IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `I-2' NEW DELHI
BEFORE SHRI O.P.KANT, ACCOUNTANT MEMBER
AND
SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER
I.T.A.No. 1426/Del/2015
Assessment Year: 2010-11
American Express (I) P. Ltd., vs DCIT, Circle-2(2),
Metropolitan Saket, 7th floor, New Delhi.
Office Block, District Centre,
New Delhi.
PAN AAACA8163F
(Appellant) (Respondent)
Appellant by: Shri Nageshwar Rao, Advocate
Respondent by: Shri H.K. Choudhary, CIT DR
Date of hearing: 03/7/2019
Date of order : 17/7/2019
ORDER
PER K. NARASIMHA CHARY, J.M.
Challenging the addition of Rs.71,35,97,820/- on account of
transfer pricing adjustment and Rs.49,93,98,378/- u/s 10A of the
Income-tax Act, 1961 ("the Act") in the order dated 22.1.2015
passed u/s 143(3) read with Section 144C of the Act pursuant to the
directions dated 17.1.2014 by the ld. Dispute Resolution Panel-I, New
Delhi (ld. DRP) the assessee, namely M/s American Express India
Private Limited filed this appeal in respect of Asstt. Year 2010-11.
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2. Brief facts of the case are that the assessee was incorporated
in India in 1994 and is engaged in the business of providing travel
related services (Charge Cards, Credit Cards, Traveler's Cheques and
Travel Agency Services). During FY 2007-08, the international banking
business of American Express Group was sold off. American Express
group is involved in strategic decision making and evolving
standardized policies and procedures to run the business. It
exercises management control and oversight. It also manages the
marketing and corporate governance initiatives and integrates it with
the overall business objectives. Assessee is compensated for services
rendered with a fee that is equivalent to operating expenses plus
20% of the mark up. During the Financial Year 2009-10, the value of
the international transaction i.e. export of data processing and back
office support undertaken by the assessee was Rs.714,56,74,755/-.
3. For the AY 2010-11, the assessee filed the return of income on
1.10.2010 declaring an income of Rs.2,42,82,74,285/- and since the
international transaction undertaken by the assessee with the
Associate Enterprises was to the tune of more than Rs.15 crores, in
accordance with the provision of Section 92CA of the Act, the
international transaction of the assessee with the Associate
Enterprise was referred to the TPO for determination of arm's length
price. Ld. TPO by order dated 16.1.2014 suggested an adjustment of
Rs.114,75,06,127/- to the income of the assessee, being the
difference between the arm's length price and the price charged by
the assessee. Assessee filed objections before the ld. DRP. Ld. DRP
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by order dated 17.12.2014 gave certain directions, pursuant to which
ld. AO passed the assessment order making the transfer pricing
adjustment to the tune of Rs.71,35,97,820/- and also an addition of
Rs.49,93,98,378/- by withdrawing deduction u/s 10A of the Act.
4. The assessee is, therefore, before us in this appeal challenging
the same and as could be understood from the contentions of the
assessee before us, the assessee is challenging the inclusion of five
comparables, namely, eClerx services Ltd., Infosys BPO Ltd., Accentia
Technologies Ltd., TCS e-serve Ltd. and TCS e-serve International Ltd..
Assessee is also challenging the exclusion of four comparables,
namely, R. Systems International Ltd. (Segmental); CG Vak Software
Exports ltd.; Informed Technologies Ltd.; Micro genetics Systems Ltd.
Besides this, the assessee also complained thatthe ld.TPO/AO
erroneously interchanged the operating profit/operating costs
margins of the companies, namely, eClerx services Ltd. and Omega
Healthcare Management Services P. Ltd. Further grievance of the
assessee is that the authorities below grossly erred by charging
interest on credit period granted by the company under normal trade
practices and also ld. AO not granting full credit of TDS to the
assessee as claimed by them in the return of income.
5. Contention of the assessee in respect of five comparables,
namely, eClerx services Ltd., Infosys BPO Ltd., Accentia Technologies
Ltd., TCS e-serve Ltd. and TCS e-serve International Ltd. is that these
companies are not at all good comparables to the assessee on several
ground including the functional dissimilarity, non availability of
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segmental data and diversified activities besides high end use brand
worth. Assessee also challenges the exclusion of four comparables,
namely, R. Systems International Ltd. (Segmental); CG Vak Software
Exports ltd.; Informed Technologies Ltd.; Micro genetics Systems Ltd.
on the ground that functionally all these companies are good
comparables to the assessee but for the year ending not matching in
case of R. Systems International Ltd. and turnover filter in respect of
the other three companies. It has, therefore, become necessary for
us to look into the functions performed and risks assumed as
incorporated by them in their TP Report to be found from page
nos.365 of the paper book:
"Functions Performed
4.02.2.1 Functions Performed by American Express Group
American Express Group is engaged in the business of providing
travel related services (charge cards, credit cards, traveler's cheques
and travel agency services). During FY 2007-08, the international
banking business of American Express Group was sold off. American
Express Group is involved in strategic decision making and evolving
standardized policies and procedures to run the business. It
exercises management control and oversight. It also manages the
marketing and corporate governance initiatives and integrates it
with the overall business objectives.
