M/s Vodafone Global Services P Ltd, Pune V. Assistant Commissioner of Income-Tax, Circle 1(1), Pune

ITA 198/PUN/2022

AI Insights

The case involves Vodafone Global Services Private Limited appealing against the order of the National Faceless Assessment Centre, which pertained to the assessment year 2017-18. The primary contention revolved around the selection of comparable companies for the purpose of Transfer Pricing analysis. The assessee argued that several companies included by the TPO were not functionally comparable to its business operations. The Tribunal examined the functional profiles of the companies in question, the nature of services provided, and relevant judicial precedents to arrive at its decision. The Tribunal's decision led to the exclusion of certain companies from the comparables list, thereby impacting the assessment of arm's length pricing for the transactions in question.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133030 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 22-01-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 05-04-2022
• Other Referred Cases: Credence Resource Management Private Limited vs. ACIT, Rampgreen Solutions Pvt. Ltd. Vs. CIT, Symantec Software India Private Limited Vs. DCIT, Emerson Electric Company (India) Private Limited Vs. ACIT, Goldman Sachs (India) Securities Pvt. Ltd. vs. DCIT, Macom Technology Solutions (India) Private Limited Vs. DCIT, Tasty Bite Eatables Limited Vs. ACIT, United Health Group Information Services Pvt. Ltd. Vs. ACIT
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 191

Judgement Text

आयकर अपीलीय अधिकरण “सी” न्यायपीठ पुणे में । IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER आयकर अपील सं. / ITA No.198/PUN/2022 धििाारण वर्ा / Assessment Year : 2017-18 M/s. Vodafone Global Services Private Limited, Business at Mantri, 3A, Wing B1 and B2, Near Hotel Uppala, Survey No. 197, Hissa No. 2 and 4 to 7B, Lohegaon Pune – 411014 PAN : AAECV7299P ......अपीलार्थी / Appellant बिाम / V/s. The Assistant Commissioner of Income Tax, Circle – 1(1), Pune ......प्रत्यर्थी / Respondent Assessee by : S/Shri Ajit Jain, Siddhesh Chaugule & Siddhant Chandgude Revenue by : Shri Shivraj Morey सुिवाई की तारीख / Date of Hearing : 23-01-2023 घोर्णा की तारीख / Date of Pronouncement : 12-04-2023 आदेश / ORDER PER S.S. VISWANETHRA RAVI, JM : This appeal by the assessee against the order dated 07-02-2022 passed by National Faceless Assessment Centre, Delhi (“NFAC”) for assessment year 2017-18. 2 ITA No.198/PUN/2022, A.Y. 2017-18 2. The ld. AR, Shri Ajit Jain submits that the assessee filed additional grounds of appeal and requested the same may be adjudicated for due dispensation of substantial justice. The said additional grounds does not require any examination of facts as the assessee challenging the validity of reference to TPO. The ld. AR drew our attention to additional grounds vide letter dated 29-08-2022. After hearing both the parties and considering the necessary information as brought on record by the ld. DR, we reject the additional grounds of appeal raised by the assessee. Thus, additional ground Nos. 1 to 4 raised by the assessee are dismissed. 3. Ground Nos. A1, B4 and B5 are general in nature, hence, require no adjudication. 4. The ld. AR submits that the assessee is not interested to prosecute ground No. 8. Hence, the same is dismissed as not pressed. 5. Ground Nos. B2, B3, B6 and B7 raised by the assessee are with regard to benchmarking analysis of comparable companies selected by the assessee, rejecting the same as not comparable which are functionally comparables, not accepting the additional comparable companies and erroneously computing the operating margins of the comparable companies selected by the TPO. 6. Brief facts of the case are that the assessee is a wholly owned subsidiary of Vodafone Tele-Services (India) Holdings Limited, Mauritius and Vodafone Mauritius Limited. (VGSPL). The assessee engaged in the business of providing telecommunication networking services including network design, project management and implementation, network 3 ITA No.198/PUN/2022, A.Y. 2017-18 management and maintenance services. The assessee entered into five international transactions with its AEs. The only dispute is with regard to nature of transaction as provision of network design and implementation services. The assessee adopted TNMM. According to the TPO, on an examination of TP study report furnished by the assessee that the assessee is engaged in Information Technology Enabled Services (ITES) and taken OP/OC of Profit Level Indicator. 7. On perusal of TPO’s order, the assessee identified nine comparable companies on the basis of function performed, risk assumed and asset utilized which is evident at page 3 of the TPO’s order. The TPO issued show cause notice observing that the filters applied as turnover filter, foreign exchange earnings filter are not properly applied. According to the TPO, segmental information in the audited financial statements that the expenses incurred by the assessee on account of employee cost is more than 68.56% and opined that the services provided by the assessee are only in the nature of outsourcing. The TPO discussed in detail about the comparability of companies as provided by the assessee in its TP study and found the all, are not acceptable. 8. The TPO made search to find comparable companies by following filter criteria which is evident from pages 11 and 12 of the TPO’s order and selected ten comparables which are evident from pages 15 and 16 of the TPO’s order excluding Suma Soft Pvt. Ltd. The assessee submitted its reply to the show cause notice, summary of which is reproduced from para 7.1 and the TPO discussed the objections in detail. 