IT firm wins transfer pricing case, avoids Rs 9.56 crore tax adjustment on export services.

Case Name:

BNY Mellon International Operations (India) Private Limited vs. Dy. Commissioner of Income Tax, Circle 1(1), Pune (ITAT Pune)

Key Takeaways:

- Selection of appropriate comparable companies is crucial in transfer pricing analysis - Courts will scrutinize the functional profile and business model differences between the taxpayer and comparable companies - Verbatim citations of legal precedents and provisions are important **Issue:** Whether the transfer pricing adjustment of Rs 9.56 crore made by the tax authorities to the value of international transactions of the IT company was justified? **Facts:** - The taxpayer, an IT company, provided BPO services exclusively to its associated enterprises - For FY 2009-10, it reported Rs 82.42 crore as consideration from associated enterprises - It used the Transactional Net Margin Method to benchmark its international transactions - The Transfer Pricing Officer (TPO) made a transfer pricing adjustment of Rs 9.56 crore, increasing the arm's length price **Arguments:** Taxpayer's Arguments: - Objected to inclusion of 5 companies as comparables by TPO due to functional dissimilarities - Cited legal precedents where these companies were rejected as comparables for BPO service providers Revenue's Arguments: - Defended the comparables selected, stating they were in the IT-enabled services category - Rejected taxpayer's objections and legal precedents cited **Key Legal Precedents:** - PTC Software (India) Pvt Ltd vs DCIT (ITA No.336/PN/2014) - Capital IQ Information Systems (India) Pvt Ltd vs AddlCIT (ITA No.124/Hyd/2014) - DCIT vs Willis Processing Services (India) Pvt Ltd (ITA No.2152/Mum/2014) - Mercer Consulting (India) P Ltd vs DCIT (ITA No.966/Del/2014) **Judgement:** The court upheld the taxpayer's objections and excluded the 5 companies from the final list of comparables based on functional dissimilarities and legal precedents. With the revised comparables, the transfer pricing adjustment fell within the +/- 5% range, making it insignificant. Thus, the court ruled that no transfer pricing adjustment was warranted. **FAQs:** 1. What is the significance of this case? This case highlights the importance of selecting truly comparable companies in transfer pricing analysis. Functional profile and business model differences can render a company incomparable, even if it falls under the same broad industry category. 2. Why did the court rely on legal precedents? The court relied on legal precedents from various jurisdictions to assess the comparability of the disputed companies. Precedents provide guidance on how similar situations were analyzed and decided previously. 3. What is the relevance of verbatim citations? The court emphasized accurately citing verbatim names of case laws and section numbers from the original judgment. This ensures precise reference to legal provisions and precedents. 4. What is the impact of this decision? This decision provides taxpayers with guidance on challenging the comparables selected by tax authorities in transfer pricing cases, especially when there are functional dissimilarities or differences in business models.

The captioned appeal has been preferred by the assessee pertaining to the assessment year 2009-10, which is directed against the order of the Dy. Commissioner of Income Tax, Circle 1(1), Pune (in short ‘the Assessing Officer’) passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short “the Act”) dated 14.11.2013, which is in conformity with the directions given by the Dispute Resolution Panel, Pune (in short ‘the DRP’) dated 12.11.2013.

2. In this appeal, the Grounds of Appeal raised by the assessee read as under: -

“The Appellant objects to the order dated 14 November 2013 passed by the learned Deputy Commissioner of Income Tax, Circle 1(1), Pune ("DCIT") under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 ("the Act") in pursuance of the directions of the learned Dispute Resolution 2 ITA No.23/PN/2014 Panel, Pune ("DRP") for the Assessment Year ("AY") 2009-10 on the following among other grounds:

1. General:

The learned DCIT, pursuant to the directions of the Hon'ble DRP has erred in law and on the facts and in circumstances of the case in making an adjustment amounting to INR 9,56,21,498 to the value of international transactions entered into by the Appellant with its associated enterprise ("AE") with respect to export of transaction processing services.

