Exl Service SEZ BPO Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 1351/DEL/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6885 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 08-11-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 10-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI S. V. MEHROTRA, ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO. 1351/DEL/ 2016 (ASSESSMENT YEAR (2 011-12) EXL SERVICE SEZ BPO PVT. LTD. 414, 4 TH FLOOR, DLF JASOLA TOWER B, PLOT NO. 10 & 11, DDA DISTRICT CENTRE, JASOLA NEW DELHI AACCE2427Q (APPELLANT) VS ITO WARD-8(4) NEW DELHI (RESPONDENT) ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER DATED 23/11/2015 FOR A.Y. 2011-12 PASSED UNDER SECTION 14 3(2) READ WITH SECTION 144C OF THE INCOME TAX ACT, 1961. 2. EXL SEZ WAS INCORPORATED IN INDIA AS A PRIVATE L IMITED COMPANY IN JANUARY 2009 AND IS A SUBSIDIARY OF EXL SERVICE MAURITIUS LIMITED WHICH IS A SUBSIDIARY OF EXL HOL DINGS INC. THROUGH EXLSERVICE.COM LLC (EARLIER KNOWN AS EXLSER VICE.COM INC.). APPELLANT BY SH. TARUN ARORA, CA, MS. DEEPA NANDA, CA RESPONDENT BY SH. AMRENDRA KUMAR, CIT DR DATE OF HEARING 08.11.2016 DATE OF PRONOUNCEMENT 23.01.2017 DURING FY 2010-11, THE ASSESSEE WAS ENGAGED IN PROV IDING BACK- OFFICE INFORMATION TECHNOLOGY (IT) ENABLED SERVIC ES TO ITS ASSOCIATED ENTERPRISES (AE). FOR RENDERING THESE SERVICES, THE ASSESSEE WAS REMUNERATED ON AN ARMS LENGTH COST PL US BASIS I.E. IT WAS COMPENSATED FOR ALL ITS OPERATING COSTS, PLUS A PRE-AGREED MARK-UP THEREON. AS PER ASSESSEE, IN OPERATING AS A CONTRACT SERVICE PROVIDER FOR GROUP COMPANIES AND IN BEING C OMPENSATED ON A COST PLUS REVENUE MODEL BASIS, THE ASSESSEE IS CO MPLETELY SHIELDED FROM RISKS SUCH AS COST VARIANCE/COST ESCALATION RI SK (WHICH ARISES ON ACCOUNT OF VARIATIONS BETWEEN ACTUAL COSTS AND B UDGETED COSTS), REWORK/CORRECTIONS RISK (WHICH IS THE RISK OF HAVIN G TO PERFORM NON- BILLABLE REWORK), PRICE RISK (WHICH ARISES AS A RES ULT OF PRICING AND COST PRESSURES IN THE MARKET, AND THEREBY ADVERSELY IMPACTS PROFITABILITY) AND CAPACITY UTILIZATION RISK (WHICH ARISES ON ACCOUNT OF UNDER- UTILIZATION OF SERVICE FACILITIES/PERSONNEL OR IDEA L CAPACITY). THE ASSESSEE FURTHER SUBMITTED BEFORE THE AO THAT , SINCE THE ASSESSEES CUSTOMERS ARE GROUP COMPANIES ONLY, AND SINCE GROUP COMPANIES UNDERTAKE ALL THE MARKETING AND BUSINESS DEVELOPMENT FUNCTIONS OVERSEAS, WITH NO INVOLVEMENT OF THE ASSE SSEE, IT IS ALSO SHIELDED FROM OTHER CRITICAL RISKS SUCH AS CREDIT R ISK/DEBT COLLECTION RISK AND MARKET RISK. THE ASSESSEE FILED ELECTRONIC RETURN DECLARING INCOME OF RS. 4,91,769/- ON NOVEMBER 29, 2011 FOR T HE AY IN CONSIDERATION. 3. THE TP STUDY REPORT PREPARED FOR THE FY 2010-11 SATISFIED THE REQUIREMENTS PRESCRIBED UNDER RULE 10D(1) OF THE IN COME-TAX RULE, 1962 AND COMPLIED WITH THE CONTEMPORANEOUS DOCUMENT ATION REQUIREMENTS OF RULE 10D(4). THE TP STUDY REPORT US ED MULTIPLE YEAR DATA IN ACCORDANCE WITH RULE 10B(4) OF THE RUL ES AND THE OECD GUIDELINES. THE SAID DATA SHOWS THAT THE INTER NATIONAL TRANSACTIONS WERE AT ARMS LENGTH IN ACCORDANCE WIT H THE INDIAN TP REGULATIONS. 