CPA Global Support Services India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 1524/DEL/2017

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 6274 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 14-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Assessee Lawyers: MANOMEET DALAL SHRI VISHU GOEL
• Keywords: Related party transaction; Transfer pricing; International transaction; Set aside
• Section: 143(3); 201; 144C; 274; 13; 22; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCE) ITA NO.1524/DEL./2017 (ASSESSMENT YEAR : 2012-13) M/S. CPA GLOBAL SUPPORT SERVICES INDIA VS. ACIT, CI RCLE 6 (2), PRIVATE LIMITED, NEW DELHI. 1/3, 2 ND FLOOR, SIR GANGARAM HOSPITAL MARG, OLD RAJINDER NAGAR, NEW DELHI 110 060. (PAN : AABCI1509C) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI MANOMEET DALAL, ADVOCATE SHRI VISHU GOEL, AR REVENUE BY : SHRI SURENDER PAL, CIT DR DATE OF HEARING : 22.12.2020 DATE OF ORDER : 03.02.2021 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. CPA GLOBAL SUPPORT SERVICES INDIA PVT. LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 13.01.2017 PASSED BY THE ASSESSING OFFICER (AO) IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH ITA NO.1524/DEL./2017 2 SECTION 144C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2012-13 ON THE GROUNDS INTER A LIA THAT :- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP')/ LEARNED ASSESSING OFFICER ('AO')/ LEARNED TRANSFER PRICING OFFICER ('TPO') ERRED IN MAKING ADDITION TO THE RETURNED IN COME OF THE APPELLANT BY INR 13,30,04,676/- BY RE-COMPUTING THE ARM'S LENGTH PRICE ('ALP') OF INTERNATIONAL TRANSACTIONS UNDER S ECTION 92 OF THE INCOME-TAX ACT, 1961 ('THE ACT'). 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE REFERENCE MADE BY THE AO SUFFERS FROM JURI SDICTIONAL ERROR AS THE AO DID NOT RECORD ANY REASONS IN THE DRAFT A SSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WA S 'NECESSARY AND EXPEDIENT' TO REFER THE MATTER TO THE TPO FOR COMPU TATION OF THE ARM'S LENGTH PRICE, AS IS REQUIRED UNDER SECTION 92 CA(1) OF THE ACT. 3. THAT ON FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE DRP/AO/TPO ERRED IN NOT APPRECIATING THAT NONE OF THE CONDITIONS SET OUT IN SECTION 92C(3) OF THE ACT ARE SATISFIED IN THE PRESENT CASE. 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, DRP/AO/TPO ERRED IN HOLDING THE FUNCTIONS PERF ORMED BY THE APPELLANT TO BE IN THE NATURE OF KNOWLEDGE PROCESS OUTSOURCING ('KPO') COMPANY WITHOUT APPRECIATING THE FACTS ON R ECORD AND THEREBY ACCEPTING CERTAIN COMPANIES WHICH WERE PERF ORMING HIGH END AND DIFFERENT SERVICES AS COMPARED TO THE APPEL LANT. 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, DRP/AO/TPO ERRED IN RE-COMPUTING THE ARM'S LEN GTH PRICE OF THE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES BY REJECTING THE QUANTITATIVE FILTERS SELECTED BY THE APPELLANT AND INSTEAD APPLYING HIS ADDITIONAL/MODIFIED QUANTITATI VE FILTERS WHICH LACKED VALID AND SUFFICIENT REASONING. 6. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, DRP/AO/TPO ERRED IN REJECTING THE COMPARABLE C OMPANIES SELECTED BY THE APPELLANT WITHOUT PROVIDING COGENT REASONS AND ACCEPTING COMPANIES WHICH ARE FUNCTIONALLY NOT COMP ARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS, ASSETS AND RISK PR OFILE. 7. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, DRP/AO/TPO ERRED IN DISREGARDING THE MULTIPLE YEAR DATA SELECTED BY THE APPELLANT IN THE TP DOCUMENTATION A ND IN SELECTING THE CURRENT YEAR (I.E. FINANCIAL YEAR 2011-12) DATA FOR COMPARABILITY DESPITE THE FACT THAT AT THE TIME OF COMPARISON DON E BY THE APPELLANT, THE COMPLETE DATA FOR FINANCIAL YEAR 201 1-12 WAS NOT AVAILABLE WITHIN THE PUBLIC DOMAIN. 8. THAT DRP/AO/TPO ERRED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW IN NOT CONSIDE RING THE FOREIGN ITA NO.1524/DEL./2017 3 EXCHANGE GAINS AND BANK CHARGES AS OPERATING ITEMS WHILE COMPUTING THE OPERATING MARGINS OF THE APPELLANT AS WELL AS OF THE COMPARABLE COMPANIES. 9. THAT DRP/AO/TPO ERRED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW IN MAKING ARIT HMETICAL ERRORS WHILE COMPUTING THE MARGINS OF COMPARABLE COMPANIES . 10. THAT DRP/AO/TPO ERRED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW IN IGNORING TH E BUSINESS/ COMMERCIAL' REALITY THAT SINCE THE APPELLANT IS REM UNERATED ON AN ARM'S LENGTH COST PLUS BASIS, I.E. IT IS COMPENSATE D FOR ALL ITS OPERATING COSTS PLUS A PRE-AGREED MARK-UP BASED ON A BENCHMAR KING ANALYSIS, THE APPELLANT UNDERTAKES MINIMAL BUSINESS RISKS AS AGAINST COMPARABLE COMPANIES THAT ARE FULL-FLEDGED RISK TAK ING ENTREPRENEURS, AND BY NOT ALLOWING A RISK ADJUSTMEN T TO THE APPELLANT ON ACCOUNT OF THIS FACT. 11. THAT DRP/AO/TPO ERRED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW BY NOT GIVING BENEFIT OF MAT CREDIT TO THE APPELLANT IN COMPUTATION OF INCOME. 12. THAT DRP/AO/TPO ERRED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 274 READ WITH 271 OF THE ACT. 3. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. CPA GLOBAL SUPPORT S ERVICES INDIA PVT. LTD., THE TAXPAYER, INCORPORATED IN SEPTEMBER 2003 IS INTO RENDERING INFORMATION TECHNOLOGY ENABLED SERVICES ( ITES) RELATED TO IP ADMINISTRATION / RENEWAL AND DATA MANAGEMENT SERVICES TO ITS GROUP COMPANIES INCLUDING RENEWAL SUPPORT SERVICES, PROOF READING SUPPORT, CUSTOMER SUPPORT SERVICES ETC.. THE TAXPA YER FUNCTIONS AS A CAPTIVE OFF-SHORE CENTRE IN INDIA AND SUPPORTS IT S ASSOCIATED ENTERPRISES (AES) IN SERVICING CUSTOMER CONTRACTS. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER ENTERED INTO INTERNA TIONAL TRANSACTIONS WITH IS AES : ITA NO.1524/DEL./2017 4 S. NO. TYPE OF INTERNATIONAL TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS.) MAM PLI 1 PROVISION OF IT ENABLED SERVICES TNMM OP/OC 871,922,767 2 REIMBURSEMENT OF EXPENSE TO AES TNMM OP/OC 12,304,322 3 PAYMENT OF INTEREST ON ECB CUP NA 1,002,818 4 REIMBURSEMENT OF EXPENSES FROM AES CUP NA 40,439,829 4. THE TAXPAYER IN ORDER TO BENCHMARK ITS MAIN INTE RNATIONAL TRANSACTION QUA BUSINESS PROCESSING SERVICES/ITES A PPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) WITH OPERATING PROFIT/OPER ATING COST (OP/OC) AS THE PROFIT LEVEL INDICATOR (PLI) AND COM PUTED THE TESTED PARTY MARGIN AT 17.20%, SELECTED 10 COMPARAB LES WITH AVERAGE OP/OC AT 11.01% AND TREATED ITS INTERNATION AL TRANSACTION AT ARMS LENGTH. HOWEVER, LD. TPO ACCEPTED TNMM AS THE MAM WITH OP/OC AS PLI BUT REJECTED 4 COMPARABLES CHOSEN BY THE TAXPAYER AND INTRODUCED 5 NEW COMPARABLES BY APPLYI NG VARIOUS FILTERS DETAILED IN PARAS 5 & 6 OF ITS ORDER. LD. TPO FINALLY SELECTED 12 COMPARABLES WITH AVERAGE OP/OC AT 29.70%. LD. T PO ALSO COMPUTED THE MARGIN OF THE TAXPAYER AFTER CONSIDERI NG FOREIGN EXCHANGE AS NON-OPERATING AT 12.53% AND PROPOSED TH E ALP ADJUSTMENT AT RS.13,30,04,676/-. ITA NO.1524/DEL./2017 5 5. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY WAY OF FILING THE OBJECTIONS WHICH HAVE BEEN DISPOSED O FF. CONSEQUENTLY, THE ASSESSING OFFICER (AO) FRAMED THE ASSESSMENT AT RS.28,85,81,220/- U/S 143(3) READ WITH SECTION 1 44C OF THE ACT. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 6. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUND NO.1 7. GROUND NO.1 IS GENERAL IN NATURE, HENCE DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. GROUNDS NO.1, 2, 3, 4, 5, 6, 7, 9 & 10 8. UNDISPUTEDLY, LD. TPO/DRP HAVE ACCEPTED THE TNMM WITH OP/OC AS THE PLI AS THE MAM FOR BENCHMARKING THE IN TERNATIONAL TRANSACTIONS UNDERTAKEN BY THE TAXPAYER WITH ITS AE S QUA PROVIDING ITES SERVICES. IT IS ALSO NOT IN DISPUTE THAT VARI OUS FILTERS INTRODUCED BY THE TPO HAS ALSO BEEN ACCEPTED BY THE TAXPAYER FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. LD. T PO/DRP AFTER ITA NO.1524/DEL./2017 6 DISPOSING OFF VARIOUS OBJECTIONS RAISED BY THE TAXP AYER FINALLY SELECTED COMPARABLES AS UNDER :- SL. NO. COMPANY LONG NAME ADJUSTED OP/OC 1. ACCENTIA TECHNOLOGIES LTD. 13.21% 2. ECLERX SERVICES LTD. 62.04% 3. INFORMED TECHNOLOGIES INDIA LTD. 22.78% 4. JINDAL INTELLICOM LTD. 3.54% 5. T C S E-SERVE LTD. 66.21% 6. EXCEL INFORWAYS LTD. (SEG)(IT/BVPO) 42.89% 7. R SYSTEMS INTERNATIONAL LTD.(SEG./BPO) 2.31% 8. INFOSYS BPO LIMITED 39.04% 9. ACROPETAL TECHNOLOGIES LTD. (SEGMENT) 19.91% 10. B N R UDYOG LIMITED 50.72% 11. E4E HEALTHCARE BUSINESS SERVICES PVT.LTD. 23.52% 12. MICROGENETICS SYSTEMS LTD. 10.19% AVERAGE 29.70% 9. LD. TPO ALSO COMPUTED THE MARGIN OF TAXPAYER AT 12.53% AS AGAINST 17.20% COMPUTED BY THE TAXPAYER BY CONSIDER ING FOREIGN EXCHANGE AS NON-OPERATING AS UNDER :- PARTICULARS IT ENABLED SERVICES OPERATING REVENUES 871,922,767 OPERATING COSTS 774,809,131 OPERATING PROFIT 97,113,636 OP/OC 12.53% 10. SINCE THE METHOD OF BENCHMARKING THE INTERNATIO NAL TRANSACTIONS IS NOT IN DISPUTE, LD. AR FOR THE TAXP AYER IN ORDER TO COMPRESS THE CONTROVERSY AT HAND CONTENDED THAT THE TAXPAYER IS AGGRIEVED WITH INCLUSION OF 4 COMPARABLES OUT OF 5 INTRODUCED BY THE TPO AND IS ALSO AGGRIEVED IN CONSIDERING FOREIG N EXCHANGE ITA NO.1524/DEL./2017 7 FLUCTUATION OF BANK CHARGES AS NON-OPERATING BY THE TPO WHILE COMPUTING OPERATING MARGIN OF THE TAXPAYER. 11. FIRST OF ALL, WE WOULD DISCUSS THE SUITABILITY OF FOUR COMPARABLES VIZ. ECLERX SERVICES LIMITED, TCS E-SER VE LIMITED, EXCEL INFOWAYS LIMITED & BNR UDYOG LIMITED VIS--VI S THE TAXPAYER SOUGHT TO BE EXCLUDED BY THE TAXPAYER TO B ENCHMARK THE INTENTIONAL TRANSACTIONS ONE BY ONE. ECLERX SERVICES LIMITED (ECLERX) 12. THE TAXPAYER SOUGHT EXCLUSION OF ECLERX ON THE GROUNDS INTER ALIA THAT IT IS FUNCTIONALLY DISSIMILAR; THAT IT IS ALSO OUTSOURCING SUBSTANTIAL AMOUNTS OF WORK TO OUTSIDER AND THAT EC LERX HAS UNRELIABLE DATA. 13. HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVE NUE DREW OUR ATTENTION TOWARDS FINDINGS GIVEN BY THE LD. DRP AT PAGE 22 OF ITS ORDER AND THEREBY RELIED UPON THE DRP FINDINGS. 14. WHEN WE EXAMINE FINANCIALS OF THE ECLERX AT PAG E 766 OF THE PAPER BOOK, ITS PROFILE IS AS UNDER :- WHO WE ARE INCORPORATED IN 2000, ECLERX SERVICES LIMITED (ECLE RX) IS A KNOWLEDGE PROCESS OUTSOURCING COMPANY PROVIDING DAT A ANALYTICS AND CUSTOMIZED PROCESS SOLUTIONS TO GLOBA L ENTERPRISE CLIENTS. ECLERX SUPPORTS CORE AND COMPLE X ACTIVITIES FOR ITS CLIENTS USING PROPRIETARY PROCESSES AND A S CALABLE OFFSHORE DELIVERY MODEL. ITA NO.1524/DEL./2017 8 IN MAY 2012, WE ACQUIRED AGILYST INC, A NICHE OPERA TIONAL AND ANALYTICS COMPANY