2. Erroneous selection of comparable companies

The learned DCIT, pursuant to the directions of the Hon'ble DRP has erred in law and on the facts and circumstances of the case in confirming the following companies as the comparable companies:

2.1 Accentia Technologies Limited

2.2 Coral Hub Limited

2.3 Eclerx Services Limited

2.4 Cosmic Global Limited

2.5 Crossdomain Solutions Limited

3. Erroneous rejection of comparable companies

The learned DCIT, pursuant to the directions of the Hon'ble DRP has erred in law and on the facts and in circumstances of the case in rejecting following companies as comparable companies:

3.1 Transworks Information Services Limited

3.2 Allsec Technologies Limited

3.3 Professional Management Consultants Private Limited

3.4 Sundaram Business Services Limited

3.5 Teletech Services (India) Pvt Limited

4. Erroneous selection of Information Technology Enabled Services (ITES) and Knowledge Process Outsourcing (KPO) companies unlike Business Process Outsourcing (BPO) companies as comparable to the Appellant which is into BPO services

The learned DCIT, pursuant to the directions of Hon'ble DRP has erred in law and on the facts and in circumstances of the case in selection of ITES and KPO companies unlike the Appellant which is into BPO segment.

5. Erroneous selection of outliers companies as comparable to the Appellant

The learned DCIT, pursuant to the directions of Hon'ble DRP has erred in law and on the facts and in circumstances of the case in selection of outliers companies e.g. Accentia Technologies Ltd., Cosmic Global Ltd., Eclerx Services Ltd. and Coral Hubs Ltd. (with operating margin on cost of 48.40%, 48.12%, 48.43% and 36.93% respectively).

6. Incorrect calculation of working capital adjustment

The learned DCIT, pursuant to the directions of the Hon'ble DRP has erred on the facts and in circumstances of the case in computing the working capital adjustment.

7. Search Matrix and FAR Analysis of search carried out by the learned transfer pricing officer (TPO) not shared

The learned DCIT, pursuant to the directions of Hon'ble DRP has erred in law and on the facts and in not sharing with the Appellant the search matrix and functional asset and risk analysis (FAR) carried out by the learned TPO for fresh search of comparable companies done by him.

8. Rejection of the multiple year data of comparable companies

The learned DCIT, pursuant to the directions of Hon'ble DRP has erred in law and on the facts and in circumstances of the case in not accepting the use of multiple year data for computing the profit level indicator of the comparables.

9. Non-consideration of Risk adjustment to the Appellant

The learned DCIT, pursuant to the directions of the Hon'ble DRP has erred on the facts and in circumstances of the case in non-granting risk adjustment to the Appellant.

10. Transfer pricing adjustment without giving benefit of +/- 5 per cent

The learned DCIT, pursuant to the directions of Hon'ble DRP has erred in law and on the facts and in circumstances of the case in not granting the benefit of +/- 5 percent as per proviso to section 92C(2) of the Act.

11. Initiation of penalty proceedings

The learned DCIT, erred on the facts and in law in proposing to initiate penalty proceedings section 271(1)(c) of the Act, without considering the facts of the case.

12. Levying of interest

12.1 The learned DCIT, has erred on the facts and in law by levying interest under sections 234B and 234D of the Act.

12.2 The Appellant pleads that the shortfall in advance tax and excess refund has resulted in view of the transfer pricing adjustment which have been objected in the grounds above.

13. Each one of the above grounds of appeal is without prejudice to the other.

14. The Appellant reserves the right to amend, alter or add to the grounds of appeal.”

3. Although, assessee has raised multiple Grounds of Appeal but the solitary addition in dispute is a sum of Rs.9,56,21,498/- made by the Assessing Officer while determining the arm's length price of the international transactions entered by the assessee with its associated enterprises.

