Iqor India Services (P) Ltd., New Delhi vs Department Of Income Tax

DCIT, Ward 11(4), vs. iQor India Services Pvt. Ltd., New Delhi. B-92, 9th Floor, Himalaya House, 23, K.G. Marg, New Delhi - 110 001. (PAN : AABCI2835F)

CO No.136/Del/2013 (in ITA No.1581/Del/2012) (Assessment Year : 2008-09)

iQor India Services Pvt. Ltd. Vs. DCIT, Circle 11 (1), B-92, 9th Floor, Himalaya House, New Delhi. 23, K.G. Marg, New Delhi - 110 001. (PAN : AABCI2835F)

(Appellant) (Respondent)

Date of Hearing : 25.03.2015 Date of Pronouncement : 27.04.2015

Appellant by : Shri Arun Chhabra & Ms. Kanika Makkan, CAs Respondent by : Sh. Judy James, Standing Counsel DR ORDER

PER GEORGE GEORGE K., JM:

The appeal, at the instance of the revenue, and the cross objection, at the

instance of the assessee, are directed against the order of the CIT (A)-XX, New

Delhi dated 05.02.2013. The relevant assessment year is 2008-09. 2 ITA No.1581/Del./2013

CO No.136/Del./2013

2. In revenue's appeal, the solitary effective ground raised reads as under :-

"On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of Rs.2,36,31,584/- made on account of ALP made by the TPO."

However, in the course of hearing, the ld. Standing Counsel confined his

submissions to the exclusion by the CIT (A) the following companies from the

comparable list :-

(i) Vishal Technologies Ltd.

(ii) Mold Tek Technologies Ltd.

3. In the assessee's cross objection, fourteen grounds have been taken.

However, in the course of hearing, the ld. AR confined his submissions for

exclusion of Eclerx Technologies Ltd. from the comparable list of companies.

ITA NO.1581/DEL/2013 (REVENUE'S APPEAL)

4. Brief facts of the case are as follows. The assessee is a subsidiary of

IntelliRisk Management Corporation ('IRMC US') and is primarily engaged in

the provision of IT enabled service ('ITeS'). The assessee is a 100% export

oriented unit registered under the Software Technology Park Scheme of

Department of Electronics, Government of India. During the relevant previous

year, the assessee provided back office services in the nature of outbound call

center services and support services to its associated enterprises ('AEs'). In the

Transfer Pricing Documentation, the assessee was characterized as a limited risk

IT enabled service provider while rendering call center and support services.

The international transaction undertaken by assessee during the year was :- 3 ITA No.1581/Del./2013

CO No.136/Del./2013

S.No. Description of each transaction Amount

1 Information Technology Enabled 29,56,53,486 Services

2 Reimbursement of expenses incurred on 45,05,234 behalf of AE

With regard to reimbursement of expenses, the same was accepted at arm's

length. With reference to ITES, the assessee used Transactional Net Margin

Method ('TNMM') and selected Operating Profit/Total Cost ('OP /TC') as profit

level indicator ('PLI'). The margin earned by the assessee during the Financial

Year (FY) 2007-2008 was 18.06% as opposed to 16.11% being the mean margin

earned by comparables. Since the margin earned by the assessee was more than

that of the comparables, the international transaction was concluded to be at

arm's length.

5. During the assessment proceedings the TPO accepted the method i.e.

TNMM and the PLI i.e. OP/ TC selected by the assessee for computing the ALP

of international transaction. The TPO rejected few filters applied by the assessee

and applied new filters to the search process. Out of the nine companies selected

by the assessee, the TPO rejected six companies based on the financial data for

FY 2007-08 and on account of various reasons introduced seventeen additional

comparable companies. The TPO finally selected twenty comparables to

determine the ALP. The TPO recalculated the OP /TC margin of twenty

comparables as 27.50 percent based on the data for FY 2007-08 and after

granting working capital adjustments.

