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Judgment
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER :
The captioned appeal preferred by the assessee is against the order of the DC/ACIT TP – 1(1)(2), Delhi passed under section 92CA(3) of the Income-tax Act, 1961 (in short “the Act”) order dated 30.10.2023 for Assessment Year 2021-22 in pursuance of directions of the Dispute Resolution Panel (DRP) under S. 144C(5) of the Income tax Act, 1961 dated 22.08.2024.
The grounds raised by the assessee are as under :
“1.On the facts and circumstances of the case and in law, the final assessment order dated 26-09-2024 passed under section 143(3) read with section 144C (13) read with section 144B of the Income-tax Act, 1961 ("the Act") by National Faceless Assessment Centre ("NFAC" or "Ld. AO") [Impugned order) is bad, both in the eyes of law and on facts.
2.The Ld. AO/Learned Transfer Pricing Officer ("Ld. TPO") erred on facts and circumstances of the case in determining thee arm's length price ("ALP") adjustment to the Appellant's international transaction with Associated enterprise ("AE"), thereby resulting in the enhancement of returned income of the Appellant by INR 71,36,967.
3.On the facts and circumstances of the case, the Ld. DRP has erred in law and in facts, by passing order under section 144C(5) of the Income-tax Act, 1961 without calling for the remand report from Ld. TPO.
4.On the facts and circumstances of the case, the Ld. TPO has erred in law and in facts, by passing the final assessment order under section 143(3) read with section 144C(13) read with section 144B of the Income-tax Act, 1961 without issuing the remand report and providing an opportunity of being heard.
5.On the facts and circumstances of the case, the Ld. AO/Ld. TPO has erred in law and in facts, by rejecting certain functionally comparable companies (selected by the Appellant) based on unreasonable comparability criteria.
6.Without prejudice to Ground No. 5, On the facts and circumstances of the case, the Ld. AO /Ld. TPO has erred in law and in facts, by following the inconsistent approach in applying functional filter while rejecting the comparable selected by the Appellant and including the comparable selected by Ld. TPO.
7.On the facts and circumstances of the case, the Ld. AO/Ld. TPO has erred in law and in facts, by accepting certain functionally non-comparable companies (newly added by Ld. TPO) based on unreasonable comparability criteria.
8.On the facts and circumstances of the case, the Ld. TPO has erred in law and in facts, by passing the order giving effect under section 144C (5) of the Income-tax Act, 1961 without following the direction of Ld. DRP issued vide order dated 22-08-2024 passed under section 144C (5) of the Act inasmuch as:
8.1As specifically directed by Ld. DRP at Para 4.2.4 of DRP order dated 22-08-2024, the Ld. TPO has erred in law and in facts, by passing the order giving effect under section 144C (5) of the Income-tax Act, 1961 without specifying the search methodology and the database used for identifying comparable companies and by not making it as a part of order.
8.2The Ld. TPO has erred in law and in facts, by passing the order giving effect under section 144C (5) of the Income-tax Act, 1961 without providing the evidence /source of information on which he had relied upon while explaining functional profile of the comparable companies selected by the Appellant.
8.3The Ld. TPO has erred in law and in facts, by passing the order giving effect under section 144C (5) of the Income-tax Act, 1961 without applying all the quantitative filters while selecting newly added comparable companies by Ld. TPO passes all the quantitative filters.
9.The Ld. DRP has erred in fact and in law in accepting two newly added comparable company by Ld. TPO (namely Anderson Business Solutions Private Limited and Vitae International Accounting Services Private Limited) as a comparable company without considering the objections filed by the Appellant before Ld. DRP.
10.On the facts and circumstances of the case, the Ld. AO has erred in law, to initiate penalty proceedings under section 270A of the Act for under-reporting of income in consequence of mis-reporting.
The Appellant craves leave to alter, amend or withdraw all of any of the Grounds herein or add any further grounds as may be considered necessary and to submit such statements, documents etc. as may be considered necessary either before or during the course of hearing.”