4. In brief, the relevant facts are that the assessee is a company incorporated under the provisions of the Companies Act, 1956 in June, 2004 as a subsidiary of MBC Investments Corporation, USA. MBC Investments Corporation, USA is a subsidiary of erstwhile Mellon Financial Corporation, USA, which has since merged with the Bank of New York, USA. As a consequence, the Bank of New York Mellon Corporation, USA is the ultimate holding company of the assessee. The assessee-company is engaged in the business of providing ‘Business Process Outsourcing’ (BPO) services exclusively to its affiliated companies. The unit of the assessee is registered under the Software Technology Parks of India (STPI) as a 100% Export Oriented Unit (EOU). During the year under consideration, assessee had rendered its IT Enabled Services (ITES) i.e. BPO services to its associated enterprises for a stated consideration of Rs.82,42,39,503/-. In its Transfer Pricing Study, assessee selected the Transactional Net Margin (TNM) Method as the most appropriate method in order to determine the arm's length price of the international transactions relating to the provisions of ITES to the associated enterprises. The Profit Level Indicator (PLI) was taken as Operating Profit/Operating Cost while carrying out the comparability analysis under the TNM Method. Assessee was rendering captive services to its associated enterprises and was being remunerated at cost plus markup of 15% on the entire cost entered for rendering such ITES. The assessee applied certain filters and the search analysis revealed a set of comparables based on the use of multiple years financial data of the comparables. Since the average PLI of the comparables was arrived at 10.08% and the PLI of the assessee was arrived at 16.33%, the contention of the assessee was that the transaction of ITES rendered to the associated enterprises were at an arm's length price. The income-tax authorities have differed with the assessee as according to them, an adjustment of Rs.9,56,21,498/- is required to be made to the stated value of the international transactions so as to bring it to the level of their arm's length price. As a consequence, the total income returned by the assessee for the year under consideration has been enhanced by the said amount, which is the subject-matter of controversy before us.

5. Notably, the Assessing Officer was required to compute the income arising from the international transaction of ITES segment having regard to the arm's length price, as required by the provisions of section 92(1) of the Act. As a consequence, the Assessing Officer referred the computation of the arm's length price in relation to the international transaction of ITES to the Transfer Pricing Officer (in short “the TPO”) in terms of section 92CA(1) of the Act. The TPO after allowing the assessee an opportunity of being heard passed an order u/s 92CA(3) of the Act dated 28.01.2013 determining the arm's length price of the international transactions of ITES at a figure higher than the stated consideration by a sum of Rs.9,56,21,498/-. As a consequence, the Assessing Officer passed a draft assessment order u/s 143(3) r.w.s. 144C(1) of the Act conformity with the order of the TPO. Assessee raised objections before the Dispute Resolution Panel (in short “the DRP”) who vide its directions u/s 144C(5) of the Act dated 12.11.2013 dismissed the objections of the assessee. As a consequence, the Assessing Officer passed an assessment order u/s 143(3) r.w.s. 144C(13) of the Act dated 14.11.2013 after making an addition of Rs.9,56,21,498/- on account of the transfer pricing adjustment.

6. At the time of hearing, the Ld. Representative for the assessee has made arguments only on a single issue relating to the inclusion of following five concerns by the TPO in the final set of comparables, namely, (i) Accentia Technologies Limited; (ii) Crossdomain Solutions Limited.; (iii) Cosmic Global Limited; (iv) Eclerx Services Limited; and, (v) Coral Hubs Limited.

7. In this context, it is noticed that the TPO accepted the selection of TNM Method by the assessee as the most appropriate method in order to carry out the comparability analysis for the purposes of computing the arm's length price of the international transactions of ITES. However, the TPO carried out a fresh search analysis and after applying certain filters has determined the final set of comparables along with their PLIs as under :-

8. The TPO considered single year data of the comparables relating to the financial year under consideration as against the assessee approach of using the multiple year’s data of the comparables. This aspect of the controversy is not disputed before us. Further, the TPO has also not disputed the PLI of the assessee determined at 16.33%. After considering the average margin of the aforesaid eight comparables at 30.24%, the TPO determined the arm's length price of the international transactions of Provisions of ITES to the associated enterprises at Rs.91,99,81,498/- as against the stated value of the international transactions of Rs.82,43,60,000/- thereby resulting in an adjustment of Rs.9,56,21,498/-.