4 ITA No.1581/Del./2013

CO No.136/Del./2013

6. Aggrieved, assessee preferred an appeal to the First Appellate Authority.

Before the CIT (A), the assessee, amongst various other issues, challenged the

selection of following comparables :-

(i) Accentia Technologies Ltd. (ii) Infosys BPO Limited (iii) Eclerx Services Private Limited (iv) Datamatics Financial Services Ltd. (v) Triton Corp Ltd. (vi) Coral Hub Ltd (formally known as Vishal Technologies Ltd.) (vii) Mold-tek Technologies Limited

(viii) HCL Comnet Systems And Services Limited

(ix) Wipro BPO

(x) Genesys International Corporation Ltd.

(xi) Acropetal Technologies Ltd.

(xii) NIIT Smartserve Ltd.

Out of the above, the CIT(A) accepted assessee's contention regarding Mold-tek

Technologies Limited and Coral Hub Limited (formally known as Vishal

Technologies Limited) and upheld the selection of other comparables.

7. The department has challenged the order of CIT (A) vide ITA

No.1581/Del/2013. The only point of contention in the Department's appeal is

rejection by CIT (A) of the following companies from the comparable list :-

(i) Coral Hub Ltd (formally known as Vishal Technologies Limited)

(ii) Moldtek Technologies Limited

8. Heard rival contention and perused the material on record, the above two

companies have been rejected as comparable by the order of the Tribunal in 5 ITA No.1581/Del./2013 CO No.136/Del./2013

assessee's own case for AY 2007-08 (ITA No.6034/Del/2012). The reasoning

of the Tribunal is that the above two companies are functionally different from

that of the assessee's company. In this assessment year, the facts are identical to

that of the facts in assessment year 2007-08 and, therefore, our reasoning in ITA

No.6034/Del/2012 for assessment year 2007-08 wll hold good for this

assessment year. For ready reference, our finding for assessment year 2007-08

is reproduced below :-

"(ii) Vishal Information Technology Ltd.

Vishal Information Technology ltd is engaged in diversified activities such as e-publishing, therefore, it is functionally different from assessee. Further, the Hon'ble Tribunal in the case of Techbooks International Pvt. Ltd. vs. ACIT Cir-1, in ITA No.4990/Del/2011 in AY 2007-08 has also rejected Vishal as a comparable even though the assessee in that case had initially included the same as comparable company. The Tribunal held Vishal was having low employee cost of 3% in comparison to 60% of assessee in that case. In the relevant year assessee wages/total cost ratio stands at 58.01%. and therefore not functionally comparable with the assessee company. Moreover, Vishal is very high profit making company and operates on outsourcing model and hence, has different business model to that of assessee. Further, the CIT(A) in the subsequent year i.e AY 2008-09 also rejected the same from the list of comparable in the assessee 's own case. Therefore, we accept the contention of the Ld. Counsel and direct for the exclusion of this company from the final list of comparables.

(iii) Maple E Solutions Ltd. and Triton Corporation Ltd.

The promoters of the company were involved in the fraud for earlier years, hence the financial results of these companies are distorted and accordingly cannot be relied upon. The said view has also been held in various judicial rulings namely:

• M/s. Capital IQ Information Systems (India ) Pvt. Ltd. vs. DCIT (ITA No.1961/Hyd/2011) AY 2007-08 Para 19 (page 831-832 of the paperbook) 6 ITA No.1581/Del./2013 CO No.136/Del./2013

• ITO vs. CRM Services India (P) Ltd.(ITA No. 4068 (Del)/2009) AY 2006-07 (page 889-891 of the paperbook)

• M/s.Stream International Services Pvt.Ltd vs. ACIT AY 2007-08 (ITA No. 8290/Mum/2011) (page 1351-1352 of the paperbook)

• M/s. Pentair Water India Pvt. Ltd. vs. ACIT (ITA NO.

