Xchanging Technology Services India ... vs Assessee

(Appellant) (Respondent) Assessee By : Shri Nageshwar Rao, Shri S. Karhail and Shri Aniket D. Agrawal, Advocates Department By : Shri Judy James, Standing Counsel

Date of Hearing : 24.04.2015 Date of Pronouncement : 24.04.2015 ORDER PER R.S. SYAL, AM:

This appeal by the assessee is directed against the final order

passed by the Assessing Officer on 18.3.2013 u/s 143(3) read with ITA No.1897/Del/2014 section 144C of the Income-tax Act, 1961 (hereinafter also called 'the

Act') in relation to the assessment year 2009-10.

2. The only issue raised in this appeal is against the addition on

account of transfer pricing adjustment in Information Technology

enabled services (ITES) segment.

3. Briefly stated, the facts of the case are that the assessee is a

subsidiary of Xchanging Resourcing Services Ltd., UK. It is engaged in

rendering contracted software development services and also

InformationTechnology-enabled services to Xchanging Group

Companies. One of the international transactions reported by the

assessee was the `Provision of ITES' with transacted value of

Rs.43,64,55,419/-. The assessee applied the Transactional Net Margin

Method (TNMM) as the most appropriate method to demonstrate that

the international transaction of providing ITES was at ALP. The Profit

Level Indicator (PLI) of Operating Profit to Total Cost (OP/TC) was

used. In this way, the assessee showed its operating profit margin under

this segment at 14.98%. 14 companies were chosen as comparable with

2 ITA No.1897/Del/2014

their average of operating profit margin at 11.19%. That is how, the

assessee tried to demonstrate that this international transaction was at

arm's length price (ALP). The Assessing Officer (AO) referred the

determination of arm's length price (ALP) to the Transfer Pricing

Officer (TPO). The TPO did not agree with the comparables chosen by

the assessee. After making certain exclusions and inclusions, the TPO

finalized the following six companies as comparable with their

respective profit margins as under:-

Sl.No. Comparables OP/OC (%)

1. Cosmic Global Ltd. 50.70

2. Crossdomain Solution Pvt. Ltd. 25.63

3. Infosys BPO Ltd. 24.28

4. Coral Hub Ltd. 37.03

5. Accentia Technologies Ltd. 52.52

6. Aditya Birla Minacs Worldwide Ltd. 11.95

Average 33.68

4. In this way, the TPO worked out average profit margin of the

above six comparable companies at 33.68%. This resulted into the

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transfer pricing adjustment of Rs.6,23,11,494/- on this transaction, for

which equal amount of addition was made by the AO in his final order.

The assessee is aggrieved against the above addition.

5. We have heard the rival submissions and perused the relevant

material on record. The TPO has not disputed the application of TNMM

as the most appropriate method for determining the ALP of the

international transaction of the `Provision of ITES'. Even the PLI of

OP/TC has not been disputed. The assessee is aggrieved against the

inclusion of Cosmic Global Ltd. and Accentia Technologies Ltd. Apart

from that, the assessee seeks the inclusion of Microland Ltd.

6. Before considering the above three companies from the angle of

their comparability, it is essential to note the nature of activity carried

out by the assessee under this segment. It can be seen from the TPO's

order as well as the Transfer pricing study that the assessee provided the

following services to its different associated enterprises as under:-

"a) Xchanging Procurement Services (XPS): The end

client under this contract is a London-based retail chain.

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The services provided under the project involved back office

procurement processing services like invoicing, query

management, etc.

b) Xchanging Ins Sure Services: The project involves

the provision of insurance-related services like premium

booking and allocation processes, etc.

c) Xchanging UK Limited: The project involves the

provision of accounting-based services like payroll

processing, account reconciliation, AR & AP, etc.

d) Xchanging Global Insurance Solutions Ltd.: The

Services provided included helpdesk support services.

e) Xchanging Transaction Bank GmbH, Germany:

The services provided included security processing banking

related processes.

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f) Xchanging HR Services Limited, United

Kingdom: The Services provided included the HR related

back office processes.

g) Xchanging Claim Services, United Kingdom: The

services provided included insurance-related back office

processes like claim processing."

7. A careful perusal of the services rendered by the assessee to its

AEs brings out the nature of such services, being, back office services

like invoicing, etc., provision of insurance related services, provision of

accounting based services, helpdesk support services, security

processing, banking related services, claims processing and HR related

back office processes. Now, we will examine the above companies, one

by one, from the angle of their comparability.

Cosmic Global Ltd.

8. The TPO considered Cosmic Global Ltd. as comparable with the

assessee company on entity level. We have examined the Annual report

of this company for the year in question, which is available in the paper 6 ITA No.1897/Del/2014

book. It can be noticed that its revenue from operations stands at

Rs.7,37,02,584/-, which consists of three amounts, namely, Medical

transcription and consultancy service charges amounting to

Rs.9,90,737/-; Translation charges amounting to Rs.6,99,35,756/-; and

Accounts BPO charges amounting to Rs.27,76,090/-. This company

outsourced the activity of Translation. 57.31% of total operating

expenses incurred by this company are outsourcing charges.

Admittedly, outsourcing is confined to Translation, for which it paid

charges at Rs.3.00 crore. In our considered opinion, this company cannot

be considered as comparable with the assessee company for the reason

of its major activity, namely, Translation, with revenue of Rs.6.99 crore

(out of total revenue of Rs.7.35 crore), being dissimilar with the

assessee's activities under this segment. The second reason for

considering this company as incomparable on entity level is the business

model adopted by it. It can be seen that this company has outsourced

major activities in comparison with the assessee doing its business in-

house. It goes without saying that these two business models, namely,

outsourcing services and providing in-house services, cannot be 7 ITA No.1897/Del/2014

compared with each other because of their inherent differences. Since

the TPO has considered this company as comparable on entity level, we

hold that the same cannot be so treated. Similar view has been taken by

the Tribunal in the case of United Health Group Information Services

Pvt. Ltd. Vs. ACIT (ITA No.6312/Del/2012) vide its order dated

28.8.2014. Respectfully following the precedent, we direct the

exclusion of this company from the list of comparables.

Accentia Technologies Ltd.

9.1. The TPO considered this company with profit margin of 52.52%

as comparable. The assessee's objection for not treating it as comparable

was jettisoned both by the TPO as well as the DRP. The assessee is

aggrieved against the inclusion of this company in the final tally of

comparables.

9.2. We have heard the rival submissions and perused the relevant

material on record. We have also gone through the Annual report of this

company for the year in question, which has been placed in the paper

book. It can be noticed from page 31 of the Annual report that during

8 ITA No.1897/Del/2014

the year under consideration this company completed the acquisition of

96% of M/s Oak Technologies Inc., a healthcare back-office processing

company engaged in medical billing, coding and transcription activities

and having substantial global work force. The Mumbai Bench of the

Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum)

176, has held that a company cannot be considered as comparable

because of exceptional financial results due to mergers/demergers.

Similar view has been taken by the Delhi Bench of the Tribunal in

several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA

No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact

that there was merger of some entity with Accentia Technologies Ltd.,

we hold that this company cannot be considered as comparable.

Accordingly, the same is directed to be excluded from the final list of

comparables.

Microland Ltd.

10.1. Before taking up the functional profile of this company for

examining its comparability, it is necessary to mention that this company

9 ITA No.1897/Del/2014

was not originally selected by the assessee as comparable in its TP

study. No contention was raised before the TPO for considering it as

comparable. It was only for the first time that the assessee came up with

the argument for the inclusion of Microland Ltd., in the list of

comparables before the Dispute Resolution Panel (DRP). Without

commenting on the comparability or otherwise of this company, the

DRP did not consider this objection.

10.2. We have heard both the sides on this issue and perused the

relevant material on record. It is discernible that the assessee did not

take up the issue of considering this company as comparable either in its

TP study report or before the TPO. However, contention was raised

before the DRP. In our considered opinion, there can be no reason to

reject the contention at the outset without examining the actual

comparability of a company. Since the authorities below have not

pondered over the comparability of this company, we are of the

considered opinion that the ends of justice would meet adequately if the

impugned order on this score is set aside and the matter is restored to the

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file of AO/TPO for examining the comparability of this company. We

order accordingly.

11. No other aspect of the transfer pricing adjustment has been assailed

before us. We, therefore, set aside the impugned order to this extent and

direct the AO/TPO to determine the ALP of the international transaction

of `Provision of ITES' afresh in consonance with our above directions.

12. In the result, the appeal is allowed for statistical purposes.

The order pronounced in the open court on 24.04.2015.

Sd/- Sd/-

[C.M. GARG] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated, 24th April, 2015. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.

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