HSBC Electronic Data Processing India Private Limited , Hyderabad V. Asst. Commissioner of Income Tax, Circle-2(2), Hyderabad

ITA 2388/Hyd/2018

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 8415 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB-B
• Assessment Year: 2014-2015
• Appeal Filed On: 27-12-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Bad and doubtful debts; Tax effect
• Section: 271(1)(c); 143(3); 92B; 234B; 133(6); 37(1)

Judgement Text

ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 1 OF 22 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.2388/HYD/2018 (ASSESSMENT YEAR: 2014-15) HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD PAN: AAACH8235M VS ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 2 (2) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI RAJAN VORA FOR REVENUE : SHRI Y.V.S.T. SAI, CIT(DR) O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2014-15 AGAIN ST THE ORDER PASSED U/S 143(3) R.W.S. 92CA R.W.S. 144C OF THE I.T. ACT DATED 29.10.2018. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY FURNISHED ITS RETURN OF INCOME FOR THE A.Y 2014-15 ON 24.11.2014 ELECTRONICALLY DECLARING A TOTAL INCOME OF RS.423,0 1,96,430/-. THE RETURN WAS SELECTED FOR SCRUTINY UNDER CASS. 3. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3), TH E AO NOTICED THAT THE ASSESSEE HAS ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) TO THE TUNE OF DATE OF HEARING: 22.04.2019 DATE OF PRONOUNCEMENT: 17.07.2019 ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 2 OF 22 RS.2671,51,51,628/-. THE AO THEREFORE, REFERRED THE MATTER TO THE FILE OF THE TPO U/S 92CA OF THE ACT FOR DETERMINATI ON OF THE ARMS LENGTH PRICE (ALP) OF THE TRANSACTION. 4. THE TPO OBSERVED THAT THE ASSESSEE (HDPI IN SHOR T) WAS SET UP IN INDIA AS WHOLLY OWNED SUBSIDIARY OF H SBC HOLDINGS BV NETHERLANDS TO MEET THE BACK OFFICE PROCESSING N EEDS OF THE HSBC GROUP. HE CLASSIFIED THE SERVICES RENDERED BY HDPI (ASSESSEE) TO THE HSBC GROUP ENTITIES UNDER THE FOL LOWING 4 HEADS; (A) CALL CENTER; (B) DATA PROCESSING; (C) DATA ENTRY; AND (D) PROFESSIONAL SERVICES. HE OBSERVED THAT THE HSBC GROUP ENTITIES ARE RENDER ING THE BANKING AND FINANCIAL SERVICES AND HAVE MIGRATED SO ME OF THE BACK OFFICE AND CALL CENTER ACTIVITIES TO THE ASSES SEE. AFTER PERUSING THE FINANCIAL RESULTS OF THE TAXPAYER COMP ANY FOR THE FINANCIAL YEAR 2013-14, THE TPO OBSERVED THAT OP/OC (%) OF THE ASSESSEE IS 20.76%. AS REGARDS THE INTERNATIONAL TR ANSACTIONS ENTERED INTO BY THE ASSESSEE, THE AO OBSERVED THAT THE ASSESSEE HAS EARNED A MARGIN OF 20.09% AS AGAINST THE MARGIN S OF COMPARABLES TAKEN BY THE ASSESSEE AT 13.75% AND HAS CONSIDERED THE TRANSACTIONS TO BE AT ALP. FURTHER, THE TPO ALS O OBSERVED THAT THE ASSESSEE HAD TRADE RECEIVABLES AND SHORT-TERM L OANS AND ADVANCES FROM ITS AE WHICH WERE NOT REPORTED IN FOR M NO.3CED AND NO BENCHMARK ANALYSIS HAS BEEN DONE IN THE T.P. STUDY WITH REGARD TO THESE TRANSACTIONS. THEREFORE, HE CONDUCT ED THE FAR ANALYSIS AND FOUND CERTAIN DEFECTS IN THE TP ANALYS IS CARRIED ON BY THE ASSESSEE. THE DEFECTS FOUND ARE; ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 3 OF 22 (I) AS PER RULE 10B(4), IT IS MANDATORY FOR THE CU RRENT YEARS FINANCIAL DATA I.E. FINANCIAL YEAR IN WHICH THE INT ERNATIONAL TRANSACTIONS TOOK PLACE (FINANCIAL YEAR 2013-14); (II) ASSESSEE HAS USED EARLIER YEAR DATA PERTAINING TO FINANCIAL YEAR 2011-12 TO FINANCIAL YEAR 2012-13 BUT NO REASONS WE RE GIVEN AS TO HOW THE EARLIER YEAR DATA HAS INFLUENCE OVER THE PROCESS EITHER OF THE TAXPAYER OR OF THE COMPARABLES SO AS TO TARG ET THE PROVISO TO SECTION 10B(4); (III) 9 COMPARABLES HAVE BEEN SELECTED FOR THE FINA NCIAL YEAR 2013- 14. THEREFORE, TPO REJECTED THE COMPARABLES SELECTED BY THE ASSESSEE AND CONDUCTED A FRESH ANALYSIS AND ARRIVED AT 8 COM PANIES AS COMPARABLE TO THE ASSESSEE WHOSE AVERAGE MARGIN WAS 35.46%. A SHOW-CAUSE NOTICE WAS ACCORDINGLY ISSUED TO THE ASS ESSEE AND THE ASSESSEE SUBMITTED ITS OBJECTIONS AND ALSO REQUESTE D FOR WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT. THE AO HOWE VER, FINALIZED AT 9 COMPANIES AS COMPARABLES WHOSE MARGI N WAS 32.04%. HE ALSO REJECTED THE ASSESSEES REQUEST FOR WORKING CAPITAL ADJUSTMENT AND PROPOSED THE SHORTFALL BEING ADJUSTMENT OF RS.235,38,30,888/-. IN ACCORDANCE THEREWITH, A DRAF T ASSESSMENT ORDER WAS PASSED, AGAINST WHICH THE ASSESSEE RAISED ITS OBJECTIONS BEFORE THE DRP. THE DRP GRANTED PARTIAL RELIEF TO T HE ASSESSEE AND IN ACCORDANCE WITH THE DIRECTIONS OF THE DRP, THE F INAL ASSESSMENT ORDER WAS PASSED AGAINST WHICH THE ASSESSEE IS IN A PPEAL BEFORE US BY RAISING THE FOLLOWING GROUNDS OF APPEAL: A. TRANSFER PRICING MATTERS NON-APPLICATION OF APA TERMS BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED AO/HON'BLE DRP GROSSLY ERRED IN: 1. NOT APPLYING THE TERMS OF THE ADVANCE PRICING AGREEMENT ENTERED BY THE APPELLANT WITH THE CBDT WHEREIN 1AY 2014-15 IS A YEAR PRIOR TO THE COVERED ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 4 OF 22 PERIOD UNDER APA WITHOUT ANY CHANGE IN THE FACTS AN D CIRCUMSTANCES OF THE APPELLANTS BUSINESS. 