Pr. Commissioner Of Income Tax-4, New Delhi vs Symphony Marketing Solutions India Pvt. Ltd. (Now Merged With Genpact India)

VIBHU BAKHRU, J. (ORAL)

The Revenue has filed the present appeal impugning the judgment and order dated 18.08.2017 passed by the learned Income Tax Appellate Tribunal (hereafter ITAT) in IT (TP) A No. 111/Bang/2014 in respect of the assessment year (AY) 2009-2010.

The respondent (hereafter Assessee) had preferred the said appeal [IT (TP) A No. 111/Bang/2014] against an assessment order dated 26.03.2013 passed under Section 143(3) read with Section 144C of the Income Tax Act, 1961 (hereafter the Act) pursuant to the directions issued by the Dispute Resolution Panel (hereafter DRP) dated 18.11.2013. The issue raised in the present case relates to the transfer pricing adjustments as directed by the Transfer Pricing Officer (hereafter TPO) which forms the basis of the addition by the Assessing Officer (hereafter the AO) and the consideration of the DRP. The Assessee was, essentially, aggrieved that the TPO had used Transactional Net Margin Method (TNMM) for determining the Arms Length Price (hereafter ALP) in the cases of certain international transactions.

The issue relates to the use of certain comparable entities for conducting the bench marking studies and for excluding certain other entities. The Assessee was aggrieved by the exclusion of three entities, namely, (i) Lee & Nee Software (Exports) Limited, (ii) Caliber Point Business Solutions Limited, and (iii) R Systems International Limited. In addition, the Assessee was also aggrieved by the selection of four other entities, namely, (i) Infosys BPO Ltd. (hereafter the Infosys), (ii) Accentia Technologies Ltd., (hereafter Accentia Technologies) (iii) Cosmic Global Ltd., and (iv) M/s Eclerx Services Ltd. (hereafter Eclerx Services). The learned ITAT had examined the suitability of exclusion and inclusion of the entities as mentioned above for the purpose of bench marking the international transaction for determining the ALP. The TPO rejected the comparable entities as selected by the Assessee and had selected eight companies for determining the mean Profit Level Indicator (hereafter PLI) which wa selected as Operating Profit on Cost.

A tabular statement setting out the mean PLI as determined by the TPO is set out below:

The Assessee’s PLI was determined at 15.95%, and consequently a transfer pricing adjustment of ₹7,26,28,614/- on account of the ALP determined on the basis of the arithmetic mean of the PLI was recommended. The objections raised by the Assessee before the DRP were rejected and the directions passed by the TPO were affirmed. In the aforesaid context, the Assessee had approached the learned ITAT seeking to explain the four entities, which according to the Assessee were incorrectly included for the purposes of determining the ALP.

The learned ITAT found that the Accentia Technologies and Eclerx Services were functionally dissimilar as compared to the Assessee. It was noted that the Accentia Technologies was engaged in diversified activities of medical transcription, medical coding, billing and receivable management. These activities were found to be significantly different from the services of the call centre provided by the Assessee to its Associate Enterprise (hereafter AE).

Similarly, Eclerx Services was also found to be functionally dissimilar. The learned ITAT found that Eclerx was providing industries specialised services to meet complex clients’ needs, data analytics, and was a Knowledge Process Outsourcing (hereafter KPO) service provider. Clearly, the functional profile of Eclerx Services was different from that of the Assessee, which as noted above, was providing call centre services to its AE.

After examining the same, this court had concluded vide an order dated 23.07.2018, found that there was no infirmity with the decision of the learned ITAT in accepting the Assessee’s appeal against inclusion of the aforementioned two entities as comparable for bench marking the international transaction. The issue whether a KPO could be considered as functionally similar to a business process outing was considered in some detail by this court in Rampgree Solutions (P.) Ltd. v. Commissioner of Income Tax: [2015] 60 taxmann.com 355 (Delhi).

This court thus issued a notice in the present appeal and confined the question whether Infosys BPO Ltd. was required to be excluded as a comparable entity for conducting the bench marking analysis for determining the ALP under Section 92CA of the Act. This question was also considered in some detail by this court on 07.08.2019, and this court found no fault with the decision of the learned ITAT to exclude Infosys. The Court noted that the said company provided business process management services to organisations over a wide range of industries. However, the Assessee, in this case, was a routine captive service provider. The court noted that there was a significant difference in value of intangibles used by Infosys, and the Assessee. In addition, this court found that the risk profile of Infosys was different as it was an entity that was taking a full fledged risk of an enterprise while the Assessee’s risks were significantly mitigated as it was a 100% service provider to its AE.

It is material to note that this court had examined the question whether the three entities mentioned above i.e. Infosys, Accentia Technologies and Eclerx Services ought to be excluded as a comparable on merits.

The Revenue had filed a Special Leave Petition before the Hon’ble Supreme Court i.e. SLP (C) No. 20872/2022 assailing the order dated 23.07.2018. The leave was granted and the said appeal (Civil Appeal No. 8504/2022) was tagged with the batch of matters which was decided by the Supreme Court on 19.04.2023 in SAP Labs India Private Ltd. v. Income Tax Officer, Circle 6, Bangalore: [2023] 454 ITR 121.

It is apparent from the plain reading of the decision of the Supreme Court that the batch appeals in that case were directed against the decision of the High Court refraining from examining the question of comparability of entities on the ground that the same did not constitute substantial question of law. In the aforesaid circumstances, the Supreme Court had clarified that the examination by this court with regard to the comparable entities were not excluded. The relevant extract of SAP Labs India Private Ltd. v. Income Tax Officer, Circle 6, Bangalore (supra) are set out below:

In the present case, as noted above, this court had examined the question of comparability of entities on merit and in accordance with the statutory framework under Section 92CA of the Act read with Rule 10B(1)(e) of the Income Tax Rules, 1963. It is also material to note that the question of suitability to include Infosys for the purpose of bench mark analysis in normal cases was considered by this court in Principal Commissioner of Income Tax v. Evalueserve.com (P.) Ltd.: ITA 948/2018 decided on 09.09.2024, this court had reiterated the earlier decision.

In view of the above, the present appeal is disposed of.