del/2014 No.1202/del/2015 for AY 2010-11 by returning following findings:-
"26. We have considered the submissions of both the parties and perused the material available on the record. As regards to the issue relating to exclusion of Infosys BPO Ltd., TCS E-Serve International Ltd. and TCS E-Serve Ltd. is concerned, it is noticed that this issue has been decided by the ITAT Delhi Bench 'I', New Delhi in the case of Equant Solutions India Pvt. Ltd. Vs DCIT in ITA No. 1202/Del/2015 for the assessment year 2010-11 (supra) and the relevant findings have been given in paras 22 to 24 of the order dated 21.01.2016 which read as under:
"22. Infosys BPO Limited a. The assessee further objected to inclusion of Infosys BPO Ltd as comparable which has a margin at 31.44%. Before the TPO assessee submitted that, this is the company, which has very high turnover and has huge brand value. Submission of the assessee that higher profits is because of highly established brand in the market place. TPO rejected the contention of the assessee holding that the assessee has failed to establish how the brand has influenced increased profitability of the comparable. The ld DRP also rejected the contention of the assessee. Before us, the assessee submitted that comparable is engaged in high-end integrated services in improving the competitive position of their clients and manage their business process and providing value added services to them. Further, the Infosys also carrying huge brand value and therefore this comparable should not be taken.
b. Ld DR Relied on the orders of lower authorities and stated that all the reasons have been considered by the TPO and DRP for inclusion of this comparable.27 ITA No.1829/Del/2014
c. We have considered the rival contention regarding exclusion of Infosys BPO Ltd. It is engaged in high and integrated services and therefore it is functionally dissimilar. The Infosys brand is indisputably is a huge brand and definitely, result of that brand goes to this comparable. Therefore, the brand of Infosys definitely results in opening higher profits to this company. In view of the following decisions, the same is required to be excluded and hence it is ordered accordingly.
.......
27. So, respectfully following the aforesaid referred to order of the Co-ordinate Bench, we direct the AO/TPO to exclude the said companies i.e. M/s Infosys BPO, M/s TCS E-Serve International Ltd. and M/s TCS E-Serve Ltd. from the list of the comparables while working out the operating profit/operating cost ratio."
38. Hon'ble High Court of Bombay in case cited as CIT vs. M/s. Pentair Water India Pvt. Ltd. in Tax Appeal No.18 of 2015 order dated 16.09.2015 also ordered to exclude this company out of the list of comparables on ground of turnover to the tune of Rs.649.56 crores as against the tested party at Rs.11 crores which is more than 55 times of the taxpayer's turnover.
39. Furthermore appraisal of the annual report of Infosys, available at pages 106 to 151 of the paper book, goes to prove that Infosys has undergone reorganization of its subsidiaries as under :- 28 ITA No.1829/Del/2014
"Re-organisation of subsidiaries The shareholders may be aware that as part of making our company a truly global entity and also as part of investment strategy, our company concluded a sale and purchase agreement with Koninklijke Phillips Electronics N.V (Phillips) by means of which our company made a 100% investment in the share capital amounting Rs.1 07.13 crore in P -Financial Services Holding BV, the Netherlands entity (Holding Company) which in turn made an investment in three entities situated in India (Chennai), Poland (Lodz) and Thailand (Bangkok) [Operating Company].
During the year under review, your company has re-organized the subsidiaries as follows:
a. Transfer of shares from P-Financial Services Holding B.V. to Infosys BPO Limited.
b. Liquidation of P-Financial Services Holding B. V. (direct subsidiary of Infosys BPO holding 100% shareholding in each of Poland, Thailand and Chennai subsidiaries) c. Merger of PAN Financial Shared Services India Private Limited with Infosys BPO Limited.
The liquidation proceeding consisting of the investment of Infosys BPO Limited has made in P-Financial Holding Services B.V. has been off-set with the proceeds that Infosys BPO Limited needs to pay to P-Financial Holding Services B.V. for the transfer of shares it has made to Infosys BPO Limited.
a. Transfer of Shares from P-Financial Services Holding B.V. to Infosys BPO Limited Infosys BPO Limited entered into Share Purchase Agreements with P-Financial Services Holding B.V. by means of which the entire shares P-financial Services Holding B.V. holds in the three subsidiaries (i.e) Infosys BPO (Poland) Sp.Z.o.o., Infosys BPO (Thailand) Limited and PAN Financial Shared Services India Private Limited were transferred to Infosys BPO Limited on December 31, 2008. As a result of the said transfer, the said three subsidiaries which were hitherto step-down subsidiaries of Infosys BPO Limited became the direct subsidiaries of Infosys BPO Limited.
b. Liquidation of P-Financial Services Holding B.V. P-Financial Services Holding BV, a limited liability company incorporated under the Dutch laws and 100% wholly owned subsidiary of Infosys BPO Limited was liquidated in accordance 29 ITA No.1829/Del/2014 with Dutch Laws with effect from close of business hours of December 31, 2008. The assets and liabilities of the company have been transferred to Infosys BPO Limited.
c. Merger of PAN Financial Shared Services India Private Limited with Infosys BPO Limited A Scheme of amalgamation under Section 391 and 394 of the Companies Act, 1956 was filed in the High Court of Madras and High Court of Karnataka, Bangalore for merging PAN Financial Shared Services India Private Limited with Infosys BPO Limited. Both the courts have approved the scheme of amalgamation of Pan Financial Shared Services India Private Limited with Infosys BPO Limited with effect from April 1, 2008 and hence the standalone accounts have been re-stated to the reflect the order of the High Courts.
Consequent to the above re-organisation, Infosys BPO Limited has the following subsidiaries as on March 31,2009 S.No. Name of subsidiary Country of Percentage incorporation of holding
1. Infosys BPO s.r.o Czech 100% Republic
2. Infosys BPO (Poland) Poland 100% Sp.Z.o.o.
3. lnfosys BPO (Thailand) Thailand 100% Limited
40. So, such a large scale of reorganization of subsidiaries certainly impacted its PLI. Even otherwise, its huge highly qualified work force as is event from pages 75 to 78 of the paper book goes to prove that this company is having no comparability with the taxpayer which is a low end ITES service provider.
41. So, in view of what has been discussed above, we order to exclude Infosys from the final set of comparables for benchmarking the international transactions. 30 ITA No.1829/Del/2014 GROUND NO.3
42. Ground No.3 is consequential in nature. GROUND NO.4
43. Ground No.4 is premature and does not require any adjudication.
44. Resultantly, the appeal filed by the assessee is partly allowed.
Order pronounced in open court on this 25th day of October, 2017.
Sd/- sd/-
(R.K. PANDA) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 25th day of October, 2017
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.