4.02.2.2 Functions Performed by AEIPL
AEIPL is a captive contract IT enabled service provider catering to the
needs of the Group.
As per the contractual arrangement that AEIPL has with its AEs for
the provision of such support, the resultant output is the property of
American Express Group and at no point in time shall such
ownership vest with AEIPL either wholly or partly. AEIPL does not
obtain any copyrights, patents rights, trade secrets or trademarks on
such output.
AEIPL is remunerated on a cost-plus basis without regard to the
success or failure of its activities. For this purpose, costs comprise all
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of the direct and indirect costs, including salaries, travel expenses,
professional fees, rent, depreciation, financial charges, etc.
Therefore, AEIPL is insulated from all key business risks.
The functions performed by AEIPL are explained below:
a) Input
AEIPL receives raw data / raw information ("raw data") in electronic
form or in the form of paper based inputs (documents, vouchers,
reports etc.). The raw data is received through mail/courier, fax and
electronic transmission from clients' respective locations to AEIPL
servers via data links. The raw data comprises unprocessed or semi-
processed accounting, financial and commercial information relating
to the businesses of American Express locations worldwide:
The various kinds of raw data received by AEIPL are as follows:
Card.member Data: Data pertaining to transactions executed
by American Express card members.
American Express Company Data: Data pertaining to day-to-
day transactions undertaken within American Express
companies which need to be recorded and reported to the
respective American Express companies ('customer country')
in different reports and accounting formats. Various types of
inputs received for processing and recording in electronic or
physical form are as follows:
Invoices;
Vouchers;
Vendor Purchase Orders; and
Employees Travel Expense Vouchers
Airlines / SES / Hotels Data: These pertain to transactions
undertaken for American Express travel business and include
data on:
Sale of air tickets to customers and payments to airlines;
`Payment to service establishments for purchases made
through American Express cards; and
Booking of hotels for customers and payments to hotels.
Customers Bank Data: These include data on treasury and
other transactions done by American Express card members.
b) Processing of Inputs (Data management. Information
Analysis and Control)
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The Company uses the raw data as input and carries out a series of
processes (i.e., reorganization, analysis and transformation and
conversion of raw data) as per requirements of its customers to
generate customized output.
c) Output
The Company's output includes the following items processed and
prepared as per the customers' specifications:
Ready to use business reports and computations;
Financial statements such as balance sheets, profit and loss
accounts, ledgers, trial balances, accounts payable analysis,
accounts receivable analysis, and fixed assets registers;
Payroll processing and reports;
Account reconciliation reports;
Payment instructions for payment to vendors;
Card transaction process outputs;
Travel business transaction reports; and
Other MIS reports per customers' specific requirements.
Further, AEIPL also provides call centre services to Group Companies,
which involves answering incoming American Express card member
calls for queries related to card member transactions.
These queries include, inter alia, balance enquiry, product feature
queries, change in personal information, etc.
4.02.1 Risks Assumed
The risk profile of AEIPL as compared to American Express Group for the above
mentioned international transaction is tabulated below:
RISK CATEGORY & DESCRIPTION EXPOSURE TO AEIPL EXPOSURES TO AEs
Market Risk: Market risk arises for a AEIPL does not have any AEs render services to
business due to the uncertainty in the exposure to this risk end customers and
structure of the market, demand because it is a captive hence, all market risks
patterns and needs of customers, support provider, assured with respect to the
costs, pricing etc. Market risk of a fixed mark up on its support provided by
represents standard risk borne by any operating costs. AEIPL including customer
enterprise in market driven acceptance are borne by
transactions. American Express Group.
Product/service liability risk: Risks AEIPL is not exposed to AEs face this risk as they
associated with product/service this risk since it deals with render services to end
failures including non-performance AEs only who would not customers.
to generally accepted or regulatory recover any damages from
standards. This could result in AEIPL even if services
injury/harm to the end-users. rendered by AEIPL were
defective and caused
losses to them.
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Credit Risk: This is the risk arising AEIPL is protected from Since the data processing
from non-payment of dues by this risk as the and back office support is
customers. remuneration for the only rendered to
support rendered by it American Express Group
entirely comes from Group Companies, the risk of no
Companies, and therefore settlement of inter-
the risk of non-payment is company dues in respect
remote. of this support is remote.
