Income Tax Appellate Tribunal - Delhi
E-Valueserve Sez (Gurgaon) P.Ltd, New ... vs Acit, Circle-8(2), New Delhi on 28 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES: 'I-1', NEW DELHI
BEFORE SHRI N.K.SAINI, ACCOUNTANT MEMBER
AND SMT. BEENA A PILLAI, JUDICIAL MEMBER
ITA No.5147/Del/2017
A.Y. 2011-12
E-Valueserve SEZ (Gurgaon) ACIT, Circle 8(2)
P Ltd. New Delhi
A 47, Lower Ground Floor vs.
Hauz Khas
New Delhi 110 016
PAN: AABCE8812A
(Appellant) (Respondent)
Appellant by Ms. Ananya Kapoor, Adv.
Respondent by Sh. Kumar Pranav, Sr.D.R.
Date of Hearing 21.03.2018
Date of Pronouncement 28.03. 2018
ORDER
PER BEENA A PILLAI, JUDICIAL MEMBER
Present appeal has been filed by assessee against the order passed by Ld.CIT(A)-19, dated 17/05/17 for Assessment Year 2011- 12 on the following grounds of appeal:
"1. That assessment order passed u/s 143(3) r.w.s. 92CA(3) r.w.s. 144C(l3) of the Income Tax Act, 1961('the Act') by the Assessing Officer ('AO') and the order passed by the Transfer Pricing Officer ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi ("TPO') and the additional disallowances made by the AO/TPO, as upheld by the Commissioner of Income Tax (Appeals) ('CIT(A)') are illegal, bad in law and without jurisdiction.
2. That additional disallowances made are unsustainable, unjust, highly excessive and are not based on any material on record. The total income of the Appellant has been incorrectly and un-lawfully assessed by the AO at Rs. 22.46,350/- as against declared income at Rs. 63,28,954/-.
3. That the reference made by the AO to the TPO suffers from jurisdictional error as the AO has not recorded any reasons in the draft assessment order/assessment order based on which he reached to the conclusion that it was 'necessary or expedient' to refer the matter to the TPO for computation of the arm's length price (ALP), as is required under Section 92CA(1) of the Act.
4. That the TPO/AO/CIT(A) have erred, in law and on facts and circumstances of the case, in making an adjustment of Rs. 6,59,17,396/- to the total income of the Appellant in respect of international transaction pertaining to provision of services to its Associated Enterprises ("AEs") and have erred by not accepting the economic analysis undertaken by the Appellant which is in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("Rules").
5. That, on the facts and in circumstances of the case and in law, the AO/TPO/CIT(A) erred in not appreciating the Appellant's business model and functional and risk profile.2
ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi
6. That, the TPO/ AO/CIT(A) have erred, in law and on facts and circumstances of the case, by rejecting certain filters as applied by the Appellant for determining the applicability of the comparable companies.
7. That, the TPO/ AO/CIT(A) have erred, in law and on facts and circumstances of the case, by applying certain new filters for determining the applicability of the comparable companies.
8. That, the TPO/ AO/CIT(A) have erred, in law and on facts and circumstances of the case, by not appreciating that if a low turnover filter is applied, then even a high turnover filter should be applicable.
9. That the TPO/AO/CIT(A) have erred, in law and on facts and circumstances of the case, by not appreciating that if persistent loss making companies are rejected, then persistent high profit making companies should also be rejected.
10. That the TPO/AO/CIT(A) have erred, in law and on facts and circumstances of the case by wrongfully rejecting certain companies without appreciating that the appellant had selected the comparables after undertaking a detailed economic analysis and the said companies are comparable to the Appellant.
11. That the TPO/AO/CIT(A) have erred in rejecting Caliber Point Business Solution Ltd., Cosmic Global Ltd., Informed Technologies India Ltd, Jindal Intellicom Ltd, Omega Healthcare Management Services, R Systems International Ltd., Datamatics Financial Services Ltd., Apex Knowledge Solutions P. Ltd., Ace BPO Services P. Ltd., Interglobe Technologies P. Ltd., Microgenetics Systems Ltd. and Zavata India P. Ltd without appreciating that the said comparables 3 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi companies meet all the criteria, and hence should be taken into consideration for benchmarking the said transaction.
12. That the TPO/AO/CIT(A) have erred, in law and on facts and circumstances of the case, by wrongfully rejecting Caliber Point Business Solutions Ltd. and R Systems International Ltd., on the ground of different financial year ending as such a reason cannot be the basis for rejection.
13. The TPO/AO/DRP have erred, in law and on facts and circumstances of the case, by adding certain companies to the final set of comparable companies for the impugned transaction on an adhoc basis, thereby resorting to cherry picking of comparables. The TPO/AO/DRP have erred in not appreciating that the said companies, do not meet the FAR analysis, and hence cannot be taken as comparable companies to determine the ALP for the said transaction. The selection of such comparables is not in conformity with the principles as laid down Rule 1OB of the Rules .
14. That, the TPO/AO/DRP erred in not rejecting Accentia Technologies Ltd., Eclerx Ltd., Infosys BPO Ltd. and TCS e-serve Ltd., without appreciating that the said companies are not comparable to the Appellant.
15. That the TPO/AO/CIT(A) have erred in not appreciating that there are certain computational errors as the calculation of OP/OC of the Appellant is not in accordance with law.
