ITES Transfer Pricing: Datamatics Excluded as Comparable to Captive BPO: ITAT Bangalore

Exxonmobil Services and Technology Pvt. Ltd. Vs DCIT (ITAT Bangalore)

Summary: The Bangalore Bench of the Income Tax Appellate Tribunal considered an appeal filed by the assessee against the final assessment order dated 29 July 2022 for Assessment Year 2017-18. The assessee, a subsidiary of a US-based company, was engaged in providing business process outsourcing (BPO) and technical support services to its associated enterprises (AEs). It operated as a captive service provider assuming limited risks. For transfer pricing purposes, the assessee adopted the Transactional Net Margin Method (TNMM) and computed its operating profit margin at 17.24%. Based on its benchmarking study, the assessee contended that its international transactions satisfied the arm’s length principle. However, the Transfer Pricing Officer (TPO) rejected the benchmarking analysis, selected 13 comparable companies and determined a median operating margin of 24.37%. The TPO recomputed the assessee’s operating margin at 7.74%, resulting in an initial transfer pricing adjustment of Rs.41,52,50,000.

The TPO subsequently passed a rectification order under Section 154 of the Income-tax Act, 1961, increasing the adjustment to Rs.42,29,80,000. The assessee filed objections before the Dispute Resolution Panel (DRP), challenging the selection of comparable companies, treatment of certain expenditure as operating costs and denial of working capital and risk adjustments. The DRP rejected several objections concerning comparability and filters but granted partial relief regarding pre-project expenses, employee stock option plan (ESOP) expenses and certain comparable companies. Following the DRP’s directions, the TPO reduced the transfer pricing adjustment to Rs.13,52,50,000. Consequently, the Assessing Officer assessed the assessee’s total income at Rs.38,23,50,150 against the returned income of Rs.24,71,00,150. Aggrieved by the remaining adjustment, the assessee approached the Tribunal.

Before the Tribunal, the assessee primarily challenged the inclusion of Datamatics Business Solutions Ltd., Infosys BPM Services Pvt. Ltd., Manipal Digital Systems Pvt. Ltd., CES Ltd. and SPI Technologies India Pvt. Ltd. in the final set of comparables. The assessee argued that these companies were functionally different from a routine captive ITES service provider because of their involvement in knowledge process outsourcing, diversified operations, specialised services, ownership of intangible assets, brand advantages or different operating models. The Tribunal examined the submissions and relied on decisions of coordinate benches, including Eurofins IT Solutions India Pvt. Ltd., Global E:Business Operations Pvt. Ltd. and other relevant precedents. In particular, the Tribunal directed exclusion of Datamatics Business Solutions Ltd. from the comparable set, following the reasoning that its knowledge process outsourcing activities were not comparable with the assessee’s routine support functions. The Tribunal considered the objections to other companies with reference to their functional profiles and earlier judicial decisions.

The assessee also contested the denial of working capital adjustment. It submitted that differences in working capital levels between the assessee and comparable companies materially affected their operating margins and required suitable adjustment for reliable benchmarking under TNMM. The Tribunal accepted the need to account for such differences and directed the Assessing Officer/TPO to grant working capital adjustment on an actual basis. Another dispute concerned lease equalisation cost amounting to Rs.3,60,96,753, which had been treated as an operating expense while computing the assessee’s profit margin. The assessee contended that this expenditure had already been disallowed in its computation of taxable income and therefore should not be included in operating costs for transfer pricing purposes. The Tribunal directed the Assessing Officer/TPO to verify the relevant computation and exclude the amount from operating expenditure if the assessee’s contention was established.

The Tribunal thus granted partial relief to the assessee by directing appropriate modifications to the comparable companies used for benchmarking, allowing working capital adjustment on an actual basis and remitting the issue relating to lease equalisation cost for verification. These directions required the Assessing Officer/TPO to undertake the consequential recomputation of the arm’s length price and transfer pricing adjustment in accordance with the Tribunal’s findings. The Tribunal did not finally determine the revised adjustment amount, as certain matters required verification and recomputation by the tax authorities. Accordingly, the assessee’s appeal was partly allowed for statistical purposes. The decision highlights the importance of functional comparability in selecting ITES companies under TNMM, proper treatment of non-operating expenditure and adjustments for material working capital differences when determining the arm’s length price of international transactions.

Cases Discussed

• Ocwen Financial Services Pvt. Ltd. (ITAT Bangalore), IT(TP)A No. 718/Bang/2022, dated 31.03.2023
• Eurofins IT Solutions India Pvt. Ltd. Vs DCIT (ITAT Bangalore), IT(TP)A No. 186/Bang/2022, dated 05.01.2023
• Global E-Business Operations Pvt. Ltd. Vs DCIT (ITAT Bangalore), IT(TP)A No. 174/Bang/2022, dated 16.11.2022
• ADP (P.) Ltd. (ITAT Hyderabad), [2022] 135 taxmann.com 44
• Swiss Re Global Business Solutions India (P.) Ltd. Vs DCIT (ITAT Bangalore), [2022] 137 taxmann.com 417
• Morgan Stanley Advantage Services (P.) Ltd. (ITAT Mumbai), ITA No. 6523/Mum/2014, dated 23.07.2020
• Swiss Re Global Business Solutions India (P.) Ltd. Vs DCIT (ITAT Bangalore), [2020] 116 taxmann.com 716
• Huawei Technologies India Pvt. Ltd. (ITAT Bangalore), [2019] 101 taxmann.com 313
• ITO Vs E Value Serve.com (ITAT Delhi), [2016] 75 taxmann.com 195
• Rampgreen Solutions (P.) Ltd. Vs CIT (Delhi High Court), (2015) 377 ITR 533
• Mobis India Ltd. Vs DCIT (ITAT Chennai), [2013] 38 taxmann.com 231 / [2014] 61 SOT 40
• GE India Technology Centre (P.) Ltd. Vs DDIT (ITAT Bangalore), [2013] 30 taxmann.com 249 / 141 ITD 245
• Aztec Software & Technology Services Ltd. Vs ACIT (ITAT Bangalore Special Bench), [2007] 294 ITR (AT) 32
• Wills Processing Services (India) Ltd. Vs ACIT (ITAT Mumbai)
• Pino Bisazza Glass Pvt. Ltd. Vs ACIT (ITAT Ahmedabad), ITA Nos. 1690 & 1622/Ahd/2010 and 3201/Ahd/2011
• EIT Services India Pvt. Ltd. Vs DCIT (ITAT Bangalore)
• TCL Holdings Pvt. Ltd. Vs ACIT (ITAT Mumbai), ITA No. 7129/Mum/2011

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal by assessee is directed against final assessment order of Deputy Commissioner of Income-tax Circle-2(1)(1), Bangalore assessment unit NFAC for the assessment year 2017-18 dated 29.7.2022.

2. Facts of the case are that the Assessee was incorporated on 11.05.2015 and is a subsidiary of Mobil Rocky. Mountain Inc, USA. The assessee is engaged in the business of providing business process outsourcing services in the nature of administrative support, document processing, account maintenance, billing and transaction support in investment function to the Associated Enterprises (“AE”). During March 2017, the Assessee also commenced provision of technical support services to its AE’s which involves applying, maintaining and implementing computational models and software within Exxon Group. The functions, asset and risk analysis (“FAR analysis”) as per the TP study of the Assessee are at pages 58 to 62 of paper book. The Assessee was characterized as ‘captive service provider’ that assumes limited risks.

2.1 For the subject Assessment Year (“AY”) 2017-18, the Assessee e-filed its return of income on 29.11.2017 declaring the taxable income of Rs.24,.71,00,150/-. The return filed by the Assessee was processed under section 143(1) of the was selected for scrutiny assessment under CASS.

2.2 During AY 2017-18, the Assessee has the following international transactions with its AE:

* Since the TP Officer has made adjustment only towards BPO Services and Technical Support Services (together considered as ITES segment), the other transactions are not discussed in this note being hell to fie .at arm’s length by the TP Officer.

AS PER TRANSFER PRICING (“TP”) STUDY:

3. For the subject AY 2017-18, the Assessee had total revenue from services of Rs.268,97,90,000/- which comprised of Rs.263,76,00,000/- from rendering Business support centre services and Rs.5,21,90,000/- from rendering Technical support centre services.

3.1 Out of the Business support centre services of Rs.268,97,90,000/-, the Assessee received Rs.252,19,09,071/- from its AE outside India and the balance amount of Rs.11,56,90,92.9/- was received from rendering services to the AE in India. The entire revenue pertaining to Technical support services was received from its AE outside India. The Assessee had selected Transaction Net Margin Method (“TNMM”) as the Most Appropriate Method (“MAM”) and had computed its margin at 17.24% on operating cost. The TP documentation of the Assessee initially considered lease equalization cost and revenue on account of the same as ‘operating’ in nature. However, subsequently, the AE issued the letter dated 04.09.2018 confirming that the lease equalization cost was not intended to be charged, out to the AE. The margins were recomputed treating the lease equalization cost and revenue as ‘non-operating’ in nature. The margin of the Assessee was accordingly computed at 17.24%.