4. DURING THE COURSE OF THE TP ASSESSMENT PROCEEDIN GS, THE ASSESSEE FILED DETAILED SUBMISSIONS WITH EXPLANATIO NS FOR THE APPROACH FOLLOWED IN THE TP STUDY REPORT AND PROVID ED EVIDENCES AND WORKINGS AS REQUESTED BY THE TPO. THE TPO SELEC TED 9 COMPANIES AS COMPARABLES COMPRISING OF ENTREPRENEUR IAL COMPANIES EARNING HIGH MARK-UP, ENGAGED IN PROVISIO N OF DIVERSIFIED ACTIVITIES INCLUDING HIGH END KPO SERVI CES AND/OR OWNING SOFTWARE PRODUCTS/INTANGIBLES. IN DOING SO, THE TPO DETERMINED AN ADJUSTMENT OF RS. 13,67,51,320/- TO THE INCOME OF T HE ASSESSEE. 5. THE ASSESSEE FILED AN APPEAL BEFORE THE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE DRAFT ASSESSMENT ORDER. THE DRP ALLOWED THE WORKING CAPITAL ADJUSTMENT AND DIRECTED THE TPO TO RE-WORK THE OPERATING MARGINS KEEPING IN VIEW THE SAFE HARBOUR RULES FOR TREATMENT OF EXPENSES AS OPERATING/NON-OPERATING. T HE TPO VIDE ORDER DATED JANUARY 15, 2016, GIVING EFFECT TO DRP S DIRECTIONS, DETERMINED OP/TC MARK-UP OF 23.73% AS ARMS LENGTH MARK UP AND CONSEQUENTLY REVISED TP ADJUSTMENT OF RS. 4,99, 34,460/-. CONSIDERING THE SAID ADJUSTMENT, THE AO PASSED THE FINAL ASSESSMENT ORDER DATED JANUARY 21, 2016. FURTHER, T HE DRP WHILE FRAMING ITS DIRECTIONS U/S 144C, INADVERTENTLY MISS ED ADJUDICATION ON ONE OF THE SPECIFIC GROUNDS OF THE ASSESSEE, WIT H RESPECT TO ALLOWING ADJUSTMENT ON ACCOUNT OF HIGHER RATES OF D EPRECIATION CHARGED BY THE ASSESSEE AS COMPARED TO COMPARABLES, WHILE COMPUTING THE MARGIN OF COMPARABLES. IN THIS REGARD , THE ASSESSEE FIELD AN APPLICATION WITH THE DRP REQUESTING ADJUDI CATION FOR THE SAME AND GRANT APPROPRIATE ADJUSTMENT TO THE ASSESS EE. THE DRP VIDE DIRECTIONS DATED APRIL 22, 2016 DIRECTED THE T PO TO ALLOW SUITABLE ADJUSTMENT TO THE PROFITS OF COMPARABLE KE EPING IN VIEW THE HIGHER RATE OF DEPRECIATION CHARGED BY THE ASSESSEE AND RETAIN THE PLI AS OP/TC. THE TPO PASSED THE REVISED ORDER GIVI NG EFFECT TO THE DRPS DIRECTIONS, DETERMINED THE ALP AS 15.58%. CON SEQUENTLY, THE TPO REVISED THE TP ADJUSTMENT TO RS. 25,598,271. 6. THE ASSESSEE FILED THE PRESENT APPEAL BEFORE U S. 7. THE LD. AR SUBMITS THAT THE COMPANIES ENGAGED IN KPO ACTIVITIES CANNOT BE COMPARED WITH A LOW END BPO SE RVICE PROVIDER AS THE ASSESSEE IS PRIMARILY ENGAGED IN RENDERING B PO SERVICES IN THE NATURE OF CLAIMS PROCESSING, FINANCE AND ACCOUN TING AND CUSTOMER SERVICE FOR THE CUSTOMERS OF ITS AE. THE L D. AR POINTED OUT THE FUNCTIONAL DIFFERENCE THAT ECLERX IS ENGAGE D IN THE BUSINESS OF PROVIDING KNOWLEDGE PROCESS OUTSOURCING (KPO) SE RVICES. IT IS ENGAGED IN PROVIDING BUSINESS/DATA ANALYTICS AND DA TA PROCESS SOLUTION TO THE CUSTOMERS. THE COMPANY PROVIDES DAT A ANALYTICS SERVICES WHEREIN IT COLLATES RAW DATA AND ANALYSE S UCH DATA WITH THE PURPOSE OF DRAWING CONCLUSIONS ABOUT THE INFORMATIO N. IT