Manpower Risk: Any enterprise which AEIPL is exposed to the costs AEs reimburses AEIPL on
is greatly dependent, for its success, associated with high cost- plus basis and hence
upon quality personnel with superior attrition rate in Indian call would bear the excess cost
technical knowledge is faced with this centre and back office associated with this risk.
risk. Competitive market forces industry. However, since Therefore, AEs have
expose such an enterprise to the risk AEIPL is remunerated on a indirect exposure to this
of loosing its trained personnel. cost-plus basis, this risk is risk.
mitigated to a significant
extent.
Price Risk: This risk arises as a result of AEIPL does not have any The data processing and
price pressures in the market resulting exposure to this risk as its back office support is
in price undercutting, and thereby compensation from AEs is rendered within the
adversely impacting profitability. pre-agreed and is on a cost- American Express Group,
plus basis. and the inter company
prices are typically
determined based on arm's
length principle. Thus, price'
risk associated with
intercompany prices
charged in respect of such
support would depend
upon the nature of
arrangement/ agreement
between Group Companies
and would lie with . Group
Foreign Currency Risk: The risk arises AEIPL does not bear this risk AEs have an exposure to this
from any adverse revaluation of assets since it incurs expenses in risk.
and liabilities due to fluctuation in local currency and also
exchange rates, which would invoices its customers in
eventually have a negative impact on local currency.
the profitability of the enterprise.
Capacity Utilization risk: This risk AEIPL is not exposed to this The AEs bear the excess
arises on account of underutilization risk as it is remunerated by cost associated with
of manufacturing/service Group Companies on a cost unutilized capacity as it
facility/personnel. plus basis, irrespective of compensates AEIPL on a
whether the employees full cost-plus basis.
/systems are being fully
utilized or not.
Re-work risk: This is the risk of AEIPL AEIPL is not exposed to this American Express Group
having to perform no billable re-work. risk as it is remunerated by would remunerate AEIPL
Group Companies on a cost for the rework costs also
plus basis, and the costs as they get included in the
incurred by it, in performing cost base.
the re-work would also form
part of the cost base.
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Technology Risk: This risk arises if the Loss of telecommunication American Express Group
market in which the Company operates links and connectivity is a faces this risk as any
in is sensitive to introduction of new key business risk faced by technical snag would
products and technologies. Hence, in AEIPL, and AEIPL is therefore directly hamper support
that case, business units may face loss required to ensure adequate provided to the companies
of potential revenues due to business continuity planning in the American Express
inefficiencies arising from obsolete and maintenance of the Group / to customers of
infrastructure and tools as well as same. With the telecom/IT the American Express
obsolescence of manufacturing industries facing rapid Group.
processes. technological advancements,
to keep pace, AEIPL is also
required to maintain state-
of-art infrastructure and
ensure that its employees'
skills are correspondingly
upgraded on a continuous
basis.
Since AEIPL is remunerated
on a cost plus basis, this risk
is mitigated to a great
extent.
Cost variance risk: This risk arises on AEIPL is not exposed to this The AEs are exposed to
account of variations between actual risk as it is remunerated by this risk as they
costs and budgeted costs. its AEs on an actual cost plus compensate AEIPL on an
mark up basis, irrespective actual cost plus basis
of the variance between the irrespective of the extent
actual and budgeted costs of to which AElPL's actual
AEIPL. costs vary from its
budgeted costs.
4.02.4 Characterization
Based on the facts as presented in the above analysis of functions performed,
assets employed and risks assumed by AEIPL, AEIPL can be characterized as a
back officer support service provider operating in a limited risk environment.
6. Keeping in view these functions performed and reasons assumed,
we shall now proceed to deal with the comparability of different
entities included and excluded by the ld. TPO not to the liking of the
assessee. As could be seen from the record, the bone of contention in
this matter relates to the service of export of data processing and back
office support undertaken by the assessee to the tune of
Rs.714,56,74,755/-.
7. For benchmarking this service characterized by the assessee as a
back office support service operating in a limited risk environment i.e.
ITeS segment, the assessee adopted TNMM method as the most
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appropriate method with PLI as Operating Profit/Operating Cost with a
PLI arrived at 17.98%.
8. Assessee initially selected ten comparables by rejecting six in the
matrix. Out of 10 comparables selected by the assessee, ld. TPO
rejected six including R. Systems International Ltd. (Segmental); CG Vak
Software Exports ltd.; Informed Technologies Ltd.; Micro genetics
Systems Ltd. So also ld. TPO selected six comparables which were
rejected by the assessee, namely, eClerx services Ltd., Infosys BPO Ltd.,
Accentia Technologies Ltd., TCS e-serve Ltd. and TCS e-serve
International Ltd. Therefore, it is clear now that the assessee is
disputing the inclusion of eClerx services Ltd., Infosys BPO Ltd., Accentia
Technologies Ltd., TCS e-serve Ltd. and TCS e-serve International Ltd.,
which according to the assessee, rendered high end technical services
falling under the category of KPO.