FOCUSED ON THE U.S. MEDIA AND TEL ECOM INDUSTRY. IN JULY 2007 WE HAD ACQUIRED IGENTICA GRO UP WHICH INTRODUCED THE COMPANY TO A CLIENT BASE OF GLOBAL C ORPORATION IN TRAVEL AND HOSPITALITY INDUSTRY AND STRENGTHENED THE COMPANY'S PRESENCE IN WESTERN EUROPE. ECLERX EQUITY SHARES ARE LISTED ON THE BOMBAY STOCK EXCHANGE AND THE NATIONAL STOCK EXCHANGE OF INDIA. AS ON MAR CH 31, 2012 THE MARKET CAPITALIZATION OF THE COMPANY WAS R S. 21,338 MILLION. WHAT WE DO THE COMPANY SUPPORTS CRITICAL PROCESSES FOR MORE TH AN 50 CLIENTS THAT INCLUDE GLOBAL LEADERS IN FINANCIAL SE RVICES, MANUFACTURING, RETAIL, MEDIA, TRAVEL AND HOSPITALIT Y. ABOUT 97% OF OUR REVENUES COME FROM FORTUNE 500 OR FINANC IAL TIMES 500 CLIENTS. 15. FUNCTIONAL PROFILE OF ECLERX SHOWS THAT IT IS A KNOWLEDGE PROCESS OUTSOURCING (KPO) COMPANY AND IS PROVIDING DOMAIN SPECIFIC REENGINEERING EXPERTISE IN PARTNERSHIP WIT H FINANCIAL SERVICES FIRMS TO INCREASE CONTROL AND EXECUTE ONGO ING FUNCTIONS. IT IS ALSO PROVIDING CONSULTING, BUSINESS ANALYSIS AND SOLUTION TESTING SERVICES WHICH PROVIDES A BROAD SUITE OF SERVICES T HAT ALLOWS ITS CLIENTS TO OPERATE ON DAY-TO-DAY BASIS INCLUDING TR ADE PROCESSING, REFERENCE DATA, ACCOUNTING & FINANCE AND EXPENSE MA NAGEMENT ACTIVITIES. SIMILARLY, UNDER SALES AND MARKETING S ERVICES SEGMENT, AS HAS BEEN DESCRIBED AT PAGE 767 OF THE ANNUAL REP ORT PAPER BOOK, ECLERX PROVIDES WEB CONTENT MANAGEMENT & MERCHANDIS ING EXECUTION, WEB ANALYTICS, SOCIAL MEDIA MODERATION A ND ANALYTICS, SEARCH ENGINE ANALYTICS & SUPPORT, CRM PLATFORM SUP PORT, LEAD ITA NO.1524/DEL./2017 9 GENERATION, SUPPLY CHAIN AND CHANNEL ANALYTICS, PRI CE & CATALOGUE COMPETITIVE INTELLIGENCE ETC. 16. COORDINATE BENCH OF THE TRIBUNAL IN CASE OF AME RIPRISE INDIA PVT. LTD. IN ITA NO.2010/DEL/2014 HELD THAT E CLERX IS HAVING SIGNIFICANT INTANGIBLES TO PROVIDE KPO SERVICES WHE REAS THE TAXPAYER ON THE OTHER HAND IS A CAPTIVE ITES SERVIC E PROVIDER ON COST PLUS MARK-UP MODEL WITH MINIMAL RISK. OPERATI VE PART OF THE ORDER OF THE COORDINATE BENCH OF THE TRIBUNAL IS AS UNDER :- 14.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT IT IS A K NOWLEDGE PROCESS OUTSOURCING (KPO) COMPANY PROVIDING DATA AN ALYTICS AND DATA PROCESS SOLUTIONS TO GLOBAL CLIENTS. THIS COMPANY PROVIDES END TO END SUPPORT THROUGH TRADE LIFE CYCL E INCLUDING TRADE CONFIRMATIONS AND SETTLEMENTS ETC. IT ALSO PR OVIDES SALES AND MARKETING SUPPORT SERVICES TO LEADING GLOBAL MA NUFACTURING, RETAIL, TRAVEL AND. LEISURE COMPANIES THROUGH ITS P RICING AND PROFITABILITY SERVICES. FROM THE ABOVE NARRATION OF THE NATURE OF BUSINESS CARRIED ON BY E-CLERX SERVICES LTD., IT IS MANIFEST THAT THE SAME BEING A KPO COMPANY, IS QUITE DIFFERENT FR OM THE ASSESSEE, PROVIDING ONLY IT ENABLED SERVICES TO ITS AE. APART FROM THAT, IT IS FURTHER OBSERVED THAT THIS COMPANY HAS SIGNIFICANT INTANGIBLES WHICH IT USES IN RENDERING KPO SERVICES , AGAINST WHICH THE ASSESSEE DOES NOT HAVE ANY INTANGIBLES. AS SUCH, E- CLERX SERVICES LTD. CANNOT BE CONSIDERED AS COMPARA BLE. THE SAME IS DIRECTED TO BE ELIMINATED. 