PROVIDES END-TO-END SUPPORT THROUGH THE TRADE LIFECYCLE, INC LUDING TRADE CONFIRMATION, SETTLEMENTS, TRANSACTION MAINTENANCE, RISK ANALYTICS AND REPORTING. FURTHER, UNDER SALES AND MARKETING S ERVICES, ECLERX PROVIDES WEB CONTENT MANAGEMENT & MERCHANDISING EXE CUTION, WEB ANALYTICS, SOCIAL MEDIA MODERATION AND ANALYTICS, S EARCH ENGINE ANALYTICS & SUPPORT, CRM PLATFORM SUPPORT, LEAD GEN ERATION, CUSTOMER DATA MANAGEMENT, SUPPLY CHAIN AND CHANNEL ANALYTICS, PRICE & CATALOGUE COMPETITIVE INTELLIGENCE AND BROA DER DATA COLLECTION, CLEANSING, ENRICHING AND REPORTING. IT IS VERY EVIDENT THAT THESE SERVICES ARE A MIX OF RESEARCH, ADVICE AND OP ERATION MANAGEMENT. HENCE, IN VIEW OF THE SAME, THE LD. AR SUBMITTED THAT THE DATA ANALYTICS SERVICES BEING PROVIDED BY ECLER X IS MORE VALUE ADDING AND HIGH END IN NATURE THAN THE ROUTINE IT E NABLED BACK OFFICE SUPPORT SERVICE FUNCTIONS BEING PERFORMED BY THE ASSESSEE. THE LD. AR RELIED UPON THE HONBLE DELHI HIGH COURT JUDGMENT IN CASE OF RAMPGREEN SOLUTIONS PRIVATE LIMITED VS. CIT (TS-387-HC- 2015(DEL)-TP), WHEREIN THE HONBLE HIGH COURT ADJUD ICATED THE PRINCIPAL QUESTION OF WHETHER A KPO SERVICE PROVID ER COULD BE CONSIDERED AS A COMPARABLE FOR BENCHMARKING INTERNA TIONAL TRANSACTIONS ENTERED INTO BY AN ENTITY RENDERING VO ICE CALL SERVICE. WHILE ADJUDICATING UPON THIS ISSUE, THE HONBLE JUR ISDICTIONAL HIGH COURT ACKNOWLEDGED THAT VOICE CALL SERVICES ARE CON SIDERED TO BE THE LOWER-END OF ITES WHEREAS KPO ON THE OTHER HAND INC LUDES INVOLVEMENT OF ADVANCE SKILLS WHEREIN THE SERVICES PROVIDED MAY INCLUDE ANALYTICAL SERVICES, MARKET RESEARCH, LEGAL RESEARCH, ENGINEERING AND DESIGN SERVICES, INTELLECTUAL MANAG EMENT ETC. THE LD. AR ALSO RELIED UPON THE DELHI ITAT RULING IN TH E CASE OF GENPACT SERVICES LLC VS. ADIT (ITA NO. 2024/DEL/2014), WHER EIN THE TRIBUNAL ACKNOWLEDGING THE FACT THAT ECLERX BEING A KPO COMPANY CANNOT BE COMPARED TO ASSESSEE PROVIDING ONLY IT EN ABLED SERVICES TO ITS AE AND RELYING ON HONBLE HIGH COURT RULING IN THE CASE OF RAMPGREEN SOLUTIONS (SUPRA), DIRECTED EXCLUSION OF ECLERX FROM THE LIST OF COMPARABLES. THE LD. AR ALSO RELIED UPON T HE DECISION OF ASSESSEES GROUP COMPANIES NAMELY, EXLSERVICE.COM (INDIA) PRIVATE LIMITED VS. DCIT (ITA NO. 5182/DEL/2010 & 5174/DEL/ 2011) FOR ONE OF THE PRECEDING YEARS I.E. AY 2007-08 WHICH IS ALSO ENGAGED IN SAME/SIMILAR ACTIVITIES AS THE ASSESSEE. THE TRIBUN AL IN ITS ORDER HAD DIRECTED TO VERIFY THE FUNCTIONAL COMPARABILITY OF ECLERX SERVICES LIMITED IN LIGHT OF DECISION IN THE CASE OF SPECIAL BENCH IN MAERSK GLOBAL CENTRES (INDIA) PRIVATE LIMITED, ITA NO. 7466/MUM/2012 AND HONBLE DELHI HIGH COURT DECISION IN CASE OF RAMPGREEN SOLUTIONS PRIVATE LIMITED VS. CIT (ITA NO . 