Pr. Commissioner Of Income Tax-1, Delhi v. M/S. Convvergys India Services Pvt. Ltd & Anr

$~18 *IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 234/2022 & CM APPL. 33042/2022 PR. COMMISSIONER OF INCOME TAX-1, DELHI ..... AppellantThrough:Mr.AjitSharma,Sr.StandingCounsel for Revenue. versus M/S. CONVVERGYS INDIA SERVICES PVT. LTD & ANR. ..... RespondentThrough:Mr. Deepak Chopra and Mr. AnkurGoyal, Advocates. % Date of Decision: 29[th]July, 2022 CORAM: HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMOHAN, J (Oral): CM APPL. 33042/2022 In view of the averments made in the application, the delay of 85 daysin filing the appeal is condoned. Accordingly, this application is disposed of. ITA 234/2022 ITA 234/2022 1.Present Income Tax Appeal has been filed challenging the Orderdated 22[nd]November, 2019 passed by the Income Tax Appellate Tribunal(‘ITAT’) in ITA 1934/Del./2018 for the Assessment Year (hereinafterreferred to as ‘AY’) 2012-13. 2.Learned counsel for the Appellant states that the ITAT has erred inlaying down stringent standards of comparability and attempting to identifyexact replica of taxpayer for comparability analysis, whereas the Indian Lawand the international jurisprudence recognize the reality that there cannot bean exact comparable in a given situation without any difference and withoutappreciating that such stringency will defeat the purpose of flexibilityprovided in the comparability analysis for determination of Arm’s LengthPrice (ALP). 3.He states that the ITAT erred in excluding Excel Infoways Ltd. byrelying on the decision of the coordinate Bench of the Tribunal in BaxterIndia Pvt. Ltd. for the AY 2012-13. He states that upon an appeal beingfiled against the judgment of the Tribunal in Baxtor India Pvt. Ltd., thisCourt had framed questions of law. He, however, states that the said appealwas disposed of on account of low tax effect. He further states that theTribunal wrongly concluded that the Excel’s ratio of employee cost to saleswas merely 13.05%. He states that in response to a notice under Section133(6) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’),Excel Infoways had informed that the segmental employee cost pertaining toITES/BPO was Rs.2.02 crores as against segmental value of Rs.7.07 crores.Consequently, as according to him, the ratio of employee cost was morethan 25%, the filter selected by the Transfer Pricing Officer (TPO) was ITA 234/2022 satisfied in the present proceedings. 4.He also contends that the service revenue filter from export/ITES of75% is not sacrosanct. He states that as in the present case, since ExcelInfoways Ltd. satisfies the functional similarity test, the filter of servicerevenue from exports/ITES could be diluted. 5.Learned counsel for the appellant fairly states that he is not pressingthe present appeal qua exclusion of TCSE-Serve Ltd. and Infosys BPO inview of the fact that the revenue itself has excluded TCSE-Serve Ltd. as acomparable in subsequent assessment years in the case of the assessee andInfosys BPO had acquired Portland Group Pty Ltd., Australia during theyear under assessment. 6.Learned counsel for the respondent, who appears on advance notice,points out that the TPO had insisted on service revenue filter fromexport/ITES of 75% and had rejected the assessee’s suggestion to adopt thefilter of 50% export. In support of his contention, he relies upon the orderpassed by the TPO dated 15[th]February, 2016. The relevant portion of thesaid order is reproduced hereinbelow:- No.Description offilterRemarks of this office.........2Selected companies which hadThe filter is insufficient.positive sales and ratio of otherFurther, the correct filter inoperating income to sales >respect of operating income50% over the time period underisthatserviceincomeconsideration.should be more than 75%.Thiswillensurethatpredominantlyservicecompanies are selected. xxx xxx xxx ITA 234/2022 6.Learned counsel for the respondent, who appears on advance notice,points out that the TPO had insisted on service revenue filter fromexport/ITES of 75% and had rejected the assessee’s suggestion to adopt thefilter of 50% export. In support of his contention, he relies upon the orderpassed by the TPO dated 15[th]February, 2016. The relevant portion of thesaid order is reproduced hereinbelow:- No.Description offilterRemarks of this office.........2Selected companies which hadThe filter is insufficient.positive sales and ratio of otherFurther, the correct filter inoperating income to sales >respect of operating income50% over the time period underisthatserviceincomeconsideration.should be more than 75%.Thiswillensurethatpredominantlyservicecompanies are selected. xxx xxx xxx ITA 234/2022 Companies who have export service income less than 75% of thesales were excludedThis has been done primarily to exclude predominantly domesticcompanies which cannot be compared with the taxpayer, havingmajor earnings from exports. This is because economic circumstancesof such companies are different. Rule 10 B(2) also supports thisview.”Companies who have export service income less than 75% of thesales were excludedThis has been done primarily to exclude predominantly domesticcompanies which cannot be compared with the taxpayer, havingmajor earnings from exports. This is because economic circumstancesof such companies are different. Rule 10 B(2) also supports thisview.” 