17. IN OTHER WORDS, THE TAXPAYER IS A BPO/ITES SERV ICE PROVIDER WHICH CANNOT BE COMPARED WITH KPO. 18. FURTHERMORE, WHEN WE PERUSE FINANCIALS OF ECLER X AT PAGE 835 OF THE PAPER BOOK, IT SHOWS THAT ECLERX IS OUTS OURCING ITS SUBSTANTIAL AMOUNT OF WORK TO OUTSIDERS UNDER THE H EAD CONTRACT ITA NO.1524/DEL./2017 10 FOR SERVICES TO THE TUNE OF RS.66,08,10,000/- IN A DDITION TO PAYMENT OF SALARY TO THE TUNE OF RS.158,38,70,000/- WHICH IS 41% OF THE TOTAL ACTIVITY CARRIED OUT BY THE COMPANY. SO, FOR AVAILING ITES SERVICES FROM THE OUTSIDERS, IT IS OUTSOURCING ITS WORK AND AS SUCH, CANNOT BE COMPARED WITH THE TAXPAYER WHICH IS WORKING AS A CAPTIVE ITES SERVICE PROVIDER ON COST PLUS MARK-UP MODEL WITH MINIMAL RISK. 19. LD. AR FOR THE TAXPAYER ALSO CONTENDED THAT FIN ANCIAL DATA OF ECLERX IN THE PUBLIC DOMAIN IS NOT RELIABLE ONE BEC AUSE TURNOVER APPEARING IN CONSOLIDATED FINANCIAL STATEMENTS IS N OT MERELY A SUM OF TURNOVER OF ECLERX (AS PER STANDALONE FINANCIALS ) AND ITS SUBSIDIARIES. RATHER IT INCLUDES THE TURNOVER OF SU BSIDIARY COMPANIES AND DREW OUR ATTENTION TO PAGES 821, 849 AND 872 OF THE PAPER BOOK WHICH IS TABULATED AS UNDER :- NAME OF THE COMPANY RUPEES IN MILLIONS REFERENCE STANDALONE FINANCIALS TUROVER ECLERX SERVICES LIMITED 4,724.66 PAGE 821 CONSOLIDATED FINANCIAL STATEMENTS TURNOVER OF ECLERX SERVICES LTD. ALONG WITH ITS SUBSIDIARIES 4,728.85 PAGE 849 REVENUE OF SUBSIDIARIES INCLUDED UNDER CONSOLIDATED FINANCIAL STATEMENTS - ECLERX LIMITED 245.79 PAGE 872 - ECLERX LLC 355.48 - ECLERX INVESTMENTS LTD. - - IGENTICA TRAVEL SOLUTIONS LTD. - - ECLERX PRIVATE LIMITED 63.47 TOTAL SUBSIDIARIES TURNOVER 664.75 ITA NO.1524/DEL./2017 11 20. SO, THE FINANCIALS OF ECLERX AVAILABLE IN THE P UBLIC DOMAIN, REFERRED TO ABOVE, ARE NOT RELIABLE RATHER INCLUDE TURNOVER OF ITS SUBSIDIARY COMPANIES. 21. ECLERX HAS BEEN FOUND TO BE NOT SUITABLE COMPAR ABLE VIS-- VIS CAPTIVE SERVICE PROVIDER BY THE COORDINATE BENCH OF THE TRIBUNAL IN ARIBA INDIA PVT. LTD. VS. DCIT ITA NO.5201/DEL/2012 . 22. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, W E ARE OF THE CONSIDERED VIEW THAT ECLERX IS NOT A SUITABLE COMPA RABLE VIS--VIS THE TAXPAYER, HENCE ORDERED TO BE EXCLUDED. TCS E-SERVE LIMITED (TCS E-SERVE) 23. THE TAXPAYER SOUTH EXCLUSION OF TCS E-SERVE ON GROUNDS OF FUNCTIONAL DISSIMILARITY; PROVIDING SERVICES PREDOM INANTLY TO CITI GROUP; HAVING HIGH TURNOVER AND PRESENCE AND PAYMEN T FOR BAND; SEGMENTAL INFORMATION NOT AVAILABLE; HAVING ABNORMA L PROFITABILITY TREND AND RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN AVAYA INDIA PVT. LTD. VS. ACIT IN ITA 532/2019, DECISIONS OF COORDINATE BENCH OF THE TRIBUNAL IN CASE OF ARIBA I NDIA PVT. LTD. VS. DCIT ITA NO.876/DEL/2015, AND BAXTER INDIA PVT. LTD. IN ITA NO.6185/DEL/2016. ITA NO.1524/DEL./2017 12 24. HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVE NUE DREW OUR ATTENTION TOWARDS FINDINGS GIVEN BY THE LD. DRP AT PAGES 22 & 23 OF ITS ORDER AND THEREBY RELIED UPON THE DRP FIN DINGS. 25. WHEN WE EXAMINE FUNCTIONAL PROFILE OF TCS E-SER VE AT PAGE 903 OF THE PAPER BOOK WHICH SHOWS THAT TCS E-SERVE IS INTO PROVIDING SERVICES FROM VARIOUS PROCESSING FACILITI ES WHICH INCLUDES PROCESSING, COLLECTIONS, CUSTOMER CARE PA YMENTS IN RELATION TO SERVICES OFFERED TO CITI GROUP, SOFTWAR E TESTING, VERIFICATION AND VALIDATION OF SOFTWARE. FURTHERMO RE, IT IS PREDOMINANTLY PROVIDING SERVICES TO CITI GROUP, AS IS EVIDENT FROM NOTES TO ACCOUNTS TO ANNUAL REPORT FOR FINANCIAL YE AR 2010-11 AND DESCRIBED AT PAGES 1090 TO 1092 OF THE PAPER BOOK. FROM PAGES 1093 TO 1102 OF THE PAPER BOOK, IT IS PROVED THAT T CS E-SERVE ALSO ACQUIRED BPO ARM OF CITI GROUP WITH A $ 2.5 BILLION CONTRACT FOR A PERIOD OF 9.5 YEARS AND AS SUCH, CITI GROUP BECAME A RELATED PARTY DURING FY 2009-10. 