ITO, Ward-4(3) vs Majorel India Pvt. Ltd. (Earlier Known As Bertelsmann Marketing Services India Pvt. Ltd.)

“1.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in including the comparable R. Systems International Ltd. in the final list of comparables.

2.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in excluding the comparable Accentia Technologies Ltd.

3.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in excluding the comparable I-Gate Global Solutions Ltd.

4.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in excluding the comparable Infosys BPO Limited.

5.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in excluding the comparable TCS E-Serve Ltd. and TCS E-Serve International Ltd.

6.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in excluding the comparable Fortune Infotech Ltd.

7.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in excluding the comparable ICRA Techno Analytic Ltd. (Segmental).

8.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in excluding the comparable E-clerx Services Ltd.

9.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the TPO to include the comparables companies whose turnover range falls between Rs. 1Cr. to 5Cr.

10.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the TPO to include the comparables namely Motif India Infotech Pvt. Ltd., WNS Global Services Pvt. Ltd., Omega Healthcare Management Services Pvt. Ltd. and Zavata India Pvt. Ltd. final list of comparables.

11.

The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal”

“1.

That on facts and in the circumstances of the case and in law, the Learned ("Ld.") Commissioner of Income Tax (Appeal) ["CIT(A)"] erred in upholding the action of the Assessing Officer ("AO")/Transfer Pricing Officer ("TPO") in rejecting the internal Transactional Net Margin Method ("TNMM") adopted by the Respondant and thereby erred in applying external TNMM to benchmark the international transactions of the Respondant at entity level.

2.

That on the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO/ TPO of rejecting the segmental accounts maintained by the Respondant. The CIT(A) further erred in disregarding the submissions and documentary evidence furnished by the Respondant providing basis and bifurcation of costs between Associated Enterprise ("AE") and non AE segments.

3.

That on the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO/ TPO in comparing entity wide operating margin of the Respondant vis-à-vis of the comparable companies using external TNMM method and thereby erred in proposing addition on transactions with unrelated parties.

4.

That on the facts and circumstances of the case and in law, the Ld. AO/TPO/CIT(A) erred in modifying quantitative filter of accepting companies having minimum turnover of INR 1 crore to INR 5 crore and thereby erred in rejecting Informed Technologies India Limited as a comparable company

5.

That on the facts and circumstances of the case and in law, the CIT(A) erred in upholding the rejection Caliber Point Business Solutions Limited as a comparable company by the AO/ TΡΟ on the ground that it follows a different financial year.”

“4.

That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in rejecting the internal transactional net margin method (TNMM) applied by the appellant and thereby applying external TNMM to benchmark the international transactions of the appellant.

5.

That on facts and in the circumstances of the case and in law, the DRP/AO/ TPO erred in rejecting the segmental accounts maintained by the appellant. “

“6.

As regards Ground No. 4 & 5 relating to rejection of internal TNMM applied by the assessee, the Ld. AR submitted that the assessee is engaged in the provisions of ITeS Services to both AE's as well as non-AE's wherein the functions performed and risk assumed in relation to the provision of such services are sinidar and comparable. Therefore, based on the Functions, Assets and Risk ie. FAR analysis and the availability of data for determining the Arms' Length Price of its international transactions, the assessee applied internal TNMM and compared the OP/OC margin of AE claimed with OP/OC margin of non-AE segment. Since the OP/OC margin of 12.8% in its AE segment was higher than 7.24% OP/OC margin earned in the non-AE segment, it was concluded that the international transaction in respect of provision of ITeS undertook by the assessee are at Arms' Length in accordance with Indian TP Regulations. The TPO in the show cause notice, proposed to reject internal TNMM applied by the assessee for benchmarking provision of ITeS. However, the submissions of the assessee in this respect were not considered. The TPO proceeded to apply external TNMM to benchmark the said international transaction. Further, the DRP while dealing with internal TNMM applied by the assessee, rejected the project stating that the nature of services being performed in AE Segment are totally different from nature of Services in nonAE segment as well as no audited segments are being maintained and the assessee has created artificial segmentation.

7.

The Ld. AR further submitted that the following nature of Services are being rendered by the assessee:

* The customer query resolution a call centre Services * Accounts receivable/payable management services

* Data processing support services

* Sale support services

* other support services for e.g. warehouse services.