3.2 The Assessee further carried out the search for uncontrolled comparables using Prowess and Capitaline Database which yielded a set of 11 comparable companies with 35th and 65th percentile range of the weighted average operating profit/total cost of the comparable companies of 1.55% to 12.58% and median bf 5.50%. Since the profit margin of the Assessee at 17.24% on operating cost was higher than the median, the profit margin earned by the Assessee in the ITES segment was treated at arm’s length.

AS PER THE TP ORDER:

3.3 The TP Officer rejected the TP study and conducted fresh analysis. The TP Officer agreed with the Assessee that TNMM was to be applied as the MAM.

3.4 The TP Officer thereafter applied certain filters and selected 13 comparable companies in ITES segment which included 3 comparables from the TO study of the Assessee while 10 new comparables were introduced by the TP Officer. The list of the final set of comparables selected by the TP Officer are at pages 45-46 of TP order.

3.5 The TP Officer in selecting the said comparables applied the following filters.

3.6 The TP Officer determined the 35th to 65”’ percentile at 22.37% to 27.41% with median at 24.37% based on the weighted average operating profit/total cost of the following 13 comparable companies in the ITES segment.

–

3.8 A summary of the international transaction, method adopted, margin computed, and ALP determined is provided in the table below.

The TP Officer therefore passed the order dated 29.01.2021 under section 92CA of the Act and determined an adjustment of Rs.41,52,50,000/-in the ITES segment.

AS PER DRAFT ASSESSMENT ORDER (“9A0”):

3.9 The learned Assessing Officer (“AO”) passed the DAO on 30.09.2021 incorporating the TP adjustment of Rs.41,52,50,000/- determined by the TP Officer in the order passed under section 92CA of the ‘Act. The AO accordingly proposed to assess the income of the Assessee at Rs.66,23,50,150/- against the returned income of Rs.24,71,00,150/-.

3.10 The Assessee being aggrieved by the TP addition proposed in the DAO, filed its objections before the Dispute Resolution Panel (“DRP”).

AS PER 154 ORDER OF TP OFFICER:

3.11 The TP Officer revised his order passed under section 92CA of the Act by passing the order dated 07.10.2021 under section 154 of the Act. The TP Officer initiated rectification for the reason that the weighted average margin of the comparable Infosys BPM Ltd was incorrectly considered at 24.37% against the weighted average margin of 24.68% and the same had resulted in short computation of TP adjustment of Rs.77,30,000/- with tax effect of Rs.26,76,402/-. The TP Officer accordingly modified the TP adjustment of Rs.41,52,50,000/-determined in the order passed under section 92CA of the Act to Rs.42,29,80,000/-as per the 154 order.

Note: The Assessee submits that the AO has not revised his DAO pursuant to the 154 order passes by the TP Officer. The Assessee further submits that TP Officer has considered the margin of Infosys BPM Ltd as determined in the 154 order, while giving effect to the directions of the DRP.

AS PER HON’BLE DRP:

3.12 The DRP rejected the ground of the Assessee challenging the application of certain filters by the TP Officer. The DRP also rejected the objection of the Assessee seeking to apply turnover filter and also rejected the claim for grant of working capital and risk adjustment.

3.13 The Assessee had sought exclusion of the following comparables before the DRP. The DRP has rejected the arguments of the Assessee and has upheld the inclusion:

(I) Datamatics Business Solutions Ltd

(ii). Manipal Digital Systems Private Ltd

(iii) SPI Technologies India Pvt Ltd

(iv) Vitae International Accounting Services Pvt Ltd

(v) Infosys BPO Ltd

(vi) CES Limited

(vii) Inteq BPO Services Pvt Ltd

(viii) Microland Limited

3.14 The ld. DRP further rejected the Assessee’s arguments seeking inclusion of the following comparables:

(i) R Systems International Ltd

(ii) Allsec Technologies Ltd

(iii) Cosmic Global Ltd

(iv) BNR Udyog Ltd

(v) Digicall Teleservices Pvt Ltd

(vi) Bhilwara Infotechnology Limited

3.15 The ld. DRP however accepted the following objections of the Assessee and directed the TP Officer to exclude the same:

(i) Pre-project expenses Of Rs.88.48 million considered twice by the TP Officer: The DRP directed the TPO to verify and delete the double disallowance.

(ii) Pre-project expenses: The DRP directed the TP Officer to verify the Assessee’s contention that pre-project expenses was not claimed by the Assessee in the return of income filed for AY 2017-18. The DRP directed the TP Officer to exclude the pre- project expense from the cost base.

iii) ESOP Expense: The DRP agreed with the Assessee that ESOP cost was non-operating in nature and directed the TP Officer to exclude the same from the cost base.

iv) Exclusion of Ultramarine & Pigment Ltd: The DRP accepted the objection of the Assessee and directed the TP Officer to exclude Ultramarine & Pigment Ltd.(v) Inclusion of Crystal Voxx Ltd: The DRP directed the TP Officer to include this company if it qualifies all the filters adopted by the TP Officer. The DRP accordingly disposed of the objections of the Assessee vide directions dated 23.06.2022.

As PER FINAL ASSESSMENT ORDER (“FAO”):

3.16 The TP Officer passed the order dated 25.07.2022 to give effect to the directions of the DRP. The TP Officer determined the adjustment of Rs.13,52,50,000/- against the adjustment of Rs.42,29,80,000/- proposed in the 154 order passed by the TP Officer.

3.17 The AO has passed the FAO assessing the income of the Assessee at Rs.38,23,50,150/- against the returned income of Rs.24,71,00,150/-.

3.18 Aggrieved by the TP adjustment of Rs. 13,52,50,000/- made in the FAO, the Assessee has filed the present appeal before this Tribunal.

4. Ground Nos.1 to 11 are not pressed and accordingly, these grounds are dismissed as not pressed.

5. Ground No.12 is with regard to exclusion of following comparable companies:

12.1 Datamatics Business Solutions Ltd.

12.3 Infosys BPM Services Pvt. Ltd.

12.5 Manipal Digital Systems Pvt. Ltd.

12.6 CES Limited 12.7 SPI Technologies Pvt. Ltd.

5.1 The other comparables in this ground no.12 are not pressed. Accordingly, dismissed as not pressed.

(I) Datamatics Business Solutins Ltd.

6. The ld. A.R. submitted that Datamatics fails the export filter applied by the learned TPO, lacks segmental data and therefore, should be rejected.

> Fails export earnings filter proposed to be applied by the learned TPO for the two previous years, i.e. FY 2015-16 and FY 2014-15

> Functionally different – Engaged in KPO services

> No segmental details are provided

7. The ld. D.R. submitted that the Ld. DRP observed in his report that as per the Form No. MGT-9 forming part of the annual report, the principal activity of the company is described as IT enabled Services and BPM Service providers deriving income around 87.29%. Therefore, the company is functionally similar to the assessee as it is being predominantly into ITES Company.

7.1 In this case as ld. DRP pointed out earlier that difference in various segments i.e. low end to high end in ITES services is mainly on account of differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly qualified/skilled also goes up steeply and, therefore, the margins are not much affected. Intact, no evidence has been produced before us to show that margins in the high end segments of ITES services is high compared to low end services. Therefore, ld. DRP was unable to accept the argument advanced by learned AR that the comparables belonging to high end segments such as KPO etc. should be excluded from the comparability list on this ground alone. In fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. In view of the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. Accordingly, the ld. DRP rejected this plea of the assessee.

7.2 The ld. D.R. further submitted that as regards, the export revenue as given in Note No. 18, the revenue is around Rs.50.43 crores as on 31.03.2017 as against total revenue of Rs.62.70 crores, which comes to 80.43%. As the company is functionally similar and satisfies the filters adopted by the TPO including export revenue filter of more than 75%, the company is considered as comparable. Therefore, the action of the TPO considering the company was upheld by the ld. DRP.

7.3 The ld. DR submitted that s regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17.

7.4 She submitted that the assessee contended before the ld. DRP that this comparable has incurred significant selling, marketing expenses. From the perusal of the annual report, the ld. DRP noted that the expenses on this count is only 4.57% of the total sales and which is not at all significant to affect the profitability of the comparable. Further, during the previous year 2015-16 the assessee has incurred more selling and marketing expenses amounting Rs.326.33 lakhs as against total sales of Rs.6314.04 lakhs whereas the company has incurred Rs.299.46 lakhs during the previous year 2016-17 as against total sales of Rs.6544.60 lakhs. Thus, that though expenses are less this year the revenue has slightly gone up. This shows that there is no correlation between the expenses and the revenue. The assessee has failed to establish that such differences have material effect on the margin of the above company, in terms of clause (i) of sub- rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas were rejected by the ld. DRP.