4 ITA No.198/PUN/2022, A.Y. 2017-18 9. We note that the final list of comparables is detailed in para 24 of the TPO’s order. The assessee challenged the TPO in holding the companies at Sr. No. 2 to 10 of the said final set of comparable of DRP’s order. We find the DRP rejected the contentions of the assessee and upheld the view of TPO. Therefore, let us examine about the comparable companies included by the TPO which are as under : Sr. No. Company Name Turnover WCA (OP/OC for Comp Cos) Weighted WCA (OP/OC for Comp Cos) 1 Microland Ltd. 530.59 4.44% 9.09% 2 Parexel International (India) Pvt. Ltd. 364.46 16.58% 15.66% 3 24/7 Customer Pvt. Ltd. 521.82 17.22% 17.22% 4 Exlservice.Com (I) Pvt. Ltd. 1350.15 17.78% 17.78% 5 Datamatics Business Solutions Ltd. 62.8 0.58% 18.36% 6 Tech Mahindra Business services Ltd. 707.6 19.74% 22.64% 7 Manipal Digital systems Pvt. Ltd. (Merged) 24.34 30.01% 23.10% 8 C E S Ltd. 67.11 32.27% 32.23% 9 M P S Ltd. 224.13 59.67% 57.79% 10 Domex E-Data Pvt. Ltd. 22.24 69.62% 60.40% 35 th percentile 17.78% Median 20.50% 65 th percentile 23.10% 10. The ld. AR did not dispute the inclusion of comparable company at Sr. No. 1 i.e. Microland Ltd. 5 ITA No.198/PUN/2022, A.Y. 2017-18 11. The assessee seeking exclusion of Parexel International (India) Services Pvt. Ltd. 12. It was contended by the ld. AR that the Parexel is into wide range of clinical service offerings like medical communication, consulting, medical and scientific services, clinical development etc. The ld. AR argued that the assessee assists its AEs in running day-to-day operations, monitor issues, troubleshooting and other back office support, but however, Parexel is not at all comparable functionally to the assessee. We note that the TPO on an examination of annual report of Parexel opined that it is into single business segment i.e. ITES segment. Further, he was of the opinion, the said company is into single business segment engaged in the Business Process Outsourcing unit and providing Information Technology and IT enabled services. The TPO rejected the contention of the assessee and held that it is functionally comparable vide para 20 at page 54 of the TPO’s order. The DRP taking into account its order in A.Y. 2016-17 held Parexel is functionally comparable as it is engaged in IT and ITES services and the assessee could not controvert the factual findings of the TPO which are based on annual report. We note that annual report for F.Y. 2016-17 relevant to the year under consideration of Parexel is placed at pages 1495 to 1585 of the paper book. On perusal of the same at page 1503, we note that the principal business activity is Information Technology and IT enabled services which aid the clinical trials business. Further, we note at page 1532 of the paper book clearly shows that the Parexel is engaged in Information Technology and IT enabled services, obtained the approval from Government of India vide letter dated 27-07-2007 for setting up of undertakings in Special Economic Zone for rendering of IT & IT Enabled Services. Admittedly, there is no dispute that the assessee is also engaged 6 ITA No.198/PUN/2022, A.Y. 2017-18 in Information Technology Enabled Services which is reflected from para 5.1 of the TPO’s order, therefore, we find no infirmity in the findings of DRP in confirming the view of TPO in retaining Parexel International (India) Pvt. Ltd. as comparable consequently which resulted in final assessment order holding the same. 13. The assessee is seeking exclusion of 24/7 Customer Pvt. Ltd. as comparable. 14. The ld. AR drew our attention to page 441 of the TPO’s order and argued that the 24/7 Customer Pvt. Ltd. has completely different functions as that of the assessee, as it earned total revenue from customer relationship management services which includes CRM and customer analytics. He treated the functions of the assessee in running day-to-day operations, monitor issues, troubleshooting and other back office support to its AEs as that of comparable company. He drew our attention to the finding of TPO at page 442of the appeal memo and argued that the TPO made the said 24/7 Customer Pvt. Ltd. as comparable only on the basis as it is engaged in the business of providing IT enabled services from the annual report and the TPO rejected the contentions of the assessee. The DRP in its order at page 78 of the appeal memo confirmed the view of TPO in selecting 24/7 Customer Pvt. Ltd. as comparable taking into account the annual report showing of 100% from ITES. The Financial Statement for 01-04-2016 to 31-03-2017 is placed at page 1586 of the paper book, wherein, it is noted in the auditor report that the said company is engaged in the BPO and IT enabled services. Further, it is noted at page 1595 of the paper book, where, a declaration was made regarding the main products/services by the 24/7 Customer Pvt. Ltd. as the total turnover 7 ITA No.198/PUN/2022, A.Y. 2017-18 from Customer Relationship Management Services is 100% which supports from page 1665 of the paper book showing revenue from communication services is of Rs.52,17,69,87,803/-. On perusal of the said statement the said company derived total revenue from communication services only i.e. sale of services. We note that in segmental report at page 1659 of the paper book shows that the said company is engaged in the business of providing IT enabled services. 15. The ld. AR vehemently contended that the assessee is into troubleshooting that monitor the fault and rectify the same. There is no relationship with the customer that the assessee as that of 24/7 Customer Pvt. Ltd. The ld. DR supported the findings of DRP/TPO and argued the customer analytics is one function, is very difficult to find out the exact analytics. We note that as it is emanating from the TPO’s order in para 3 which culminates the services details in para 3 into Information Technology Enables services in para 5.1 of the TPO’s order. As discussed above in pages 1586, 1595 and 1665 as it clearly shows that the 24/7 Customer Pvt. Ltd. is into the business of IT enables services and is very difficult to find out the exact services from the said context as rightly pointed by the ld. DR. Admittedly, there is no dispute with regard to the business of assessee company engaged into IT enables services which is also that of 24/7 Customer Pvt. Ltd. as emanating from the annual report referred above, therefore, we find no infirmity in the findings of DRP in confirming the view of TPO in retaining 24/7 Customer Pvt. Ltd. as comparable consequently which resulted in final assessment order holding the same. 16. The assessee is seeking exclusion of Exlservice.Com (I) Pvt. Ltd. 8 ITA No.198/PUN/2022, A.Y. 2017-18 17. The assessee contended that the Exlservice.Com (I) Pvt. Ltd. is functionally different from the assessee as it is engaged in rendering transaction processing services, internet, consulting and voice-based care services to customers of its parent company. Further, it was also contended