9. Before us, the Ld. Representative has contended that that TPO erred in accepting Accentia Technologies Ltd. as a comparable disregarding the assessee’s plea for its exclusion from the list of comparables. Before the TPO, assessee had contended that the said concern was showing an 7 ITA No.23/PN/2014 abnormal trend of profitability. Secondly, it was also canvassed that the said concern was having different streams of income, namely, (i) medical transcription billing; (ii) coding; and, (iii) software development and implementation services; and, that there was no separate segmental information available in the Annual financial statements. Thirdly, it was canvassed that functionally the said concern was carrying out different functions than the assessee. As per the assessee, the main segment of the said concern is IT enabled services in Health Care Receivables Cycle Management (medical transcription, medical coding, billing and collections in the Medical Transcription Industry) using mostly third party software and in some cases proprietary software also. The said concern was also into Legal Process Outsourcing. The said concern was also offering Saas model in the Health Care Receivable Cycle Management areas and in this connection, a typical software was deployed by the said concern. The aforesaid was canvassed before the TPO on the basis of the Annual financial statements of the said concern. In contrast, the claim of the assessee was that it was functionally different as it was only a BPO service provider. The aforesaid arguments of the assessee have been rejected by the TPO primarily on the ground that the category of IT enabled services as classified by the CBDT includes a variety of functions and therefore it could not be said that the Accentia Technologies Ltd. was not comparable to the assessee.

10. In this background, the Ld. Representative for the assessee pointed out that Pune Bench of the Tribunal in the case of PTC Software (India) Private Limited vs. DCIT vide ITA No.336/PN/2014 dated 31.10.2014 pertaining to the assessment year 2009-10 has considered M/s Accentia Technologies Ltd. as non-comparable. It was pointed out that the decision of the Pune Bench of the Tribunal in the case of PTC Software (India) Private Limited (supra) has been rendered in the context of the provider of IT enabled services, which are 8 ITA No.23/PN/2014 similar to the functions of the assessee. Our attention has been drawn to para 47 of the order of the Tribunal dated 31.10.2014 (supra) which reads as under :-

“47. The next objection of the learned Authorized Representative for the assessee was with regard to the inclusion of M/s. Accentia Technologies Ltd. which admittedly was engaged in developing its own software products and was rendering medical transcription services. Further, the said company during the year under consideration had made certain acquisitions which in turn affected the margins of the year of the acquisition. We find that Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Pvt. Ltd. (supra) had rejected Accentia Technologies Ltd. for having extra-ordinary circumstances i.e. amalgamation. Following the parity of reasoning as adopted by the Hyderabad Bench of the Tribunal, we hold that the said company had different functional profile as compared to the assessee, which in turn explained the abnormally high profit margins earned by the said company as compared to the assessee. Accordingly, we accept the plea of the assessee and hold that the said company is not to be used as comparable in ITES segments of the assessee.”

11. The aforesaid discussion by the Tribunal reveals that for the very same assessment year M/s Accentia Technologies Ltd. has not been found to be comparable to a concern rendering IT enabled services. The arguments putforth by the TPO, which has been reiterated before us, do not justifiably meet with the assessee’s plea for exclusion of M/s Accentia Technologies Ltd. from the final set of comparables. The plea of the assessee is quite potent and is in-fact based on the discussion available in public domain in the form of Annual financial statement of the said concern. Moreover, in the light of the decision of the Pune Bench of the Tribunal in the case of PTC Software (India) Private Limited (supra), we find no reason to negate the plea raised by the assessee for exclusion of Accentia Technologies Ltd. from the final set of comparables. We hold so.