16. That the TPO/AO/CIT(A) have erred in not appreciating that there are certain computational errors as the calculation of OP/OC of the comparable companies is not in accordance with law.4
ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi
17. That the TPO/AO/CIT(A) erred in not granting the working capital adjustment to the Appellant.
18. That the CIT(A) erred in not appreciating that the functional profile of the Appellant and the TP Study stood accepted by the TPO/AO.
19. That, in view of the facts and circumstance of the case, the CIT(A) has erred on facts and in law in holding that the Appellant performs KPO services.
20. That the CIT(A) also erred in arbitrarily accepting/rejecting the comparable companies and adopting an inconsistent view.
21. That, without prejudice 2 KPOs are not automatically comparable. The mandate of Rule 10B is to be applied and FAR analysis is to be undertaken.
22. The AO/TPO/CIT(A) erred in not following the detailed procedure as laid down in Chapter X of the Act read with the Rule for determining the mechanism for computing the arm's length price and has not allowed the Appellant the benefit of various provisions as stated in the Act and the Rules.
23. That the AO/TPO erred in not giving effect to the finding of the CIT(A).
24. The additions/observations made are unjust, unlawful and are based on mere surmises and conjunctures. The additions made cannot be justified by any material on record and also highly excessive.
25. The explanation given and the evidence produced, material placed and available on record has not been properly considered and 5 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi judiciously interpreted and the same does not justify the additional allowances made.
26. The AO has erred in charging of interest u/s 234B, 234C, 234D and 244A. The same has been unjustly and illegally charged. It is also wrongly worked out.
27. The AO/TPO has erred in initiation of penalty proceedings u/s 271 (1 )( c) of the Act.
The above grounds are without prejudice to each other. The Appellant company reserves the right to add, alter, amend or modify any of the grounds appealed against during the course of hearing."
2. Brief facts of the case are as under:
Assessee filed its return of income declaring total income of Rs.63,28,954/-on 29/11/2011. The return was processed under section 143 (1) of the Income Tax Act, 1961 (the Act) and the case was selected for scrutiny. Statutory notices were issued to assessee in response to which Representatives of assessee appeared before Ld. AO and submitted various details.
2.1. Ld. AO observed that assessee is carrying on business of IT enabled services and was set up in SEZ. Assessee was claiming deduction under section 10AA of the Act amounting to Rs.100,407,633/-. He observed that assessee during the year had entered into international transaction and accordingly reference was made to Transfer Pricing Officer (TPO) for determination of arm's length price.
2.2. Ld. TPO accordingly issued notice to assessee and called for various details.6
ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi 2.3. Ld.TPO observed that assessee was engaged in provision of IT Enabled Services (ITES) to its Associated Enterprises (AEs). It was observed that assessee was incorporated in India on 17/12/07 and was 100% export oriented unit set up under SEZ guidelines. It was observed that assessee carried out research driven by business information, market research and intellectual property research. Ld.TPO recorded that the client executives (based in Bermuda, US, Europe and Asia-Pacific) was operating from overseas, formed interface between client and assessee and the deliverable was typically in the form of research report that is forwarded directly to the client under the supervision and post a quality assurance by the AE's. It is also observed by Ld. TPO that the reports and research studies prepared by assessee are owned by the clients only and the operations of EVS SEZ India comprises of the following segments:
· Marketing and After sales;
· Strategic Policies;
· Finance, Accounting and IT;
· Human Resource Management.
Assessee had categorised international transaction as under:
Sl. International transaction Amount in Rs. No.
1. Provision of services-back office 56,61,90,975 operations (research services)
2. Cost reimbursementreceived/receivable 1,13,82,904 7 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi 2.4. Ld.TPO observed that the TP report submitted by assessee described the functions of assessee and its AE and the functions as IT enabled services. Assessee had used TNMM as the most appropriate method and OP/TC as a PLI. In the TP report assessee arrived at a set of 8 comparables with an average margin of 14.38% against the assessee's own margin worked out to be at 16.57%. The list of comparables are as under:-
Sl.No. Name of the Company
1. Aditya Birla Minacs Worldwide Ltd.
2. Caliber Point Business Solutions Ltd.
3. Cosmic Global Ltd.
4. Fortune Infotech Ltd.
5. Informed Technologies Ltd.
6. Jindal Intellicom Pvt.Ltd.
7. Omega Healthcare Management Services
8. R Systems International Ltd.
Based on the comparables assessee concluded its international transaction at arm's length.
2.5. During transfer pricing proceedings, assessee again conducted fresh research and insisted on introduction of following comparables:
8ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi Sl. Name of the Comparable No.
1. Datamatics Financial Services Ltd.
2. Interglobe Technologies Pvt Ltd.
3. Microgenetics Systems Ltd.
4. Apex Knowledge Solutions P Ltd.
5. Ace BPO Services P Ltd.
6. Zavata India P Ltd.
2.6. Ld.TPO rejected the other comparables selected by assessee for the following reasons:
Sl.No. Name of the Company Remarks
1. Aditya Birla Minacs Worldwide This company fails
Ltd. export filter (60.51%).
Hence, not a suitable
comparable.
2. Caliber Point Business This company is having
Solutions Ltd. different financial year
ending i.e. December.
Hence, can't be
considered as suitable
comparable.
3. Cosmic Global Ltd. This company fails
export filter (52.96%).
Hence, not a suitable
9
ITA 5147/Del/2017 A.Y.: 2011-12
E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi comparable.
4. Fortune Infotech Ltd. This company is having significant RPT (98.70%).
Hence, not a suitable comparable.