Brief facts of the case are that the assessee is a Pvt. Ltd. company primarily engaged in the operations of the company stated to be in provision of Software Solutions, E-commerce and website related services and also engaged in providing software development services and administrative and/or back-office support services of its Associated Enterprises. The assessee-company electronically field its return of income on 10.02.2022 declaring total income of Rs.8,100/-. The case of assessee was selected for scrutiny under CASS to examine the issue of “large value of international transactions in services including transactions”.
The assessee, in the year under consideration, had shown in its TP study, international transaction in the nature of provision of Software Development and Back Office Support System of Rs 26,48,98,469/-. The AO found that the computation of the arms-length price for different types of transactions (software development services and back- office support services) was done aggregately by the Assessee using TNMM where the assessee has shown a combined margin of 16.17%. The TPO however, computed the ALP separately for Administrative/Back office support considering the FAR of providing Administrative/Back office support service different from Software Development Support service. The TPO found that margin earned in Administrative/Back office support service segment shown by the assessee is at 12%. As the assessee had not separately benchmarked the transaction, therefore, the TPO found the calculation of ALP for the above international transaction as incorrect and resulted in selection of wrong comparables by the Assessee. Accordingly, the TPO rejected 6 of the assessee’s comparables and introduced 7 of his own comparables companies and arrived at a median margin of 18.63% with an upward adjustment of Rs 71,28,867/- in the arms length price for Administrative/Back office support service segment. Aggrieved the assessee is before us.
Ground No. 1 and 2 are general in nature and Ground No. 3 and 4 are not pressed by the assessee, hence dismissed.
The substantive grievance of the assessee, with the arm’s length price adjustment of Rs.71,36,967/- on the International Transaction with the assessee’s AE, is that the TPO/DRP’s rejection of 16 comparables out of 24 comparables selected by the assessee, and introduction of 7 new comparables for making said adjustment.
It is the say of the learned Counsel of the assessee that for 6 Comparable rejected by Ld. TPO, the DRP found no reason for rejection and directed to pass a speaking order and include these companies as comparable only if it is functionally similar.
The ld AR submitted that for the 7 new Comparable selected by Ld. TPO, the Ld. DRP has accepted two companies as good comparable. For remaining 5 companies, the Ld. DRP found that the TPO did not comment on the functional aspect of the comparable selected and directed to pass speaking order. The ld AR stated that the TPO however, ignored the detailed responses filed by the Assessee and made upward TP adjustment amounting to Rs. 71,28,867 and passed the final assessment order.
The ld AR, before us, accepted the rejection of i) Suprawin Technologies Limited and ii) DKM Online Pvt. Ltd out of six companies rejected by the TPO. The ld AR however, submitted the other 4 are valid comparables as follows:
Riddhi Corporate Services Ltd.
The Ld. TPO rejected this comparable by alleging that this comparable is engaged in software development along with verification services and recruitment services
However, as evident from Page 48 of the paper book, The Ld. TPO has ignored the prominent services which are in the nature of back-office support and provided by the Comparable company such as customer services support, Data entry, document management, legal documents, debt. collection etc., However Ld. TPO, in the Assessment order, merely mentioned about the ancillary activities mentioned at the bottom of the services drop-down menu of the website. As evident from page 48 and page 49 of the paper book, core services undertaken by Riddhi Corporate Services Ltd. is in the nature back-office support function only.
Afore-stated argument also finds support from the current and updated website of Riddhi Corporate Services Limited wherein software development is no more coming as a service offering in the website.
Further, the 'Letter of Chairman' forming part of Annual Report, states that its principal activities consist of document management, inbound and outbound contact centre, data entry, verification etc. which makes it functionally similar to Appellant. The relevant extract Letter of chairman on page 10 of the additional Paper Book (Annexure 1 of this synopsis). Thus, Riddhi Corporate is a valid comparable.
ii) Expert More BPO Solutions Pvt. Ltd.
o The Ld. TPO rejected this company on the ground that it is engaged in the insurance segment. The Appellant contends that this comparable is not engaged in the insurance segment and rather this comparable company provides backend support services (similar to Appellant's services) to Insurance sector entities.The website (PB 51-53) of Expect More shows that it is engaged in services such as debt collection, record keeping, and data entry etc. These are support functions which are extensively similar to the services performed by Appellant.
o It is pertinent to note that the Ld. TPO has itself considered Ecare India Pvt.