12. Another plea raised by the assessee is for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. In this regard, assessee canvassed before the TPO that the said concern was functionally not comparable to the activity of IT enabled services being carried out by the 9 ITA No.23/PN/2014 assessee. It was pointed out by the assessee before the TPO that the said concern was involved in various activities which involved outsourcing, human resources, insurance, healthcare/accounting and consulting, business excellence, market research/analysis and IT services. It was pointed out that the above functions being performed by the said concern were not comparable to the activity of an IT enabled service provider undertaken by the assessee. It was also canvassed that there was no segmental profitability available from the Annual financial statement of the assessee and the said concern was not a comparable concern on the entity level. The TPO has rejected the plea of the assessee on similar grounds as taken by him for rejecting the assessee’s plea for exclusion of Accentia Technologies Ltd..

13. Before us, the Ld. Representative has relied upon the decision of the Mumbai Bench of the Tribunal in the case of DCIT vs. M/s Willis Processing Services (India) Pvt. Ltd. vide ITA No.2152/Mum/2014 dated 10.10.2014 in order to justify the exclusion of Crossdomain Solutions Ltd..

14. We find that M/s Wills Processing Services (India) Pvt. Ltd. (supra) was a concern where the tested party was providing IT enabled services to its various group concerns and activities were quite similar to the activity of IT enabled services rendered by assessee to its affiliates. In this context, the concern, M/s Crossdomain Solutions Ltd. was found to be functionally not comparable by the DRP and such decision was affirmed by the Tribunal by making the following discussion :-

“3. M/s Crossdomain Solutions Ltd.

This company has been rejected by the DRP on the ground that it is indulged in high skill IT services which are not comparable to the routine I.T. Enabled services. The Tribunal Hyderabad Bench in the case of M/s Market Tools Research Pvt. Ltd. in ITA No.1811/Hyd/2012 has held that this company is providing services which are in the nature of KPO. Further, the company is engaged in providing Niche services as well as developed its own brand ‘Exdion’ to target the insurance industry in US. The Tribunal followed the findings of the Bangalore Bench in the case of M/s Symphony Marketing Solutions India Pvt. Ltd. in ITA No.1316/Bang/2012 while rejecting the issue of this company in the final set of comparables. Respectfully following the findings of the co-ordinate bench, we uphold the directions of the DRP for the rejection of this company from the final list of comparable.”

15. Following the aforesaid precedent, which has been rendered in the context of the same assessment year, we uphold assessee’s plea for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. We hold so.

16. The third concern, which is sought to be excluded by the assessee is Cosmic Global Ltd.. Before the TPO also, assessee had canvassed that the said concern was functionally not comparable to the assessee. It was pointed out that the said concern is engaged into translation, transcription of data which is entirely different from the functions being performed by the assessee. The TPO has rejected the plea of the assessee by merely noticing that in the preceding assessment year 2008-09, the stated concern was selected by the assessee as a comparable concern.

17. Before us, the Ld. Representative for the assessee pointed out that the plea of the assessee for exclusion of Cosmic Global Ltd. is supported by the decision of the PTC Software (India) Private Limited (supra), which has also been rendered in the context of a concern rendering similar services as the assessee. The following discussion in the order of the Tribunal dated 31.10.2014 is relevant in this regard :-

“50. The next company as per the assessee which should not be taken as comparable is Cosmic Global Ltd. Admittedly, the assessee had not objected to its inclusion either before the TPO or DRP. However, the assessee challenged the exclusion of the said company as comparable before the Tribunal.

51. We find that the Special Bench of Chandigarh Tribunal in the case of Quark Systems Pvt. Ltd. (supra) had held that even if the assessee had not challenged the inclusion of the comparable before the authorities below, the same could be challenged before the Tribunal for the first time. Accordingly, we hold that the assessee at this point can raise the said issue. Now, the second part of the objection was that the company had outsourced its vendor and was making high vendor payments as compared to the sales and hence was not comparable. While adjudicating the exclusion of M/s. Vishal Information Technologies Ltd., we have in paras hereinabove already considered this aspect of the companies outsourcing to vendors and held M/s. Vishal Information Technologies Ltd. to be not functionally comparable. Following the same parity of reasoning, we hold that M/s. Cosmic Global Ltd. is not functionally comparable.”

18. Apart from the decision in the case of PTC Software (India) Private Limited (supra), the decision of Hyderabad Bench of the Tribunal in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. Addl.CIT vide ITA No.124/Hyd/2014 dated 31.07.2014 has also been relied upon by the assessee to justify the exclusion of M/s Cosmic Global Ltd. from the final set of comparables. The Hyderabad Bench of the Tribunal considered an earlier decision of the Delhi Bench of the Tribunal in the case of M/s Mercer Consulting (India) P. Ltd. vs. DCIT vide ITA No.966/Del/2014 dated 06.06.2014 wherein also the said concern was found to be incomparable with an ITES provider. The following discussion in the order of the Hyderabad Bench of the Tribunal is worthy of notice :-

“19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under-

"13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at Rs.7.37 crore divided into three segments, namely, Medical transcription and consultancy services at Rs.9,90 lacs, Translation charges at Rs.6.99 crore and Accounts BPO at Rs.27.76 lac. The Id. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the Id. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs.3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of Rs.6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment.

13.3. However, we find this case to incomparable on the alternative argument advanced by the Id. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs.27.76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs.86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs.27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables.

"In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons.”

19. The aforesaid discussion made by the respective Benches of the Tribunal reveals that in relation to the financial year under consideration, the business model in which M/s Cosmic Global Ltd. has functioned is quite dissimilar to the business model of the assessee while carrying out the activity of an ITES provider. Moreover, none of the objections raised by the assessee have been met by the TPO on the basis of any cogent reasoning. On that count also, we find that the plea of the assessee to exclude M/s Cosmic Global Ltd. from the final set of comparables is justified. The objection of the TPO that the said concern was found comparable by the assessee in earlier year cannot be the sole basis to include the said concern in the list of comparables, in view of the aforesaid discussion. Thus, assessee succeeds on this aspect.

20. The next concern whose inclusion has been objected by the assessee is Eclerx Services Ltd.. In this regard, assessee submitted before the TPO that the said concern was carrying out functionally different business activities and therefore it was not a comparable concern. The detailed submissions in this regard have been reproduced by the TPO in para 30 of his order. It was pointed out that the said concern was engaged in the provision of sale and marketing services, Online Operations Support, Data Management Services, Pricing Operations Support, Reporting, Analytics and Business Intelligence services, etc.. It was thus canvassed that the aforesaid functions are quite different from functions of an ITES provider. The TPO has rejected the aforesaid pleas of the assessee.

21. Before us, the Ld. Representative has relied upon the decisions of the Pune Bench of the Tribunal in the case of PTC Software (India) Private Limited (supra) and the Hyderabad Bench of the Tribunal in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd. (supra) to point out that the plea regarding the functional dissimilarity of the said concern has been affirmed. The Pune Bench of the Tribunal in the case of PTC Software (India) Private Limited (supra) has dealt with the nature of services being rendered by Eclerx Services Ltd. in following manner :-

“48. The next objection of the assessee was that with regard to inclusion of Eclerx Services Ltd. which admittedly was engaged in providing KPO services i.e. Knowledge Process Outsourcing, whereas the assessee was engaged in BPO services. The Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. (supra) vide order dated 21.08.2014 had excluded the said company as a comparable while determining the margins under ITES segments. The Special Bench of the Tribunal vide paras 82 and 83 at pages 73 and 74 of the order, had observed as under:-

“keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns.”