before the TPO that the said company failed in RPT filter category for earlier years. The TPO was of the opinion that the said Exlservice.Com (I) Pvt. Ltd. only engaged in ITES segment basing on its annual reports. The DRP confirmed the view of TPO in retaining Exlservice.Com (I) Pvt. Ltd. as the filter category of RPT is not material as the RPT transactions of the year under consideration, examined for the application of quantitative filter. We find the financial statements for the year under consideration of the Exlservice.Com (I) Pvt. Ltd. is placed at page 1674 of the paper book-4. On perusal of the business of the said company at page 1675, discloses that it is engaged in the product or category of BPO and KPO which includes human resource services. Further, we note that its total turnover earned from BPO is at 100%. Further, at page 1734 of the paper book which is profit and loss account where revenue from operations is valued at 13,499.32 Millions of Rs. and other income is of 905.84 Millions of Rs. We find no further details. The case of the TPO/DRP is that the said company is in the business of providing ITES and therefore it is comparable to the functions of the assessee. The ld. AR vehemently argued that the assessee is not into BPO and the functions of the said company are entirely different from the functions of the assessee. The ld. DR submits that the assessee is into highly technical services like that of KPO, but it is only BPO and there is no difference between KPO and BPO. On an examination of the record, we note that the Exlservice.Com (I) Pvt. Ltd. disclosed revenue from operations under BPO as it is main products/services. Though, it is mentioned BPO 9 ITA No.198/PUN/2022, A.Y. 2017-18 and KPO in its business process, but revenue earned at 100% from BPO. Admittedly, no further details were given in the financials, therefore, we find no infirmity in the findings of DRP in confirming the view of TPO in retaining Exlservice.Com (I) Pvt. Ltd. as comparable consequently which resulted in final assessment order holding the same. 18. The assessee is seeking exclusion of Datamatics Business Solutions Ltd. 19. According to the ld. AR the Datamatics Business Solutions Ltd. is engaged in providing intelligent Business Process Management services and Database Solutions & B2B Marketing, Demand Generation & Sales etc. He argued that the said company failed in foreign currency/sales filter for A.Y. 2015-16 and referred to page 248 of the appeal memo. On perusal of the same, we note that the said company failed in earning in foreign currency/sales filter for F.Y> 2014-15 and 2015-16 and the TPO has not mentioned anything regarding the assessee’s contentions for its failure in the filter category of foreign currency/sales. On perusal of the TPO’s order, the assessee raised the said objection before the TPO, but however, the TPO taking into account earning of Revenue from IT enabled services, retained the same as comparable without making any finding with regard to filter category of foreign currency/sales. The DRP at page 79 of the appeal memo held the application of filter regarding the failure of foreign currency/sales as applied by the TPO is factually correct as it was not material for the current year as it being examined for quantitative filter. ON perusal of annual report of Datamatics Business Solutions Ltd. at page 279 which clearly shows that there was no foreign currency transaction for the year ended on 31-03-2015 and also on 31-03-2016, but however, there 10 ITA No.198/PUN/2022, A.Y. 2017-18 is a gain in the year under consideration as on 31-03-2017. Admittedly, this issue was not discussed by the TPO and both the parties were agreed in remanding the said issue to the file of TPO for its fresh consideration regarding the examination of filter category of foreign currency/sales. Thus, we deem it proper to remand the issue of comparability under foreign currency/sales filter to the file of TPO. The assessee is liberty to file evidences, if any, in support of its claim. 20. The assessee is seeking exclusion of Tech Mahindra Business Services Ltd. 21. The TPO selected Tech Mahindra Business Services Ltd. as the comparable company taking into account the main description of product/services as Information Technology Enabled Services as it constitutes 100% total turnover. The assessee contended the functions of the said Tech Mahindra Business Services Ltd. is different as it is engaged in providing voice-based call center services to Hutchison 3G UK Limited and Vodafone Hutchison Australia Pty Limited and Hutchison 3G Ireland Limited. It is also noted the main contention of the assessee before the TPO was that the Tech Mahindra Business Services Ltd. commands a premium price due to brand value and objected the billing mechanism. According to the TPO that the Tech Mahindra Business Services Ltd. is not global and since the software services in India is outsourced to abroad clients and the billing is cost plus revenue and held the brand of Tech Mahindra Business Services Ltd. does not fetch higher margin. Further, the assessee could not point out the billing mechanism affects the functional comparison. The DRP basing on its earlier decisions in taking the Tech Mahindra Business Services Ltd. as comparable in similar ITES 11 ITA No.198/PUN/2022, A.Y. 2017-18 segment and also in assessee’s own case for A.Y. 2016-17 confirmed the finding of TPO in selecting the Tech Mahindra Business Services Ltd. as comparable. We find the annual report of Tech Mahindra Business Services Ltd. from page 1438 of the paper book-3. On perusal of page 1443, the said company discloses its principal business as Information Technology Enabled Services voice-based call center services which is contributing 100% of the total turnover. The Board’s report is at page 1439 of the paper book-3 which shows that there was no change in the nature of business carried out relevant to the year under consideration. We note that the Revenue from operations is disclosed the profit and loss account at page 1462 of the paper book of 7,076 Millions of Rs. and Note No. 24 discloses the other income under bank deposits etc. which is at page 1480 to an extent of 174 Millions of Rs. The contention of ld. AR is that the assessee is not a voice-based call center and the Tech Mahindra Business Services Ltd. which