The nature of services rendered by the assessee to non-AEs broadly comprised of customer care and technical support, viz., payroll, recruitment, IT support etc. The Ld. AR further submitted that business operations of the assessee are divided into various operational processes that it performs for its customers (AE’s and non AE’s). While processes carried out for the AE and non AE may differ, the fundamental functions performed by the assessee under each of these processes are the same and fall under the category of ITeS Industry. The Ld. AR submitted that the DRP has erred in considering the services/scope of work from the agreement entered into by the assessee with its AE for ‘procurement of IT Services’ and comparing the same with the back-end ITeS Services provided by the assessee to AEs and non AEs. In this regard, the Ld. AR submitted that Rule 10C of the Income Tax Rules, 1962 provides that the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an Arms’ Length Price in relation to the intentional transactions. Since, the financial data pertaining to internal segmentation is more reliable and accurate, as compared to financial data of external comparable companies, and is more reliable to the facts and circumstances of the case, internal benchmarking analysis should be selected over external benchmarking analysis. The Ld. AR relied upon the OECD Transfer Pricing guidelines for Multinational Enterprises and Tax Administrations which highlight the preference of internal comparables over external comparables. (relied upon Para 3.27 and 2.58 of OECD guidelines). Further, the Ld. AR submitted that even the United Nations Practical Manual on Transfer Pricing for Developing Countries, released in 2013 (UN manual) also provides that TNMM is less dependent on product comparability because net margins are less influenced by differences in products and functions, as compare to other methods like CUP. The Ld. AR relied upon the following cases wherein it has been held that TNMM is not dependent on product similarity, and in TNMM, broad nature of Services/functions is to be seen:

 DCIT vs. Isagro (Asia) Agrochemicals Pvt. Ltd. (ITA No. 5093/Mum/2017)

 Diageo India Pvt. Ltd. Vs DCIT (2013) 59 SOT 150 (Mumbai Tri.)

 Eaton Fluid Power Ltd. Vs. ACTI (2015) 56 Taxman.com 135 (Pune Tri.)

8.

The Ld. AR further submitted that the DRP observed that the segments furnished by the assessee were not audited. But the DRP or the TPO did not highlight any defect or discrepancy that led to such a conclusion. The segmental analysis was based on valid allocation keys and the same was furnished in the TP study. The Ld. AR relied upon the following decisions wherein it has been held that segments do not have to be audited and that they cannot be rejected without any basis:

 Lummus Technology Heat Transfer BV Vs. DCIT (2014) 64 SOT 47 (Delhi Tri.)

 Destination of the World Subcontinent (P) Ltd. Vs. ACIT (2011) 47 SOT 1 (Delhi Tri.)

 CSR Technology India Pvt. Ltd. Vs. ACIT (2018) 90 Taxman.com 85 (Delhi Tri.)

 Birlasoft (India) Ltd. Vs. DCIT (2011) 44 SOT 664 (Delhi Tri.)

 S.B.& T Designs Ltd. Vs. ACIT (2017) 82 Taxman.com 385 (Mumbai Tri.)

9.

The Ld. DR submitted that the TPO in the show cause notice, proposed to reject internal TNMM applied by the assessee for benchmarking provision of ITeS. The TPO proceeded to apply external TNMM to benchmark the said international transactionThe DRP while dealing with internal TNMM applied by the assessee, rejected the project stating that the nature of services being performed in AE Segment are totally different from nature of Services in nonAE segment as well as no audited segments are being maintained and the assessee has created artificial segmentation. Thus, the Ld. DR submitted that the external TNMM is appropriate for benchmarking provision of ITeS.

10.

We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the nature of services rendered by the assessee to non-AEs broadly comprised of customer care and technical support, viz., payroll, recruitment, IT support etc. The business operations of the assessee are divided into various operational processes that it performs for its customers (AE’s and non AE’s). While processes carried out for the AE and non AE may differ, the fundamental functions performed by the assessee under each of these processes are the same and fall under the category of ITeS Industry. These aspects were never disputed by the TPO/AO at any stage. In fact, the TPO/AO simply stated that the nature of services performed in AE segment are totally different from nature of services in non-AE segment. But how the services are fundamentally different has not been demonstrated by the Assessing Officer. In fact, in broader context the services rendered to AE and non-AE are that of customer care and technical support. Thus, rejecting the internal TNMM on this ground is not valid as internal TNMM is the method which makes it easy to find comparable companies and reasonably determine the arm’s length nature of related as well as unrelated transactions. Besides this the TPO/AO has also rejected internal TNMM on the ground that there were no audited segments maintained. But at the same time, the TPO/AO has not pointed out any discrepancy related to segmental analysis based on valid allocation keys furnished by the assessee in its TP study. Therefore, these two aspects cannot be valid for rejecting the internal TNMM. The DRP was not correct in considering the services/scope of work from the agreement entered into by the assessee with its AE for ‘procurement of IT Services’ and comparing the same with the back-end ITeS Services provided by the assessee to AEs. In the present case best suited method is that of internal TNMM. The financial data pertaining to internal segmentation is more reliable and accurate, as compared to financial data of external comparable companies, therefore, it will be appropriate to apply internal benchmarking analysis over external benchmarking analysis. This finds support from the “OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” which highlight the preference of internal comparables over external comparables. (relied upon Para 3.27 and 2.58 of OECD guidelines). In fact, the United Nations Practical Manual on Transfer Pricing for Developing Countries, released in 2013 (UN manual) also provides that TNMM is less dependent on product comparability because net margins are less influenced by differences in products and functions, as compare to other methods like CUP. Therefore, we direct the TPO/AO to adopt internal TNMM for benchmarking provision of ITeS. Ground Nos. 4 and 5 are allowed.”