26. FURTHERMORE, WHEN WE EXAMINE THE TURNOVER OF TC S E- SERVE, IT IS 180 TIMES OF THE TAXPAYER AND IS DULY SUPPORTED BY TATA CONSULTANCY SERVICES (TCS)/TATA GROUP HAVING LARGE SCALE AND LARGE CLIENT BASE. TCS E-SERVE ALSO CONTRIBUTED BR AND EQUITY TO THE TUNE OF RS.3.67 CRORES TO TATA SONS LTD. BY USING I TS BRAND NAME TATA WHICH MAKES IT INCOMPARABLE VIS--VIS THE TA XPAYER. ITA NO.1524/DEL./2017 13 27. HONBLE DELHI HIGH COURT IN CASE OF AVAYA INDIA PVT. LTD. IN ITA 532/2019 ORDER DATED 24.07.2019 EXCLUDED TCS E-SERVE AS A COMPARABLE FOR THE PURPOSE OF DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS INVOLVING THE ASSESSEE A ND ITS AE ON ACCOUNT OF HUGE TURNOVER AND NON-AVAILABILITY OF SE GMENTAL REVENUES BY RETURNING FOLLOWING FINDINGS :- 27. THERE IS MERIT IN THE CONTENTION OF THE ASSES SEE THAT THE SCALE OF OPERATIONS OF THE COMPARABLES WITH THE TES TED ENTITY IS A FACTOR THAT REQUIRES TO BE KEPT IN VIEW. TCS E-SERV E HAS A TURNOVER OF RS.1359 CRORES AND HAS NO SEGMENTAL REV ENUE WHEREAS THE ASSESSEES ENTIRE SEGMENTAL REVENUE IS A MERE 24 CRORES. AS OBSERVED BY THIS COURT IN ITS DECISION D ATED 5TH AUGUST 2016 IN ITA 417/2016(PCIT V. ACTIS GLOBAL SERVICES PRIVATE LIMITED) 'SIZE AND SCALE OF TCS S OPERATION MAKES IT AN INAPPOSITE COMPARABLE VIS-A- VIS THE PETITIONER.' A S ALREADY POINTED OUT EARLIER THERE IS A CLOSER COMPARISON OF TCS E-SERVE LIMITED WITH INFOSYS BPO LIMITED WITH EACH OF THEM EMPLOYING 13,342 AND 17,934 EMPLOYEES RESPECTIVELY AND MAKING RS.37 CRORES AND RS.19 CRORES AS CONTRIBUTION TOWARDS BRA ND EQUITY. WHEN RULE 10(B) (2) IS APPLIED I.E. THE FAR ANALYSI S, NAMELY, FUNCTIONS PERFORMED, ASSETS OWNED AND RISKS ASSUMED IS DEPLOYED THEN BRAND AND HIGH ECONOMIC UPSCALE WOULD FALL WIT HIN THE DOMAIN OF 'ASSETS' AND THIS ALSO WOULD MAKE BOTH TH ESE COMPANIES AS UNSUITABLE COMPARABLES. 28. THE DIRECTORS REPORT OF TCS E-SERVE LIMITED B EARS OUT THE CONTENTION OF THE ASSESSEE THAT BOTH ENTITIES H AVE BEEN LEVERAGING TCSS SCALE AND LARGE CLIENT BASE TO INCR EASE THEIR BUSINESS IN A SIGNIFICANT WAY. THE SUBMISSION THAT THE TWO COMPARABLES OFFER AN ILLUSTRATION OF 'AN IDENTICAL TRANSACTION BEING CONDUCTED IN AN UNCONTROLLED MANNER' OVERLOOK S THE EFFECT OF THE TATA BRAND ON THE PERFORMANCE OF THE IMPUGNE D COMPARABLES. THE QUESTION WAS NOT MERELY WHETHER TH E MARGINS EARNED BY THE TATA GROUP IN PROVIDING CAPTIVE SERVI CE TO THE CITI ENTITIES WERE AT ARMS LENGTH. THE QUESTION WAS WHE THER THEY OFFERED A RELIABLE BASIS TO RE-CALIBRATE THE PLI OF THE ASSESSEE WHOSE SCALE OF OPERATIONS WAS OF A MUCH LOWER ORDER THAN THE TWO IMPUGNED COMPARABLES. THE MERE FACT THAT THE TR ANSACTIONS WERE IDENTICAL WAS NOT, IN TERMS OF THE LAW EXPLAIN ED IN THE ABOVE DECISIONS, EITHER A SOLE OR A RELIABLE YARDSTICK TO DETERMINE THE OPPOSITE CHOICE OF COMPARABLES. ITA NO.1524/DEL./2017 14 29. FOR ALL OF THE AFOREMENTIONED REASONS, THE COU RT FINDS MERIT IN THE CONTENTION OF THE ASSESSEE THAT BOTH T HE IMPUGNED COMPARABLES VIZ., TCS E- SERVE LIMITED AND TCS E-SE RVE INTERNATIONAL LIMITED OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE PURPOSES OF DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS INVOLVING THE ASSESSEE A ND ITS AES. 28. FURTHERMORE, LD. AR FOR THE TAXPAYER DREW OUR A TTENTION TOWARDS THE ABNORMAL PROFITABILITY TREND OF TCS E-S ERVE SINCE 2004-05 TO 2012-13 IN TABULATED FORM WHICH IS EXTRA CTED FOR READY REFERENCE AS UNDER :- PRE ACQUISITION PERIOD POST ACQUISITION PERIOD TCS E - SERVE LTD. 2004 - 05 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 