5. Informed Technologies Ltd. The turnover is less than Rs.5 crores, hence rejected.
6. Jindal Intellicom Pvt.Ltd. This is a suitable comparable.
7. Omega Healthcare Management Complete financial Services information is not available. Hence, can't be considered as a suitable comparable.
8. R Systems International Ltd. This company is having different financial year ending i.e. December.
Hence, can't be
considered as suitable
comparable.
10
ITA 5147/Del/2017 A.Y.: 2011-12
E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi 2.7. Ld.TPO rejected all comparables except for Jindal Intellicom Pvt.Ltd., and came to different set of comparables, which are as under:
Sl.No. Name of the Company OP/OC
1. Accentia Technologies Ltd. 29.18%
2. Aeropetal Technologies Ltd. 14.36%
(segment)
3. e4e Healthcare Business Services P 9.77% Ltd.
4. Eclerx Services Ltd. 56.82%
5. ICRA Techno Analytics Ltd. 25.54% (segment)
6. Infosys BPO Ltd. 17.86%
7. Jindal Intellicom Ltd. 13.70%
8. TCS E-Serve Ltd. 69.31% Average 29.57% Ld.TPO thus made an adjustment of Rs.6,59,17,396/-
3. Aggrieved by adjustment made, assessee preferred appeal before Ld. CIT (A). During the first appellate proceedings Ld. CIT (A) rejected the comparable, ICRA Techno Analytics Ltd., but accepted other comparables that was finally selected by Ld. TPO.
4. Aggrieved by the order of Ld. CIT (A) assessee is in appeal before us now.
11ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi 4.1. The only issue that has been agitated by assessee is in respect of wrong selection of comparables by ld.TPO and rejection of two comparables being R Systems and Omega Healthcare. 4.2. Before dealing with comparables it is sine qua non to deal with the functions performed by assessee for the year under consideration.
4.3. From TP report placed at page 696 of the paper book, it is observed that assessee is 100% wholly owned Subsidiary of Evalueserve Ltd, located at Bermuda providing Knowledge Process Outsourcing (KPO) services (intellectual property, market research, business research, financial and investment research and data analytics services) to its clients. It has been stated in the TP report that assessee was incorporated on 17/12/07 and began its operations from August 2008.
4.4. At page 697 of paper book it is being submitted that assessee renders research services primarily to its AE's. Business information Assesse's analysts covers a range of industries including banking, insurance, telecommunications, pharmaceuticals, biotechnology, chemicals, energy and consumer goods. It has also been stated that assessee utilises primary and secondary sources to conduct its research and analysis in the segment.
Intellectual property Assessee is involved in carrying out the patent assessments, intellectual property research and analysis, patents consulting and preparing draft of patent application to be filed overseas. This 12 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi research is delivered to its AE's which have an arrangement with the team of lawyers for filing patent applications in the appropriate jurisdictions. Assessee also offers intellectual property, asset management and helps in analysing portfolio of patents. Investment research and financial analytic These services include financial analysis and research focussed on global funds and equities. Essentially it involves tracking performance of specific stocks and mutual funds and analysing it. The background data is compiled and provided to the clients that include mainly investment banks. The work is customised according to the requirements of the clients and the specific request received from them.
Market Research (primary research) The services involve voice-based support for conducting telephonic customer surveys in different parts of the world and formulation of preliminary hypothesis based on the surveys. Assessee has extensive primary research capabilities, including the ability to conduct research in multiple languages.
4.5. Thus in the TP report assessee has characterised itself to be providing ITES-BPO services there and it provides research- based specialized reports and services to its clients in Europe and North America. It undertakes projects spanning multiple dimensions including project scope, schedule, language, format of deliverables etc. Assessee makes use of a right of research tools including the Web databases and publications apart from analytics and forecasting. The industry covered include financial services 13 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi (banking and insurance), high-tech, software, electronics, engineering, nanotechnology, networking, biomedical engineering), telecom equipment and operators, pharmaceutical and biotech chemicals, energy and consumer products.
4.6. In terms of assets it does not own any non-routine intangibles and does not own trade secrets or undertake research and development activities on its account that would lead to the development of non-routine tangibles.
4.7. In terms of risk assessee has been characterised as a high-level risk exposed in India which includes foreign exchange risk, entrepreneurs risk, price risk, manpower risk.
5. After the above FAR analysis, we shall now proceed with the comparability in respect of the comparables disputed by assessee as well as the comparables that has been proposed to be included by assessee in the final list.
The comparables that has been submitted by assessee to be excluded are as under:
· Accentia technologies Ltd;
· Infosys BPO Ltd · TCS E-Serve Ltd · Eclerx services Ltd The comparables that have been submitted by assessee to be included are as under:
· R Systems · Omega Healthcare Ltd 14 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi
6. Ground No. 1- 5 are general in nature and therefore do not require any adjudication.
7. Ground No 6-16 and Ground No. 18-25, deals with the comparables and the functional profile of assessee. We shall first take up the comparables that have been disputed by assessee to be excluded from the list of comparables. Ld.Counsel during the hearing submitted a chart consisting of comparables and the reasons contended for their exclusions as under:
S Comparable Reasons of rejection (our contentions) Case laws relied upon by the No appellant (Delhi ITAT and Delhi High Court) for same reasons and for same Assessment Year
1. 1) Extraordinary events during AY 1) 1.Delhi High Court- PCIT vs. 2010-11(acquisitions/ Ameriprist India P. Ltd.- ITA Accentia Technologies No. 461/16- pg. 79A- 79 B CLC amalgamation) (pg. 1172)- hence Ltd.(pg. 2) United HealthGroup 1145-1184- fails TPO's own filter of peculiar Information Services P. Ltd.