2. WITHOUT PREJUDICE TO THE ABOVE AGREEMENT ON NON- APPLICATION OF THE APA TERMS, WE WISH TO SUBMIT THA T BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED AO/HON'BLE DRP ERRED IN GROUND NO.2 TO 13). REJECTION OF TP DOCUMENTS. 2. REJECTION OF THE TRANSFER PRICING DOCUMENTATION MAINTAINED BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULE S 1961 (RULES) AND UNDERTAKING A FRESH ECONOMIC ANALYSIS D URING THE COURSE OF ASSESSMENT PROCEEDINGS AND THEREBY MA KING AN ADJUSTMENT OF INR 305,33,05,656 TO THE INTERNATI ONAL TRANSACTIONS. REJECTION OF USE OF MULTIPLE YEAR DATA IN APPLYING TNMM 3. REJECTING THE USE OF MULTIPLE YEAR DATA OF THE COMPARABLE COMPANIES FOR DETERMINING THE ARMS LENGTH MARGIN UNDER TRANSACTIONAL NET MARGIN METHOD (TNMM). 4. USE OF ADDITIONAL FILTERS INTER-ALIA USE OF THE FOLLOWING ADDITIONAL/MODIFIED FILTERS IN UNDERTAKING THE COMPARATIVE ANALYSIS AND REJECTING THE COMPARABLE COMPANIES HAVING: A) DIMINISHING REVENUE/PERSISTENT LOSS FILTER; AND B) DIFFERENT FINANCIAL YEAR END; 5. INFORMATION OBTAINED U/S 133(6) SELECTIVE USE OF INFORMATION/DOCUMENTS OBTAINED BY EXERCISING POWERS U/S 133(6) OF THE ACT, WHICH ARE NOT AVAILABLE IN PUBLIC DOMAIN SELECTION OF UNCOMPARABLE COMPANIES 6. NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYSIS AND INTER-ALIA SELECTING THE FOLLOWING COMPANIES AS COMPARABLE: A) CROSS DOMAIN SOLUTIONS P LTD B) E CLEREX SERVICES LTD C) HARTRON COMMUNICATIONS LTD (ENTITY LEVEL) D) INFOSYS BPO LTD E) MICROGENETICS SYSTEMS LTD F) MICROLAND LTD G) MPS LTD 7. NOT FOLLOWING THE DIRECTIONS OF THE HON'BLE DRP NOT FOLLOWING THE DIRECTIONS OF THE HON'BLE DRP TO CONSIDER THE OFFICE BACKUP OPERATIONS SEGMENT OF HARTRON COMMUNICATIONS LTD AS COMPARABLE REJECTION OF COMPARABLE COMPANIES ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 5 OF 22 8. NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYSIS A ND INTER-ALIA REJECTING THE FOLLOWING COMPARABLE COMPANIES: A) ACE BPO SERVICES P LTD B) ALLSEC TECHNOLOGIES LTD C) CALIBER POINT BUSINESS SOLUTIONS LTD (SEG.) D) CYSTEL HUES LTD E) DATAMATICS FINANCIAL SERVICES L:TD F) JUDICIAL INTELLICOM LTD G) ACCENTIA TECHNOLOGIES LTD H) ACRPETAL TECHNOLOGIES LTD COMPUTATION OF OPERATING MARGIN OF THE COMPARABLES 9. NOT CONSIDERING PROVISION FOR BAD AND DOUBETFUL DEB TS AND PROVISION FOR LOANS AND ADVANCES AS OPERATING I N NATURE 10. NON-PROVISION OF ADJUSTMENT FOR RISK DIFFERENCES. A) NOT APPRECIATING THE FACT THAT THE APPELLANT OPERAT ES AS A RISK FREE SERVICE PROVIDER AND ALL THE KEY RISKS ASSOCIATED WITH THE FUNCTIONS PERFORMED ARE BORNE B Y THE ASSOCIATED ENTERPRISES (AES). B) NOT PROVIDING ADJUSTMENTS TAKING INTO ACCOUNT THE FUNCTIONAL AND RISK DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT AND THE COMPARABLE TRANSACTIONS UNDER TNMM, IN ACCORDANCE WITH THE PROVISIONS OF RULE 10B(1) OF THE I.T.RULE S, 1962. 11. IMPUTING INTEREST ON OUTSTANDING RECEIVABLES AS ON 31 ST MARCH, 2014 RS.17,31,66,150/- . A) NOT APPRECIATING THAT THE INSTANT TRANSACTION IS NO T COVERED IN THE DEFINITION OF INTERNATIONAL TRANSACT ION AS DEFINED U/S 92B OF THE ACT IN THE FACTS AND CIRCUMSTANCES OF THE CASE. B) NOT APPRECIATING THE FACT THAT THE RECEIVABLES ARE CONSEQUENTIAL/CLOSELY LINKED TO THE PRINCIPLE TRANSACTION OF PROVISION OF IT ENABLED SERVICES AND HENCE HAVE BEEN AGGREGATED FOR DETERMINATION OF ALP UNDER TNMM C) NOT APPRECIATING THE FACT THAT THE COMPANY HAS OUTSTANDING PAYABLES ON WHICH NO INTEREST HAS BEEN CHARGED BY THE AES D) NOT APPRECIATING THE FACTS AND CIRCUMSTANCES SURROUNDING THE RECEIVABLES AND RE-CHARACTERIZING T HE OUTSTANDING RECEIVABLES AS UNSECURED LOANS ADVANCED TO AES. 12. WITHOUT PREJUDICE TO THE ABOVE, NOT UNDERTAKING AN OBJECTIVE ECONOMIC ANALYSIS TO DETERMINE THE ARMS LENGTH PRICE OF THE OUTSTANDING RECEIVABLES BY ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 6 OF 22 A) NOT APPRECIATING THAT THE RECEIVABLES DUE FROM OVERSEAS AES ARE IN FOREIGN CURRENCY AND HENCE INTEREST, IF ANY, IS TO BE BENCHMARKED WITH THE RAT ES PREVALENT IN THE INTERNATIONAL MARKET FOR FOREIGN CURRENCY LOANS; B) DETERMINING THE ARMS LENGTH CREDIT PERIOD AS 35 DA YS AND IMPUTING INTEREST ON CREDIT PERIOD PROVIDED FOR THE INVOICES RAISED RELATING TO PROVISION OF SERVICES C) CALCULATING INTEREST ON ALL THE INVOICES OUTSTANDIN G AS ON 31 ST MARCH, 2014 ON AN AGGREGATE BASIS. NOT FOLLOWING THE DIRECTIONS OF HON'BLE DRP 13. NOT FOLLOWING THE DIRECTIONS OF HON'BLE DRP TO COMP UTE INTEREST ON INVOICE BY INVOICE BASIS RELATING TO IN VOICES RAISED ON AES FOR THE SERVICES RENDERED. B. CORPORATE TAX MATTERS ESOP AND ESPPO EXPENSE 14. DISALLOWANCE OF EXPENDITURE ON EMPLOYEE STOCK OPTIO N SCHEME AND EMPLOYEE STOCK PURCHASE PLAN OF INR 8,49,84,000 15. UNREALISED BEDGING LOSS A) DISALLOWING THE UNREALIZED HEDGING LOSS ON FORWARD CONTRACTS OF INR 3,06,99,395; B) WITHOUT PREJUDICE TO ABOVE, FOLLOWING AN INCONSISTE NT APPROACH BY NOT EXCLUDING THE UNREALIZED FOREX GAIN OF INR 9,90,18,250 FROM THE TAXABLE INCOME; 16. IMPOSITION OF INTEREST U/S 234B OF THE ACT = RS.89,62,80,825/- 17. IMPOSING PENALTY U/S 271(1)(C) OF THE ACT. 18. THE APPELLANT CARVES TO CONSIDER EACH OF THE ABOVE GROUNDS OF APPEAL WITHOUT PREJUDICE TO EACH OTHER A ND CRAVES LEAVE TO ADD, ALTER, DELETE OR MODIFY ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. TOTAL TAX EFFECT: INR 197,34,20,204/- 5. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEES GROUND NO.2 IS GENERAL IN NATURE AND GROUNDS 3, 4 AND 5 ARE NOT PRESSED. THE Y ARE ACCORDINGLY REJECTED AS NOT PRESSED. 6. AS REGARDS GROUND NO.6, IT IS SUBMITTED THAT THO UGH IN THE GROUND, 7 COMPANIES ARE MENTIONED, THE ASSESSEE IS NOW ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 7 OF 22 SEEKING EXCLUSION OF ONLY ONE COMPANY I.E. E CLERX SERVICES LTD AND IN GROUND NO.7, IT IS PRAYING FOR CONSIDERATION OF ONLY SEGMENTAL LEVEL RESULTS OF HARTRON COMMUNICATIONS L TD AS DIRECTED BY THE DRP AND NOT THE ENTITY LEVEL RESULT TAKEN BY THE TPO. 7. AS REGARDS GROUND NO.8, IT IS SUBMITTED THAT THE ASSESSEE IS SEEKING INCLUSION OF THE COMPANIES, WHI CH WERE SELECTED BY THE ASSESSEE BUT WERE REJECTED BY THE T PO. IT IS SUBMITTED THAT IN THE GROUNDS, THOUGH 8 COMPANIES A RE MENTIONED, THE ASSESSEE IS SEEKING INCLUSION OF ONL Y TWO COMPANIES I.E. ACE BPO SERVICES LTD AND ALTEX TECHN OLOGIES LTD IN THE FINAL LIST OF COMPARABLES AND ALSO OF OFFICE BACK OPERATIONS SEGMENT OF HARTRON COMMUNICATIONS LTD. 8. GROUND NO.9 & 10 ARE STATED TO BE INCLUDED IN GR OUND NO.6 AND THEREFORE, THESE TWO GROUNDS NEED NO SEPAR ATE ADJUDICATION. IT IS SUBMITTED ALL THE THAT OTHER GR OUNDS I.E. 11 TO 18 ARE ALSO PRESSED BY THE ASSESSEE. 9. LET US NOW THEREFORE, PROCEED TO DISPOSE OF THE ASSESSEES APPEAL GROUND-WISE. 11. AS FAR AS GROUND NO.1 IS CONCERNED, IT IS SUBMI TTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSES SEE HAD ENTERED INTO ADVANCE PRICING AGREEMENT (APA) WITH T HE DEPARTMENT CBDT ON 29.8.2016 FOR THE PERIOD COVERIN G THE A.YS 2015-16 TO 2019-20 AND THE INTERNATIONAL TRANSACTIO NS COVERED, ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 8 OF 22 FUNCTIONS PERFORMED AND RISKS ASSUMED BY THE ASSESS EE DURING THE ABOVE PERIOD AS WELL AS A.Y 2014-15 ARE ALL TH E SAME AS DOCUMENTED AS UNDER THE APA. IT IS SUBMITTED THAT T HE AGREED OPERATING MARGIN ON OPERATING COST FOR THE PROVISIO N OF I.T. ENABLED SERVICES TRANSACTION AND THE OTHER INTERNA TIONAL TRANSACTIONS TREATED AS CLOSELY LINKED, IS 18% WHER EAS THE OPERATING MARGIN EARNED BY THE ASSESSEE DURING THE A.Y 2013-14 IS 20.76% WHICH IS OF HIGHER THAN THE MARGIN DETERM INED BY THE APA AUTHORITIES. IT IS SUBMITTED THAT DURING THE AP A PROCEEDINGS, IT WAS CONSIDERED AND ACCEPTED BY THE AUTHORITIES T HAT THE SAME TP METHODOLOGY IS CONSISTENTLY APPLIED BY THE ASSES SEE THROUGHOUT THE APA PERIOD; THAT THE FAR ANALYSIS RE MAINED MATERIALLY THE SAME DURING THE APA PERIOD; AND THAT THE SALARY OF EMPLOYEES WORKING IN THE AREA OF ANALYTICS WOULD NO T BE MORE THAN 20% OF THE TOTAL SALARY OF THE EMPLOYEES IN AN Y YEAR. IT IS THUS SUBMITTED THAT THE APA HAS CONSIDERED THAT THE ASSESSEE FOLLOWED A UNIFORM METHOD THROUGHOUT THE PERIOD FOR ACCEPTING THE MARGIN AT 18% ON COSTS. SINCE THE A.Y BEFORE US IS 2014-15, ONLY ONE YEAR PRIOR TO THE APA PERIOD AND THE ASSES SEE HAS FOLLOWED THE SAME METHOD, HE SOUGHT APPLICATION OF THE SAME MARGIN TO THE ASSESSEE FOR THIS A.Y ALSO AND SINCE ASSESSEES MARGIN WAS HIGHER AT 20.76% THAN 18% AGREED DURING THE APA PROCEEDINGS. THUS, HE PRAYED THAT THE ASSESSEES MA RGIN BE ACCEPTED TO BE AT ALP. 12. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT THE RELEVANT A.Y IS NOT FALLING WITHIN THE APA PERIOD A ND THEREFORE, IT SHOULD BE CONSIDERED INDEPENDENTLY AS DONE BY THE T PO AND THE DRP. ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 9 OF 22 13. THE GROUND NO.6 IS THAT E CLERX LTD IS NOT COMP ARABLE TO THE ASSESSEE DUE TO FUNCTIONAL DISSIMILARITY AND ALSO VARIOUS OTHER REASONS. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS BEEN CONSIDERED AS A LOW END ITES SERVICE PROVIDER, WHEREAS THE E CLERX LTD PROVIDES FINANCIA L ANALYTICS TO ITS GROUP COMPANIES AND SUCH SERVICES ARE RECOGNIZE D AS KPO SERVICES. HE SUBMITTED THAT E CLERX PROVIDES WIDE R ANGE OF ACTIVITIES UNDER THE GAMUT OF FINANCIAL SERVICES AS WELL AS MARKETING SERVICES, CABLE AND VIDEO SERVICES; AND E CLERX HAS DESCRIBED ITSELF AS A SPECIALIZED KNOWLEDGE AND BUS INESS PROCESS OUTSOURCE COMPANY. TO ARGUE THAT IT IS A KPO COMPAN Y, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT E C LERX SERVICES LTD IS ENGAGED IN THE PROVIDING HIGH END IT ENABLED SERVICES SUCH AS CONSULTANTS, BUSINESS ANALYTICS, SOLUTION TESTIN G, DATA MANAGEMENT ETC., WHICH REQUIRE MUCH ADVANCED SKILLS IN COMPARISON TO THE ASSESSEE, WHICH IS ENGAGED IN PRO VISION OF ROUTINE IT ENABLED SERVICES TO ITS AES. HE ALSO REF ERRED TO THE APA AGREEMENT WHEREIN THE OPERATIONS/ACTIVITIES CARRIED ON BY THE ASSESSEE, SALARY COST OF THE EMPLOYEES IN THE ANALY TICS DIVISION BEING LESS THAN 20% OF THE COST WERE CONSIDERED AND , THE APA AUTHORITIES HAVE AGREED FOR A MARKUP OF 18% ON COST BECAUSE OF THE NATURE OF THE SERVICES RENDERED BY THE ASSESSEE . THEREFORE, HE SUBMITTED THAT CARE IS TAKEN SO THAT EVEN SMALL POR TION OF THE ANALYTICAL WORK CARRIED ON BY THE ASSESSEE SHOULD N OT AFFECT THE WHOLE OUTCOME OF THE APA WHICH IS THE VERY REASON A S TO WHY ANY TAXPAYER OPTS FOR AN APA. WITH REGARD TO THE