2011 - 12 2012 - 13 SALES 4659 59 65 7936 9400 12176 13594 14424 15784 17916 OPERATING PROFIT 593 772 1642 1835 3510 5114 5889 6145 7288 OP/OC% 14.59% 14.87% 26.10% 24.27% 40.50% 60.39% 69.02% 63,75% 68.57% AVERAGE OP/OC MARGINS 19.96% 60.45% 29. SO, THE POST ACQUISITION PERIOD SHOWS HUGE PROF ITABILITY TREND IN THE TCS E-SERVE WHICH WAS AVERAGE OP/OC MARGIN O F 19.96% IN FY 2004-05 TO 2007-08 AND SHOOT UP TO 60.45% IN POST ACQUISITION PERIOD OF FY 2008-09 TO 2012-13 WHICH I S ALSO A FACTOR TO BE RECKONED WITH FOR TP ANALYSIS. 30. SO, KEEPING IN VIEW THE FUNCTIONAL DISSIMILARIT Y, RELATED PARTY TRANSACTIONS, HIGH TURNOVER AND PAYMENT FOR BRAND F EE TO TATA AND ABNORMAL PROFITABILITY TREND DISCUSSED IN THE PRECE DING PARAS, WE ARE OF THE CONSIDERED VIEW THAT TCS E-SERVE IS NOT A SUITABLE COMPARABLE VIS--VIS THE TAXPAYER WHO IS A BPO/ITE S SERVICE PROVIDER, HENCE ORDERED TO BE EXCLUDED. ITA NO.1524/DEL./2017 15 EXCEL INFOWAYS LTD. (EXCEL) 31. THE TAXPAYER SOUGHT EXCLUSION OF EXCEL ON THE G ROUNDS INTER ALIA THAT IT FAILS EMPLOYEE COST FILTER APPLIED BY THE LD. TPO; IT FACED EXTRA ORDINARY CIRCUMSTANCES DUE TO STEEP REDUCTION IN THE PROFIT; SEGMENTAL FINANCIALS ARE NOT AVAILABLE. HOWEVER, L D. DR FOR THE REVENUE RELIED UPON THE FINDINGS RETURNED BY THE LD . DRP. 32. PERUSAL OF PARA 5 OF THE TP ORDER SHOWS THAT TP O HAS HIMSELF APPLIED A FILTER TO REJECT THE COMPANIES HA VING EMPLOYEE COST LESS THAN 25% OF THE SALES. 33. WHEN WE EXAMINE FINANCIALS OF EXCEL, AVAILABLE AT PAGE 1015 OF THE PAPER BOOK, IT SHOWS THAT EMPLOYEE COST /NET SALES IS 13.50% EXPLAINED IN THE TABLE BELOW : EMPLOYEE COST (AMOUNT IN 000) NET SALES (AMOUNT IN 000) EMPLOYEE COST/ NET SALES INR 20,215.30 INR 154,921.03 13.05% 34. FURTHERMORE, WHEN WE EXAMINE FINANCIALS OF EXCE L NO DOUBT IT IS ENGAGED IN IT & BPO BUT SEGMENTAL DETAILS OF THE SAME ARE NOT AVAILABLE AS IS EVIDENT FROM PAGE 1029 OF THE PAPER BOOK. WHEN WE EXAMINE PAGE 1029 & 1025 OF THE PAPER BOOK EXCEL IS SHOWN TO HAVE INCURRED SIGNIFICANT COST ON ACCOUNT OF CERTAI N MATERIAL RELATED TO INFRA ACTIVITIES AMOUNTING TO RS.7,48,53,000/- W HICH HAS BEEN SHOWN UNDER THE P&L ACCOUNT AS PURCHASE OF STOCK BU T ITS ITA NO.1524/DEL./2017 16 SEGMENTAL DATA IS NOT AVAILABLE. PERUSAL OF ANNUAL REPORT AT PAGE 1190 OF THE PAPER BOOK SHOWS THAT EXCEL HAS STARTED INFRASTRUCTURE ACTIVITIES DURING FY 2011-12, AS IS EVIDENT FROM IT EM NO.6 UNDER THE HEAD COMMENCEMENT OF NEW ACTIVITIES, EXTRACTE D AS UNDER :- IN VIEW OF THE GLOBAL RECESSION IN INFORMATION TEC HNOLOGY (IT) AND BUSINESS PROCESSING OUTSOURCING (BPO), THE BOARD OF DIRECTORS OF THE COMPANY CONSIDER IT PRUDENT TO CLO SE DOWN THE RELATED SERVICES IN FUTURE AND TO DIVERSIFY THE BUSINESS INTO NEW AREAS OF CONSTRUCTION, DEVELOPMENT OF PROPERTY AND REAL ESTATE ETC. AS MENTIONED IN SUB CLAUSES (73), (84) AND (85) OF CLAUSE (C) OF PART III OF THE MEMORANDUM OF ASSOCIA TION OF THE COMPANY, AT THE APPROPRIATE TIME AND DEPENDING ON T HE AVAILABILITY OF RESOURCES AND OPPORTUNITY. 35. EXCEL HAS BEEN REJECTED BY THE TRIBUNAL IN TAXP AYERS OWN CASE OF EARLIER YEARS. SO, IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT EXCEL IS NOT A SUITABLE COMPAR ABLE VIS--VIS THE TAXPAYER AS IT FAILS EMPLOYEE COST/NET SALES RA TIO FILTER APPLIED BY THE TPO AND SEGMENTAL FINANCIALS ARE NOT AVAILAB LE, WHICH IS INTO NEW INFRASTRUCTURE ACTIVITIES, REAL ESTATE, ET C.. SO, WE ORDER TO EXCLUDE EXCEL FROM THE FINAL SET OF COMPARABLES. BNR UDYOG LTD. (BNR) 36. THE TAXPAYER SOUGHT EXCLUSION OF BNR ON THE GRO UND THAT IT FAILS RELATED PARTY TRANSACTIONS OF 25% APPLIED BY THE TPO. THE TPO HAS HIMSELF APPLIED FILTER TO REJECT COMPANIES WHERE RELATED PARTY TRANSACTIONS EXCEEDS 25% OF THE SALES AND THA T THIS COMPANY IS EARNING SUPER ABNORMAL PROFIT AND IS ALSO FUNCTI ONALLY DISSIMILAR. ITA NO.1524/DEL./2017 17 37. HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVE NUE DREW OUR ATTENTION TOWARDS FINDINGS GIVEN BY THE LD. DRP IN PARA 19 OF ITS ORDER AND THEREBY RELIED UPON THE DRP FINDINGS. 38. PERUSAL OF FINANCIALS OF BNR, AVAILABLE AT PAGE S 744 & 745 OF THE PAPER BOOK, SHOWS THAT RELATED PARTY TRANSAC TIONS/NET SALES OF THIS COMPANY IS 49.60% EXPLAINED IN TABULATED FORM AS UNDER :- RPT (IN INR) NET SALES (AMOUNT IN 000) RPT/ NET SALES 1,70,35,029 3,43,43,644 49.60% 39. FURTHERMORE, THIS COMPANY HAS EARNED SUPER NORM AL PROFIT HAVING EXTRA ORDINARY GROWTH IN ITS REVENUE. FOLLO WING TABLE EXPLAINED THE SUPER NORMAL PROFIT/GROWTH AS UNDER : - PARTICULARS REVENUE RELATED PARTIES TRANSACTIONS TURNOVER 90,94,848 3,43,43,644 3,42,60,146 1,70,35,029 GROWTH (%) 277.62% PBT 3,26,196 98,19,993 GROWTH (%) 2910.46% 40. FURTHERMORE, WHEN WE EXAMINE FUNCTIONAL PROFILE OF BNR AT PAGE 723 OF THE PAPER BOOK SHOWS THAT IT IS ENGAGED IN MEDICAL TRANSCRIPTION AND MEDICAL CODING WHICH IS DIFFERENT FROM THE TAXPAYER WHO IS A ROUTINE ITES SERVICE PROVIDER WOR KING ON COST PLUS MARK-UP BUSINESS MODEL. SO, WE ARE OF THE CON SIDERED VIEW THAT SINCE BNR FAILS RPT FILTER OF 25% APPLIED BY T HE TPO HIMSELF, HAVING SUPER NORMAL GROWTH, HAVING FUNCTIONAL DISSIMILARITY ITA NO.1524/DEL./2017 18 VIS--VIS TAXPAYER IS NOT A SUITABLE COMPARABLE, HE NCE ORDERED TO BE EXCLUDED. GROUND NO.8 41. LD. DRP/TPO/AO ERRED IN TREATING FOREIGN EXCHAN GE LOSS AS A NON-OPERATING ITEM. UNDISPUTEDLY, THE TAXPAYER I NVOICES ITS AES FOR ITS SERVICES IN US DOLLARS AND BEARS FOREIGN EX CHANGE RISK QUA MOVEMENT IN THE EXCHANGE RATE BETWEEN US DOLLAR AND INR. WHEN THE TAXPAYER DRIVES ITS INCOME FROM OVERSEAS A ES AND THE REMUNERATION OF SUPPORT SERVICES PROVIDED TO ITS AE IS A MAJOR SOURCE OF INCOME. LD. TPO/DRP HAVE ERRED IN APPLYI NG THE SAFE HARBOUR RULE WHICH IS NOT APPLICABLE FOR AY 2012-13 , THE YEAR UNDER CONSIDERATION BEING EFFECTIVE FROM 18.09.2013 HAVING BEEN MADE APPLICABLE PROSPECTIVELY. 42. SO, WHEN FOREIGN EXCHANGE LOSS IS TO FORM PART OF THE TOTAL BASE OF THE TAXPAYER FOR THE PURPOSE OF CHARGING A MARK UP TO ITS AES AS IT DRIVES INCOME FROM ITS OVERSEAS AES AND I T BEING A COST PLUS ENTITY, THE TAXPAYER EARNS FOREIGN EXCHANGE LO SS INCURRED IF ANY, FOREIGN EXCHANGE FLUCTUATION IS OPERATING IN N ATURE IN ORDER TO COMPUTE MARGINS, HENCE LD. DRP/TPO/AO HAS ERRED IN TREATING FOREIGN EXCHANGE LOSS AS NON-OPERATING ITEM. SO, W E DIRECT TO TREAT FOREIGN EXCHANGE LOSS AS OPERATING IN NATURE, HENCE GROUND NO.8 IS DETERMINED IN FAVOUR OF THE TAXPAYER. ITA NO.1524/DEL./2017 19 GROUND NO.11 43. GROUND NO.11 IS DISMISSED HAVING NOT BEEN PRESS ED DURING THE COURSE OF ARGUMENTS. GROUND NO.12 44. GROUND NO.12 BEING CONSEQUENTIAL IN NATURE NEED S NO SPECIFIC FINDINGS. 45. RESULTANTLY, THE APPEAL FILED BY THE TAXPAYER I S PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 3 RD DAY OF FEBRUARY , 2021. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 3 RD DAY OF FEBRUARY, 2021 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.DRP 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.