Vol. 4- Annual economic circumstances (ITA No. 1038/D/15) (p 201-204 Report)
2) Functional dissimilarity - of CLC) diversified business operations 3) Equant Solutions India P. (pg. 1171- also Nta kindly refer Ltd.(ITA No. 1202/D/2015)(pg.176-180 CLC) TPO order pg. 27)
4) Ameriprise India Pvt Ltd. (ITA
3) Different revenue recognition No. 7014/Del/2014) (pg. 60-62 of model (pg. 1171)- assessee's CLC) model at pg. 695 5) Bechtel India Pvt. Ltd. (ITA No.
4) Significant intangible assets (pg. 1478/Del/2015) (pg. 95-96 of 1167)- assesse has no intangibles CLC)
6) Techbooks International Pvt. Ltd.
(pg. 692) (IT/ No. 240/Del/2015 for AY
5) Abnormally high profit margins 2010-11) (pq. 119 of CLC)
7) Sun Lif e Ind ia Serv ice Ce nt re P. Lt d. (IT A No. 750/ 201 5) (pg.
2. Eclerx 1) Ameripris e I ndi a Pvt Lt d.
services 1 ) F unct iona lly d issimi lar (p g.
t d. (pg. 734- (IT A No.
37- Vol. 3- 739, 740, 7 57, 758 )- it is a 7014/ D el/ 2 014)( pg. 69-7 0
Annua l KPO of CLC)
15
ITA 5147/Del/2017 A.Y.: 2011-12
E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi Report ) 2 ) Unrel iab le d at a- t he st and alo ne 2) Rampgr een So lut io ns vs. f inanc ials incl ude t he t ur nover CIT (IT A No. 10 2/ 201 5)-
377 IT R 5 33 (De l) of t he subsid iar ies als o (pg.
784, 808, 8 27) 3 ) Signif icant i nt ang ibl e asset s. -
(comput er sof t w are- pg. 787 ) '
4 ) Insuf f ic ient Se gment a l det ai ls
Igat e glo bal 1) Delh i Hi gh Co urt - PCIT
3 solut i ons
vs. Ameriprise Ind ia P.
t d. (pg. 838-
1. Except ion al year of operat ions Lt d. - IT A No. 461/ 16 - pg.
42- Vol. 3-
mnual ve port ) (amalg amat io n) (pg. 88 8k 79A- 79B CL C
hence f a ils T PO 's ow n f ilt er of 2) Unit ed H ea lt hG roup
pecul iar ec onom ic Inf ormat ion Serv ices P.
Lt d. (IT A No. 1038/ D/ 1 5)
circumst ances
(pg. 204- 205 O f CLC)
2 ) F unct iona lly d if f erent an d
3) T echbooks Int er nat io nal
Insuf f ic ient se gment a l Pvt . Lt d. (IT A No.
inf ormat i on (IT an d IT ES 240/ De l/ 20 15 f or AY
services) (p g. 888 a nd 89 3, 2010- 11) (p g. 28- 29 of
904, 910 ) CLC).
3 ) High t urnov er (Rs. 932. 1 8 4) Ameripris e I ndi a Pvt Lt d.
(IT A No.
crores) (pg. 87 9) (assess ee's
7014/ D el/ 2 014)( pg. 62-6 3
t urnover is a bout 5 0 crores-
of CLC).
t urnover is a bout 1 8 t imes 5) Sun Lif e Ind ia Serv ice
more t han t hat of t he assess e). Cent re P. Lt d. (IT A No.
750/ 20 15)
ICRA Techno 1. Functionally dissimilar- it is 1) DCIT vs. Ikan os
4. Analytics Ltd. Communic at io n In dia (P. )
(pg. 1209- 1234- engaged in business
Lt d (Bang- IT AT -f or A
Vol. 4- Annual intelligence and analytics
Report) Y2010- 11)[ 20 15] 64
(pg. 1210, 1226, 1232). t axmc 436 (Banga lore -
T rib. )
2. No segmental details 2) IDC IT vs. App lie d
Mat erials I ndi a (P. ) Lt d2 0
t axmann. com 16 0
(Banga lore - T rib. F or AY
2 11)-
5. 1) High brand value and 01. Delhi High Court- PCIT vs.
intangibles (goodwill) (pg. Amen) India P. Ltd.- ITA No.
Infosys BPO 981)- assesse has no 461/16- pg. 7 79B CLC
goodwill- pg. 692 02. Equant Solutions India P. Ltd.(pg. 943-
2) Benefits from being part of Ltd.(IT/ 1202/D/2015) (pg. 1026- Vol 4- 'Infosys' group (pg. 952, 950) 183-184 of CLC) 16 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi
3) Substantial selling and 03. Techbooks International Annual Report) marketing expenses - Pvt. Ltd. No. substantial employee salary 240/Del/2015)(pg. 29-30 of under this head and also CLC brand building and 04. Ameriprise India Pvt Ltd. advertisement expense (about (ITA No. 7014/Del/2014)(pg.