49. Following the same parity of reasoning, we direct the TPO to exclude M/s. Eclerx Services Ltd. as comparable.”

22. Similarly, the Hyderabad Bench of the Tribunal in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd. (supra) has discussed the nature of services rendered by M/s Eclerx Services Ltd. in the following manner :-

“18. The objection of assessee to this comparable is that this company is functionally dissimilar. It is in the business of consultancy and advisory service and provides only analytical data. It is also involved in quality monitoring. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. Therefore, the functions of the above company are dissimilar to assessee, which is a captive service provider. On the principles laid down by the Hon'ble Special Bench of the ITAT (Mumbai) in the case of Maersk Global Centres (India) Pvt. Ltd. V/s. ACIT (ITA No.7466/Mum/2012 for assessment year 2008-09 dated 7.3.2014) and the principles laid down by the coordinate bench of the Tribunal (Delhi) in the case of M/s. Mercer Consulting (India) Pvt. Ltd. (supra), assessee submits that this company cannot be selected as a comparable.

18.1 The Learned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded.

18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company be considered as KPO and we are of the opinion that this company is not comparable to assessee's services. We therefore, direct the Assessing Officer/TPO to exclude this company.”

23. The aforesaid discussion by the respective Benches of the Tribunal clearly show that the plea of the assessee that the said concern is functionally dissimilarly to the assessee, has been wrongly rejected by the TPO. Even before us, there is no cogent reasoning brought out by the Revenue to assail assessee’s plea for exclusion of M/s Eclerx Services Ltd. from the final set of comparables. We direct accordingly.

24. The next objection of the assessee is with regard to the inclusion of Coral Hubs Ltd. (Formerly known as Vishal Informational Technologies Ltd.) in the final set of comparables. The plea of the assessee in this regard has been noted by the TPO in para 29 of his order. It was canvassed by the assessee that the said concern was functionally dissimilar to the activities undertaken by the assessee. It was pointed out that the said concern was involved in digitization activity and was also in e-publishing arena. It was also pointed out that it had entered into a new business of Digital Library & Print on Demand (POD) activities, which are quite different from the activities of BPO undertaken by the assessee. By analyzing the employee cost ratio to sales of the said concern, assessee also pointed out before the TPO that the said concern was operating with a different business model. In the case of Coral Hubs Ltd., the employee cost as a percentage of sales stood at 1.22% for the financial year under consideration whereas the employee cost as a percentage of sales stood at 54.22% in the case of the assessee. It was also pointed out that, M/s Coral Hubs Ltd. was having major vendor payments which showed that it was outsourcing its activities to third parties on a substantial level, whereas assessee was operating through its employees. All the aforesaid pleas of the assessee have been summarily rejected by the TPO.

25. Before us, the Ld. Representative for the assessee has reiterated the submissions put-forth before the TPO and has also pointed out that in a similar situation, the Pune Bench of the Tribunal in the case of PTC Software (India) Private Limited (supra) has found the said concern to be functionally dissimilar to a concern engaged in rendering of BPO services (ITES). The following discussion in the order of the Tribunal in the case of PTC Software (India) Private Limited (supra) has been rendered to :-

“45. We have heard the rival contentions and perused the record. In the TP study carried out by the TPO in the ITES segments, fresh search criteria were applied by the TPO and list of comparables which were not selected by the assessee were picked up in the TP study and the margins of the said comparables were applied to determine the arm’s length price of the transactions of the assessee in ITES segments. The assessee was aggrieved by the selection of the said comparables and the plea of the assessee was that in case said comparables were not included in the TP study, the margins shown by the assessee would be at arm’s length. The first comparable referred to by the learned Authorized Representative for the assessee was M/s. Vishal Information Technologies Ltd. The said company was providing IT enabled services and was also engaged in other diversified activities. Further, it has outsourced its services to third party vendor and acted as intermediary between the final customer and the vendor. The assessee on the other hand was engaged in the running of a call centre and was providing technical support to its AEs. We find that the Tribunal in assessee’s own case relating to assessment year 2006-07 in ITA No.1346/PN/2010 and in assessment year 2007-08 in ITA No.1605/PN/2011 had excluded the said comparables observing as under:

