Outsourcing company cannot be compared to one incurring substantial salary costs

Case Name:

New River Software Services (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle-13 (1), New Delhi (ITAT Delhi)

Case Synopsis:

1. The assessee was engaged in rendering online financial services, which included strategic advisory services, industry and operation expertise, compliance focus services, web marketing services, electronic commerce knowledge services, and intelligence and best practice services to its AE of USA.

2. The assessee had shown PLI of OP/OC at 10.33 per cent, which had been benchmarked with the arithmetic mean of 8.45 per cent in respect of 17 comparables selected by the assessee.

3. TPO selected fresh 24 comparables for benchmarking the international transactions relating to provision of market support/information services, and, accordingly, made TP adjustment.

4. DRP confirmed said order directing to select only 12 comparables.

5. On appeal, the assessee had primarily objected to the inclusion of four comparables, and pointed out that from the distinction between BPO and KPO amplified in the Safe Harbour Rules, it was evident that assessee was providing only BPO service to the group.

6. On appeal, the ITAT held as under

The main contention of revenue is that assessee was imparting high end knowledge services which come within the ambit of KPO and not mere BPO. All these services which the assessee was imparting, required special knowledge and could not be imparted in a routine manner. The employee actually undertaking these services was required to analyse various datas by employing his special knowledge and then only it could provide its AE with necessary support. It cannot be denied that these were high end services, requiring strategic decision making before arriving at final conclusion. Therefore, the assessee's submission that it was mere a BPO could not be accepted. The distinction elucidated in Safe Harbour Rules is also in same lines.

Coral Hub (Vishal Information Technologies Ltd.) : The annual report of this company is contained at page 476 to 525 of the PB. However, the actual operations carried out by assessee have not been specified. The assessee's main contention is that this company was outsourcing a considerable portion of their business as is evident from the outsourcing cost to total cost which was 85.58% as noted earlier. Therefore, the business model of this company cannot be compared with the business model of assessee where salary cost was 54.67% of the total cost. When the business operations are out sourced, the profit margins are bound to increase substantially as compared to a business which is carried on through employees. Therefore, this company cannot be included in the list of comparables, though it might be carrying on the similar functions which assessee was carrying on. The functional profile no doubt is one of the major criteria but not the sole criteria for deciding whether the said company can be included in the list of comparables or not. The assets and risk profile also has to be taken into consideration. This company was selected by TPO and, therefore, the submissions of ld. Standing Counsel on the ground of functional profile cannot be accepted. Moreover, we note that ld. Counsel has pointed out that data entry charges were 84.5% of total expenditure and, therefore, this cannot be compared to assessee, which was primarily imparting high end services. We, accordingly, direct for exclusion of this company from the list of comparables. Eclerx Service Ltd.: Ld. counsel for the assessee has, inter alia, relied on the decision of Tribunal in the case of Calibrated Healthcare Systems India (P.) Ltd. (supra). In this decision we note that the Tribunal has observed that this company was a knowledge process outsourcing KPO company, providing data analytic and data processing solutions to its clients. It is further observed that it is a recognized expertise in financial services and retail manufacturing and provide consultancy services and also process outsourcing. This company was rejected by the Tribunal observing that the nature of assessee's business viz. Calibrated Healthcare Systems India (P.) Ltd's case (supra) was in processing insurance claim and data entry. Therefore, this decision, in our opinion, is of no help to assessee. In the present case all the functions are carried out by assessee for its AEs and, there is no doubt it was a captive service provider. However, the important aspect which is to be considered is as to what functions were being performed by assessee. If assessee was merely providing data to its AE without any analysis and performing its functions only in a mechanical manner, then no doubt it would be comparable to BPO but when the results provided to AE are after detailed analysis after employing skills of highest standards, then it would come within the ambit of BPO. Therefore, merely on the ground that assessee is a captive service provider, it cannot be said that this company was functionally not comparable. Ld. counsel has pointed out that extraordinary events of acquisition had occurred. However, in this year no such extraordinary events took place. We, therefore, are not inclined to accept the assessee's contention on this count and uphold the findings of DRP on this count.

As far as Infosys BPO and Wipro BPO are concerned, ld. Standing Counsel submitted that the decision of Hon'ble Delhi High Court in the case of Aginity India Technologies (supra), deals primarily with software development services. Be that as it may, we are in agreement with ld. counsel for the assessee that keeping in view the huge turnover, economies of scale, brand value and other factors pointed out by ld. counsel in his submissions and also keeping in view the decision of Hon'ble Delhi High Court in the case of Aginity India Technologies (supra) these two companies cannot be included in the list of comparables because the assessee's turn over was only Rs. 11 crores.

In the result, assessee's appeal is partly allowed.