Rs. 78 crores- approx. 6.96 63 of CLC) percent) (pg. 977, 978)- 05. Sun Life India Service assesse has no "§och Centre P. L (ITA No. expenditure- In the TP Study 750/2015) at pg. 599 and 603, it is clearly mentioned that market risk lies with AE and hence assesse is not liable for marketing, sales promotion and business development.
4) Significantly large scale of
operations (turnover is 22
times more than that of the
assesse)
5) Exceptional year of
operations (acquisitions) (pg.
950, 956)- hence fails TPO's
own filter of peculiar
economic circumstances
6 1) United HealthGroup
01. Functional dissimilarity (pg.
1058) Information Services P.
02. No segmental data (pg. 1066) Ltd. (ITA No.
TCS
E-Serve 1038/D/15)(pg. 208-210 of
03. Owns significant intangibles
lational CLC)
'9- 1102- - 04. Uses the 'TATA' brand- royalty is 2) Equant Solutions India P.
Annual t) paid (pg. 1064)
Ltd.(ITA No. 1202/D/2015)
05. Part of TATA group and benefits (pg. 184-187 of CLC)
thereof (pg. 1035) v.
3) Ameriprise India Pvt Ltd.
06. Primary client is Citigroup (pg. (ITA No. 7014/Del/2014)
10^8)
(pg. 63-66 of CLC)
07. First full-year as step down 4) Bechtel India Pvt. Ltd.
subsidiary of TCS- which has led
to substantial growth-Total (ITA No. 1478/Del/2015)
income is 3 times higher as (pg. 95 of CLC)
compared to last year (from 54 5) Techbooks International
crores to 150 crores). Operating Pvt. Ltd. (ITA No.
Income higher by 173% as
compared to last year. From loss 240/Del/2015 for AY 2010-
of 24 crores to profit of 44 11) (pg. 19-24 of CLC)
crores this year, due to 6) Sun Life India Service
improved operational
17
ITA 5147/Del/2017 A.Y.: 2011-12
E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi performance and increased Centre P. Ltd. (ITA No. utilization of infrastructure 750/2015) capacities, (pg. 1034)
7. 01. Functional dissimilarity (pg. 1. United HealthGroup Information Services P. TCS E-Serve 1122) Ltd. (ITA No. 1038/D/15) 1103-1144- 02. No segmental details are (pg. 208-210 of CLC) Vol -4 Annual available (pg. 1134) 2. Equant solutions India Pvt Report Ltd (ITA No. 1202/Del/2015
03. Owns significant intangibles (pg 184-187 of CLC)
04. Uses the TATA brand royalty is
3. Ameriprise India Pvt Ltd paid (pg 1131) (ITA No. 7014/Del/2014 (pg
05. High turnover-27 times more than 66-69 of CLC that of the assessee 4. Bechtel India Pvt Ltd (ITA No. 1478/Del/2015) Pg 95 of CLC
5. Sun Life India Service Centre P ltd (ITA No. 750/2015 S No.l Name of the Reasons for acceptance Case laws relied upon by the comparable appellant 1 1. Techbooks international pvt.
Ltd (ITA No. 240/Del/2015) pg R Systems 1. different financial year ending cannot 30-33 of CLC) (page 1285- 2. United Healthcare Group 1374 Vo4 of be the sole basis for excluding a Information Services P Ltd annual report comparable (ITA No. 103.8/Del/2015 page 210-211 of CLC
3. Ameriprise India Pvt Ltd (ITA No. 7014/Del/2014 (pg 66-69 of 18 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi CLC
4. Sun Life India Service Centre P ltd (ITA No. 750/2015 Recently, the Delhi High Court (ITA No. 217/2014) in the case of CIT vs. Mckinsey Knowledge Centre India Ltd.
has held that different financial year ending cannot be the sole basis of rejection of a comparable, (pg. 145-158 ofCLC) Even otherwise, the following cases have held for the same comparable, that different financial year ending cannot be the sole basis of excluding a comparable, which otherwise passes all the filters and is functionally comparable-
5) Macquarie Global Services Private Limited- ITA No. 6803/DEL/2013
6) Ameriprise India Pvt. Ltd. vs. ACIT- ITA No. 2010/Del/2014 Mercer Consulting India P. Ltd.
ITA 966/Del-
2. Omega 1) the TPO/DRP rejected the 1) Bechtel India Pvt. Ltd. Healthcare Ltd comparable only on the ground that (ITA No. 1478/Del/2015) (pg 1269-1284) Vol 4 Annual the annual report is not available in (pg. 96-97 ofCLC) Report the public domain. However, this is not true.
19ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi 7.1. It has also been cited by Ld. Counsel that Hon'ble Delhi High Court vide order dated 26/02/2008 in ITA No. 241/2008 upheld the exclusion of the 4 comparables disputed by assessee herein, and has approved decision of this Tribunal in assessee's own case for assessment year 2010-11.