7.5 The ld. D.R. submitted that as per the fixed asset schedule given in the annual report, the value of intangible assets as on 31-3-2017 was only Rs.256.67 lakhs as against total revenue of Rs.6544.60 lakhs constituting 3.92% of operating revenue. There is no reference to any IPR or patent owned or developed by the company, in the stand-alone annual report. There is also no acquisition of IPR during the year. The intangibles shown in the Asset Schedule are only computer software acquired for the business. Even the assessee has such computer software to the extent under the head intangible asset. The assessee also did not point to any information in the annual report to indicate that the intangibles have materially affected the profitability of the company as required in clause (i) of sub-rule (3) of Rule 10B. Taking into account all these aspects, we do not find any material difference so as to affect comparability. Hence, these pleas are rejected.

7.6 In view of the above, the pleas of assessee were rejected and selection of this company was upheld by the ld. DRP.

8. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of Eurofins IT Solutions India Pvt. Ltd. for the AY 2017-18 in IT(TP)A No.186/Bang/2022 dated 5.1.2023, wherein held as under:

“7. We have heard the rival submissions and perused the materials available on record. Similar issue was considered in the case of Morgan Stanley Advantage Services P. Ltd. in ITA No.6523/Mum/2014 dated 23.7.2020 for the AY 2008-09, wherein held as under:

10. We have carefully considered the submissions and perused the records. The assessee in the present case is a subsidiary of Morgan Stanley International Holdings Incorporated USA. The assessee provides back office support functions to its associated enterprises. The transactions of IT Enabled Support Services to its associated enterprises and the arms length price computed by the assessee was accepted by the revenue in A.Y. 2005 – 06 and A.Y. 2006-07. The same was also upheld by the ITAT for assessment year 2007 – 08. For the current assessment year, the Transfer Pricing Officer characterized the assessee’s functions as knowledge process outsourcing KPO. Thereafter, the Transfer Pricing officer made general comments on the selection systems adopted by the assessee. He proceeded to reject the same. He did not specify as to which of the comparables is being rejected for which specific reasons thereof. Thereafter, the transfer pricing officer mentioned his own criteria and proceeded to select comparables and accordingly made the transfer pricing adjustment.

11. Upon the assessee’s appeal, the ld. CIT(A) has accepted that the characterization by the transfer pricing officer of the assessee’s functions as knowledge process outsourcing was not correct. Thereafter, the ld. CIT(A) contradicted himself by stating that the functions of the assessee are in alignment with the knowledge process outsourcing comparable dealt with by the transfer pricing officer. In this regard, the learned CIT appeals relied upon the ITAT decision in the case of Maersk Global Centers (India)(P) Ltd. Thereafter, the learned CIT (A) upheld the assessing officer’s action of selection of four of the comparables and accepted the assessee’s contention in rejection of two the comparables.

12. Now in appeal before us, the submission of the learned counsel of the assessee is that assessee’s functions are that of ITES which has been duly accepted by the revenue as well as by the ITAT in earlier years. Hence, the re- characterisation of the assessee’s functions as knowledge process outsourcing is not sustainable. We are in full agreement with this contention. Furthermore, we find that the ld. CIT(A) has clearly contradicted himself by stating both that assessee is not a KPO and at the same time accepting the comparables selected by the Transfer Pricing Officer from the database for knowledge process outsourcing companies.

13. As regards the rejection of four companies, it is the submission of learned counsel of the assessee that the functions of Eclerx Services Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) has been held to be not comparable to the assessee by the ITAT for the assessment year 2007 – 08. In this regard, we find that ITAT in the aforesaid order has observed as under:

32. As noted earlier the Id AR for the assessee submitted that the assessee submits that Eclerx Services Ltd. has not considered as a comparable in earlier years. Eclerx Services Ltd. is a Knowledge Process Outsourcing (KPO) Service provider which is not comparable to assessee; assessee is engaged in providing back office support services. In support of his submission, the Id. AR of the assessee relied upon the decision of Delhi High Court in Rampgreen Solution P Ltd Vs CIT (2015) ITR 533 (Delhi). The TPO included this comparable by taking his view that this company is in date process and analytical services. The Id CIT(A) confirmed the action of the TPO by taking his view that this comparable company is into the health care receivable management and therefore renders ITeS services. The Hon’ble Delhi Court in Rampgreen Solution (P) Ltd (supra) held entities rendering voice call center services for customer support and a KPO service provider employ IT-based delivery systems, but characteristics of services, functional aspects, business environment, risks and quality of human resource employed are materially different; and therefore, benchmarking international transactions on basis of comparison of PLI of high-end KPO service providers with PLI of Voice Call Centers, would be unreliable. Further, Mumbai Tribunal in Wills Processing Services (India) Ltd. vs. ACIT (supra) on considering similar contentions excluded this comparable.

38. The Id. AR submitted as we recorded earlier that Coral Hubs Ltd. was outsourcing its significant part of its operation as evident from its low employee cost and have substantial different business model compared to assessee and prayed for exclusion. The ld. DR has supported the inclusion.

The TPO while making benchmarking taking his view that this comparable company is in the business of IT enabled services to overseas markets and included in the list of comparable. The Id. CIT(A) confirmed the action of TPO holding that the TPO conducting benchmarking after calling information under section 133(6) and is benchmarking analysis are correct. We have noted that, though the Id. AR has relied upon a number of decisions of Tribunal/co-ordinate bench. We have noted that in a recent decision of Tribunal in Wills Processing Services (I) Pvt. Ltd. (supra) on comparability, the Tribunal held as under:

We though in light of our aforesaid observations had partly disagreed with certain grounds as had been averred by the Ld. A.R to facilitate exclusion of the aforesaid comparable, however as observed by us hereinabove that the aforesaid comparable viz. Coral Hub Limited (earlier known as Vishal Information Technology Limited) had a business model where services are outsourced, as ‘ against the business model of the assessee where services are rendered by employing own employees and using one’s own infrastructure, on the basis of which we are of the considered view that it can safely be concluded that the said comparable was functionally different, and as such was liable to be excluded from the final list of comparables. That our aforesaid view stands fortified by the aforesaid order passed by the Tribunal while disposing of the appeal of the assesses own appeal for A.Y. 2005-06, as well as the judgment of the Hon’ble High Court of Delhi in the case of: Rampgreen Solutions (P.) Ltd. (supra). Thus as there has been no material shift in the facts involved in the case of the assessee for the year under consideration, as observed by us hereinabove, we are thus of the considered view that as the business model of the aforesaid comparable, viz. Coral Hub Ltd. (supra) is substantially different from that of the assessee, therefore the same cannot be accepted as a comparable and hence is directed to be excluded from the list of comparables.

14. Accordingly, following the aforesaid decision of the tribunal, we hold that the Eclerx Services Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) are liable to be rejected as invalid comparable.

As regards the other comparables namely Crossdomain Solutions and Datamatics Financial Services, we find that the Transfer Pricing officer and the ld. CTI(A) have found their functions to be similar to that of KPO and that of E-clerx and Vishal technologies. Since, the ITAT has duly upheld the rejection of the aforesaid companies, i.e., these two companies are also liable to be rejected. Furthermore, Datamatics Financial Services also fails the export filter of 75% which has been adopted by the transfer pricing officer. Hence, in the background of aforesaid, we hold that following comparable are to be rejected:

• Eclerx Services Ltd.
• Vishal Information Technologies Ltd
• Crossdomain Solutions
• Datamatics Financial Services.”

7.1 Accordingly, we direct the AO to exclude this company M/s. Datamatics Business Solutions Ltd. from the list of comparables as this company is a KPO company and not comparable to assessee company.”

8.1 In view of the above, we direct the AO/TPO to exclude this company Datamatics Business Solutions Ltd. from the list of comparables.

(II) Infosys BPM Services Pvt. Ltd.:

9. The ld. A.R. submitted that Infosys BPO Limited should be rejected as a comparable company as this company is functionally different and therefore ought to be rejected. Further, Infosys BPO had presence of intangibles, brand value, subcontracting expenses as compared to the Assessee who did not possess the same.

> Functionally dissimilar – business process management

> Ownership of intangible assets & IPs

> Brand Value/ Marketing expenses

>  Consultancy expenses in the nature of Sub-contracting charges

10. The ld. D.R. submitted that the ld. DRP in his report observed that on perusal of the annual report, this company offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. Further, at Page 31 and 32 under Note 11 Segment Reporting, it was clearly stated that the company’s operations primarily relate to providing business process management services, and accordingly revenues represented along with industry classes comprise the primary basis of segmental information. Thus, primary business activity of this company is business process management services, in various verticals such as FSI, MFG, RCL, ECS. At page 81 of annual report, Note 2.24, the report clearly states that as per function wise classification it has income from business process management services. The company’s catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas. In view of the above information in the annual report, the ld. DRP did not find any merit in the plea that this company is functionally different, and that it has diversified activities, and hence these pleas were rejected by him.

10.1 The ld. D.R. further submitted that a plea was also raised before the ld. DRP by the assessee that this company is into high end ITES service provider, and hence not comparable. The ld. DRP was unable to accept such plea, as under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard, the ld. DRP observed that the Hon’ble Bangalore Tribunal in the case of GE India Technology Centre Private limited Vs. Dy. Director of Income Tax (ITA No. 789/Bang/2010 & ITA Nos 487 & 925/Bang/2011 observed that TNMM requires only broad comparability. The relevant observation is as under:

‘As per the principles of comparability, controlled and uncontrolled transactions are regarded as comparable if their economically relevant attributes and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm’s length result. However, in reality, two transactions are seldom completely alike. To be comparable does not mean that the two transactions are necessarily identical, but that either none of the differences between them could materially affect the arm’s length price or, where such material differences exist, then reasonably accurate adjustments can be made to eliminate their effect. It is important to note that the type and attributes of the comparables available in a given situation typically determine the most appropriate transfer pricing method. In general, closely comparable products/services are required if the comparable uncontrolled price (‘CUP’) method is used for arms’ length pricing; the resale price, cost-plus methods generally require a lesser degree of products or services comparability and may be appropriate if functional comparables are available. The TNMM requires only broad functional and product/services comparability. In many instances, it will be possible to use ‘imperfect’ comparables, e.g., comparables from another industry sector, possibly adjusted to eliminate or reduce the differences between them and the controlled transaction.’

10.2 Reliance was also placed in the case of PinoBisazza Glass Pvt. Ltd. Vs. ACIT C-5,Ahmedabad 2005-06 & 2007-08, ITA No.1690 ^& 1622/Ahd/2010 & 3201/Ahd/2011 wherein acceptance of broad comparables was upheld. The relevant extract has been reproduced below:

“12 – Although the selection of “Industry Segment” is the start point but it is a broad selection, particularly if a finer or more close selection is available. We are aware about Para 1.41 of OECD guidelines which prescribes that it is acceptable to broaden the scope of the comparability analysis to include uncontrolled transaction involving products that are different, but where similar functions are undertaken. But the OECD guide fines have not stopped there and said that the acceptance of such an approach depends on the effects that the product differences have on the reliability of the comparison and on whether or not more reliable data are available. It is rather clarified that before broadening the search to include a large number of potentially comparable uncontrolled transactions based on similar functions being undertaken, thought should be given to whether such transaction are likely to offer reliable comparables for the controlled transaction. Therefore the Guidelines are unambiguously suggesting that ‘comparability factor’ do not restrict to ‘functional analysis’ and the importance of FAR as a major comparability factor can’t be over emphasized but one needs to carry out the process again and again till the exactly reliable comparable is found.”

10.3 In case of Aztec Software Technology Vs ACTT [2007] 294 ITR (A.T.) 32 (Bang), the ITAT has observed following with respect to TNMM:

“The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operation”

10.4 The ld. DRP further observed that in the case of TCL holdings Pvt. Ltd., vs. Assistant Commissioner of Income Tax, (ITA No. 7129/Mum/2011), where in the ITAT held that:

……………………………….. in TNMM method it is not necessary that the product should be exactly the same as dealt in by the assessee”

10.4 Therefore, the ld. DRP rejected these pleas of the assessee.

11. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this has been considered in the case of Global E:Business Operations Pvt. Ltd. by this Tribunal for the AY 2017-18 in IT(TP)A No.174/Bang/2022 dated 16.11.2022, wherein held as under:

12.1.20 We have heard the rival submissions and perused the materials available on record. We have considered the arguments of both parties. In the assessment year 2016-17, in the assessee’s own case in IT(TP)A No.212/Bang/2021 dated 27.9.2022, the Tribunal has considered this company as not comparable wherein held as under: “10. As mentioned earlier, the limited submission of the assessee before the Tribunal as per ground 1.12 is seeking exclusion of three companies from the list of comparable companies, namely, (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited. We find in the case of assessee’s group company namely EIT Services India Pvt. Ltd. v. DCIT (supra), the above three companies were excluded from the list of comparables on account of functional dissimilarities. We find that profile of the assessee in the instant case and that of the assessee in case of EIT services India Pvt. Ltd. are identical. Moreover, the assessment year is the same. The relevant finding of the Tribunal in the case of EIT Services India Pvt. Ltd. v. DCIT (supra) reads as follows (For exclusion of (i) Infosys BPO Limited, (ii) SPI Technologies India Pvt. Ltd. and (iii) Eclerx Services Limited):-

“13. Further, the assessee wants exclusion of following comparables in IT enabled services.

i. Infosys BPO Ltd.

ii. SPI Technologies Pvt. Ltd.

iii. Eclerx Services Ltd.

i. Infosys BPO Ltd.

13.1 The Ld. A.R. submitted that that Infosys BPO offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. The nomenclature in the profit and loss account indicates that the income is earned from ‘Revenue from business process management services’ which suggests that the company is engaged in consultancy and management services unlike the Appellant which is involved only in providing ITES as a captive service provider entity.

13.2 Further, Infosys BPO Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore – Trib.) AY 2016-2017 (He referred Page 162-163 of the Case Law Compilation, Para 11 – 21). Below is the relevant extract from the order for ready reference:

11. The ld. AR submitted that Infosys BPM Ltd. should be rejected as a comparable because it is functionally not comparable, has diversified activities and lack of segmental data, different business model, brand profits, various revenue models, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several clients and span across multiple industry segments. The company’s catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas.

12. The DRP was of the view that just because the company is providing cloud based services over various mainframe computers, the company would not be functionally different as claimed by the assessee and rejected this plea of the assessee.

Regarding the plea of the assessee that this company is into high end ITES service provider, and hence not comparable, the DRP held that under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard the DRP relied on the Bangalore Tribunal decision in the case of GE India Technology Centre (P.) Ltd. v. Dy.

13. DIT [2013] 30 taxmann.com 249/141 ITD 245 and other decisions wherein it was observed that TNMM requires only broad comparability.

14. The contention of the assessee that Infosys BPO has various Revenue Models and its revenues are generated principally on time and material basis, transaction basis and fixed price contracts and therefore, it should not be compared with the assessee, the DRP observed that as the assessed failed to demonstrate as to how the different methods of billing would affect the Functional comparability or impact the profitability. Unless the same is demonstrated with credible evidence, it remains a theoretical argument without any backing with facts and figures and hence rejected it.

15. The assessee pointed out that this company has reported an amount of Rs. 136 crore as ‘cost of Technical sub-contractors’ which constitutes about 4.45% of total revenue of the company during the year. The DRP observed that the annual report mentions that these sub-contractors are used for operational activities. This is a common practice in almost all the companies to give a small portion of the work to some other subcontractors for a variety of reasons. This may allow the company to focus on its core activities. Sometimes it may be to meet the mismatch in certain skill-sets that are required in various projects. These expenses are incurred in the routine course of business. This cannot be held to be a criteria to affect the functional comparability of a company and more so in the facts of this case, wherein the sub-contracting expenses are about 4.45% only. This objection was accordingly rejected.

16. Regarding the lack of segment data to reject it as a comparable, the DRP was of the view that when it has been held that all the services being done by this company falls in the category of ITeS, then the absence of segmental information remains a theoretical argument.

17. The assessee has also argued that this company has significant intangibles and brand and hence not functionally comparable. The DRP noted that the expenditure incurred towards brand was just Rs. 19 crore which is meagre considering its operating revenue of Rs. 3050 crores. Further, the assessee could not point to any information from the annual report to indicate brand has contributed to the revenue growth or profitability. Therefore, the presence of brand, as such, has not affected comparability. Further, there is no information in the annual report to indicate that the company has undertaken any major R&D initiatives & own intangibles. Therefore, the presence of intangible in the form of goodwill, which is also insignificant, as the value is only Rs. 19 crore compared to the revenue from operations of Rs. 3050 crores do not have any impact on the profits of the company. Hence, these pleas were rejected by the DRP.

18. The assessee’s contention that this comparable has incurred significant selling and marketing expense was also not accepted by the DRP, since from the perusal of the annual report, the DRP noted that the expenses on this count is only 4.56% of the total expenditure and which is not at all significant to affect the profitability of the comparable.

19. Thus, in view of the discussions held above, all the grounds raised by the assessee were rejected and the action of the AO/TPO was upheld by the DRP.

20. We have heard both the parties and perused the material on record. This comparable has been considered as not comparable in SwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 (Bang. – Trib.) wherein it was observed as under:—

“We have perused submissions advanced by both sides in light of records placed before us. We note that this company is providing services in various areas of sourcing and procurement, customer services, finance and accounting legal process outsourcing, sales and fulfilment, analytics, business platforms, business transformation services, human resource outsourcing and technology solution optimisation. It is noted that this comparable also provides services in financial services and insurance, manufacturing, energy utilities communications and services and retail, consumer packaged foods, logistics and life services. Further in the annual report it has been mentioned that this comparable provides services that are different from routine back-office services. This noting itself makes this comparable not functionally similar with that of assessee.

Accordingly we direct this comparable to be excluded from finalist.”

21. In view of the above order of the Tribunal, we are inclined to hold that this company should be excluded from the list of comparables.

13.3 The company has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad – Trib.) AY 2016-2017 by the Hyderabad Tribunal.

13.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 13.5 Ld. D.R. relied on the order of Ld. DRP.

13.6 We have heard the rival submissions and perused the materials available on record. This company has been considered as in the case of ADP Pvt. Ltd. cited (supra and held that this company cannot be included by observing as under:-

“16.1 Infosys BPO Ltd.: The ld. AR submitted that this company may be excluded from the final set of comparables for the reason that this company has incurred outsourcing costs for FY 2013-14, FY 2014-15 and FY 2015-16 and the outsourcing cost incurred by this company reflects a different operating model and hence cannot be compared with the assessee company. Further, he submitted that while this company operates under various revenue model as per the assignments i.e., proportional completion method on rendering services, whereas the assessee charges a mark-up on the cost incurred to provide the services. Further, he submitted that since the cost structure and revenue model of this company is different with that of the assessee, this company ought to be rejected as a comparable company. He relied on the decision of the co-ordinate bench in assessee’s own case ADP (P.) Ltd. (supra) wherein the coordinate bench excluded this company as comparable.

16.2 The ld. DR, on the other hand, submitted that presence of outsourcing cost/subcontracting cost does not affect functional comparability. Further, it reduces the operating margin of the company, which is beneficial to the assessee. He, therefore, submitted that the TPO/DRP has rightly included this company as comparable.

16.3 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the co-ordinate bench in assessee’s own case ADP (P.) Ltd. (supra) has excluded this company as comparable by observing as under:

’38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee’s own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under:

“6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS E-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the objection was that the said company renders vide array of services and has high brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008- 09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee’s objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies.

7. Referring to the order of the TPO, it was the contention of Ld.DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Co- ordinate Benches in excluding the above three comparables.

8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS E-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under:

ITA No 2233 of 2018 ADP Private Ltd Hyderabad “TCS e-SERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO’s order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also.

11.2.2 We find that the assessee’s contentions about the presence of ‘brand value’ and owning of ‘intangibles’ is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee’s own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon’ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd., [2013] 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon’ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon’ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e- Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS EServe Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee’s grounds of appeal No. 6 is partly allowed.

8.1 Respectfully following the above decision of the Coordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables.’ We observe from the financial statements of this company, that this company is functionally dissimilar and use robotics automation and diversified activities. Therefore, following the decision of the coordinate bench, we direct the AO/TPO to exclude this company as comparable for determining ALP. 13.7 In view of the above order of the coordinate bench of Hyderabad, we direct the AO/TPO to exclude this company viz.

Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment.

………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………

11 In view of the above order of the Tribunal, which is a group company of the assessee, and having same profile of the assessee, we direct the TPO to exclude (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited from the list of comparables and recompute the ALP of the international transaction.”

12.1.21 In view of the above order of the Tribunal in assessee’s own case and having same profile of the assessee, we direct the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables.” 11.1 In view of the above, we direct the AO/TPO to exclude this company Infosys BPM Services Pvt. Ltd. from the list of comparables.

(III) Manipal Digital Systems Pvt. Ltd.

12. The ld. A.R. submitted that Manipal Digital Systems Private Limited should be rejected as a comparable company as it is functionally dissimilar and ought to be rejected. Further, the Company did not disclose segmental details with respect to its back office support services activity and also incurred advertisement/ promotional expenditure.

> Functionally not comparable

> No segmental details are available

> Advertising and sales promotion expenses

12.1 The ld. D.R. submitted that the ld. DRP in his report observed that it is crystal clear from the annual report that the principal business activity of the company is given as IT enabled services which contributes 100% turnover of the company. On perusal of the breakup of the revenue given at page 41 of the annual report, the revenue earned from IT enabled services is Rs. 23.63 crores out of total revenue of 24.34 crores which comes to around 97.08%. The other activities like pre-media work, e-distribution contributes around Rs.0.70 crores which is a minor revenue. The assessee, based on the website information, argued that the company is into diversified activities that can be classified as KPO services as per the definition of safe harbour rules. At the outset, the ld. DRP observed that the information put in website cannot be given complete credence, as they are mere forward-looking information and statements with the motive of advertisement and other promotional gains. The functional aspect has to be determined by the information in the annual report which is based on audited financial statements and management reports, for qualitative analysis of comparability. The fact that the company is into ITES segment is corroborated by the corporate information given at page 45 of the annual report where it is lucidly stated that “the main business of the company is to provide information technology enabled services that means pre-press activities mainly to overseas as well as domestic customers”. Therefore, the ld. DRP observed that the pleas raised based on information said to be available in the website are liable to be rejected is in limine in view of the information given in the annual report on the functional aspect.

12.2 Further, the ld. DRP observed that this company operates under a single primary segment. The profit margins of various comparables will be averaged and a variation of 3% is also permitted. These aspects take care of some differences which are bound to be there between various comparables. In view of the above, he observed that ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. It is a fact that this company falls in the category of ITeS. Hence, the objection on the functional dissimilarity of the company was rejected by the ld. DRP.

12.3 The ld. DRP further observed that that as regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the ITES activities only. This is further supported by the clarificatory note No. 27 at page 52 of the annual report that “the company was operating under one reportable geographical segment and one business segment. Therefore, the ld. DRP observed that disclosure as prescribed under AS 17- segment reporting is not applicable and hence, the objection on lack of segmental information is not valid and not acceptable.

12.4 The ld. DRP further observed that the assessee also contended that this comparable has incurred significant selling, marketing expense. From the perusal of the annual report, he observed that the expenses on this count is only 14.95% of the total sales and which is not at all significant to affect the profitability of the comparable. Accordingly, this plea was rejected and in view of the above, the pleas of assessee were rejected and selection of this company was upheld by the ld. DRP.

13. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this has been considered in the case of Global E:Business Operations Pvt. Ltd. by this Tribunal for the AY 2017-18 in IT(TP)A No.174/Bang/2022 dated 16.11.2022, wherein held as under:

“12.1.8 We have heard the rival submissions and perused the materials available on record. As per the annual report of the company, it is also in end-to- end content services across the value chain. From the website and annual report, it is clearly evident that the company is also engaged in web development, mobile application development. The company also provides publishing editorial & composition services, which includes creating layout & artwork for advertisements and brochures, typesetting services and proof reading. As per revenue from operations, it includes “Revenue from web development and other services” (INR 2.18 Cr) and “income from e-book Distribution” (INR 69 lakhs), without providing the segmental revenue and profitability with respect to ITES segment. Advertising and sales promotion expenses at 6.50%, 7.19% & 8.78% of total expenditure in FY 2016-17, FY 2015-16 & FY 2014-15 respectively.

12.1.9 Further, the Tribunal in the case of Iron Mountain Services Ltd. in IT(TP)A No.307/Bang/2022 dated 20.9.2022 has held as under:-

16. “The next company the assessee seeks to exclude is Manipal Digital Systems Pvt. Ltd. In this regard, it was submitted that this company is engaged in provision of multiple high-end services including KPO activity like Design Services, Animation. It was submitted that no segmental details were available in the financial statements on the variety of services provided by this company like Design Services, Animation. Reliance was placed on the decision of the ITAT, Pune Bench in the case of Credence Resource Management Pvt. Ltd., (supra) wherein this company was excluded by the Pune Bench with the following observations:

“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 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 Honble 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 subclassification 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 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 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.”

17. Learned DR submitted that the aforesaid decision was in relation to Assessment Year 2016-17 whereas the case of the assessee in this appeal is in reference to Assessment Year 2017-18. Learned Counsel for the assessee submitted that the functional profile of the comparable company as well as the assessee remains the same for both Assessment Years 2016-17 and 2017- 18 and therefore the decisions cited above are applicable to Assessment Year 2017-18 also.

18. We have given a careful consideration to the rival submissions and are of the view that it would be just and appropriate to set aside the question of comparability of Manipal Digital Systems Pvt. Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee and the assessees in the decisions cited by the learned AR remains the same in Assessment Year 2017-18 as it was in Assessment Year 2016-17.”

12.1.10 Accordingly, the above comparable i.e. Manipal Digital Systems Pvt. Ltd. is directed to be excluded from the list of comparables.”

13.1 In view of the above, we direct the AO/TPO to exclude this company Manipal Digital Systems Pvt. Ltd. from the list of comparables.

(IV) CES Ltd. (seg):

14. The ld. A.R. submitted that CES Limited (“CES”) is functionally different and therefore ought to be rejected.

Functionally Different – engaged in KPO services

15. The ld. D.R. submitted that the ld. DRP in his report observed that the principal business activity of the company is IT enabled services-BPO/KPO. As per the details of business segment given at page 112 of the annual report, the revenue deriver, from IT enabled services out of the total revenue of 67.1 crores is 56.8 crores which comes to 84.64% of the total revenue. This clearly shows that the companies operations predominantly relate to IT enabled services, though it has minor IT services segment (10.29 crores – 15.33%). The assessee’s argument that the comparable is into different activities is based on the website information. The ld. DRP observed that the assessee has raised pleas against functional comparability of the company, with reference to certain information said to be available in the company’s website. At the outset, he observed that the information put in website cannot be given complete credence, as they are mere forward looking information and statements with the motive of advertisement and other promotional gains. Further, the information in website are dynamic and cannot be related to a particular period. There is no way to verify whether the said information has any relevance for the year under scrutiny or it totally related to subsequent current year developments. There is no way to verify the correctness of this information and the relevant period to which they may pertain to. Therefore, the information in the annual report which is based on audited financial statements and management reports is more reliable and authentic, for qualitative analysis of comparability. Therefore, the pleas raised based on information said to be available in the website are liable to be rejected is in limine. In view of the above, factual information, the contention of the assessee that the comparable company is functionally different is not correct. Therefore, the selection of the comparable by the TPO on the functional aspect was upheld by the ld. DRP.

16. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of Eurofins IT Solutions India Pvt. Ltd. for the AY 2017-18 in IT(TP)A No.186/Bang/2022 dated 5.1.2023, wherein held as under:

“11. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration in the case of Transperfect Solutions India Pvt. Ltd in ITA No.331/Pun/2021 dated 29.7.2022 for the AY 2016-17 wherein held as under:

8.1 This comparable was also chosen by the TPO. The assessee’s objection that this company was engaged in rendering KPO services as well was not approved by the TPO, who went with its inclusion.

8.2 The Annual report of this company shows that it is engaged in both the IT and IT enabled services. As the company has segmental accounts, the TPO has considered only IT enabled services segment for the purposes of comparability. However, what is important to note in the instant context is that the assessee is rendering only translation services etc., which fall within the overall domain of the BPO services. As against this, CES Limited is engaged in providing both BPO and KPO services as has been reported by it to the Registrar of companies in the requisite form. The Pune Benches of the Tribunal in Credence Resource Management Pvt. Ltd. Vs. ACIT (ITA No.133/PUN/2021) vide its order dated 18- 06-2021 has noted that CES Limited is rendering both BPO and KPO services, discussing this issue at page 19 of the order. In view of the fact that the assessee is engaged in rendering only BPO services, CES Limited providing both BPO and KPO services, cannot therefore be held as comparable. We, therefore, direct to delete this company from the list of comparables.

11.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude CES Limited from the list of comparables.”

16.1 In view of the above, we direct the AO/TPO to exclude this company CES Limited from the list of comparables.

(VI) SPI Technologies India Pvt. Ltd.

17. The ld. A.R. submitted that SPI Technologies India Pvt. Ltd. is functionally dissimilar and ought to be rejected. He further submitted that the company had presence of extraordinary events, presence of intangibles and therefore ought to be rejected.

Functionally dissimilar – KPO services
No segmental details are available
Existence of extraordinary event
Presence of intangibles

17.1 The ld. D.R. submitted that the ld. DRP in his directions observed that the assessee has relied on the website extract of this company for functional differences. The discussion on the comparability should be based on the Annual Report of the company for the relevant financial year. Having said that, the functionality of the company is analysed with reference to the annual report for F.Y. 2016-17. In page 1 and 2 of the annual report-that “Data base services including data processing & tabulation services, on-line information and data retrieval services, Electronic Data Interchange (EDI) service, web search portal content services, Code and protocol conversion services etc”. All these activities are in the nature of ITES. On page 100 of the annual report while giving the additional information it is mentioned that the total revenue of Rs.391.54 crores is derived from information technology services. In the same page while giving the description of accounting policy for recognition of revenue it is stated that “revenue from data processing and related services is recognised based on the proportionate completion method with profit margins”. Further, the company is in single segment of ITES as per segmental reporting reported in the Annual Report at page no. 75. In addition there is no indication from the annual report that the company is activities are more akin to KPO services. Nevertheless, the ld DRP observed that that there is a thin line of difference between BPO and KPO services. KPO is termed as an upward shift of the BPO industry in the value chain. Thus, BPO trying to upgrade itself as KPO is likely to render both BPO as well as KPO services in the process of evolution and therefore, such an entity cannot be considered strictly as either BPO or KPO. The comparability of transaction or the selection of comparables in our view has to be examined in terms of the rules framed in this regard. The Rule 10B (2) provides that the comparability of international transaction with uncontrolled transactions has among other things to be judged with the reference to characteristics of services provided, functions performed, asset employed and risk assumed. It has therefore to be insured that functions of the comparables and characteristics of services rendered are similar. Viewed from this angle, ld. DRP observed that all companies which are in ITES segment are providing similar services and difference is in the internal working which is reflected through difference in qualifications and skills of the employees. In all these cases employees are the main assets who are providing various services using Information Technology (IT). The main difference is the skills/qualification of the employees engaged who are providing the services. The employees are the main assets of these companies and therefore, the difference is mainly in the assets employed. Therefore, the ld DRP observed that they have to examine whether difference in the skill/qualification of the employees or their payment structure is going to affect the comparability in any significant manner. TNMM method is tolerant to minor differences and, therefore, even if there are some differences unless they materially affect the margin, the comparables could not be excluded: This is clearly provided in the Rule 10 B (3) as per which an uncontrolled transaction has to be taken as comparable to the international transaction if none of the differences between the transactions compared or the enterprises entering into such transactions are likely to materially affect the price charged, cost incurred or profit earned and even if there are material differences, the uncontrolled transaction can still be considered as comparable if reasonably accurate adjustments could be made by eliminating the material affects of such differences.

17.2 In this case as the ld. DRP pointed out earlier that difference in various segments i.e. low end to high end in ITES services is mainly on account of differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly qualified/skilled also goes up steeply and, therefore, the margins are not much affected. In fact, no evidence has been produced before us to show that margins in the highend segments of ITES services is high compared to low end services. Therefore, the ld. DRP was unable to accept the argument advanced by learned AR that the comparables belonging to high end segments such as KPO etc. should be excluded from the comparability list on this ground alone. In fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. In view of the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM functional similarity is more relevant than product similarity. Accordingly, the ld. DRP reject this plea of the assessee.

17.3 In view of the above factual information available in the annual report regarding the ITES activities performed by the company the contentions of the assessee that it is not clear from annual report extracts as to what services does the company engage in is totally baseless and factually incorrect. Accordingly, the company is functionally comparable.

17.4 The ld. DRP further observed that as regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the ITES activities only. This is further supported by clarificatory note No. 2.14 at page 75 of the annual report that Segment reporting. The Company’s business comprise only of providing data processing and related services. Accordingly, there is no other reportable primary business segment as per Accounting Standard 17(Segment Reporting). Further, the Company operates only out of its premises in India. Hence, there are no reportable secondary segments. Hence the contention of the assessee that description of the services is not provided is factually incorrect. The company since operates in one single segment there is no need of reporting segmental information as per AS 17.

17.5 Hence, the objection on lack of segmental information is not valid and not acceptable by the ld. DRP.

17.6 The ld. DRP further observed that the amalgamation is of a wholly owned subsidiary. At page no 120 of the Annual Report F.Y. 2015-16 that “Laser Words Private Limited provides comprehensive pre-press data processing services like typesetting, composition and copyediting to educational and professional publication houses across the globe.” Therefore, the amalgamated company is also in the similar line of business and the same will not have any demonstrable effect on the financials of the company. The assessee has simply pointed to increase in revenue but has failed to bring on record any evidence to suggest that the merger has impacted the profit margin of the company. This is further evidenced in the current year information given in the annual report at page 69 that the said amalgamation happened in previous years and there is no indication of reporting of any impact on the financials due to the amalgamation. Further, as per page 23 of the annual report there is no amounts involved on the structure of the share capital as a result of the amalgamation. 17.7 The ld. DRP further observed that the assessee has also argued that this company has significant intangibles and cannot be compared to the assessee which is a routine ITES service provider which does not holding non-routine intangibles and is not involved in development of intangibles. The company’s annual report on page 20 gives the details of intangible assets amounting to Rs.5.50 crores and intangible assets under development or work in progress amounting to Rs.2.11 crores. The total of intangible assets is around Rs.7.62 crores as against total revenue of Rs.391.54 crores which comes to around 1.94% of the total revenue. This is a very insignificant compared to the turnover of the company and will not influence the profit margin. Further, the intangibles are internally developed intangible which have not been seem to have any potential deriving any substantial benefit. The company, as per information does not own any significant IPRs. Further, the ld. DRP observed that the assessee has failed to demonstrate its significant positive impact on the financials of the company. Further the ALP margin is determined with reference to the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. It will not be proper to reject a comparable only on account of intangibles which otherwise is functionally comparable.