02/PNJ/2013) and ACIT vs. M/s. Pentair Water India Pvt. Ltd. (ITA NO. 05 /PNJ/2013) AY 2006-07 Para 4.3.1 (i) (page 893 of the paperbook)

• M/s. IVY Comptech Pvt. Ltd. vs. The ACIT (ITA No. 1558/Hyd/2010) AY 2005-06 Para 7(b) (page 899 of the paperbook)

• M/s. Market Tools Research Pvt. Ltd. vs. DCIT ((ITA No.1150/Hyd/2011) AY 2005-06 Para 16 (page 902 of the paperbook)

• M/s. HSBC Electronic Data Processing India Ltd. vs. ACIT AY 2006-07 (ITA No.1624/Hyd/2010 & Stay Application No.210/Hyd/2012 therein) Para 12.1 (page 906 of the paperbook)

• M/s.Stream International Services Pvt.Ltd vs. The Director of Income tax (ITA No.8997/Mum/2010) AY 2006-07 Para 17, (page 911 of the paperbook)

In view of the above we direct for the exclusion of this company from the final list of comparables."

9. For the aforesaid reason, we hold that the CIT (A) is justified in excluding

the above mentioned companies from the list of the comparables. It is ordered

accordingly.

CO No.136/DEL./2013 (ASSESSEE'S CO)

10. In the cross objection, the only issue that is raised is whether company

Eclerx Technologies Ltd. is to be excluded from the list of comparables. The 7 ITA No.1581/Del./2013 CO No.136/Del./2013

same company was excluded by the Tribunal in assessee's own case for the

assessment year 2007-08. Therefore, the reasoning of the Tribunal's order for

assessment year 2007-08 will hold good for this assessment year also, since the

facts are identical with the facts of the instant case. The relevant finding of the

Tribunal for the assessment year 2007-08 reads as follows :-

"(i) Eclerx Services Ltd.

Eclerx is engaged in providing data analytics services with expertise in financial service and retail and manufacturing. The service provided by the company are high end in nature involving special knowledge and domain expertise and therefore, not functionally comparable with the assessee company which is engaged in providing low end ITES enabled call centre services to its AE. The fact Eclerx Services Ltd. is providing high end services involving special knowledge and domain expertise is evident from the company's own reply to the notice u/s 133(6) which is placed at pages 976 to 979 of the paper book filed by the assessee. The Hon'ble Special Bench of the Tribunal in case of Maersk Global Centre (India) Private Ltd. vs. ACIT (ITA No.7466/Mumbai/ 2012) had excluded Eclerx Services Pvt. Ltd. from the list of comparables for the reason that it is providing high end services involving specialised knowledge and domain expertise and same cannot be compared with companies which are mainly engaged in providing low end services to group companies. The relevant finding of the Hon'ble Tribunal read as follows :-

"In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider 8 ITA No.1581/Del./2013 CO No.136/Del./2013

specializing in two business verticals - financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns.

For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tek Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP."

The above ruling of Hon'ble Special bench is equally applicable to the facts of this case, as it is evident from the functional profile of the assessee company that it is a low end services provider, namely, engaged in providing call centre servers to its AE. For the aforesaid reasons, we direct the TPO to exclude Eclerx Services Ltd. from the final list of comparables." 9 ITA No.1581/Del./2013

CO No.136/Del./2013

11. In view of the ruling of the Tribunal in assessee's own case for

assessment year 2007-08, we direct the TPO to exclude Eclerx Technologies

Ltd. from the list of comparables and to compute the margin and calculate the

arms length price of the international transaction of the assessee. It is ordered

accordingly.

12. In the result, the appeal filed by the revenue is dismissed and the cross

objection filed by the assessee is partly allowed for statistical purposes.

Order pronounced in open court on this 27th day of April, 2015.

Sd/- sd/- (J.S. REDDY) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated the 27th day of April, 2015 TS

Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-X, New Delhi 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.