7.2. The Ld.Counsel placed reliance upon the following Paras of Hon'ble High Court which reads as under:
"5. This Court notices that as far as the exclusion of three comparables- M/s. TCS E-Serve Limited; M/s. TCS E-Serve International Limited and M/s. Infosys BPO Ltd. is concerned, the ITAT was cognizant of and took note of the circumstances that these entities had a high brand value and, therefore, were able to command greater profits; besides, they operated on economic upscale. This approach cannot be faulted having regard to the decision of this Court in Pr. Commissioner of Income Tax v. B. C. Management Services Pvt. Ltd. 2018 (89) Taxman.com 68 (Del), which reads as follows:
"13. The exclusion of second comparable ICRA Techno Analytics Ltd. was on the basis that it had engaged itself in processing and providing software development and consultancy and engineering services/web development services. The reasons for execution were functional dissimilarities and that segmental data were unavailable. Again the findings of the ITAT are reasonable and based on record. The third comparable that the AO/TPO excluded is TCS Esserve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close 20 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value; that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld. The assessee was aggrieved by the inclusion of Accentia a Software Development Company. The Revenue is aggrieved by the exclusion of Accentia from the TP analysis. The DRP had directed its deletion. We observe that the ITAT has noticed the unavailability of the segmental data so far as these comparables are concerned. Furthermore, the functionality of this entity was concerned, it is different from that of the assessee; Accentia was engaged in KPO services in the healthcare sector.
14. In view of the above findings, this Court is of the opinion that no substantial question of law arises. The appeals are dismissed. "
6. The ITAT noted that M/s. Accentia Technologies Ltd. was mainly performing medical transcription services. It was of the opinion that its service was similar to the one that the assessee was engaged in. However, it also noted that there was no segmented data and on that account, directed the exclusion of that entity from the list of comparables. Likewise, in the case of M/s. ICRA Techno Analysis Ltd., it was found that the said entity was engaged in business intelligence and analytics supplies, software development, consultancy services, engineering services, web development and hosting services. Besides functional dissimilarity, the ITAT also noted 21 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi that there was no segmented data to compare its activity with the assessee.
Likewise, in the M/s. eClarx Services, the ITAT noted that its activity was functionally dissimilar because it performed KPO function whereas the assessee was classifiable as BPO."
7.3. On the contrary Ld.CIT,DR vehemently objected the arguments of the assessee for exclusion of various comparables and placed reliance upon the orders of the authorities below .
8. We have perused the submissions advanced by both the sides in the light of the records placed before us.
8.1. We have also perused the decision of this Tribunal in ITA No. 1467/Del/2017 for assessment year 2010-11 passed on 30/06/17. It is observed that the functions performed by assessee during assessment year 2010-11 are identical and similar to the functions performed by assessee for the year under consideration. Also from the financial reports placed in paper book at page 1-454 in respect of all the comparables argued before us for exclusion it is observed that there is no difference or exception to the functions performed by these comparables for assessment year 2010-11. 8.2. It is observed that this Tribunal in assessee's own case for assessment year 2010-11 vide paragraph nos. 9-14 and 16-29 excluded these comparable by analysing these comparables and its functions as under:
"9. Accentia Technologies is selected by the ld TPO but is challenged now by the assessee submitting that it has an extra ordinary event during the year, 22 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi functionally dis-comparable as it is engaged in medical transcription, has significant intangibles and abnormally high profit margin. For this proposition the ld AR relied upon several judicial precedents. The ld DRP rejected all the above contention of the assessee with respect to this comparable at page No. 23 to 26 of its order.
10. The ld DR reiterated the same facts as stated by lower authorities.
11. We have carefully considered the rival contentions as well as perused the annual accounts of the comparables. At page No. 1172, we have perused schedule 10 of the notes on account wherein it has mentioned that w.e.f. 01.04.2008 a company which was engaged in the business of medical transcription and coding has been amalgamated with the comparable. It is further stated figures for this year are related to amalgamating company also. The profit and loss account of the comparable shows that sales and services of the company are according to Schedule No. 8. There is no change in the income segment of the assessee after amalgamation as amalgamating company was also having the same business, hence, there is no impact of amalgamation on the company with respect to functions performed. Therefore, merely there is a an amalgamation during the year it cannot be excluded as comparable as it does not change the functional profile of the comparable company. However, at page No. 27 the ld TPO has confirmed that this company is engaged in the business of healthcare cycle management which comprises of medical transcription, coding and billing and collection. The medical transcription business require special skill and also employs medical professional who finally vet the actual transcription. Further medical coding is related to procedure of financial assessment. Medical billing is maintenance of financial accounts on insurance company etc for the purposes of recovery of sums by Doctors. Therefore, medical transcription is a service which requires employment of medical professional also. However, the medical coding the billing may not require higher technical skill. In annual report the company has mentioned that it has only one segment and therefore it does not have segmental results pertaining to medical transcription vis-à-vis coding 23 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi and billing activity. According to us the medical transcription itself cannot be said to be comparable with the functions performed by the assessee. However, the medical coding and billing activities are similar to the functions performed by the assessee. But , in absence of the segmental accounts with respect to medical coding and billing activities this comparable cannot be included. Hence, TPO is directed to exclude it.
12. The next comparable by the assessee is that eClarx Services submitting that it is a knowledge process outsourcing (KPO) unit and therefore cannot be compared with the ITES service provider like assessee. The assessee has relied on the decision of Hon'ble Delhi High Court of Ramgreen Solutions Pvt. Ltd Vs. CIT.