SPECIF IC ARGUMENT THAT E CLERX SERVICES LTD IS A KPO COMPANY AND CANN OT BE ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 10 OF 22 CONSIDERED AS IT ENABLED SERVICE COMPANY, THE ASSES SEE RELIED UPON THE FOLLOWING CASE LAW: I) ASSESSEES OWN CASE FOR THE A.Y 2007-08 IN ITA N O.1826/2011 DATED 24.10.2014. II) HON'BLE DELHI HIGH COURT IN THE CASE OF RAMPGRE EN SOLUTIONS (P) LTD (ITA NO.102 OF 2015 DATED 10.08.2015). III) IGH IT SERVICES INDIA (P) LTD IN ITA NO.397/DE L/2017 DATED 30.06.2017 IV) SPECIAL BENCH OF THE MUMBAI TRIBUNAL IN THE CAS E OF MAERSK GLOBAL CENTERS (INDIA) PVT. LTD (ITA NO.7466/MUM/20 12, DATED 7- 3-2014). V) C3I SUPPORT SERVICES P LTD (ITA NO.503/HYD/2017 DATED 25 TH JULY, 2018.) VI) COGNIZANT SERVICES TECHNOLOGIES PVT LTD IN ITA NO.495/HYD/2015 DATED 29.01.2016 14. ANOTHER DISTINCTION POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE IS THAT E CLERX LTD HAS OU TSOURCED SUBSTANTIAL PORTION OF ITS OPERATIONS TO ITS SUBSID IARIES I.E. E CLERX SERVICES LTD AND E CLERX (P) LTD FOR SERVICES AMOUN TING TO RS.111.104 CRORES WHICH IS ABOUT 58% OF THE OTHER E XPENSES AND 27% OF THE TOTAL OPERATING COST. IT IS SUBMITTED TH AT THE OUTSOURCING COST OF THE ASSESSEE IS NIL AND THERE FORE, THE COMPANY LIKE E CLERX, WHOSE OPERATIONS PRIMARILY CO MPRISES OF OUTSOURCING ITS BUSINESS, CANNOT BE COMPARED TO THE ASSESSEES BUSINESS WHICH IS OPERATING AS 100% CAPTIVE SERVICE PROVIDER. IN SUPPORT OF THIS CONTENTION, THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE UPON THE FOLLOWING DECISIONS: A) HON'BLE BOMBAY HIGH COURT IN THE CASE OF APTARA TECHNOLOGY LTD (ITA NO.1206 OF 2015 DATED 26 TH MARCH, 2018. B) HON'BLE BOMBAY HIGH COURT IN THE CASE OF PFIZER INDIA LTD (ITA NO.1731 OF 2016 DATED 4 TH MARCH, 2019. C) HON'BLE DELHI HIGH COURT IN THE CASE OF RAMPGREE N SOLUTIONS (P) LTD (SUPRA). D) MAERSK GLOBAL CENTERS INDIA P LTD IN ITA NO.7466 /MUM/2012 DATED 7 TH MARCH, 2014. ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 11 OF 22 THUS, THE LEARNED COUNSEL FOR THE ASSESSEE TRIED TO ESTABLISH THE FUNCTIONAL DIFFERENCE BETWEEN THE ASSESSEE AND E CL ERX SERVICES LTD AND PRAYED FOR EXCLUSION OF THE SAME FROM THE F INAL LIST OF COMPARABLES. 15. THE LEARNED DR, HOWEVER, ARGUED THAT BOTH THE ASSESSEE AS WELL AS E CLERX SERVICES LTD ARE DISCHA RGING SIMILAR FUNCTIONS AND THEREFORE, THE ASSESSEE ALSO SHOULD B E CONSIDERED AS A KPO AND E CLERX LTD SHOULD BE CONSIDERED AS A COMPARABLE FOR THE PURPOSE OF TP STUDY. THE LEARNED DR ALSO RE LIED ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CAS E OF MCKINSEY KNOWLEDGE CENTRE INDIA (P) LTD WHEREIN IT WAS HELD THAT THE RESEARCH AND DEVELOPMENT SERVICES RENDERED BY MCKIN SEY ARE KPO SERVICES AND SUPPORT THE ORDER OF THE TPO. A COPY O F THE DELHI HIGH COURT JUDGMENT IS ALSO FILED BEFORE US. 16. IN REBUTTAL, THE LEARNED COUNSEL FOR THE ASSESS EE HAS FILED THE LETTER MAKING THE FOLLOWING SUBMISSIONS: A) CHARACTERISATION OF SERVICES AS 'KPO' IN NATURE 1. THE LEARNED DR DURING THE HEARING PLACED RELIANC E ON THE DECISION OF HON'BLE DELHI TRIBUNAL IN CASE OF M CKINSEY KNOWLEDGE CENTRE PRIVATE LTD (ITA NO 154/DE1/20 16) DATED 15 DECEMBER 2016 AFFIRMED BY DELHI HIGH COURT IN ITA 461/2017 DATED 9 AUGUST 2018 WHEREIN IT WAS HEL D THAT RESEARCH & DEVELOPMENT SERVICES RENDERED BY MCKINSEY ARE 'KPO' SERVICES AND SUPPORTED THE ORDER OF TPO, WHEREIN HE HAS HELD THAT SERVICES BEING RENDER ED BY APPELLANT'S ANALYTIC DIVISION ARE 'KPO' IN NATURE. IN THE REJOINDER, LEARNED COUNSEL FOR THE APPELLANT BASED ON NEWS FLASH MENTIONED THAT THE HIGH COURT ORDER IN C ASE OF MCKINSEY KNOWLEDGE CENTRE PRIVATE LIMITED (SUPRA) H AS BEEN RECALLED, HOWEVER THE COPY OF THE ORDER WAS NO T AVAILABLE DURING THE HEARING. 2. IN VIEW OF THE SAME, WE NOW WISH TO FILE THE COP Y OF THE HON'BLE DELHI HIGH COURT IN CASE OF MCKINSEY KNOWLE DGE CENTRE PVT LTD (REVIEW PETITION 360/2018) DATED 16 APRIL 2019 (REFER ANNEXURE 1) AND SUBMIT THAT THE OBSERVA TIONS ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 12 OF 22 OF THE HIGH COURT WITH REGARDS TO CLASSIFICATION OF SERVICES AS 'KPO' IN NATURE BY RELYING ON SPECIAL BENCH RULI NG IN CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT LTD (161 TTJ 13 7) WHICH HAD BEEN DISAGREED BY THE DECISION OF HON 'BLE DELHI HIGH COURT IN RAMPGREEN SOLUTIONS PVT LTD (60 TAXMANN.COM 255) HAVE BEEN NEGATED BY THE HIGH COUR T IN REVIEW PETITION AND ORDER TO THAT EFFECT IS RECA LLED FOR FRESH HEARING AND HENCE, THE RELIANCE PLACED BY THE LEARNED DR ON THE SAME IS MISPLACED. 3. IN VIEW OF THE ABOVE, THE APPELLANT, ONCE AGAIN REITERATES THAT AS SUBMITTED DURING THE COURSE OF T HE HEARING AND OUR SUBMISSIONS DATED 30 APRIL 2019, TH E ANALYTICS WORK CARRIED OUT BY THE APPELLANT IS CHARACTERISED AS LOW END BPO SERVICES PROVIDER ENGA GED 'BACK OFFICE OPERATION' AS PER TERMS OF ADVANCE PRI CING AGREEMENT (' AP A') ENTERED INTO WITH CENTRAL BOARD OF DIRECT TAXES ('CBDT') DATED 29 AUGUST 2016 AND HENC E, COMPANIES ENGAGED IN 'KPO' SERVICES LIKE ECLERX SER VICES LTD BE EXCLUDED FROM LIST OF COMPARABLE IN VIEW OF DECISION RELIED ON BY THE APPELLANT. 17. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT DURING THE APA PROCEEDINGS, THE ASSESSEE AS WELL AS THE REVENUE AUTHORITIES ARE REQUIRED TO GO INTO THE FUNCTIONS PERFORMED, RISKS UNDERTAKEN AND ASSETS EM PLOYED BY THE ASSESSEE DURING THE RELEVANT PERIOD TO FINALLY ARRIVE AT THE ACCEPTABLE MARGIN. THE ASSESSEE HAS ALSO FILED COPI ES OF THE DOCUMENTS FURNISHED FOR APA PROCEEDINGS WHICH INCLU DED ANNUAL COMPLIANCE REPORT IN FORM 3CEF, COPY OF SIGNED APA AND DOCUMENTS REQUIRED TO BE FILED AS PER APPENDIX-2 TO APA. FROM THE COPY OF THE FORM 3CEF, IT IS SEEN THAT THE NATU RE OF THE COVERED TRANSACTIONS IS REPORTED AS PROVISIONS FOR IT ENABLED SERVICES AND OTHER TRANSACTIONS NAMELY PAYMENT OF BANK CHARGES, CENTRALISED SERVICES, COMMON FACILITIES AN D REIMBURSEMENT BY AES HAVE BEEN AGGRAGATED UNDER THE PRINCIPAL TRANSACTIONS. AGREED TRANSFER PRICING METHOD WAS T NMM AND THE ACCRUED PROFIT LEVEL INDICATOR WAS OPERATING PROFIT MARGIN OF 18% ON COST. THUS, IT IS SEEN THAT THE ASSESSEE HAS BEE N TREATED AS ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 13 OF 22 ITES COMPANY BOTH BY THE ASSESSEE AS WELL AS APA AU THORITIES AND EVEN THE TPO IN THE TP STUDY FOR THE RELEVANT A.Y H AS TREATED THE ASSESSEE TO BE A ITES COMPANY AND THEREFORE, IT IS NOT OPEN TO THE LEARNED DR TO TAKE A DIFFERENT STAND AND ARGUE THAT THE ASSESSEE IS ALSO A KPO. EVEN OTHERWISE, AS SEEN FROM THE ANN UAL REPORT OF THE ASSESSEE, IT IS PERFORMING THE FOLLOWING FUNCTI ONS: A) ELECTRONIC DATA PROCESSING; B) CALL CENTRE; C) PROFESSIONAL SERVICES; D) OTHER SUPPORT FUNCTIONS 18. WHETHER THESE FUNCTIONS CAN BE CATEGORIZED AS K PO FUNCTIONS?. THE SPECIAL BENCH OF THE TRIBUNAL IN TH E CASE OF MAERSK GLOBAL CENTRE (INDIA) PVT. LTD WAS CONSIDERI NG THE DISTINCTION BETWEEN A KPO AND BPO AND IN THIS PROCE SS, HAS LISTED OUT THE SERVICES/FUNCTIONS WHICH CAN BE CONS IDERED AS KPO SERVICES AS DEFINED IN CLAUSE (G) OF THE RULES 10TA . 72. THE TERM KNOWLEDGE PROCESS OUTSOURCING SERVIC ES IS DEFINED IN CLAUSE (G) OF 10-TA AS UNDER: (9) KNOWLEDGE PROCESS OUTSOURCING SERVICES MEANS THE FOLLOWING BUSINESS PROCESS OUTSOURCING SERVICES PRO VIDED MAINLY WITH THE ASSISTANCE OR USE OF INFORMATION TE CHNOLOGY REQUIRING APPLICATION OF KNOWLEDGE AND ADVANCED ANA LYTICAL AND TECHNICAL SKILLS, NAMELY; (I) GEOGRAPHIC INFORMATION SYSTEM; (II) HUMAN RESOURCES SERVICES; (III) ENGINEERING AND DESIGN SERVICES; (IV) ANIMATION OR CONTENT DEVELOPMENT AND MANAGEMENT; (V) BUSINESS ANALYTICS; (VI) FINANCIAL ANALYTICS; OR (VII) MARKET RESEARCH THUS, IT CAN BE SEEN THAT THE ASSESSEE IS NOT PERFO RMING ANY OF THESE SERVICES AND FOR THIS REASON ALSO, THE ASSESS EE CANNOT BE CONSIDERED AS A KPO SERVICES PROVIDER. AS REGARDS T HE RELIANCE OF THE LEARNED DR ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF MCKINSEY, AS RIGHTLY POINTED OUT BY THE LEARNED ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 14 OF 22 COUNSEL FOR THE ASSESSEE, THE DECISION OF THE HON'B LE DELHI HIGH COURT IN THE CASE OF MCKINSEY KNOWLEDGE CENTRE INDI A (P) LTD IS NO LONGER APPLICABLE AS THE SAID ORDER HAS BEEN REC ALLED BY THE HON'BLE HIGH COURT FOR RECONSIDERATION. 19. NOW COMING TO THE COMPARABILITY OF E CLERX SERV ICES LTD TO THE ASSESSEE, WE HAVE TO FIRST VERIFY WHETHE R THE SERVICES RENDERED BY MCKINSY CAN BE CONSIDERED AS BPO SERVIC ES OR KPO SERVICES AS CLAIMED BY THE ASSESSEE. THE LEARNED CO UNSEL FOR THE ASSESSEE HAS REFERRED TO PAGE 380 OF THE PAPER BOOK FILED BY THE ASSESSEE, WHICH IS THE ANNUAL REPORT OF E CLERX SER VICES LTD FOR THE FINANCIAL YEAR 2013-14 WHEREIN E CLERX HAS DESC RIBED ITSELF AS INDIAS FIRST PUBLICLY LISTED KPO COMPANY. AT PAGE 391 OF THE PAPER BOOK, THE DETAILS OF OTHER EXPENSES ARE MENTI ONED, WHEREIN THE EXPENSES FOR CONTRACT SERVICES ARE SHOWN AT RS. 1,11,01,000/-. AT PAGE 397 OF THE PAPER BOOK ARE LISTED OUT THE SE RVICES RENDERED BY THE COMPANY WHICH INCLUDED CUSTOMER EXPERIENCE S OLUTIONS, TECHNICAL OPERATIONS, ANALYTICS AND ADVANCED AUTOMA TION AND DIGITAL CARE SERVICES. THUS, IT CAN BE SEEN THAT TH IS COMPANY IS INTO NICHE KPO SERVICES. WE FIND THAT THE COMPARABI LITY OF THIS COMPANY TO ITES COMPANIES HAS BEEN CONSIDERED BY VA RIUS BENCHES OF THE TRIBUNAL AND ALSO THE HON'BLE DELHI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS (P) LTD. THE HON'BL E DELHI HIGH COURT IN ITA NO.102/2015 DATED 10.8.2015 HAS CONSID ERED THAT RAMPGREEN SOLUTIONS RENDERS CALL CENTRE SERVICES FA LLING WITHIN THE BROAD DESCRIPTION OF ITES AND CANNOT BE COMPARE D TO E CLERX SERVICES LTD WHICH IS A KPO SERVICE PROVIDER. THE R ELEVANT PARAS OF THE HON'BLE HIGH COURT DECISION ARE AS UNDER: 22. IN THE FACTS OF THE PRESENT CASE, IT IS NOT DISPUT ED THAT VISHAL AND ECLERX ARE ENTITIES ENGAGED IN KNOWLEDGE PROCESS OU TSOURCING SERVICES ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 15 OF 22 (KPO SERVICES). THUS, THE PRINCIPAL QUESTION TO BE ADDRESSED IS WHETHER A KPO SERVICE PROVIDER COULD BE CONSIDERED AS A COMPA RABLE FOR BENCHMARKING INTERNATIONAL TRANSACTIONS ENTERED INT O BY AN ENTITY RENDERING VOICE CALL SERVICES SUCH AS THE ASSESSE E WITH ITS ASSOCIATED ENTERPRISE BY USING TNMM AND TAKING OPERATING PROFI T MARGIN AS THE PLI . 