is into call-based call center, cannot be compared with the assessee. The ld. DR disputed the same by contending the assessee is also providing the services to its AEs as that of Tech Mahindra Business Services Ltd. is providing to Hutchison. He argued the said company is legally comparable as both the assessee and Tech Mahindra Business Services Ltd. is engaged in multiple services. On an examination of the record and the discussion made here-in-above regarding the annual report of Tech Mahindra Business Services Ltd., we find that it is engaged in the business of providing ITES to its clients abroad which is supported by the Revenue from operations at page 1462 and also the principal business which contributing 100% to the total turnover of the said company is IT enabled services at page 1443 of the paper book, therefore, we find no infirmity in the findings of DRP in confirming the view of TPO in retaining Tech Mahindra Business Services 12 ITA No.198/PUN/2022, A.Y. 2017-18 Ltd. as comparable consequently which resulted in final assessment order holding the same. 22. The assessee is seeking exclusion of Manipal Digital Systems Private Limited. 23. The ld. AR drew our attention to the order dated 18-06-2021 passed by this Tribunal in the case of Credence Resource Management Private Limited in ITA No. 133/PUN/2021 for A.Y. 2016-17 and submitted that this Tribunal considered comparability of Manipal Digital Systems Private Limited and directed the AO/TPO to exclude the same as comparable company in the final list of comparables. Both the parties agreed that the facts and circumstances covering the comparability of Manipal Digital Systems Private Limited to the case of assessee before us are similar and identical. The relevant portion of order in Credence Resource Management Private Limited at paras 8 to 14 are reproduced here-in-below for ready reference : “Manipal Digital Systems Private Limited:- 8. The assessee submits that the Manipal Digital Systems Private Limited is functionally different from the assessee which is involved in provision of ITes services. As per the annual report of the company, the activity undertaken by the company is in the nature of pre-press activities which is not comparable to the assessee. That further in the website of the company, it is engaged in the diversified set of activities which involves graphic solutions, packaging brand management, digital publishing and digital content solutions. Therefore, the assessee submits that this company should be rejected from the final set of comparables companies. 9. The TPO was of the opinion that in this company i.e. Manipal Digital Systems Private Limited, 90% of the revenue is earned from ITes which is similar to that of the assessee company. The TPO further observed that most of the information provided by the assessee was from website and it cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the contention of the assessee was rejected and the company was taken as comparable company. 10. That before the Ld. DRP, objections have been raised by the assessee which are at running Page No.34 of the appeal memo and therein, apart from 13 ITA No.198/PUN/2022, A.Y. 2017-18 reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions performed by the company. The Ld. DRP vide Para (c) of Page No.67 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and included Manipal Digital Systems Private Limited in the final set of comparables companies. That again the prime observation of the Ld. DRP in this regard was that more than 90% of the total revenue of the operation of the company comes from ITes. 11. At the time of hearing, the Ld. Counsel for the assessee took us through the annual report of the company at Volume –II, Page 1279 onwards, Page 1302 having notes of accounts. The Ld. Counsel vehemently submitted that on perusal of the annual report, notes of accounts, nothing can be stated whether at all this company i.e. Manipal Digital Systems Private Limited is engaged in the business of call center or not. The realm of ITes involves various activities and on general principle the Revenue cannot say that since majority of the earning of the said company comes from ITes, it is comparable company with that of the assessee company. 12. Placing strong reliance on the decision of the Hon‟ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT, ITA No.102/2015 dated 10.08.2015 copy of which is placed before us, the Ld. Counsel brought to our notice at Para 31 wherein the Hon‟ble Delhi High Court observed that the Tribunal had held that once a service falls under the category of ITes then there is no sub-classification of segment. Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITes. The Hon‟ble Delhi High Court rejecting such view of the Tribunal had held that such a view, if upheld, would be contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITes encompasses a wide spectrum of services that use Information Technology based delivery. Such service could include rendering highly technical services by qualified technical personnel involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITes would also include voice based call centers that render routine customer support for their clients. The relevant portion of the judgment is extracted as follows for the sake of completeness: “.............Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th 14 ITA No.198/PUN/2022, A.Y. 2017-18 November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider. 33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it 15 ITA No.198/PUN/2022, A.Y. 2017-18 would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. 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. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP.” 13. The Ld. Counsel for the assessee further submitted therefore, it is clear that merely because two companies are doing ITes services, on general categorization comparability is not permitted and one has to look into the specific services rendered in the spectrum of ITes and for this reason, the said company i.e. Manipal Digital Systems Private Limited is not a comparable company with that of the assessee company since absolutely functionally different. The Ld. Counsel also submitted that the TPO should have specifically stated why he has selected this company as comparable with that of the assessee company since the onus is on him to give reason for such inclusion. The logic was shown from the decision of the Pune Bench of the Tribunal in the case of M/s. Tasty Bite Eatables Limited Vs. ACIT, ITA No.1823/PUN/2018 for the assessment year 2014-15 dated 03.06.2021 wherein it was held that since the comparable chosen by the assessee, the onus is upon it to prove the functional comparability of this company. Extending the same logic, the Ld. Counsel submitted that it was also for the TPO to explain the reasons for inclusion of this company i.e. Manipal Digital Systems Private Limited since it was chosen as comparable by him. 14. We are of the considered view on going through the order of the TPO, findings of the Ld. DRP and the various judicial pronouncements placed on record, first of all the Revenue has selected Manipal Digital Systems Private Limited as comparable to that of the assessee company based on the earning of the company from ITes. However, there is no segmental specification provided neither by the TPO nor by the Ld. DRP for the reason of such inclusion of this company in the final set of comparable companies with that of the assessee company. In the decision of the Hon‟ble Delhi High Court (supra.), it is very much clear in the wide spectrum of ITes if two companies are to be comparable one has to look into the characteristic of service or business provided under ITes by them. This exercise was not done by the Department in this case. We also opine that as per Indian Council for Advertising, the online advertising has to be published on true and honest disclosure basis and therefore, when proper documentation of activities are not physically available, in such scenario, referring the website for information is correct option and the information therein cannot be doubted. These are all multi-national companies and certain amount of honesty has to be attributed to them since all are functioning as per relevant rules and laws. With these observations and respectfully, following the judgment of the Hon‟ble Delhi High Court (supra.) we direct the AO/TPO to exclude this company i.e. Manipal Digital Systems Private Limited from the final set of comparables with that of the assessee company.” 16 ITA No.198/PUN/2022, A.Y. 2017-18 24. On perusal of the same, we note that this Tribunal directed the AO to exclude the Manipal Digital Systems Private Limited from the final set of comparables. The ld. DR did not bring on record any contrary view in this regard. Therefore, following the same, we direct the AO/TPO to exclude the Manipal Digital Systems Private Limited from the final list of comparables. 25. The assessee is seeking exclusion of CES Limited. 26. The ld. AR drew our attention to the order dated 18-06-2021 passed by this Tribunal in the case of Credence Resource Management Private Limited in ITA No. 133/PUN/2021 for A.Y. 2016-17 and submitted that this Tribunal considered comparability of CES Limited and directed the AO/TPO to exclude the same as comparable company in the final list of comparables. Both the parties agreed that the facts and circumstances covering the comparability of CES Limited to the case of assessee before us are similar and identical. The relevant portion of order in Credence Resource Management Private Limited at paras 15 to 19 are reproduced here-in-below for ready reference : “CES Limited :- 15. The contention of the assessee are that as per the annual report of CES Limited for FY 2015-16, the company is engaged in providing IT and ITes services. The Director‟s report has further provides the detailed disclosure of activities carried out under ITes segment which describes that the revenue under this segment is generated from BPO as well as KPO activities for which the bifurcated information is not available. Therefore it cannot be comparable to the business of the assessee which is engaged in BPO services. Further the assessee contended that as per the website of the company the BPO segment is engaged in providing varied activities which includes fraud prevention and process automation. Thus, CES Limited is engaged in high end activities which are distinguished from low end back office activities of the assessee. 16. The TPO has observed that CES limited is engaged in the business of ITes only. The TPO even referred the annual report of this company at Page 39 where IT enabled services are comprising of BPO and KPO and still the TPO was of the opinion that since at Page 12 of the annual report of this company, there are ITes activities which formed 79% of the revenue and 17 ITA No.198/PUN/2022, A.Y. 2017-18 therefore, it is functionally comparable with that of the assessee company and hence, it was retained. 17. The Ld. DRP while upholding the observation of the TPO at running Page 70 of its order observed that the company derives revenue mainly from provision of ITes which works out to 79.75% of its total operational revenue for the year. Therefore, this company is very much functionally comparable with that of the assessee company. In respect of the submissions of the assessee that ITes comprises two services i.e. BPO & KPO services, referring to the Director‟s report, the Ld. DRP observed that they have only made reference in the ITes segment only and whether it is BPO or KPO services has nowhere been referred to. That further, the Ld. DRP also observed that most of the information was gathered from website of the company which may not always be reliable and relevant. 18. The Ld. Counsel for the assessee at the time of hearing reiterated the submissions made in respect of exclusion of Manipal Digital Systems Private Limited, for this company also. He took us through the annual report of the company, P & L account, notes of financial accounts and segmental information and therein, it is evident that companies operations predominantly relate to providing IT services in two primary business segments viz. IT services and IT Enables Services (ITes). The company considered the business segment as the primary segment and Geographical segment based on the location of the customers as the secondary segment. 