13. The ld DR submitted that the assessee is also a knowledge process outsourcing unit as it employs 616 personnel. He referred to page No. 6 of the order of the ld Transfer Pricing Officer for this. He submitted that assessee's case falls into all three horizontal segments of ITES industries such as call centre and technical support, payment supply chain and analytics. He therefore, stated that eClarx is the right comparable
14. We have carefully considered the rival contentions and perused the annual report of the comparable for AY 2010-11 at page No. 734 to 83.7 of the paper book. The functions of the company are described at page No. 23 of its annual report under management discussion and analysis. It provides that eClerx supports its clients through its two business units- Capital markets and sales and marketing support. Across both these units, the company supports and improves processes that are core of its customers day to day business operations. The company continues to focus on engagements where it can tap the largest percentage of client spend by leveraging its domain expertise and by bringing together consulting, project management and solution based service delivery. In the capital markets division, the company today provides end-to-end financial transaction support services such as trade booking, trade confirmation, asset servicing cash settlements, client servicing risk management and reference 24 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi data integrity across all asset classes, and its services span both sell side ( the large banks) and buy side ( the funds and assets managers) Furthermore, the company provides strategic and process consulting services helping clients devise solutions to improve efficiency, reduce risk and meet regulatory and market demands. Similarly in the sales and marketing support division, the company today supports clients in all elements of product and services marketing and sales with a focus on online support to include content development and management, search engine management, web operations, pricing and customer analytics, product database management and catalog audits. The company is also pursuing a strategy of creating a portfolio of platform attached services, by creating a suite of services that are complementary to industry standard it platforms. A glance at the functional profile of this company divulges that it is basically a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to global clients. This company provides end to end support through trade life cycle including trade confirmations and settlements etc. It also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability services. Further this company has also developed it tool and process automation. From the above discussed nature of business carried on by e- Clerx Services Ltd., it is patent that the same being a KPO company, is quite different from the assessee, providing only IT enabled services to its AE, which fall in the realm of BPO services. Apart from that, it is further observed that this company has significant intangibles which it uses in rendering KPO services, against which the assessee does not have any intangibles. The Hon'ble jurisdictional High Court in Rampgreen Solutions (P.) Ltd. v. CIT [2015] 234 Taxman 573/60 taxmann.com 355 (Delhi), has held that e-Clerx Services Ltd., being engaged in KPO, cannot be treated as comparable of an assessee engaged in rendering BPO services. In view of the direct judgment of the Hon'ble jurisdictional High Court on the point, we direct to eliminate e-Clerx from the list of comparables. As such, e-Clerx Services Ltd. cannot be considered as comparable.
25ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi
16. The next comparable contested by the ld AR is ICRA Techno Analytics Ltd stating that this company is functionally not comparable as it is engaged in business intelligence and analytics.
17. The ld DR contested the argument of the assessee and submitted that the assessee is engaged in such high end services.
18. We have carefully considered the rival contentions. This company as per its annual accounts placed at Page NO. 1210 shows that it is engaged in the business intelligence and analytics space. It is also engaged in software development and consultancy, engineering services, web development and hosting services. It is also noted that it has two income segments of services and sales and it does not have the complete segmental information with respect to both the segments of services and sales as fixed assets and services are used inter-changeability. In view of this we find that this company is functionally not comparable as well as it does not have complete segmental information with respect to the sales and service segments. In the result we direct the Transfer Pricing Officer to exclude the above comparable.
19. The assessee has challenged the inclusion of Infosys BPO Ltd. the main reason seeking its exclusion was high brand value, intangibles, benefit of Infosys branch and large scale operation.
20. The ld DR objected to this and relied upon the order of the ld Transfer Pricing Officer submitting that all these arguments of the assessee has been considered by the ld TPO.
21. We have carefully considered the rival contentions and also verified the annual accounts of Infosys BPO Ltd from page No. 943 to 1026, undoubtedly the Infosys BPO is driving leverage from the client of Infosys Technologies Ltd for cross selling the BPO services of this company. The assets of the comparable company shows that it has a goodwill of approximately Rs. 19 crores. The income stream of comparable was Rs. 1126.63 crores whereas, the assessee's income stream was Rs. 50.90 crores. Hon'ble Delhi High Court in case of Pr. CIT 26 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi Vs. Actis Global Services Ltd in TS-417-H.C--2017(DEL)(TP) has held that even the size and scale of operation can make the comparable inapposite. In the present case the size of this comparable with the size of the assessee is more than 20 times. Therefore, in view of this respectfully following the decision of the Hon'ble Delhi High Court we direct exclusion of this comparable on the size and scale of its operation.
22. TCS eServe International Ltd The ld AR contested it on the issue of functional dissimilarity, Tata Brand and ownership of intangibles.
23. Ld DR referred to page No. 39 of the order of ld Transfer Pricing Officer and submitted that all these aspects have been considered by the lower authorities and has given their reasons.
24. We have carefully considered the rival contentions and also perused annual accounts of this submitted at page No. 201 onwards. The revenue stream of the company is transaction processing charges and during the year it has earned Rs. 150 crores. It is mainly engaged in the business of software testing, verification and validation of software at the time of implementation of the software and data centre management activities. The coordinate bench in case of ITA No. 2536/Pn/2012 dated 11.02.2015 has discussed the profile as to what amounts to verification and validation in context of software. It was held that ostensibly verification and validation are broadly speaking a parcel of the process of software development. This company also contributes to Tata Brand Equity from this year and according to Schedule M of the financial statement during the year it has contributed Rs. 37 crores towards the brand. In view of this the functional profile of the assessee as well as the assets employ are not comparable. In view of this ld Transfer Pricing Officer is directed to exclude it.
25. The next comparable is TCS eServe Ltd. The assessee has contested it on the similar line as TCS Eserve International Ltd.