9. Revenue disputes that by looking at the functional profile of
the assessee, it is clear that the assessee is not providing the low end
IT Services but, on the other hand, the business being carried on by
the Associated Enterprises, which are receiving services from the
assessee are very high end businesses. He further submitted that by
looking into what is input for the service and what are output
generated by the assessee and the services provided by the assessee
including the data analysis to detect high risk account activity and
also support initiatives such as product redesign consolidation
migration organizational restructuring and project management
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support to implementation.According to him services provided by the
assessee cannot be characterized as low end ITeS.
10. Per contra, it is the submission of the ld. AR that all the
services rendered by the assessee are only in the nature of low end
services and as a matter of fact this question had arisen for the
consideration of the Tribunal in assessee's own case for the Asstt.
Year 2007-08 and by order dated 7.6.2017, the Tribunal dealt with
this issue at length and reached a conclusion that the assessee
provides back office operation, revenueaccounting, call centre
services, support center and ITES services and is definitely different
from the Knowledge process outsourcing services. Merely for the
reason that AEGSEC services at Gurgaon unit provides certain data
risk analysis services to detect high risk account activity does not
make the services provided as high end service Provider.
11. He further submitted that ld. TPO has not questioned the FAR
analysis provided by the assessee and accepted the same to be ITeS
Service Provider and not a KPO.
12. On this aspect, we have gone through the functional profile of
the assessee as contained in the TP study report for this year with the
functional profile of the assessee as incorporated in the order dated
7.6.2017 for the AY 2007-08 in ITA No.1865/Del/2015. We do not
find any change in the functions performed, reasons assumed or the
assets deployed by the assessee in these years. Vide Para Nos. 21 to
29, a Coordinate Bench of this Tribunal dealt with this issue in detail
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and reached a conclusion that definitely the services rendered by the
assessee falling in the category of Business Process Outsourcing, but
not Knowledge Process Outsourcing. When the facts permeating all
through the years are same, we do not find any reason to take a
different view. We, therefore, hold that the services rendered by the
assessee are only back office operations falling in the category of ITES
and not KPO.
13. Now coming to the first comparable eClerx Services Ltd.,
learned AR submitted that on the ground of functional dissimilarity in
the assessee's own case for AY 2007-08 and 2009-10, a coordinate
bench of this Tribunal rejected this company as a comparable in ITA
No.295/Del/2012 and ITA No.1973/Del/2014 respectively. He further
submitted that learned DRP rejected this comparable in assessee's
own case for AY 2011-12 vide order dated 13.11.2015.
14. We have gone through the orders of the authorities below and
also the orders cited by the assessee. Assessee challenging the
inclusion of this company on the ground of functional dissimilarity,
abnormal fluctuations in revenue and profits besides unreliability of
the data. Learned TPO rejected the same.
15. Learned DRP held that several services provided by the
assessee are also of similar nature as could be observed from the
profile of this eClerx Services Ltd. and the extracts of the agreement
produced in preceding paras. In DRP's opinion, all the services
provided by the taxpayer as well as eClerx are not high end in nature
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but a low end and high end comparable is used in the case of the
assessee.
16. As could be found from the discussion in relation to eClerx
Services Ltd in ITA No.295/Del/2012 for AY 2007-08 and in ITA
No.1973/Del/2014 for AY 2009-10, it is clear that under similar
circumstances, this Tribunal found that eClerx Services Ltd. is
functionally different from the assessee. Further, ld. DRP in their
order dated 13.11.2015 for AY 2011-12 observed in respect of eClerx
as follows:
Regarding eClerx
This is functionally different-from taxpayer for the ITeS segment.