“30. The next point raised by the assessee is against the inclusion of Vishal Information Technologies Ltd., appearing at Item (10) in the Tabulation in para 25 as a comparable case. The TPO has discussed the issue in para 6.9.6. of the order. As per the TPO, the said concern is functionally comparable to the IT-Enabled services segment of the assessee and for that reason, the said concern has been included as a comparable for the purposes of comparability analysis. In this connection, the plea set up by the assessee is that the said concern is engaged in not only IT-Enabled services, but also in providing quality products and in the creation of animated films and books. It has also been ascertained by referring to the Annual Report of the said concern that it is engaged in providing agency services by way of outsourcing the services to third party vendors and acting as an intermediary between the final customer and the vendor. The assessee furnished detailed submissions in this regard before the lower authorities, copies of which have been placed in the Paper Book at pages 420.8 to 420.31. By referring to the written submissions, it is also sought to be pointed out that the intermediary functions performed by the said concern can be compared to that of a distributor which takes title to service/ product for resale to the customers. The aforesaid assertion is sought to be substantiated by the details of payments made by the said concern for data entry and vendor payments, personnel costs and sales. It is, therefore, contended that the said concern is functionally dissimilar to that of the IT-Enabled services segment of the assessee. It has also been argued that the said concern has earned supernormal profits as high as 59.19% and therefore, the same is not includible in the list of comparables so as to avoid skewing of the comparability analysis. On the other hand, the stand of the Revenue as brought out by the TPO in para 6.9.6. of the order is to the effect that the said concern being categorized as an IT-Enabled services concern, the same is liable to be included.

31. We have carefully considered the rival submissions on this aspect. At the outset, we may refer to page 810 of the Paper book, wherein the Notes to Accounts for the year ended 31.3.2007 of the said concern have been placed. As per the available information, the said concern has related party transactions as reported by the concern at para 7 of the said Notes at 86.92%, which breaches the RPT filter. Furthermore, the functional profile of the said concern brought out by the assessee also reveals differentiation in the activity profile. The TPO, in our view, has not appreciated the qualitative difference in the functions performed by the said concern as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern be excluded from the list of comparables for the reasons canvassed. Thus, on this aspect assessee succeeds.”

46. The Tribunal in the assessee’s own case had held that the said concern was found to be operating in different functional environment and the same was excluded for the purpose of comparability analysis. Following the ratio laid down by the Tribunal in assessee’s own case in assessment years 2006-07 and 2007-08 (supra), we uphold the plea of the assessee in excluding the margins of the said concern M/s. Vishal Technologies Ltd.”

26. In the context of the aforesaid precedent, no cogent reasoning has been advanced by the Ld. Departmental Representative and therefore, we uphold assessee’s plea for exclusion of Coral Hubs Ltd. (formerly known as Vishal Informational Technologies Ltd.) from the final set of comparables.

27. At the time of hearing, it was stated by the Ld. Representative for the appellant that if assessee was to succeed on its plea of the exclusion of (i) Accentia Technologies Limited; (ii) Crossdomain Solutions Limited.; (iii) Cosmic Global Limited; (iv) Eclerx Services Limited; and, (v) Coral Hubs Limited from the final set of comparables, then the variation between the arm’s length price so determined and the stated value of the international transactions would fall within the +/- 5% and therefore in terms of section 92C(2) of the Act no adjustment would be required to be made. Since we have upheld the plea of the assessee for exclusion of (i) Accentia Technologies Limited; (ii) Crossdomain Solutions Limited.; (iii) Cosmic Global Limited; (iv) Eclerx Services Limited; and, (v) Coral Hubs Limited from the final set of comparables, the other Grounds of Appeal raised by the assessee in order to assail the addition of Rs.9,56,21,498/- on account of transfer pricing adjustment are rendered academic and are not being adjudicated for the present.

28. In the result, the appeal of the assessee is partly allowed.

Order pronounced on 11th February, 2015.

Sd/- Sd/-

(R.S. PADVEKAR) (G.S. PANNU)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 11th February, 2015