19. Having perused the relevant documents on record, analyzing the facts and circumstances, we find that the Revenue Authorities have not clearly stated regarding involvement of BPO/KPO ITes services as evident from Page 39 of the annual report of the company where principal business activities of the company has been given. Both the Revenue Authorities TPO as well as DRP have gone into the revenue generation aspect from ITes which is at around 79%. That however, they have not specifically given reasons why this company should be included in the final set of comparables. The inclusion of KPO along with BPO is also not disputed by the Department and in respect thereof, following the decision of the Hon‟ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT, ITA No.102/2015 dated 10.08.2015, it is an undisputed fact therefore that the assessee in the present case is involved in ITes services which is primarily a call center. However, CES Ltd is doing both BPO and KPO services. The principle involved in the judgment of the Hon‟ble Delhi High Court (supra.) is crystal clear that segregation of ITes services has to be categorically conducted before classifying as functionally comparable with another. In this case Revenue Authorities have only looked into the revenue earning from ITes segment and included this company as comparable. The facts remains both these companies are functionally different. We therefore, direct the AO/TPO to exclude CES Limited from the final set of comparables with that of the assessee company.” 27. On perusal of the same, we note that this Tribunal directed the AO to exclude the CES Limited from the final set of comparables. The ld. DR did not bring on record any contrary view in this regard. Therefore, following the same, we direct the AO/TPO to exclude the CES Limited from the final list of comparables. 18 ITA No.198/PUN/2022, A.Y. 2017-18 28. The assessee is seeking exclusion of MPS Ltd. 29. The ld. AR drew our attention to the order dated 18-06-2021 passed by this Tribunal in the case of Credence Resource Management Private Limited in ITA No. 133/PUN/2021 for A.Y. 2016-17 and submitted that this Tribunal considered comparability of MPS Ltd. and directed the AO/TPO to exclude the same as comparable company in the final list of comparables. Both the parties agreed that the facts and circumstances covering the comparability of MPS Ltd. to the case of assessee before us are similar and identical. The relevant portion of order in Credence Resource Management Private Limited at paras 20 to 24 are reproduced here-in- below for ready reference : “MPS Limited :- 20. The assessee contends that MPS Limited is functionally different from the assessee which involves in provision of ITes services. That as per the annual report of MPS Limited, MPS Limited is engaged in the business of providing publishing solutions viz. type setting and data digitalization services for overseas publishers and supports international publishers through every stage of the author to reader publishing process and provides a digital first strategy for publishers across content production, enhancement and transformation, delivery and customer support. The assessee further contends that this company is engaged in research and development activities and there has been several acquisitions leading to extraordinary events and also MPS Limited has an fluctuation margin ranging from 8.23% in FY 2011- 12 to 67.08% in FY 2015-16. The detailed submissions of the assessee are at running Page No.188 of the TPO‟s order and thereafter, the TPO has given his detailed findings running Page No.189 to 191 of his order. 21. The Ld. DRP while upholding the findings of the TPO at running Page 58 to 62 of its order and as per reasoning given therein had found the company to be functionally comparable with that of the assessee company. 22. The Ld. Counsel for the assessee at the time of hearing took us through the annual report of this company i.e. MPS Limited specifically at Page No.1134 of the paper book wherein products of the company has been enumerated and submitted that they are functionally different with that of the assessee company. This fact was not disputed by the Ld. DR. The Ld. Counsel for the assessee also submitted that the high end activities performed by MPS Ltd. are akin to IT services and not ITes. 23. The Ld. Counsel for the assessee heavily relied on the decision of the Pune Bench of the Tribunal in the case of Symantec Software India Private Limited Vs. DCIT, ITA No.1824/PUN/2018 for the assessment year 2014- 15 19 ITA No.198/PUN/2022, A.Y. 2017-18 dated 17.02.2020 wherein the Tribunal in respect of MPS Limited has held and observed as follows : “20. We have perused the case records and heard the rival contentions. We find from the annual report of MPS Limited is engaged in high end activity i.e. type-setting, data digitization, content and product development for learners which is in the nature of „knowledge processing outsourcing services. From the various functions performed by MPS Limited, we find that the said comparable is predominantly in the business of digital publishing which cannot be treated at par with ITes which is in the name of the assessee in ITes segment. In this regard, we find in the case of Emerson Electric Company (India) Private Limited Vs. ACIT (supra.) wherein the Co-ordinate Bench of the Tribunal, Mumbai held the MPS Limited as functionally not comparable by observing as follows: “9.3. From the perusal of the annual report for the year ended 31/03/2014 of the said comparable, we find from page 707 of the paper book that the said comparable had incurred outsourcing cost ofRs.1078.76 Crores which is included under the head "miscellaneous expenses" which goes to prove that it has got a different business model. From the various functions performed by MPS Ltd., we find that the said comparable is predominantly in the business of digital publishing which cannot be treated at par with ITeS which is the case of the assessee in ITeS segment. In this regard, we find that the reliance placed by the ld.AR on the Co-ordinate Bench decision of Bangalore Tribunal in the case of M/s. Google (India) Pvt. Ltd., vs. DCIT in ITA No.1368/Bang/2010 for A.Y.2006-07 dated 19/10/2012 is well founded wherein it was held asunder:- 16. As far as (4) Apex Knowledge Solutions Pvt. Ltd., is concerned, we find that the assessee had taken objections before the TPO that it is functionally different, as it is provides services such as Epublishing knowledge based services etc. But TPO has rejected the objection on the ground the