17.8 Therefore, all these objections were rejected by the ld. DRP and this company was upheld to be a comparable.

18. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of NTT Data Information Processing Services Pvt. Ld. in IT(TP)A No.297/Bang/2021 dated 7.7.2022, wherein held as under:

“11. We have heard the rival submissions and perused the materials available on record. The main contention of the Ld. A.R. is that TPO rejected the NPS Ltd. which is engaged in the business of providing publishing solutions namely typesetting, data digitisation commission for overseas publisher and support international publisher through every stage of the author to reader publishing process and provides the digital first strategy for publishing contents, production and transformation, delivery and customer support. Thus, NPS Ltd. Has been rejected based on functional incomparability. Hence, on the same logic SPI Technologies Ltd. to be excluded.”

18.1 In view of the above, we direct the AO/TPO to exclude this company SPI Technologies India Pvt. Ltd. from the list of comparables.

19. In ground No.13 of the assessee’s appeal, the assessee wants inclusion of only following comparable companies. Other comparables were not pressed.

13.1 R. Systems International Ltd. 13.4 BNR Udyog Ltd. 13.6 Bhilwara Infotechnology Ltd.

(I) R Systems International Ltd.:

19.1 The ld. A.R. submitted that M/s. R Systems International Limited should be accepted as this company functionally comparable and qualifies all filters of the learned TPO and therefore should be accepted. He further submitted that the Learned TPO has erred in rejecting R Systems on the ground the company was not found in the search matrix..

Annual report was submitted before the learned TPO
Functionally comparable
Segmental Information
Qualifies all of the filters applied by the learned TPO
Different financial year ending is not a criteria or rejection

19.2 The ld. D.R. submitted that the ld. DRP observed in his report that this company failed the different financial year filter adopted by the TPO. The ld. DRP discussed in detail regarding upholding the applicability of the different financial year filter. Accordingly, the ld. DRP did not find merit in the objection and hence he rejected the same

20.. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of Mindteck India Ltd. in IT(TP)A No.211/Bang/2022 dated 30.11.2022, wherein held as under:

“32. The Ld. A.R. submitted that the TPO modified the comparable filter of persistent losses filter by excluding companies with operating losses in at least two out of three years. The assessee however, had adopted the filter of excluding companies with operating losses in all the three years. The DRP upheld the action of the TPO. The assessee submitted that the ITAT in its own case for AY 2016-17 in IT(TP)A No. 252/Bang/2021 dated 11.07.2022 [Page 1713 to 1746 of compilation filed on 02.09.2022] has held that a company can be rejected as a comparable only if it has losses in all the 3 financial years forming part of the search matrix. In other words, it held that if the company has profits in any one financial year, it should be considered as a comparable. He extracted the relevant observations of the Tribunal recorded at para 20 (internal page 21-22) of the order are as follows:

20. The next company that the assessee seeks to include is Sagarsoft India Ltd. As far as inclusion of this company is concerned, the learned Counsel for the assessee placed reliance on decision of ITAT, Mumbai Bench of the Tribunal in the case of Redhat India Pvt. Ltd., Vs. NFAC (2022) 132 taxmann.com 52 (Mumbai Tribunal). In the present case, the AO rejected this company for the reason that out of the 3 earlier Financial Years, this company has persistently suffered losses and hence should not be taken as a comparable company. The DRP agreed with the conclusion of the TPO. In the case of Redhat India Pvt. Ltd., (supra) which was also an appeal in relation to Assessment Year 2016-17, the Tribunal held that the comparability of the company requires to be examined afresh. It was submitted by the learned Counsel for the assessee that this company did not suffer losses in all the 3 years and submitted that in one of the 3 Financial Years, the assessee made profit. The learned Counsel placed reliance on the decision of the Bengaluru Bench of the Tribunal in the case of KBACE Technologies Pvt. Ltd., Vs. DCIT (2020) 118 taxmann.com 231 (Bengaluru) wherein it was held that for a company to be excluded on the ground that it was persistently making losses, the comparable company should have suffered losses in all the 3 previous Financial Years and even if in one Financial Year it makes a profit, then that company has to be regarded as a comparable company if it is otherwise a comparable company. In the light of the aforesaid decision and in the light of the facts brought to our notice, we are of the view that the comparability of this company has to be considered afersh by the AO/TPO in the light of the facts brought to our knowledge as above. The TPO will verify if this company suffered financial loss in all the earlier Financial Years and even if in one Financial Year, the company has made a profit, it has to be regarded as a comparable company.

In view of the above, the ld AR for the assessee contended that the action of the TPO in modifying the persistent losses filter is incorrect.

33. The Ld. D.R. submitted that the Ld DRP observed that M/s R Systems International Ltd does not figure in the search matrix of the TPO. Ld. DRP already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted by the TPO. Based on the fresh search, the TPO has identified the comparables. The assessee can only ask those companies out of the TPO’s search matrix which have been wrongly rejected by the TPO. As these companies do not figure in the TPO’s search matrix, it amounts to cherry picking. Accordingly, the plea for inclusion of these companies was rejected by the ld DRP.

33.1. As discussed above, this company has not included in the search matrix conducted by the AO/TPO. Being so, at this stage, it is not possible to include this company in the list of comparables. Hence, it is rejected for exclusion from the list of comparables.” 20.1 In view of the above, this comparable R Systems International Ltd. is remitted to AO/TPO for fresh consideration to verify whether it satisfies all the filters adopted by TPO while selecting comparables. Ordered accordingly.

(II) BNR Udyog Ltd.

21 The ld. AR. submitted that the Learned TPO has erred in rejecting BNR Udyog Limited (“BNR”) on the ground that it fails the export revenue filter of 75% to total income. He submitted that BNR is functionally comparable and qualifies the TPO’S export revenue filter.

>  Application of export revenue filter

> Functionally comparable

> Qualifies all of the other filters applied by the learned TPO

21.1 The ld. DR submitted that the ld. DRP observed in his report that the TPO has applied the filter that minimum 75% of operating revenue should be from exports. The ld. DPR found that the Indian Law supports the use of export sales/ total sales as a filter vide Rule 10B(2)(d) which provides that comparability of an international transaction shall be judged with respect to conditions prevailing in markets in which respective parties to the transactions operate, including the geographical location and size of the market. Further, para 4.43 of the OECD Transfer Pricing Guidelines 2010 provide ‘foreign sales/total sales’ as one of the quantitative filter. When tested party’s international transaction is compared, then it is implicit that comparison should be made with the entity having similar transaction. Therefore, if two transactions were to be substantially similar, the export sales should be substantially similar if not same. The amount of substantial similarity by convention is accepted as 75% export sales to total sales. In this connection, it is presumed that net margin from export sales irrespective of market it is exported to, is similar. Therefore, market differences do not make significant impact as far as export transactions are concerned. Therefore, we agree with the TPO on this filter. Moreover, export revenue filter is impliedly approved in the following cases:

1. Cisco Systems (India) P Ltd v DCIT (2014) 50 taxmann.com 280 (bang) para 27.4 Motorola Solutions Pvt Ltd (TS-240-ITAT- (2014) (Del)- TP) 2. Hyundai Motors India Engg (P) Ltd vs ITO (2014) 44 taxmann.corri, 34 (Hyd) para 7(x)

3. 24/7 Customer.com Pvt Ltd v DCIT (2013) 140 ITD 344

4. Genisys Integrating Systems (India) Pvt Ltd vs DCIT (2011) 64 DTR (Snag) (Trib) 225

5. Exxon Mobil company India Pvt Ltd vs DCIT /TA 8311/Mum/2010 dated 10.06.2011

21.2 The ld. DRP on perusal of the annual report observed that from disclosure in notes on additional information of statement of profit and loss account of the Annual Report for the F.Y. 2016-17 that earnings in foreign exchange is Rs.0.39 crore whereas the total revenue from operations is Rs.12.83 crore. Therefore, it has an export revenue of 3.03% of total revenue from operations. On examination of the annual report, the principal business activity of the company is business support services contributing 95.20% of the revenue whereas the Medical Transcription/IT/ITES contributing 03.02% of the total revenue. Therefore, the contentions of the assessee that export revenue from medical transcription services satisfies the export filter is not correct as the principal activity of the company is business support services and for purpose of export turnover filter the total revenue has to be considered. Hence, the ld. DRP came to the conclusion that it is rightly rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO. As a result, this objection was found unacceptable by the ld. DRP.

22. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in the case of NTT Data Information Processing Services Pvt. Ld. in IT(TP)A No.297/Bang/2021 dated 7.7.2022, wherein held as under:

“15. We have heard the rival submissions and perused the materials available on record. The contention of the Ld. A.R. is that when segmental information is available and not disputed, it cannot be argued that filters have to be applied at entity level. We find that this proposition accepted by this Tribunal in the case of CGI Information Systems and Management Consultants Pvt. Ltd. In IT(TP)A No.586/Bang/2015 and No.183/Bang/2017 dated 11.4.2018, wherein held as under:

“52. There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of “net profit margin realized by the enterprise from an international transaction” with the “net profit realized from a comparable uncontrolled transaction”. Therefore, comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already suited if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore, the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing. Offset Printing and Pre press /WO. Whether the label printing and offset printing segments supplement the functions performed iii the Pre- press BP° segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the Top the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press IIPO have to be adjusted taking into account the fact that two other segments supplement the pre-press IWO segment. If such adjustment cannot be reasonably or accurately ma e then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s.133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised by the Assessee in this regard about lack of information about allied services performed by the pm-press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by the TPO or DRP. Since the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regarded to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s.133(6) of the Act. The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO.

15.1 In view of the above order of Tribunal, taking a consistent view, we direct the AO/TPO to include BNR Udyog Ltd. In the list of comparables to determine the ALP of international transactions.”

22.1 In view of the above order of Tribunal, taking a consistent view, we direct the AO/TPO to include BNR Udyog Ltd. In the list of comparables to determine the ALP of international transactions.

(III) Bhilwara Infotechnology Pvt. Ltd.:

23. The ld. A.R. submitted that Bhilwara Infotechnology Limited should be accepted. He submitted that the ld. TPO has erred in not considering this company as a comparable company on the grounds of functional dissimilarity despite the Assessee’s detailed submissions seeking for inclusion of the same. He submitted that this comparable is functionally comparable and qualifies the filters applied and therefore should be accepted.

> Functionally comparable

> Bhilwara passes all filters applied by the ld. TPO

23.1 The ld. D.R. submitted that the ld. DRP has observed in his report that the above companies do not figure in the search matrix of the TPO. The ld. DRP has already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted. Now the assessee has to only see that whether any companies have been wrongly rejected by the TPO.

If yes, then it can ask for inclusion-of the same with necessary arguments in support of the same. But it doesn’t mean that it can come with any company that satisfies the search criteria of the TPO and is functionally comparable too. The ld. DRP opined that the functionality is not required to be seen at all if a particular company is not part of the search matrix.as it amounts to cherry picking. Accordingly, the plea for inclusion of this company was rejected by the ld. DRP.

24. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this has been considered in the case of Global E:Business Operations Pvt. Ltd. by this Tribunal for the AY 2017-18 in IT(TP)A No.174/Bang/2022 dated 16.11.2022, wherein held as under:

“13.4 We have heard the rival submissions and perused the materials available on record. The ld AR submitted that this comparable may go back to file of AO/TPO to verify whether it satisfies all the filters adopted by AO/TPO. We accede to the request of the ld. AR. Accordingly, these two comparables i.e. Bhilwara Infotechnology Ltd. and R. Systems International Limited are remitted to the file of AO/TPO for fresh consideration to verify whether they satisfy all the filters adopted by AO/TPO while selecting comparables. Ordered accordingly.”

24.1 In view of the above order of Tribunal, taking a consistent view, we remit this issue to the file of AO/TPO to verify whether this company satisfies all the filters adopted by the AO/TPO while selecting comparables.

25. Ground No.14 of the assessee’s appeal is not pressed and hence, this ground is dismissed as not pressed.

26. Ground No.15 is with regard to allowability of working capital adjustment, which is reproduced below:

“15. The learned AO/learned TPO/Hon’ble DRP ought to have allowed the Appellant’s claim towards working capital differential existing between the Appellant vis-à-vis independent comparable companies.”

27. After hearing both the parties, it is observed that this issue came for consideration in the case of Ocwen Financial Services Pvt. Ltd. in IT (TP)A No.718/Bang/2022 dated 31.3.2023, wherein held as under:

“7. The ld. counsel submits that the assessee had made claimed for grant of working capital adjustment before the TPO and DRP. But the revenue authorities had discarded the claim of the assessee. The assessee relied on the order of the jurisdictional Coordinate Bench of the ITAT in case of Huawei Technologies India (P) Ltd. vs. JCIT reported in (2019) 101 taxmann.com 313 (Bangalore) and in another case of Altimetrix India Pvt. Ltd. vs. Assessing Officer, National e-Assessment Centre, Delhi in IT (TP) A No. 477/Bang/2021 order dated 27.07.2022.”

8. In the argument, the AR has taken Ground No.12 is related to grant of working capital adjustment. The AR relied on the order of the Coordinate Bench in the case of Huawei Technologies India Pvt. Ltd.(2019) 101 taxmann.com 313 (Bang).

8.1. In our considered view the trade terms of payment of debtor is 60 days. So, the price of goods should equate to the price for immediate payment plus 60 days of interest on immediate payment price. For making working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparable for which is the work out the adjustment on account of working capital adjustment. Cost of capital is different for different companies. After working out the difference in the working capital employed between the tested party and the comparable companies, the cost of financing such working capital need to be adjusted to eliminate the impact of such difference in working capital on the profit margins of the tested party and comparable companies. To work out the cost of working capital, the rate of return/interest is an important factor. The cost of working capital for the tested party and each of the comparable / companies is different. The cost would depend on the source of funds and the credit standing of the borrower. The assumption of prime lending rate as the interest rate applicable for making the working capital adjustment suffers from risks of inaccuracy. The cost of capital for MNCs is determined more by the global interest rates rather than Indian prime lending rate. There is always difference between prime lending rate of India and that of international market rate of interest. Choosing one of these rates among multiple rates available in the market is as debatable as not allowing any working capital adjustment. Any change in the interest rate in the working capital adjustment will produce significantly different results making the results highly unscientific. Even though it is possible for the comparable companies to borrow in the world market the reality is entirely different. A company with global presence has a distinct advantage in terms of credit worthiness and ability to bargain based on its financial muscle.

The issue is well settled by the coordinate bench. The DR was unable to produce any contrary order against the assessee.

8.2 In our opinion, this issue is already covered by the order of the Tribunal in the case of Altimetrix India Pvt. Ltd. In IT(TP)A No.477/Bang/2021 dated 27.7.2022, wherein held as under:

19. We have heard rival submissions and perused the material on record. In the view of the ruling in the case of M/s. Huawei Technologies India (P) Ltd. v. JCIT (supra), the basis of rejection of the relief by the DRP is no longer valid. The relevant findings of the Tribunal in the case of M/s.Huawei Technologies India (P) Ltd. (supra) read as follows:-

“15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons:

(i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year.

(ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made.

(iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed.

(iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results.

16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm’s Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm’s Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi – Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)’s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable.

17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO’s working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee’s paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:

“(3) An uncontrolled transaction shall be comparable to an international transaction if—

(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or

(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.”

18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.”

20. We therefore direct the AO/TPO to consider the working capital adjustment in the light of the aforesaid ruling and allow appropriate adjustment in arriving at an arm’s length price.” 8.3 In view of the above order of the Tribunal, we direct the AO/TPO to grant working capital adjustment as indicated above.”

25.1 In view of the above order of the Tribunal, we direct the AO/TPO to give working capital adjustment on actual basis.

26. Ground Nos.16, 17 & 19 are not pressed and hence, these grounds are dismissed as not pressed.

27. Ground No.18 of the assessee’s appeal is reproduced below: “18. Without prejudice, the learned AO/learned TPO/Hon’ble DRP failed to take cognizance to the fact that the amount of lease equalization cost of INR 3,60,96,753/- was not claimed as a deductible business expenditure in the return of income of the Appellant for AY 2017-18 ad thereby the same ought to have been excluded while computing the operating markup of the Appellant.”

27.1 The contention of the ld. A.R. is that the assessee has itself disallowed this expenditure while computing the income and not claimed any expenditure and this cannot be treated as operating item while computing the operating mark-up of the assessee in determining the ALP while applying the TNMM method. For this purpose, he drew our attention to the computation of income at page 220 volume 1 of the paper book.

27.2 The ld. D.R. relied on the order of the ld. DRP.

28. We have heard the rival submissions and perused the materials available on record. In our opinion, it is appropriate to remit the issue to the file of AO/TPO to examine whether assessee has claimed any deduction towards lease equalization cost of Rs.3,60,96,753/-. If assessee itself has disallowed this expenditure while computing the total income of the assessee, it cannot be treated as operating expenditure while computing the operating mark-up of the assessee in determining the ALP while applying the TNMM method. Accordingly, the issue in dispute is remitted to the file of AO for reconsideration.

29. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 12th July, 2023