eClerx with a margin 55.97% operates in the business data analytics
and process solutions service (Annual Report 2010-11 page 69) space
catering to a global client base comprising the world's 8 top banks, 12
top Global retailers, 4 top software companies, 7 top high tech OEMs
and 9 top travel and leisure companies ( Sample Client Snapshot on
website).Its income from operations consists of revenue from data
analytics services and knowledge process outsourcing (Annual Report
2010-11 page 79) solutions/services which comprise of both time per
unit price and fixed fee based service contracts. It also has incurred a
substantial sum (34.31% of the total cost of the company Annual
Report) on outsourcing of ITeS services to third party vendors. eClerx
acquired Igentica Travel Solutions in July 2007 Limited providing it
with 28 large customers primarily in Europe into a new vertical as part
of its strategy for inorganic growth through "bolt on" acquisitions
increasing the customer base and revenues of the companies. The
Company thus clearly bears significant entrepreneurial business risks
such as market, price, service liability, credit, foreign exchange
fluctuation, technology obsolescence and owns intangibles
constituting 11.65% (Annual report 2010-11) of its total fixed assets
which enable it to earn a higher margin. ThuseClerx is not only
functionally different, but has a different asset and risk profile, has
developed value added services as a KPO. In this segment, the
Taxpayer is essentially providing back-office support services to parent
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while EClerx does not report segments. eClerx is one of, "India's first
KPOs to be appraised for and rated at maturity level 3 of people
Capability Maturity Model (PCMM)"(Annual report 2010-11 page 31).
One of the key issues when analysing transfer prices is to refine the
comparability analysis after matching the functional profile carefully.
Further margins are earned as a result of functions performed, assets
utilized and risks borne (FAR) wherein there lie considerable
differences particularly in the outsourcing model it employs as laid
down in jurisdictional HC decision in Rampgreen Solutions (P) Ltd V CIT
ITA 102/2015, order dated 10 08-2015 which has clearly stated that
where the controlled transactions are clearly in the nature of lower-
end ITeS for rendering data processing not involving domain
knowledge, inclusion of any KPO service provider as a comparable
would not be warranted and the transfer pricing study must take that
into account at the threshold holding as under,
"42 ..... The DRP held that TNMM allows flexibility and tolerance in
selection of comparables, as functional dissimilarities are subsumed at
net margin levels, as compared to Resale Price Method or Comparable
Uncontrolled Price Method and, therefore, the functional
dissimilarities pointed out by the Assesses did not warrant rejection of
eClerx and Vishal as comparables;
43. In our view, the aforesaid approach would not be apposite. Insofar
as identifying comparable transactions/entities is concerned, the same
would not differ irrespective of the transfer pricing method adopted. In
other words, the comparable transactions/entities must be selected on
the basis of similarity with the controlled transaction/entity.
Comparability of controlled and uncontrolled transactions has to be
judged, inter alia, with reference to comparability factors as indicated
under rule 108(2) of the Income Tax Rules, 1962. Comparability
analysis by TNMM method may be less sensitive to certain
dissimilarities between the tested party and the comparables,
However that cannot be the consideration for diluting the standards of
selecting comparable transactions/entities. A higher product and
functional similarity would strengthen the efficacy of the method in
ascertaining a reliable ALP. Therefore, as for as possible, the
comparables must be selected keeping in view the comparability
factors as specified. Wide deviations in PLI must trigger further
investigations/analysis.
44. Consideration for a transaction would reflect the functions
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performed, the significant activities undertaken, the assets or
resources used/consumed, the risks assumed, Thus, comparison of
activities undertaken/functions performed is important for
determining the comparability between controlled and uncontrolled
transactions/entity. It would not be apposite to ignore functional
dissimilarity only for the reason that its impact may be reduced on
account of using arithmetical mean of the PLI The DRP had noted that
eClerx was functionally dissimilar, but ignored the same relying on an
assumption that the functional dissimilarity would be subsumed in the
profit margin, As noted, the content of services provided by the
Assessee and the entities in question were not similar, In addition ,
there were also functional dissimilarities between the Assessee and
the two entities in question. In our view, these comparability factors
could not be ignored by the Tribunal. While using TNMM, the search
for comparables may be broadened by including comparables offering
services/products which are not entirely similar to the controlled
transaction/entity However this can be done only if (a) the functions
performed by the tested party and the selected comparable entity are
similar including the assets used and the risks assumed; and (h) the
difference in services/products offered has no material bearing on the
profitability Thus on the basis of functional differences from taxpayer
and it cannot serve as a valid comparable for the ITeS segment in the
case of taxpayer.
TPO is thus directed to exclude eClerx from the list of comparables
17. We have gone through the annual report of this company
incorporated from page 649 of the Paper Book and found that this
company is into multifarious activities and it is a knowledge process
outsourcing company providing data analytics, data management
and process improvement solutions to global enterprise clients.
Further, eClerx supports its clients through two business units
Capital Markets and Sales and Marketing Support. The Revenue
recognition policy of this company says that revenue from data
analytics services and process solution comprises from both
time/unit price and fixed fee based service contracts. Revenue from
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time/unit price based contracts is recognized on completion of the
related services and is billed in accordance with the contractual
terms specified in the respective customer contracts. Revenue from
fixed fee based service is recognized on achievement of performance
milestones specified in the customer contracts. Unbilled revenue
represents costs incurred and revenues recognized on contracts to be
billed in subsequent periods as per the terms of the contract.