assessee has not considered the verticals or functional lines during the search process conducted by it and, therefore, it is not proper to make any objection on this basis now. We are not able to agree with the finding of the TPO as confirmed by the DRP on this issue. Merely because, the assessee itself has not considered the said filter while making its TP study; it cannot be said that it cannot raise such an objection before the TPO. It is the TPO who has adopted this company as comparable. On such adoption, the assessee has every right to raise the objections as regards the functional differences between the assessee and comparable. It is the bounden duty of the TPO to consider the said objections in accordance with law. As brought out by the assessee, the assessee is in the TT enabled services, whereas the said company Apex Knowledge Salutation Pvt. Ltd., is in the business of E-publishing which cannot be said to be in the same line of business. The functional differences are likely to affect the profit marking capacity of both the companies. In view of the same, we are of the opinion that this company is also to be excluded from the list of comparables. 9.3. In view of the above, we hold that the comparable chosen by the ld. TPO, M/s. MPS Ltd., is functionally not comparable with that of the assessee and accordingly, we direct the ld. TPO to exclude the same from the list of comparables.” 20 ITA No.198/PUN/2022, A.Y. 2017-18 21. We further observe in the case of United Health Group Information Services Pvt. Ltd. Vs. ACIT (supra.) wherein with regard to Vishal Informatics which is engaged in e-publishing business like the company in the instant case i.e. MPS Limited, on same issue, the Coordinate Bench of the Tribunal, Delhi has held as follows: “Vishal Informatics 12.1. The TPO included this company in the list of comparables by noticing that it was engaged in providing BPO services. The assessee failed to convince him and the DRP that it was incomparable. 12.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it is mainly engaged in e-publishing business. It has more than 10,000 classic books to its credit which are also converted into large font titles for visually challenged. Apart from e-publishing, this company is also engaged in Documents scanning & Indexing. It can be seen from the financial results of this company that both the segments viz., e-publishing and Documents scanning etc. have been combined and there are no separate financial results in respect of Documents scanning work, which may be comparable with the assessee to some extent. As the assessee is not engaged in any e-publishing business and the financials given by this company are on consolidated basis, we direct to exclude this company from the list of comparables. The assessee succeeds.” 22. We further observe that the Ld. DRP held MPS Limited as BPO Company and is engaged in ITes only. In this regard, the Pune Bench of the Tribunal in the case of Macom Technology Solutions (India) Private Limited Vs. DCIT in ITA No.2393/PUN/2017 for A.Y.2013-14 vide its order dated 08.08.2019 discussed the definitions as provided under Rule 10TA of Part-II DB wherein the definition of Information Technology Enabled Services are provided the business process outsourcing is defined under clause (e) which provides mainly with assistance or use of Information Technology which as back office operations, call centre, data processing or insurance claim processing. Further, the definition of KPO is provided under clause (g) of Rule 10TA to mean certain business process outsourcing services (BPO) services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills such as geographic information system, human resource services, business analytical services, financial services or engineering and design services, therefore, the Tribunal held being a KPO, it cannot be compared with that of company which is into business of BPO. The revenue recognition note states that the company is deriving revenue from website design and development and website hosing which is not similar to ITes. Further, MPS Limited underwent type-setting, data digitization, content and product development for learner which as per Safe Harbour Rules issued by Central Board of Direct Taxes qualifies to be in the nature of KPO. In view of the above, respectfully following the decisions of the Tribunal as mentioned hereinabove, we are of the considered view, high end activities of the MPS Limited is akin to IT services and not 21 ITA No.198/PUN/2022, A.Y. 2017-18 ITes. The activities of the MPS Limited i.e. typesetting, data digitization, content development and product development are in the nature of “Knowledge Processing Outsourcing Services (KPOs) and not BPO. Accordingly, MPS Limited cannot be treated as comparable company and the AO/TPO is directed to exclude MPS Limited from final list of comparable companies with regard to its technical support service segment.” 24. Having gone through the annual report of the company, findings of the Sub-ordinate Authorities and the submissions of the assessee placed on record along with judicial pronouncements, it is evident that MPS Limited is functionally different from that of the assessee company in more-so that high end activities of MPS Ltd is akin to IT services and not ITes. Respectfully following the decision of the Co-ordinate Bench of the Tribunal (supra.) we direct the AO/TPO to exclude MPS Limited from final list of comparable companies.” 30. On perusal of the same, we note that this Tribunal directed the AO to exclude the MPS Ltd. from the final set of comparables. The ld. DR did not bring on record any contrary view in this regard. Therefore, following the same, we direct the AO/TPO to exclude the MPS Ltd. from the final list of comparables. 31. The assessee is seeking exclusion of Domex E-Data Private Limited. 