23. IN THIS CASE, THE TRIBUNAL NOTED THAT ECLERX WAS E NGAGED IN DATA PROCESSING AND ANALYTICS SERVICES AND HELD THAT THE ACTIVITIES OF THE ASSESSEE WERE FUNCTIONALLY SIMILAR TO THOSE OF ECLE RX. THE TRIBUNAL CONCLUDED THAT VOICE CALL SERVICES AND KPO SERVICES WERE ESSENTIALLY ITES AND, THEREFORE, ENTITIES RENDERING THE AFORESA ID SERVICES COULD BE CONSIDERED AS COMPARABLES FOR THE PURPOSE OF BENCHM ARKING INTERNATIONAL TRANSACTIONS BY USING TNMM. THE TRIBUNAL HELD THAT FURTHER SUB-DIVISION OF ITES WAS NOT PERMISSIBLE. THE TRIBUNAL FOLLOWED ITS EARLIER DECISION IN WILLIS PROCESSING SERVICES (INDIA) (P.) LTD. V. DY. CIT [2014] 148 ITD 678/41 TAXMANN.COM 33 (MUM.) . 24. IT IS NOT DISPUTED THAT VOICE CALL SERVICES ARE CO NSIDERED TO BE THE LOWER-END OF ITES. KPO ON THE OTHER HAND ARE ITES W HERE THE SERVICE PROVIDERS HAVE TO EMPLOY ADVANCED LEVEL OF SKILLS A ND KNOWLEDGE. NOTIFICATION NO. SO2810(E) DATED 18TH SEPTEMBER 201 3 ISSUED BY THE CBDT NOTIFYING SAFE HARBOUR RULES ALSO INDICATES TH E ABOVE. RULE 10TA(G) OF THE SAID RULES DEFINES KPO SERVICES AS U NDER:- '( G ) 'KNOWLEDGE PROCESS OUTSOURCING SERVICES' MEANS TH E FOLLOWING BUSINESS PROCESS OUTSOURCING SERVICES PROVIDED MAIN LY WITH THE ASSISTANCE OR USE OF INFORMATION TECHNOLOGY REQUIRI NG APPLICATION OF KNOWLEDGE AND ADVANCED ANALYTICAL AND TECHNICAL SKI LLS, NAMELY:- ( I ) GEOGRAPHIC INFORMATION SYSTEM; ( II ) HUMAN R ESOURCES SERVICES; ( III ) ENGINEERING AND DESIGN SE RVICES; ( IV ) ANIMATION OR CONTENT DEVELOPMENT AND MANAGEMENT; ( V ) BUSINESS ANALYTICS; ( VI ) FINANCIAL ANALYTICS; OR ( VII ) MARKET RESEARCH, BUT DOES NOT INCLUDE ANY RESEARCH AND DEVELOPMENT S ERVICES WHETHER OR NOT IN THE NATURE OF CONTRACT RESEARCH AND DEVELOPMENT SERVICE S;' 25. WHILST VOICE CALL CENTER REPRESENTS THE LOWER-END OF ITES, KPO REPRESENTS SERVICES INVOLVING A HIGHER LEVEL OF SKI LLS AND KNOWLEDGE. INDIA HAS VAST HUMAN RESOURCES AND A LARGE NUMBER O F HIGHLY -SKILLED TECHNICAL PROFESSIONALS. THE EXPRESSION 'KPO' INDIC ATES THE INVOLVEMENT OF DOMAIN KNOWLEDGE IN PROVIDING ITES. TYPICALLY, K PO INCLUDES INVOLVEMENT OF ADVANCE SKILLS; THE SERVICES PROVIDE D MAY INCLUDE ANALYTICAL SERVICES, MARKET RESEARCH, LEGAL RESEARC H, ENGINEERING AND DESIGN SERVICES, INTELLECTUAL MANAGEMENT ETC. ON TH E OTHER HAND, VOICE CALL CENTERS ARE NORMALLY INVOLVED IN CUSTOMER SUPP ORT AND PROCESSING OF ROUTINE DATA. IN THE CASE OF MAERSK GLOBAL CENTERS (INDIA) (P.) ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 16 OF 22 LTD. ( SUPRA ) A SPECIAL BENCH OF THE TRIBUNAL HAD REFERRED TO A REPORT PREPARED BY NATIONAL SKILL DEVELOPMENT CORPORATION (NSDC) ON HUMAN RESOURCE AND SKILL REQUIREMENTS IN IT AND ITES SECT OR (2022) AND NOTED THAT THE KPO SECTOR HAS BEEN DESCRIBED AS 'A VALUE PLAY'. THE SAID REPORT ALSO INDICATES THAT KPO SERVICES ARE LIKELY TO SPAN ACTIVITIES SUCH AS 'PATENT ADVISORY,HIGH -END RESEARCH AND ANALYTICS, ONLINE MARKET RESEARCH AND LEGAL ADVISORY'. 26. A KNOWLEDGE PROCESS IS UNDERSTOOD AS A HIGH VALUE ADDED PROCESS CHAIN WHEREIN THE PROCESSES ARE DEPENDENT ON ADVANC ED SKILLS, DOMAIN KNOWLEDGE AND THE EXPERIENCE OF THE PERSONS CARRYIN G ON SUCH PROCESSES. 27. THE GOVERNMENT OF RAJASTHAN (DEPARTMENT OF INFORMA TION TECHNOLOGY & COMMUNICATION) HAS ALSO FLOATED A SCHE ME ON 12TH DECEMBER, 2011 KNOWN AS 'THE RAJASTHAN INCENTIVE SC HEME FOR BPO CENTERS AND KPO CENTERS, 2011'. THE SAID SCHEME IS FOR PROVIDING INCENTIVES TO PROMOTE ITES AND TO GENERATE FURTHER EMPLOYMENT OPPORTUNITIES. IN TERMS OF THE SAID SCHEME, 'BUSINE SS PROCESS OUTSOURCING (BPO)' IS DEFINED TO MEAN 'THE TRANSFER OF AN ORGANIZATION'S ENTIRE NON-CORE BUT CRITICAL BUSINESS PROCESS/FUNCT ION TO AN EXTERNAL CENTRE WHICH USES AN IT-BASED SERVICE DELIVERY' AND 'KNOWL EDGE PROCESSING OUTSOURCING (KPO)' HAS BEEN DEFINED TO MEAN 'ALLOCA TION OF RELATIVELY HIGH-LEVEL TASKS TO AN OUTSIDE ORGANIZATION OR A DI FFERENT GROUP (POSSIBLY IN A DIFFERENT LOCATION) WITHIN THE SAME ORGANIZATI ON. KPO IS, ESSENTIALLY HIGH -END BUSINESS PROCESS OUTSOURCING (BPO)'. 28. IN OUR VIEW, THE DEFINITION OF KPO PROVIDED UNDER THE AFOREMENTIONED SCHEME ALSO INDICATES THAT KPO SERVI CES ARE UNDERSTOOD AS THE HIGHER-END OF ITES IN TERMS OF VALUE ADDITIO N. 29 .. 30. 31.. 37. APPLYING THE AFORESAID PRINCIPLES TO THE FACTS OF THE PRESENT CASE, IT IS ONCE AGAIN CLEAR THAT BOTH VISHAL AND ECLERX COULD NOT BE TAKEN AS COMPARABLES FOR DETERMINING THE ALP. VISHAL AND ECL ERX, BOTH ARE INTO KPO SERVICES. IN MAERSK GLOBAL CENTERS (INDIA) (P.) LTD. ( SUPRA ), THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THAT ECLERX IS ENGAGED IN DATA ANALYTICS, DATA PROCESSING SERVICES, PRICING ANALYT ICS, BUNDLING OPTIMIZATION, CONTENT OPERATION, SALES AND MARKETIN G SUPPORT, PRODUCT DATA MANAGEMENT, REVENUE MANAGEMENT. IN ADDITION, E CLERX ALSO OFFERED FINANCIAL SERVICES SUCH AS REAL-TIME CAPITAL MARKET S, MIDDLE AND BACK- OFFICE SUPPORT, PORTFOLIO RISK MANAGEMENT SERVICES AND VARIOUS CRITICAL DATA MANAGEMENT SERVICES. CLEARLY, THE AFORESAID SE RVICES ARE NOT COMPARABLE WITH THE SERVICES RENDERED BY THE ASSESS EE. FURTHER, THE FUNCTIONS UNDERTAKEN (I.E. THE ACTIVITIES PERFORMED ) ARE ALSO NOT COMPARABLE WITH THE ASSESSEE. IN OUR VIEW, THE TRIB UNAL ERRED IN HOLDING THAT THE FUNCTIONS