Interest income is recognized using the time proportion method
based on rates implicit in the transaction. The operating expenses of
this company include the employee costs, general and administration
expenses and selling and marketing expenses, which is different from
the assessee. Further the employee cost increased to Rs.1077.81
millionin the year under review from 748.84 million in the previous
year primarily due to increase in the head count by about 45% which
includes senior level employees hired in India, US, UK and Singapore
operations which learned AR submits that an abnormal one.
18. In view of all these factors, we are of the considered opinion
that eClerx is not a good comparable at all to the assessee. Apart
from that no segmental information is also available. The reasoning
given by the ld. DRP in respect of AY 2011-12 equally applies to the
facts obtaining in this year also. We, therefore, find eClerx not a
good comparable and have to be deleted from the list of
comparables for benchmarking international transaction.
19. Now turning to M/s Infosys BPO limited, M/s Accentia
technologies limited, M/s TCS E-Serve limited and M/s TCS E-Serve
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international Ltd are concerned, it is the argument of the Ld. AR that
these four entities are not good comparables not only because of
their diversified activities but also because of the extraordinary
events that took place during the relevant previous year i.e. Financial
Year 2009-10.
20. He further submitted that M/s Infosys BPO Ltd is into a wide
array of services, customer service outsourcing, finance and
accounting, knowledge services, human resources outsourcing, legal
process outsourcing, sales and fulfillment, sourcing and procurement
outsourcing, banking and capital outsourcing, media outsourcing,
energy outsourcing, retail etc with the significant large scale of
operations to the tune of Rs.1,126.63 crores. He further submitted
that during this financial year there took place the acquisition of
McCamish Systems LLC besides this Infosys BPO limited commanding
huge brand value.
21. In respect of M/s Accentia Technologies Ltd he submitted that
this company is also into diversified services which includes HRCM
(using SaaS model), also into KPO and LPO. With reference to the
annual report of this company, Ld. AR submitted that this entity owns
significant intangible assets at 57% and undertaken extraordinary
activities (amalgamation) during the year. Ld. AR submitted that the
extension technologies Ltd also falls in the category of KPO providing
high end services and, therefore, functionally also it is a dissimilar to
the assessee.
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22. Ld. AR further submitted that both M/s TCS E-Serve Limited
and M/s TCS E-Serve International Ltd are not good comparables to
the assessee because of the exceptional year of operation pursuant
to the acquisition by Tata group. Besides this, these two companies
are providing different services including the transaction processing,
voice based services and technical services. He also submitted that
no segmental information is available in respect of these
twocompanies. He brought to our notice the findings of a coordinate
Bench of this Tribunal in the case of Ameriprise India Private Limited
ITA No. 7014/Del/2014 for the Assessment Year 2010-11 (financial
year 2009-10).
23. We have gone through the record. In M/s Ameriprise India
Private Limited (supra), a coordinate Bench of this Tribunal recorded
the fact that the notes to accounts of M/s Accentia Technologies
Limited indicate about the amalgamation of AsscentInfoserve Private
limited with it as approved by the shareholders in the court convened
meeting held on 25.4.2009 and, subsequently, sanctioned by the
Hon'ble High Court on 21.08.2009.
24. In this order it is further held that the annual report of the
Infosys BPO shows that there was acquisition of McCamish Systems
LLC, which rendered such company incomparable because of the
extraordinary financial event. It could further be seen from this order
that financial year 2009-10 is the exceptional year of operation in
respect of M/s TCS e-serves Ltd as it is the first full year of operations
after its takeover by TCS. It was found that this company is engaged
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in transaction processing and technical services activities in respect
of which no separate segmental details are available. Further
Schedule `O' -notes to account of TCS e-serves Ltd, no information in
respect of activities carried out by the company or segmental details
were available. The same is the case with TCS E-Serve international
Ltd.
25. Findings of the coordinate Bench of this Tribunal in the case of
Ameriprise India P. Ltd. were upheld by the Hon'ble jurisdictional
High Court in the case of Ld. PCIT vs. Ameriprise India Private Limited
in ITA 461/2016 by order dated 19.10.2016, wherein the Hon'ble
High Court observed that the exclusion of M/s Accentia Technologies
and Infosys BPO 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, cannot be characterized as unreasonable.
26. In the case of M/s Agilent technologies (international) private
limited vs. ITO, ITA Nos.1620/Del/2015 and batch for the Assessment
Years 2010-11 to 2012-13, a coordinate Bench of this Tribunal found
that M/s TCS E-Serve is engaged in providing IT services primarily to
Citi group entities globally and it also provides technical services
involving software testing, verification and validation of software at
the time of implementation and data management activities which
cannot be characterized as back office support services. It was
further observed that there is no segmental bifurcation between the
transaction processing and technical services.
19
27. Apart from this, though the Revenue preferred appeal to the
Hon'ble High Court against the findings of the Tribunal in respect of
M/s AccentiaTechnologies, M/s iGate global consultants Ltd and M/s
Infosys BPO Ltd. in the case of Ameriprise India P. Ltd. (supra),
Revenue did not seem to have preferred any appeal against the
findings of the Tribunal in respect of M/s TCS E-Serve limited. In the
circumstances, we find strength in the argument of the Ld. AR that in
view of the judgment of the Hon'ble Apex Court in the case of Berger
Paints India Ltd. Vs. CIT [2004] 266 ITR 99 (SC) wherein the Hon'ble
Apex Court held that if the revenue has not challenged the
correctness of the law laid down by the High Court and has accepted
it in the case of one assessee, then it is not open to the revenue to
challenge its correctness in the case of other assessee, without just
cause, it is not open for the Revenue to challenge the contention of
the assessee that Tata E-Serve limited is not a good comparable.
28. For the reasons discussed in the preceding paragraphs, we are
of the considered opinion that because of the extraordinary events
that took place in the period under consideration, Infosys BPO
limited, Accentia technologies limited, TCS E-Serve limited and TCS E-
Serve international Ltd are not good comparables and are liable to be
excluded from the list of comparables to benchmark the
international transaction.
29. Now coming to the entities which were found to be
comparable, as stated above, among the six comparables rejected by
the ld. TPO, assessee is challenging such rejection in respect of R.
20
Systems, CG Vak Software, Informed Technologies ltd. and Micro
Genentic Systems Ltd. Firstly, in respect of M/s R. Systems, ld. TPO
rejected the same on the ground that this company is having financial
year ending other than March and, therefore, not a suitable
comparable. Ld. DRP also felt that the applicability of different
financial year ending filter is applicable and, therefore, this company
cannot be a good comparable.
30. Contention of the assessee has been that this company files
return of income and such parties prepare the accounts as required
under the Income-tax Act and, therefore, it is within competency of
the ld. AO to seek requisite information by invoking the powers u/s
133(6) of the Act, so long as the company is functionally comparable
with the assessee. It is further submitted that M/s R. System's
comparability was considered at length and accepted on the very
same ground by a coordinate bench of this Tribunal in ITA
No.1973/Del/2014 for Asstt. Year 2009-10 and the Tribunal recorded
that inasmuch as this company has not been rejected on the ground
of functionality, if the quarterly results are available in the public
domain wherein the figures for the relevant quarter are also
available, there cannot be any difficulty to work out the
proportionate margin. While placing reliance on the decision of this
Tribunal in the case of Cadence Design Systems India Ltd., the
Tribunal directed the TPO to consider the quarterly results and work
out the proportionate margin results.
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31. We have gone through the order and also the facts involved in
this matter. The rejection of this comparable is not on the ground of
functional dissimilarity, but only because of a different accounting
period. Facts being similar, we are of the considered opinion that it is
a fit case to direct the ld. AO to consider the quarterly results and
work out the proportionate profit margin for this purpose, we
remand the matter to the file of the ld. TPO/AO for compliance of our
direction.
32. In respect of CG Vak Software, observations of the ld. TPO for
rejecting this company is that under ITeS segment, sale was only just
Rs.82.78 lakhs and on that ground this company was rejected.
Assessee contended that inappropriateness of the turnover filter has
not been considered by the ld. TPO. Ld. DRP on a perusal of the
financials found that CG Vak Software is mainly involved into
software development and earns major portion of its revenue from
the same and the revenue from ITeS/BPO is only 15% i.e. Rs.83 lakhs
and, therefore, it fails the turnover filter.
33. Assessee assails the application of turnover filter so long as
functional dissimilarity is not attributable to this company and
submitted that a similar contention of the revenue was considered by
the Tribunal in assessee's own case for the AY 2009-10 wherein the
Tribunal by placing reliance on Chrys Capital Investment Advisors (I)
P. Ltd. vs ACIT, ITA No.6504/Del/2013 reached a conclusion that if
the company is functionally comparable, the same cannot be
22
rejected on the basis of turnover and therefore, directed ld. TPO to
include CG Vak Software as a comparable company.
34. We have gone through the financials of this CG Vak Software.
At page No.21 of the Annual report of this company, the income
from software development product and services is separately
mentioned and was also at page 26, the segment revenue and
segment results are also provided. In these circumstances, we are of
the considered opinion that in the absence of any finding that this
company is functionally dissimilar, ld. TPO should have considered
these figures to identify whether CG Vak Software is a suitable
comparable with the assessee. We, therefore, direct ld. TPO to
consider this entity for benchmarking the international transaction.