26. The ld DR relied on the order of the ld Transfer Pricing Officer and ld DRP.
27ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi
27. We have carefully considered the rival contentions and also perused the annual report of the company for year ended 31.03.2010. The company is mainly engaged in IT enabled services and business process outsourcing. It is also providing technical services which involve software testing, verification and validation. It also contributes similarly to Tata Brand Equity and for this year the contribution was Rs. 42 crores. Therefore, following the same reasoning given by us for exclusion of TCS eserve International Ltd we also direct the ld TPO to exclude this comparable.
28. The next comparable contested by the assessee is e4e Healthcare Ltd contesting that it is engaged in software development services and owns its own intangibles. The ld Departmental Representative contested relying upon the order of the ld TPO and DRP and submitted that this comparable is assessee's own comparable.
29. We have carefully considered the rival contentions and perused the annual report of the company placed at Page No. 1185 to 1082. However, before analyzing the balance sheet it is very important to note that above comparable was selected by the assessee and hence it was accepted by the TPO as FAR analysis is similar to the assessee. The assessee has selected this comparable based on the functional profile and applying its own filter. This comparable was also not contested before the ld DRP. Before us no reasons were given that why the assessee is now withdrawing the above comparable which was selected by the assessee itself. It is very unfortunate that despite preparing its transfer pricing documents for FY 2009-10 in 2010 the assessee did not contest this comparable or even admitted its mistake either before AO or DRP that how it was originally selected, before us it is contesting for exclusion of this comparable after almost 7 years. We are conscious of the decision of the Hon'ble Special bench in case of Quark Systems Ltd wherein the assessee was allowed to withdraw one of the comparable selected by assessee because of intial years of Transfer pricing laws and in that comparable the FAR was not in dispute but error was of filter. On identical facts and circumstances in EvalueServe.com Pvt 28 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi Ltd TS390-ITAT-2017-(DEL)TP, it has been held that those were the initial years of the transfer pricing law but the year before us is almost a decade after the transfer pricing laws were introduced. In view of this we reject the contention of the assessee of withdrawing of its own comparable for the reason that the assessee could not demonstrate before us that how the original comparable was selected when the same functional profile of the company was available at the time of preparing TP documentation. In view of this, we reject the argument of the assessee for exclusion of this comparable.
8.3. Respectfully following the same and following the observations of Hon'ble High Court in assessee's own case for assessment year 2010-11 (supra) we direct Ld. TPO to exclude these comparables from the final list of comparables. 8.4. Now coming to the comparables that have been argued by Ld. Counsel for exclusion, it is observed that the Tribunal for assessment year 2010-11 vide paras 30-32 set aside these comparables by observing as under:
"30. The next comparable is R Systems Pvt. Ltd which was included by the assessee but excluded by the ld TPO for the reason that it follows different financial year compared to the assessee. It is apparent that R Systems Ltd is having the January to December as an accounting period. Therefore, the ld Transfer Pricing Officer did not consider the same. It is held in several decisions that if the assessee can demonstrate with publicly available authentic information for the remaining period and exclusionary period and further produces the tabulated data for the similar accounting year as followed by the assessee then if the FAR analysis of that company is comparable, it may be included. Therefore, it is now the duty of the assessee to satisfy the Assessing Officer/TPO with such information. Hence, we direct the ld Transfer Pricing 29 ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi Officer to verify the information with respect to this comparable in accordance with the law and then decide inclusion or exclusion.
31. The next comparable is Omega Healthcare Ltd, which were selected by the assessee but rejected by the ld Transfer Pricing Officer and ld DRP for the reason that the annual report of the relevant year is not available in the public domain. The ld AR stated that same is available in public domain and further same is also produced before us at page No. 1269 to 1284 of the paper Book. In view of this we direct the ld TPO to verify the annual report and decide the issue about inclusion of this comparable.
32. In this appeal ground Nos. 1 to 6 is on transfer pricing issues, however except the exclusion or inclusion of the comparables no other issues were agitated therefore, other than the issue of comparability which has already been adjudicated by us in earlier paras we reject all other contentions in other grounds of appeal.
8.5. It is observed that Ld. TPO for the year under consideration has rejected these comparables on identical reasoning as has been observed by this Tribunal for assessment year 2010-11 (supra).
8.6. Respectfully following the same we also direct assessee to demonstrate with publicly available authenticated information for the remaining period and exclusionary period and produce the tabulated data for the similar accounting year as followed by assessee and the FAR analysis of the comparables for the purposes of inclusion. Ld. TPO shall verify the information with respect to this comparable in accordance with law and decide the inclusion/exclusion of the same.30
ITA 5147/Del/2017 A.Y.: 2011-12 E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi 8.7. Accordingly we allow these grounds as discussed above.
9. Ground No. 17 deals with granting of working capital adjustment which now becomes consequential to the comparables to be subjected to ld. TPO's consideration.
10. Ground No. 26-27 are in respect of charging of interest and initiation of penalty proceedings which are premature at this stage and accordingly are dismissed.
11. In the result, the appeal filed by assessee stands partly allowed as directed.
Order pronounced in the Open Court on 28.03.2018.
Sd/- Sd/-
(N.K.SAINI) (BEENA PILLAI)
Accountant Member Judicial Member
Dated: 28.03.2018.
· mv
31
ITA 5147/Del/2017 A.Y.: 2011-12
E-Valueserve SEZ (Gurgaon) Pvt. Ltd. vs. ACIT, New Delhi Copy of the Order forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
6. Guard File By Order Asst. Registrar ITAT, Delhi Benches, New Delhi 32