32. The ld. AR drew our attention to the order dated 18-06-2021 passed by this Tribunal in the case of Credence Resource Management Private Limited in ITA No. 133/PUN/2021 for A.Y. 2016-17 and submitted that this Tribunal considered comparability of Domex E-Data Private Limited and directed the AO/TPO to exclude the same as comparable company in the final list of comparables. Both the parties agreed that the facts and circumstances covering the comparability of Domex E-Data Private Limited to the case of assessee before us are similar and identical. The relevant portion of order in Credence Resource Management Private Limited at paras 25 to 27 are reproduced here-in-below for ready reference: “Domex E-Data Pvt. Ltd. :- 22 ITA No.198/PUN/2022, A.Y. 2017-18 25. The assessee submits that as per the annual report of the company for FY 2015-16, Domex E-Data Pvt. Ltd. is engaged in the business of providing export of IT, KPO and BPO services (note (ii) of Annexure to Auditor‟s Report for FY 2014-15.). Further it has diverse range of activities without sufficient segmental details and earns super normal profits. Website of the company reveals that Domex E-Data Pvt. Ltd. is a KPO company. The Domex E-Data Pvt. Ltd. is engaged in high end research and IT activities which is distinguished from low end back office activities of the assessee and therefore, both these companies are completely different and should not be considered as comparable with that of the assessee company. 26. The submissions of the assessee were not accepted by the TPO which is evident at running Page No.192 of the order and the main reason again is that the company earns most of the revenue from export of ITes. The TPO has however not dealt specifically with the objection of the assessee that Domex E-Data Pvt. Ltd. is primarily a KPO company. The Ld. DRP as per their observation at running Page No.66 on their order has given reasoning for upholding the findings of the TPO and making this company as comparable with that of the assessee company. Therein the Ld. DRP has emphasized again on the revenue earned from ITes services and regarding the objections of the assessee company i.e. Domex E-Data Pvt. Ltd. being KPO company, the Ld. DRP was of the opinion that since information was available in the website that cannot be relied on since the company has provided information in website which they intend to carry out but however at the present moment they may not be dealing with those activities. 27. Per contra, the Ld. Counsel for the assessee took us through the annual report, P & L account and reiterated the submissions placed before the Revenue Authorities. Here again as per facts placed on record, this company is primarily a KPO company as per Note-II of Annexure to Auditor‟s report for FY 2014-15. Here again the Revenue Authorities have not specifically stated the reason why this company is made comparable to that with the assessee company. That as per the logical principle following from the decision in the case of M/s. Tasty Bites Eatables Limited Vs. ACIT (supra.), it is for the TPO to explain the reason for inclusion of this company since it was chosen as comparable by him. That even the Ld. DRP had emphasized on the revenue earning of this company from ITes. Here also, the decision of the Hon‟ble Delhi High Court (supra.) is clear that if two companies performing ITes are to be considered as comparable then the specific business of the said two companies has to be analyzed and then decide upon whether they are at all comparable or not. In this case, we do not find such exercise was conducted neither by TPO nor by the Ld. DRP. Therefore, we are of the considered view that in the given set of facts, this company is functionally not comparable with that of the assessee company. We, therefore, direct the AO/TPO to exclude this company i.e. Domex E-Data Pvt. Ltd. from the final set of comparables.” 23 ITA No.198/PUN/2022, A.Y. 2017-18 33. On perusal of the same, we note that this Tribunal directed the AO to exclude the Domex E-Data Private Limited from the final set of comparables. The ld. DR did not bring on record any contrary view in this regard. Therefore, following the same, we direct the AO/TPO to exclude the Domex E-Data Private Limited from the final list of comparables. 34. The assessee is seeking inclusion of R Systems International Limited (BPO). 35. We find the said R Systems International Limited selected by the assessee as comparable. We note that the TPO rejected the same on the ground that the data of the said company are that of different financial year and excluded the same which is evident from page 400 of the appeal memo. The assessee challenged the same before the DRP and contended the exclusion of the said R Systems International Limited is inappropriate. The DRP since it approved application of quantitative turnover filter and the methodology adopted by the TPO, rejected the contention of the assessee and confirmed the exclusion of R Systems International Limited form the list of comparables. The ld. AR drew our attention to the decision of Mumbai Benches of the Tribunal in the case of Goldman Sachs (India) Securities Pvt. Ltd. in ITA Nos. 1115 & 1546/MUM/2015 for A.Y. 2010- 11. On perusal of the said order dated 17-02-2022 which is at page No. 195 of the paper book, wherein, the Tribunal discussed the issue of comparability of R Systems International Limited at para 18 at page 231 of the paper book. On an examination of the relevant para 18, we note that the Tribunal directed the AO to include the said company in the list of comparables though the accounting year is different. Further, the Tribunal directed the TPO to extrapolate the results for the comparative 24 ITA No.198/PUN/2022, A.Y. 2017-18 period. As we discussed above that admittedly, the TPO rejected R Systems International Limited as comparable only on the ground that the data is available of different accounting year and following the order of Tribunal in the case of Goldman Sachs (India) Securities Pvt. Ltd. (supra) we direct the AO to extrapolate the available data for the comparative period. 36. Thus, ground Nos. B2, B3, B6 and B7 answered. 37. In the result, the appeal of assessee is partly allowed for statistical purpose in the terms aforesaid. Order pronounced in the open court on 12 th April, 2023. Sd/- Sd/- (R.S. Syal) (S.S. Viswanethra Ravi) VICE PRESIDENT JUDICIAL MEMBER पुणे / Pune; ददिांक / Dated : 12 th April, 2023. रधव आदेश की प्रधतधलधप अग्रेधर्त / Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant. 2. प्रत्यर्थी / The Respondent. 3. The concerned CIT, Pune. 4. धवभागीय प्रधतधिधि, आयकर अपीलीय अधिकरण, “सी” बेंच, पुणे / DR, ITAT, “C” Bench, Pune. 5. गार्ा फ़ाइल / Guard File. //सत्याधपत प्रधत// True Copy// आदेशािुसार / BY ORDER, वररष्ठ धिजी सधचव / Sr. Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune