Vodafone India Services P. Ltd. Vs. DCIT (ITAT Mumbai), ITA No.7140 /Mum/2012, Date of Pronouncement: 26/4/2013
The dispute is regarding selection of comparables for bench marking the international transaction entered into by the assessee. The assessee had selected 9 comparables as unrelated parties for comparing the transaction in case of the assessee. The AO further selected 23 more comparables out of which 2 comparables i.e. Spanco and Flextronics (Seg.) were accepted by the assessee as comparable and the 21 comparables were disputed by the assessee. Out of these 21 cases, CIT (A) has accepted the claim of the assessee in six cases holding that these cases are not comparable to the case of the assessee on different grounds. The remaining 15 comparables selected by the TPO have been upheld by the CIT (A) as comparables to the case of assessee The assessee has disputed the said order of CIT (A).
The assessee has followed TNMM method for making the transfer pricing adjustment in relation to the international transaction entered into by the assessee. Therefore, the arithmetic mean of the margins of the comparables is required to be compared with that of the assessee for the purpose of making TP adjustment. The selection of comparables is important, which must be operating in the same field in order to insure that accurate adjustment as provided under the law is made. The assessee is providing IT enabled services as call centre about which there is no dispute. The assessee conducted the search for companies engaged in ITES which is clear from the note submitted by the assessee before the TPO on TP study in para 3.3.1 at page 193 of the paper book. In para 6 of the note at page 181 of paper book, the assessee has mentioned that it belongs to ITES/BPO industry. The learned DR has also placed on record the NASSCOM member directory, in the relevant portion of which the assessee has been described as ITES/BPO company. It is thus clear that the assessee is providing ITES/BPO services. The case of the assessee that ITES/BPO industry is divided into several segments and, therefore, assessee had selected only those companies which were pre-dominantly engaged in call centre business. It has also been submitted that ITES/BPO industry has several segments starting from low segment such Call centre, Customer Care to high end segments such as KPO, content development etc. in which there is wide variation in the billing rates. NASSCOM report on billing rate for different segments has been placed on record. It has thus, been argued that high end services are not comparable to the case of the assessee.
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, we find 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, we 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.
In this case as we have 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. The learned AR for the assessee has placed before us the NASSCOM report showing billing rates in different segments of the ITES sector to point out that there is wide variation between low end and high end segments. However only on the basis of billing rates 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. Infact, 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, we are unable to accept the argument advanced by learned AR that the comparables belonging to high end segments such as content development, KPO, Medical Transcription etc. should be excluded from the comparability list on this ground alone. In fact, this view is supported by the latest decision of Mumbai bench of Tribunal in case of M/s Willis Processing Services India (P) Ltd. in ITA no. 4544/Mum/2012 for assessment year 2007-08 dated 1.3.20 13 in which the Tribunal after considering the various submissions and decisions of Tribunal relied upon by the assessee held that KPO was a term given to a branch of BPO in which apart from processing data, knowledge is also applied. The Tribunal therefore, held that the KPO could not be excluded from the comparability list. The Tribunal in the case of Actis Advisors (P) Ltd.(Supra) have also held that any further dissections of ITES will not be proper as it would be a very subjective exercise. Even in the case of CRM services (P) Ltd (Supra) on which the assessee has relied, there is no finding that margin in case of high end segment of ITES is higher.
We also note that even in the case of comparables selected by the assessee details of which have been given in para 3 of the order earlier, there is wide fluctuation in the margins of the companies; the lowest margin i.e. 0.34% in case of Ask Me Info Hub Ltd. and the highest margin as 27.98% in case of Allsec Technologies Ltd. Obviously the cases selected by the assessee are not identical otherwise there would not have been so wide variation Excluding the highest margin and the loss case, the average margin of other comparables of the assessee comes to only 4.5% which is 1/6th of the highest margin. Compared to this, the average margin of the comparables of the TPO is within two times the highest margin in case of the assessee. Thus, if the comparables with 1/6th of the highest margin are acceptable to the assessee then, there is no reason for the assessee to be aggrieved with the comparables of TPO where average margin is within twice the highest margin, case selected by the assessee. The objection of the assessee will be valid only if there is material to show that high margin in case of high end services is because of nature of activities. But as it has been pointed out earlier, no such material had been produced. Therefore, we reject the argument advanced based on low end/high end services in the ITES activities.