PERFORMED BY THE ASSESSEE WERE B ROADLY SIMILAR TO THAT OF ECLERX OR VISHAL. THE OPERATING MARGIN OF ECLERX , THUS, COULD NOT BE INCLUDED TO ARRIVE AT AN ALP OF CONTROLLED TRANSACT IONS, WHICH WERE MATERIALLY DIFFERENT IN ITS CONTENT AND VALUE. IN MAERSK GLOBAL CENTERS(INDIA) (P.) LTD . ( SUPRA ), THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THE SAME AND HAD, THUS, EXCLUDED ECLERX AS A COMPARABLE. IT IS ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 17 OF 22 FURTHER OBSERVED THAT THE COMPARABILITY OF ECLERX H AD ALSO BEEN EXAMINED BY THE HYDERABAD BENCH OF THE TRIBUNAL IN CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P.) LTD. ( SUPRA ), WHEREIN, THE TRIBUNAL DIRECTED THE EXCLUSION OF ECLERX AS A COMPARABLE FOR THE REASON THAT IT WAS ENGAGED IN PROVIDING KPO SERVICES AND FURTHER THAT IT HAD ALSO RETURNED SUPERNORMAL PROFITS. 20. AS REGARDS THE INCOME FROM OUTSOURCING OF SOME OF ITS ACTIVITIES BY E CLERX IS CONCERNED AND WHETHER IT C AN BE A POINT FOR EXCLUSION OF E CLERX LTD FROM THE FINAL LIST OF COMPARABLES, THE HON'BLE DELHI HIGH COURT HAS ALSO CONSIDERED THE SA ME AND HELD AS UNDER: 38. IN OUR VIEW, EVEN VISHAL COULD NOT BE CONSIDERED A S A COMPARABLE, AS ADMITTEDLY, ITS BUSINESS MODEL WAS COMPLETELY DI FFERENT. ADMITTEDLY, VISHAL'S EXPENDITURE ON EMPLOYMENT COST DURING THE RELEVANT PERIOD WAS A SMALL FRACTION OF THE PROPORTIONATE COST INCURRED BY THE ASSESSEE, APPARENTLY, FOR THE REASON THAT MOST OF ITS WORK WA S OUTSOURCED TO OTHER VENDORS/SERVICE PROVIDERS. THE DRP AND THE TRIBUNAL ERRED IN BRUSHING ASIDE THIS VITAL DIFFERENCE BY OBSERVING THAT OUTSO URCING WAS COMMON IN ITES INDUSTRY AND THE SAME WOULD NOT HAVE A BEARING ON PROFITABILITY. PLAINLY, A BUSINESS MODEL WHERE SERVICES ARE RENDER ED BY EMPLOYING OWN EMPLOYEES AND USING ONE'S OWN INFRASTRUCTURE WOULD HAVE A DIFFERENT COST STRUCTURE AS COMPARED TO A BUSINESS MODEL WHER E SERVICES ARE OUTSOURCED. THERE WAS NO MATERIAL FOR THE TRIBUNAL TO CONCLUDE THAT THE OUTSOURCING OF SERVICES BY VISHAL WOULD HAVE NO BEA RING ON THE PROFITABILITY OF THE SAID ENTITY. 21. FURTHER, WE FIND THAT THE COORDINATE BENCHES OF THE TRIBUNAL, IN VARIOUS CASES REFERRED TO AND RELIED U PON BY THE LEARNED COUNSEL FOR THE ASSESSEE, HAS GONE INTO THI S ASPECT AND HAVE HELD E CLERX LTD TO BE A KPO COMPANY AND NOT C OMPARABLE TO A BPO CO. THE SPECIAL BENCH OF THE TRIBUNAL IN T HE CASE OF MAERSK GLOBAL CENTERS (INDIA) PVT LTD (SUPRA) HAS A LSO BROUGHT OUT THE DISTINCTION BETWEEN THE KPO AND THE BPO PAR TICULARLY IN ACCORDANCE WITH THE TERM KNOWLEDGE PROCESS OUTSOUR CING SERVICES AS DEFINED IN CL.(G) OF RULE 10TA OF THE I .T. RULES. ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 18 OF 22 RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO T O EXCLUDE E- CLERX SERVICES LTD FROM THE FINAL LIST OF COMPARABL ES. 22. AS REGARDS COMPARABILITY OF HARTRON COMMUNICATI ONS LTD, WE FIND THAT THE DRP HAS DIRECTED THE TPO TO C ONSIDER ONLY THE OPERATING MARGIN OF OFFICE BACK UP OPERATION SE GMENT OF HARTRON COMMUNICATIONS TO THE ASSESSEE TO DETERMINE THE ALP, BUT THE TPO HAS NOT FOLLOWED THE DIRECTIONS OF DRP AND HAVE RETAINED HARTRON COMMUNICATIONS AT THE ENTITY LEVEL IN THE FINAL ASSESSMENT ORDER. WE FIND THAT THE DRP DIRECTIONS A RE BINDING ON THE AO AND THEREFORE, WE DIRECT THE AO TO FOLLOW AN D IMPLEMENT THE DIRECTIONS OF THE DRP ON THIS ISSUE. THUS, THE ASSESSEES GROUND OF APPEAL NO.6 IS PARTLY ALLOWED AND GROUND NO.7 IS ALLOWED. 23. AS REGARDS ASSESSEES PRAYER FOR INCLUSION OF A CE BPO SERVICES AND APE TECHNOLOGIES (P) LTD, IN THE FINAL LIST OF COMPARABLES, THE LEARNED COUNSEL FOR THE THE ASSESS EE HAS TRIED TO DEMONSTRATE THAT THE AO AND THE DRP HAVE HELD THAT THESE TWO COMPANIES FAILS THE RPT FILTER AND POL FILTER WHERE AS ACTUALLY THESE FINDINGS ARE FACTUALLY INCORRECT. HE REFERRED TO THE RELEVANT DOCUMENTS TO DEMONSTRATE THAT THESE TWO COMPANIES D ID NOT FAIL THE FILTERS ADOPTED BY THE TPO AND ARE COMPARABLE T O THE ASSESSEE. 24. THE LEARNED DR WAS ALSO HEARD AND ON CONSIDER ATION OF THE RELEVANT MATERIAL, WE DEEM IT FIT AND PROPER TO REMAND THIS ISSUE TO THE FILE OF THE AO/TPO TO RECONSIDER THE S AME AND ONLY IF IT IS FOUND THAT THESE COMPANIES DO NOT FAIL THE RE LEVANT FILTERS ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 19 OF 22 ADOPTED BY THE TPO, THEN THESE COMPANIES SHOULD BE INCLUDED IN THE FINAL LIST OF COMPARABLES. THUS, GROUND NOS. 6, 7 & 8 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. 25. AS REGARDS GROUND NOS. 9 & 10 FOR CONSIDERING THE PROVISION FOR BAD AND DOUBTFUL DEBTS AND PROVISION FOR LOANS AND ADVANCES AS OPERATING IN NATURE AND ALLOWING RISK A DJUSTMENT, SINCE THE ASSESSEE HAS SOUGHT EXCLUSION OF ONLY ECL ERX AND WE HAVE HELD IT TO BE NOT COMPARABLE TO THE ASSESSEE, THE ADJUDICATION OF THESE GROUNDS WOULD ONLY RESULT IN AN ACADEMIC EXERCISE AT THIS STAGE. THEREFORE, WE ARE NOT INCLI NED TO ADJUDICATE THE SAME AT THIS STAGE. SIMILARLY, ADJUDICATION OF GROUND NO.1 ALSO IS NOT REQUIRED AS BY EXCLUSION OF E CLERX SER VICES LTD FROM THE FINAL LIST OF COMPARABLES, THE MARGIN OF THE AS SESSEE FALLS WITH THE + OR 3% OF THE MARGIN OF THE COMPARABLES AND THE ADJUDICATION OF THIS ISSUE ALSO IS ACADEMIC IN NATU RE. 26. AS REGARDS GROUND NO.11, ON IMPUTING INTEREST O N OUTSTANDING RECEIVABLES AS ON 31 ST MARCH, 2014, IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT AVERAGE C REDIT PERIOD ALLOWED BY THE ASSESSEE IS 92.7 DAYS AS AGAINST THE PERIOD OF 90 DAYS USUALLY ALLOWED BY VARIOUS BENCHES OF THE TRIB UNAL IN VARIOUS OTHER CASES. HE FURTHER SUBMITTED THAT THE INTERNATIONAL TRANSACTIONS WERE BUNDLED TRANSACTIONS AND THE INTE REST ON TRADE RECEIVABLES IS INCLUDED WHILE COMPUTING THE ALP, TH EREFORE, NO FURTHER ADJUSTMENT IS TO BE MADE. IN SUPPORT OF HIS CONTENTION THAT CREDIT PERIOD OF ONE YEAR SHOULD BE ALLOWED, H E PLACED RELIANCE UPON THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL DATED 27.05.2018 IN THE CASE OF C3I SUPPOR T SERVICES ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 20 OF 22 PVT. LTD IN ITA NO.503/HYD/2017 WHEREIN THE TRIBUNA L HELD THAT THE ASSESSEE THEREIN WAS PROVIDING 180 DAYS CREDIT PERIOD ON THE AMOUNT RECEIVABLES AND IS CONSISTENT WITH THE RBI G UIDELINES ON FOREIGN EXCHANGE RECEIVABLES, AS RBI ALLOWS A PERIO D OF 1 YEAR FOR THE AMOUNTS TO BE REALIZED IF THEY ARE IN FOREIGN E XCHANGE. HE ALSO PLACED RELIANCE UPON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL AT DELHI IN THE CASE OF BECHTEL INDIA PVT LTD IN ITA NO.1478/DEL/2015 DATED 21.12.2015, WHEREIN IT WAS H ELD THAT IN THE CASE OF A DEBT FREE COMPANY, IT IS NOT JUSTIFIA BLE TO PRESUME THAT BORROWED FUNDS HAVE BEEN UTILIZED TO PASS ON T HE FACILITY TO ITS AES. 27. THE LEARNED DR, ON THE OTHER HAND, REFERRED TO THE AGREEMENT BETWEEN THE ASSESSEE AND ITS AE WHEREIN 3 5 DAYS PERIOD IS FIXED FOR REALIZATION OF THE CONSIDERATIO N. THEREFORE, ACCORDING TO HIM, 35 DAYS CREDIT PERIOD ONLY SHOULD BE ALLOWED AND INTEREST ON RECEIVABLES SHOULD BE COMPUTED ACCO RDINGLY. 28. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT INTEREST ON RECEIVABLES I S AN INTERNATIONAL TRANSACTION DURING THE RELEVANT FINANCIAL YEAR. THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE IN RELATION TO THE A.YS PRIOR TO THE AMENDMENT TO SECTION 92B OF T HE ACT AND THEREFORE, ARE NOT APPLICABLE IPSO FACTO TO THE CASE OF THE ASSESSEE. FURTHER, WHEN THE CREDIT PERIOD IS CLEARLY MENTIONE D IN THE AGREEMENT BETWEEN THE PARTIES, THEN THE SAME ONLY S HOULD BE ALLOWED AND INTEREST ON TRADE RECEIVABLES AFTER SUC H CREDIT PERIOD SHOULD BE COMPUTED. THEREFORE, THE COMPUTATION OF INTEREST ON TRADE RECEIVABLES IS REMITTED TO THE FILE OF THE AO WITH THESE ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 21 OF 22 DIRECTIONS. GROUND OF APPEAL NO.11 IS ACCORDINGLY T REATED AS ALLOWED FOR STATISTICAL PURPOSES. 29. AS REGARDS GROUND 14 AGAINST DISALLOWANCE OF EX PENSES ON ESOP AND ESPP, THE LEARNED COUNSEL FOR THE ASSES SEE PLACED RELIANCE UPON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL AT BANGALORE DATED 17.02.2013 IN THE CASE OF BIOCON LT D IN ITA NO.368/BANG/2010 AND OTHERS, WHEREIN SUCH EXPENDITU RE HAS BEEN HELD TO BE REVENUE IN NATURE. THE LEARNED DR, ON THE OTHER HAND, RELIED UPON THE DECISION OF THE HON'BLE SUPRE ME COURT IN THE CASE OF BROOKE BOND INDIA REPORTED IN (1997) 22 5 ITR 798 (SC) . THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT THIS DECISION ALSO WAS CONSIDERED BY THE HON'BLE SPECIAL BENCH IN THE CASE OF BIOCON LTD. 30. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THIS ISSUE IS COVERED IN FA VOUR OF THE ASSESSEE AND THEREFORE, WE DIRECT THE AO TO GRANT R ELIEF TO THE ASSESSEE BY FOLLOWING THE DIRECTIONS OF THE SPECIAL BENCH IN THE CASE OF BIOCON LTD. THIS GROUND IS ACCORDINGLY ALLO WED. 31. AS REGARDS GROUND NO.15 AGAINST THE DISALLOWANC E OF FOREX LOSS ON FORWARD CONTRACTS, THE LEARNED COUNSE L FOR THE ASSESSEE PLACED RELIANCE UPON THE DECISION OF THE H ON'BLE SUPREME COURT IN THE CASE OF WOODWAND GOVERNOR, REP ORTED IN (2009) 312 ITR 254 (S.C). THE LEARNED DR, ON THE OT HER HAND, RELIED ON THE CBDT CIRCULAR NO.03/2010 DATED 23.3.2 010. 32. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE HON'BLE SUPREME COURT I N THE CASE OF ITA NO 2388 OF 2018 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD HYDERABAD. PAGE 22 OF 22 WOODWAND GOVERNOR INDIA (P) LTD HAS HELD THAT THE L OSS SUFFERED BY AN ASSESSEE ON ACCOUNT OF FOREIGN EXCHANGE DIFFE RENCE AS ON DATE OF BALANCE SHEET IS AN ITEM OF EXPENDITURE U/S 37(1) OF THE ACT. RESPECTFULLY FOLLOWING THE SAME, THIS GROUND O F THE ASSESSEE IS ALLOWED. 33. GROUND NO.16 IS AGAINST IMPOSITION OF INTEREST U/S 234B OF THE ACT AND THE AO IS DIRECTED TO ALLOW CON SEQUENTIAL RELIEF, IF ANY, TO THE ASSESSEE. 34. GROUND NO.17 IS AGAINST INITIATING OF PENALTY U /S 271(1)(C) OF THE ACT AND IT IS REJECTED AS PREMATUR E AT THIS STAGE. 35. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH JULY, 2019. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 17 TH JULY, 2019. VINODAN/SPS COPY TO: 1 HSBC ELECTRONIC DATA PROCESSING INDIA P LTD, PLOT NO.08, HSBC HOUSE, SURVEY NO.64 (PART) MADHAPUR, HYDERABAD 5000 81 2 ACIT, CIRCLE 2(2) SIGNATURE TOWERS, KONDAPUR, HYD ERABAD 500084 3 4 ADD. CIT (T.P) HYDERABAD DRP-1 BENGALURU 5 PR. CIT 2 HYDERABAD 6 THE DR, ITAT HYDERABAD 7 GUARD FILE BY ORDER