7.He also states that the ITAT correctly held that Excel Infoways failedthe diminishing revenue filter. In support of his statement he relied upon achart reproduced in the impugned order by the Tribunal. The said chart isreproduced hereinbelow:- 8.Having heard learned counsel for the parties, this Court is of the viewthat the intent of Chapter X of the Act is to compute the income in relationto a controlled transaction between an assessee and its associated enterprisehaving regard to the arm’s length price in order to nullify the effect oftransfer of income to a jurisdiction outside India, if any, in respect of thecontrolled transaction. The exercise of determining the arm’s length price inrespect of international transactions between related enterprises is aimed atdetermining the price which would have been charged for products andservices, as nearly as possible, if such international transactions were not ITA 234/2022 controlled by virtue of their being executed between related parties. Theobject of the exercise is to remove the effect of any influence on the pricesor costs that may have been exerted on account of the internationaltransactions being entered into between related parties. It is clear that for theexercise of determining the arm’s length price to be reliable, it is necessarythat the controlled transactions be compared with uncontrolled transactionswhich are similar in all material aspects. In Rampgreen Solutions Pvt.Limited v. Commissioner of Income Tax (2015) 377 ITR 533, Delhi, thelearned Predecessor Division Bench has held as under:- ITA 234/2022 controlled by virtue of their being executed between related parties. Theobject of the exercise is to remove the effect of any influence on the pricesor costs that may have been exerted on account of the internationaltransactions being entered into between related parties. It is clear that for theexercise of determining the arm’s length price to be reliable, it is necessarythat the controlled transactions be compared with uncontrolled transactionswhich are similar in all material aspects. In Rampgreen Solutions Pvt.Limited v. Commissioner of Income Tax (2015) 377 ITR 533, Delhi, thelearned Predecessor Division Bench has held as under:- “41. Having stated the same, it may be necessary to bear inmind that supernormal profits may in certain cases indicate afunctional dissimilarity or dissimilarity with respect to afeature that has a material bearing on the profitability. Insuch circumstances, it would be necessary to undertakefurther analysis to eliminate the possibility of the high profitsresulting on account of any material dissimilarity between thetested party and the chosen comparable. A wide deviation inthe PLI amongst selected comparables could be indicativethat the comparables selected are either materially dissimilaror the data used is not reliable. The Tribunal proceeded onthe basis that an adjustment could be made only in caseswhere supernormal profits resulted from the factors indicatedin Rule 10B of the Income Tax Rules, 1962. In our view, thefactors mentioned in Rule 10B are not exhaustive. Theprincipal object of benchmarking international transactionsagainst uncontrolled transactions is to impute an ALP tothose transactions. This exercise would fail if a factor, whichhas a material bearing on the value or the profitability, as thecase may be, depending on the method used, is ignored. 42.Before concluding, there is yet another aspect of thematter that needs consideration. The Tribunal proceeded onthebasisthatwhileapplyingTNMMmethod,broadfunctionality is sufficient and it is not necessary that further effort be taken to find a comparable entity rendering servicesof similar characteristics as the tested entity. The DRP heldthat TNMM allows flexibility and tolerance in selection ofcomparables, as functional dissimilarities are subsumed atnet margin levels, as compared to Resale Price Method orComparable Uncontrolled Price Method and, therefore, thefunctional dissimilarities pointed out by the Assessee did notwarrant rejection of eClerx and Vishal as comparables. 43.In our view, the aforesaid approach would not beapposite.Insofarasidentifyingcomparabletransactions/entities is concerned, the same would not differirrespective of the transfer pricing method adopted. In otherwords, the comparable transactions/entities must be selectedonthebasisofsimilaritywiththecontrolledtransaction/entity.Comparabilityofcontrolledanduncontrolled transactions has to be judged, inter alia, withreference to comparability factors as indicated under rule10B(2) of the Income Tax Rules, 1962. Comparabilityanalysis by TNMM method may be less sensitive to certaindissimilarities between the tested party and the comparables.However, that cannot be the consideration for diluting thestandards of selecting comparable transactions/entities. Ahigher product and functional similarity would strengthen theefficacy of the method in ascertaining a reliable ALP.Therefore, as far as possible, the comparables must beselected keeping in view the comparability factors asspecified. Wide deviations in PLI must trigger furtherinvestigations/analysis.” 9.Since, in the present case Excel Infoways Pvt. Ltd. fails not only theservice revenue from export/ITES filter of 75% insisted upon by the TPObut also the diminishing revenue filter as is apparent from the chartreproduced hereinabove, no interference is called for in the finding recordedby the Tribunal. ITA 234/2022 10.Consequently, no question of law arises for consideration in thepresent appeal. Accordingly, the same is dismissed. MANMOHAN, J JULY 29, 2022msh/KA 9.Since, in the present case Excel Infoways Pvt. Ltd. fails not only theservice revenue from export/ITES filter of 75% insisted upon by the TPObut also the diminishing revenue filter as is apparent from the chartreproduced hereinabove, no interference is called for in the finding recordedby the Tribunal. ITA 234/2022 10.Consequently, no question of law arises for consideration in thepresent appeal. Accordingly, the same is dismissed. MANMOHAN, J JULY 29, 2022msh/KA MANMEET PRITAM SINGH ARORA, J ITA 234/2022