35. The other two companies are M/s Informed Technologies Ltd.
and M/s Micro genetics Systems Ltd. Ld. TPO rejected the same on
the ground that both the Companies sales are below Rs. 5 Crores.In
tune with our findings in respect of M/s CG Vak Software, while
placing reliance on the decision of the jurisdictional High Court in the
case of Chris Capital (supra), we hold that so long as a company is
functionally similar to the assessee merely because it does not match
with the turnover, it cannot be rejected. We, therefore, direct ld. TPO
to include Informed Technologies Ltd. in the list of comparables.
Further, we consider the fact that in assessee's own case for the
Assessment Years 2004-05, 2005-06 and 2006-07, the Tribunal
considered this aspect and rejected the turnover filter.
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36. We, therefore, in the light of a view taken by the Tribunal in
assessee's own case for AYs 2004-05 to 2006-07 and also in the light
of the decision of the Hon'ble jurisdictional High Court in the case
Chris Capital (supra) accept the contention of the assessee and direct
ld. TPO to consider these two companies as good comparables with
the assessee to benchmark the international transactions.
37. Now coming to Ground No.14, this is to the effect that the
interest of credit period granted by the company under normal trade
practices was unjustly charged,having heard both the counsel, we are
of the considered opinion that if working capital adjustment is
granted, then no separate adjustment or interest receivables is
required.We are fortified in our decision by the decision of the
Hon'ble Delhi High Court in ITA No.765/2016 in the case of Kusum
Healthcare P. Ltd.
38. In Ground No.16, the grievance of the assessee is that ld.
TPO/AO has erroneously interchanged operating profit/operating
cost margin of the companies, namely, eClerx Services Ltd. and
Omega Healthcare Management Services P. Ltd. and it requires
rectification. Since it is not a part of adjudication but only a mistake
that had crept in the order, we are of the opinion that the same
could be rectified by the ld. TPO/AO. We, therefore, direct the same.
39. Ground No.20 is in respect of the claim for deduction under
10A of the Act in respect of AEGSC(STP) Unit set up by the assessee
during the financial year 2002-03 on the ground that the STP unit was
24
set up after splitting up its existing business of FCE(EOU) Unit. On
this aspect, it is submitted that in respect of Asstt. Year 2009-10, the
Tribunal considered this aspect at length and directed the AO to
allow deduction u/s 10A of the Act.
40. Paragraph Nos. 33 & 34 of the order dated 3.8.2018 in ITA
No.1973/Del/2014 for Asstt. Year 2009-10 are to the effect that,-
"33. The next issue raised by the assessee relates to claim of
deduction u/s 10A amounting to Rs.58,93,05,999/- in respect of
AEGSC (STP) Unit. Before us ld. Counsel submitted that this
issue has been decided in favour of the assessee in assessee's
own case by the Tribunal in the earlier years. On the other
hand, ld. DR strongly relied upon the order of the AO.
34. From the perusal of the impugned order as well as the
earlier order of the Tribunal, we find that in AY 2003-04, the
Tribunal has upheld the order of ld. CIT(A) allowing the
deduction u/s 10A. In AY 2008-09, again in revenue's appeal
this Tribunal following the earlier decision of the Tribunal held
that assessee was entitled for deduction u/s 10A on the ground
that it has established a new unit. Once already deduction u/s
10A on the same unit has been allowed in the earlier years by
the Tribunal, therefore, no different view can be taken for the
same unit on similar set of facts for denying the deduction in AY
2009-10. Accordingly, we direct the AO to allow deduction u/s
10A in respect of the said unit."
41. In view of the above, while respectfully following the same, we
direct the learned AO to allow the deduction u/s 10A of the Act for
the Asstt. Year 2010-11 to the tune of Rs.49,93,98,378/- in respect of
AEGSC(STP) Unit set up by the assessee during the Financial Year
2002-03.
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42. Lastly, turning to Ground No.21 which relates to the grant of
full credit to the assessee as claimed in the return, we are of the
opinion that the ends of justice would be met by directing the ld. AO
to verify the credit of TDS and allow the same to the assessee.
43. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 17th July, 2019.
Sd/- sd/-
(O.P. KANT) (K. NARASIMHA CHARY)
ACCOUNTANT MEMEBR JUDICIAL MEMBER
Dated 17th July, 2019
VJ
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
By order
Assistant Registrar
Draft dictated 10.7.2019
Draft placed before author 15.7.2019
Approved Draft comes to the Sr.PS/PS
Order signed and pronounced on
File sent to the Bench Clerk
Date on which file goes to the AR
Date on which file goes to the Head Clerk.
Date of dispatch of Order.
Date of uploading on the website
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