102/2015) AND EXCLUDE THE AFOREMENTIONED COMPANY FROM THE FIN AL SET OF COMPARABLES CONSIDERED FOR THE PURPOSE OF BENCHMARK ING ANALYSIS. SINCE, THE FUNCTIONS PERFORMED BY THE ASSESSEE ARE SIMILAR TO THE GROUP COMPANY, FOLLOWING THE PRINCIPLE OF FUNCTIONA L COMPARABILITY, E-CLERX OUGHT TO BE REJECTED IN ASSESSEES CASE AS WELL. 8. THE LD. AR SUBMITTED THAT GROUND NO.2 IS NOT PRE SSED BY HIM. AS PER THE DELHI HIGH COURT JUDGMENT IN THE CASE OF RAMPGREEN SOLUTIONS PRIVATE LIMITED, E-CLERX & GENPACT SERVIC ES LLC HAS TO BE EXCLUDED. 9. THE LD. DR SUBMITTED THAT THE DECISION IN CASE O F RAMPGREEN SOLUTIONS PRIVATE LIMITED WAS NOT AVAILABLE BEFORE THE TPO. 10. THE LD. AR SUBMITTED THAT TPO HAS NOT CHALLENGE D THE FUNCTIONALITY OF THE E-CLERX AND GENPACT SERVICES L LC AS SET OUT IN PAGE NO. 191 OF THE PAPER BOOK. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE DOCUMENTS POINTED OUT BY THE PARTIES. AS RELATES TO GROUND NO . 2 THE SAME IS NOT PRESSED BY THE ASSESSEE, HENCE DISMISSED. THE L D. DR SUBMITTED THAT THE DECISION OF RAMPGREEN SOLUTIONS WAS NOT AVAILABLE BEFORE THE TPO. THE LD. AR SUBMITTED THAT THE ITAT DECISION IN ONE OF THE GROUP COMPANY OF THE ASSESSE E, EXLSERVICE.COM (INDIA) PRIVATE LIMITED VS. DCIT (IT A NO. 5182/DEL/2010 & 5174/DEL/2011) FOR ONE OF THE PRECE DING YEARS I.E. AY 2007-08 WHICH IS ALSO ENGAGED IN SAME/SIMI LAR ACTIVITIES AS THE ASSESSEE. THE TRIBUNAL IN ITS ORDER HAD DIRECTE D TO VERIFY THE FUNCTIONAL COMPARABILITY OF ECLERX SERVICES LIMITED IN LIGHT OF DECISION IN THE CASE OF SPECIAL BENCH IN MAERSK GLO BAL CENTRES (INDIA) PRIVATE LIMITED, ITA NO. 7466/MUM/2012 AND HONBLE DELHI HIGH COURT DECISION IN CASE OF RAMPGREEN SOLUTIONS PRIVATE LIMITED VS. CIT (ITA NO. 102/2015) AND EXCLUDE THE AFOREMEN TIONED COMPANY FROM THE FINAL SET OF COMPARABLES CONSIDERE D FOR THE PURPOSE OF BENCHMARKING ANALYSIS. SINCE, THE ASSESS ING OFFICER/TRANSFER PRICING OFFICER HAS NOT CONSIDERED THE HONBLE DELHI HIGH COURT JUDGMENT IN CASE OF RAMPGREEN SOLU TIONS LIMITED, IT IS PROPER TO REMAND BACK THIS MATTER TO THE FILE OF AO/TPO TO VERIFY THE FUNCTIONAL COMPARABILITY OF ECLERX SERVI CES LIMITED AND OTHER COMPARABLES. UNDER THE GIVEN CIRCUMSTANCES, W E ARE OF THE CONSIDERED OPINION THAT THE ENDS OF JUSTICE WOULD M EET ADEQUATELY, IF THE IMPUGNED ORDER IS SET ASIDE AND THE MATTER I S RESTORED TO THE FILE OF THE AO FOR DECIDING THESE ISSUES AFRESH AS PER LAW. WE ORDER ACCORDINGLY. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH ASS ESSMENT PROCEEDINGS. 12. IN RESULT, APPEAL OF THE ASSESSEE IS PARTLY AL LOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN OPEN COURT ON 23/01/2017. SD/- SD/- (S.V. MEHROTRA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL ME MBER DATED: 23/01/2017 *R. NAHEED* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 10.11.2016 PS 2. DRAFT PLACED BEFORE AUTHOR 11.11.2016 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .01.2017 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. .01.2017 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS .01.2017 PS/PS 6. KEPT FOR PRONOUNCEMENT ON 23.01.2017 PS 7. FILE SENT TO THE BENCH CLERK 01.2017 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.