Ltd and AXA Business Services Limited as a valid comparable, which engaged in similar services to insurance segment. The relevant screenshot of Ecare India Pvt Ltd and Axa Business Services Limited are present on page 163 & 164 and 165 & 166 of the additional Paper Book (Annexure 2A and 2B of this synopsis) respectively. When two companies providing similar activities to the insurance support service segment have already been accepted and included by Ld. TPO, it is just fair and reasonable that Expect More BPO Solutions Pvt. Ltd. should also be treated as a valid comparable.
iii) Sundaram Business Services Ltd.
The Ld. TPO has erred in rejecting this comparable by misinterpreting the information on its website and treating that Sundaram Business Services Ltd. is engaged in portfolio management and Mortgage services. Sundaram Business Services Ltd. is engaged in back-office support functions that are similar to those of Appellant.
The reference to "portfolio management" and "mortgage services" on its website [Page 54 of PB) does not mean that Sundaram itself carries on these businesses. It simply provides back-office support to companies engaged in those sectors, which is in the nature of low end BPO services. Relevant screenshot of website with expanded services description available on page 229 & 230 of the additional Paper Book (Annexure-3 of this synopsis).
It is most importantly submitted that this particular company has already been accepted as a valid and good comparable by the Ld. TPO in the Transfer pricing proceedings of immediately succeeding assessment year (AY 2022-23). There is no change in facts or functional profile of this comparable in AY 2021-22 vis-à-vis AY 2022-23. Following the principle of consistency and there being no change in FAR, this company should be included in the final set of comparables for AY 2021-22 is year as well.
iv) Reliable Data Services Limited.
The Ld. TPO has erred in rejecting this comparable by stating that is engaged in Software service provider without providing any basis or valid source of such information.
Basis the screenshot of the website of the company at page 57 and 58, it is evident that there are no services which demonstrate software development/software service.
Further, the Statutory Audit report of this comparable company supports that it is engaged in rendering back-office services. [Refer page 281 of the additional Paper Book; also present in Annexure- 4 of this synopsis). Thus, it is a valid comparable It is most importantly submitted that this particular company has already been accepted as a valid and good comparable by the Ld. TPO in the Transfer pricing proceedings of immediately succeeding assessment year (AY 2022-23). There is no change in facts or functional profile of this comparable in AV 2021-22 vis-à-vis AY 2022-23. Following the principle of consistency and there being no change in FAR, this company should he included in the final set of comparables for AV 2021-22 is year as well.
The ld AR, on inclusion of comparables, accepted the inclusion of i) AXA Business Services Pvt. Ltd. and ii) Inteq BPO Services Pvt. Ltd. but contested the inclusion of other 5 comparables on the ground that the services performed by comparable companies newly added by Ld. TPO are either diversified or not similar to that performed by Appellant as follows:
| Sr. No. | Name of Comparable companies | PB page No. | Contention for rejection |
| 1. | MAA Business Solutions Private Limited | 63 | Diversified Business Majority of the activities (web mining, data mining, content development, CRM services, market research, electronic publishing, quality audits, knowledge management services) performed by MAA are not performed by the Appellant and hence it can be said that MAA Business Solutions Private Limited is engaged in diversified activities as compared to the Assessee and hence cannot be considered as comparable to the Assessee. Further, as evident from MGT-9 (Refer page 419 of the additional paper book; also present in Annexure- 5 of this synopsis), the company is engaged in providing other information technology services and computer service activities and derives 100% of its revenue by providing these services. These services are distinct from the back-office support functions performed by Appellant as they involve domain specific expertise rather than routine process-oriented support. Accordingly, MAA Business Solutions Pvt. Ltd. is functionally dissimilar and should be excluded from the final set of comparables. |
| 2. | Sotherland Global Services Pvt. Ltd. | 65 | Functionally dissimilar Sutherland Global Services Pvt Ltd. involved in digital finance, enterprise services, intelligent facilities management, smart hospitals and mortgage services. [Refer Page 65 of PB] The screenshot of its website shows that it provides 'Advanced analytics. Artificial intelligence, cloud, digital consulting, Digital engineering services, digital operations, automotions ete. [Refer page 487 of the additional paper book. Also, in Annexure- 6 of this synopsis] which is functionally different from Appellant and it cannot be treated as comparable to Appellant company. It is submitted that this company could not be considered a valid comparable for the reason that the turnover of this comparable company is INR 1721.94 Crore which is exceptionally high (Le. 142.98 times higher when compared with Appellant's turnover of INR 12.04 Crore) It is further submitted that companies with significantly high turnover benefits from superior pricing power, broader customer reach and a larger-skilled workforce advantages which are not available to a captive, routine service provider such as the Appellant, thereby materially impacting profitability and rendering such companies unsuitable for comparability. It has been held in various judicial pronouncements that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. |
| 3. | Vitae International Accounting Services Pvt. Ltd. | 67 | Functionally dissimilar it is engaged into various activities being technical/professional in nature such as Audit for firms to ensure compliance with the audit standards of their specific country and International Financial Reporting standards (IFRS) as well, Taxation services, Technical Content writing and Software Services. Thus, cannot be considered as functionally Comparable company of the Assessee. The Ld. TPO has erred in adding this comparable, which is functionally different from Biz2 Platform. As per the Director's Report [Refer page 490 of the additional paper book. Also present in Annexure- 7 of this synopsis), the company is engaged in professional services such as taxation, accounting, auditing, computer programming, consultancy, and related activities. These services are highly technical in nature which requires professional and expertise expert and hence cannot be comparable to the Appellant. |
| 4. | eClerx Services Ltd. | 69 | Functionally dissimilar-eClers Services Limited involved in technical and IT enabled |
| services which involves tech-based solution |
for various aspects primarily frons Automation perspective. It is engaged in divernified services such as 'strategic investment planning. Quality programme design, quality assurance services, technology consulting, analytics consulting, etc. majority of them are not provided by the Appellant. The L.d. TPO has erred in adding this comparable as similar to the assessee. The services rendered by eClerx require domain-specific knowledge and technical expertise which are functionally dissimilar to the Appellant. Hence, it should be comparable excluded from the final set of It is submitted that this company could not be considered a valid comparable for the reason that the turnover of this comparable company is INR 1197.40 Crore which is exceptionally high (Le., 99.42 times higher when compared with Appellant's turnover of INR 12.04 Crore) It is further submitted that companies with significantly high turnover benefits from superior pricing power, broader customer reach and a larger-skilled workforce advantages which are not available to a captive, routine service provider such as the Appellant, thereby materially impacting profitability and rendering such companies unsuitable for comparability. It has been held in various judicial pronouncements that which turnover is a ground for excluding companies as not comparable with a company that has low turnover.
5.Anderson Business 64 Diversified Business Anderson Business Solutions Pvt. Ltd. Solutions Pvt. Ltd. is functionally dissimilar to Assessee. The company earns revenue from accountancy and bookkeeping services, which constitute its principal business activity. contributing 100% of its total turnover, These activities are professionals centric and require specific technical skill sets which are distinct from the activity performed by Appellant. Thus, Anderson Business Solutions Pvt. Ltd. should be excluded from final set of comparables.
Per contra, Learned DR relied on the decision of Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT (2015) 56 taxmann.com 417 (Del). In the case Chryscapital Investment Advisors (India) (P.) Ltd. the proposition is that huge profit or huge turnover cannot be the basis of exclusion of the comparable company which are otherwise conforming to the stipulations in Rule 10B(2). The ld DR argued that for comparables, if segmental accounts are available, the matter may be remitted back to the TPO and where segmental profile is not available, the same cannot be taken as comparable.
With respect to exclusion of the company; the learned DR submitted that the company Ridhi Corporate Services Pvt Ltd is in software development and not in the back office support as reflected at page 15 of the TP study report and therefore functionally not similar. It is further submitted that it’s segmental account is available, the company may be considered as comparable, however, it should go the TPO for verification and if segmental profile is not available, it cannot be taken as comparable and TPO has rightly excluded.
We have heard the rival submissions and have carefully perused the materials on record. We find that for 6 Comparable rejected by Ld. TPO and objected by Assessee, i.e., i) Riddhi Corporate Services Ltd; ii) Expect More BPO Solutions Pvt Ltd; iii) Sundaram Business Services Ltd; iv) Reliable Data Services Ltd; v) Superwin Technologies Ltd; and vi) DKM Online Pvt ltd, the Ld. DRP has accepted the fact that no specific rejection reason for rejection has been given by the Ld. TPO in the order. Ld. DRP directed the Ld. TPO to highlight the functional profile of the comparable rejected by Ld. TPO and to include these companies as comparable only if it is functionally similar to the company and passes all the filters. The Ld. DRP has further directed the Ld. TPO to pass a speaking order. We however find that the TPO did not follow the directions of the DRP and made TP adjustment.
We further find that out of the 6 comparable companies rejected by the TPO, rejection of 2 comparables namely DKM Online Pvt Ltd and Suprawin Technologies Ltd, has been accepted by the assessee. Out of the remaining 4 comparables, 3 comparables, namely i) Expect More BPO Solutions Pvt Ltd ii) Sundram Business Service Ltd; iii) Reliable Data Services Ltd were accepted as a valid and good comparable by the Ld. TPO in the Transfer pricing proceedings of immediately succeeding assessment year (AY 2022-23). The assessee’s assertion that there is no change in facts or functional profile of this comparable in AY 2021-22 vis-à-vis AY 2022-23, remaining unrebutted by the Revenue, we direct the TPO to consider these three companies as valid comparable.
With respect to the remaining comparable, Riddhi Corporate Services Ltd, we are of the considered view that the issue whether it is functionally similar, be remitted back to the TPO to consider afresh the functional similarity in the light of the company’s current and updated website and the letter of the Chairman. The TPO may consider the segmental financials available of the said comparable with regard to its core services undertaken and decide on its comparability accordingly, spelling out reasons for his decision.
With respect to the 7 new Comparable selected by Ld. TPO and objected by Assessee, the Ld. DRP accepted two companies namely i) Anderson Business Solutions Pvt Ltd and ii) Vitae International Accounting Services Pvt Ltd, as good comparable. For remaining 5 companies, the Ld. DRP has accepted the fact that there is no discussion on the functional aspect of the comparable selected. Ld. DRP directed the Ld. TPO to highlight the functional profile of the comparable added by Ld. TPO and to include these companies as comparable only if it is functionally similar to the company and passes all the filters. The Ld. DRP has further directed the Ld. TPO to pass a speaking order.
We further find that out of 7 new comparables introduced by the TPO, the assessee as accepted two comparables namely i) AXA Business Services Pvt Ltd and ii) Inteq BPO Services Pvt Ltd. In view of the same, we uphold the inclusion of these two companies as valid comparables.
With respect to the remaining five, the assessee has objected to their inclusions on the ground of them being functionally dissimilar. On the other hand, we note that the TPO has selected these comparables without elaborating on the functional similarity with the assessee upon which the DRP’s directed the TPO to highlight the functional similarity. We also note the assessee’s grievance that the TPO did not consider the assessee’s various responses. In such facts and circumstances of the instant case, we are of the considered view that the issue of comparability of these five companies be set aside to the file of the TPO to examine afresh their functional profile focusing on revenue generated from the Back Office Support services provided by them and duly considering the submissions made by the assessee. We however note that the assessee has objected to the comparison citing the large turnover of the comparables. On this issue, we follow the judgement of the hon’ble Delhi Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT (supra) wherein the hon’ble court held that huge profit or huge turnover cannot be the basis of exclusion of the comparable company which are otherwise conforming to the stipulations in Rule 10B(2) and direct accordingly.
Ground 5 to 9 are disposed off in the aforesaid terms.
In the result the appeal of the assessee in ITA 5494/Del/2024 is partly allowed.