Facts of the Case: The Assessee was a wholly owned subsidiary of vCustomer, USA, (an Associated Enterprise-hereafter ‘AE’). The Assessee was engaged in providing voice-based customer care to the AE’s clients. The Assessee renders Call Center services, which fall within the broad description of Information Technology Enables Services (hereafter ‘ITeS’). The Assessee had two units registered under the Software Technology Park Scheme of the Government of India, which were located at New Delhi and Pune. The Assessee was remunerated for the voice call services on cost plus basis. The Assessee explained that the AE undertakes all activities such as marketing and enters into contracts with its customers seeking voice call services. The AE bears all the business risks and the Assessee only acts as an offshore service provider to the customers of the AE. In consideration for the services, the AE remunerates the Assessee by payment of all costs incurred by the Assessee plus a mark up of fifteen percent of the costs.
During the P.Y 2007-08, the Assessee received an amount of Rs. 91,73,94,525/- for voice-based call center services. The Assessee sought to justify the consideration received for the international transactions entered into with the AE to be at ALP. The Assessee submitted a Transfer Pricing Report adopting operating profit margin as the Profit Level Indicator (hereafter ‘PLI’) for the transfer pricing studies. The Assessee applied the Transactional Net Margin Method (hereafter ‘TNMM’), which was considered to be the most appropriate method for the purposes of benchmarking the international transaction. The Assessee’s operating profit margin (i.e. operating profit/total cost) was computed at 14.83% and the Assessee claimed that the same was comparable with other companies rendering voice call services. For the purposes of the transfer pricing study, the Assessee chose eight comparable entities and the arithmetic average of the operating profit margins of the said comparables was computed 15.74%. According to the Assessee, its PLI was within the acceptable range as indicated under the second proviso to Section 92C. The Assessee further claimed that the PLI was liable to be adjusted on account of (i) working capital provided to the Assessee by the AE and (ii) the risks of the business borne by the AE.
The AO referred the matter to the TPO. The TPO, by an order (19th October 2011), computed the TP Adjustment at Rs.11,00,35,400/-. The TPO accepted the method adopted by the Assessee (i.e. TNMM), but rejected the benchmarking report. The TPO also rejected the Assessee’s claim for any adjustment on account of working capital provided to the Assessee and/or risks borne by the AE. The TPO proceeded to identify a different set of comparable companies for the purposes of determining the ALP. The companies selected by the TPO which were considered to be comparables included eClerx and Vishal (subsequently known as Coral Hub Ltd.). The TPO computed the average operating profit margin of the comparable companies at 28.96% on the basis of the average operating profit margin of eleven companies selected by the TPO as comparables for the purposes of benchmarking the international transactions. On the aforesaid basis, the TPO computed the TP Adjustment at Rs.11,00,35,400/-. The AO incorporated the aforesaid adjustment in the draft assessment order passed under Section 144C(1) of the IT Act.
The Assessee objected to the draft assessment order before the DRP. The Assessee impugned the draft assessment order on several grounds including selection of certain companies as comparables and exclusion of other companies considered as appropriate comparables by the Assessee.
The DRP accepted the Assessee’s contention with respect to certain companies, which were considered as comparables by the TPO and directed that the said companies be excluded for the purposes of determining the (i.e. average operating profit margin). However, the Assessee’s contentions with regard to the exclusion of Vishal and eClerx were rejected by the DRP. The DRP held that these companies were also providing Information Technology Enabled Services (ITeS) and, thus, could be used as comparables. Insofar aseClerx is concerned, the DRP held that although there were functional dissimilarities, the same were not significant enough to warrant a rejection of the said company as a comparable. With respect to Vishal, the DRP held that the difference in business model of Vishal would not materially affect the profit margin and thus, there was no infirmity with the TPO’s decision to include the said company as a comparable in its report.
The TPO recomputed the TP Adjustment in terms of the directions issued by the DRP and computed the TP Adjustment at Rs. 5,92,07,428/-. The AO also made certain additions on account of excess deduction claimed under Section 10A of the Act and disallowance under Section 14A of the Act.
The Assessee had preferred appeal before the Tribunal, impugning the assessment order passed by the AO making the Transfer Pricing Adjustments in respect of the AY 2008-09 as finalised by the TPO pursuant to the directions issued by the DRP.
The Assessee filed the present appeal against the order passed by the ITAT. The High Court framed the following questions of law:
