Rampgreen Solutions Pvt Ltd v. Commissioner Of Income Tax

$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI 10. + ITA 102/2015 RAMPGREEN SOLUTIONS PVT LTD ..... Appellant Through: Mr Ajay Vohra, Sr. Advocate with Mr Aditya Vohra, Advocate. versus COMMISSIONER OF INCOME TAX ..... Respondent Through: Ms Suruchi Aggarwal, Sr. Standing Counsel with Ms Lakshmi, Jr. Standing Counsel. CORAM: HON'BLE DR. JUSTICE S.MURALIDHAR HON'BLE MR. JUSTICE VIBHU BAKHRU O R D E R% 10.08.2015 VIBHU BAKHRU, J. 1.The Assessee has filed the present appeal under Section 260A of the Income Tax Act, 1961 (hereafter ‘the Act’) impugning the order dated 22[nd]March, 2013 passed by the Income Tax Appellate Tribunal (hereafter ‘Tribunal’) in ITA No. 6286/Del/2012. The Assessee had preferred the aforesaid appeal before the Tribunal, impugning the assessment order passed by the Assessing Officer (hereafter ‘AO’) making the Transfer Pricing Adjustments (hereafter ‘TP Adjustments’) in respect of the Assessment Year (hereafter ‘AY’) 2008-09 as finalised by the Transfer Pricing Officer ITA 102/2015 Page 1 of 42 (hereafter ‘TPO’) pursuant to the directions issued by the Dispute Resolution Panel (hereafter ‘DRP’). 2.The Assessee is, essentially, aggrieved by the TP Adjustments made in respect of the consideration for the services rendered by the Assessee to its overseas holding company. The TP Adjustments have been made on the basis of the average operating profit margin (operating profit as a percentage ––of operating costs) declared by other companies eight in number selected as comparables for the purposes of ascertaining the Arm’s Length Price (hereafter ‘ALP’). According to the Assessee, two of the companies chosen as comparable by the concerned authority, namely, Vishal Information Technology Ltd. (hereafter ‘Vishal’) and eClerx Services Ltd. (hereafter ‘eClerx’) could not be considered as comparables as the functions performed and the services rendered by the said companies were materially different from those performed by the Assessee. 3.This Court, by an order dated 27[th] February, 2015, admitted the present appeal and framed the following questions of law:- “1. Did the ITAT fall into error in the given circumstances of the case in confirming the transfer pricing adjustment to the extent of Rs.5,92,07,428/- upholding the inclusion of the case in confirming the transfer pricing adjustment to the extent of Rs.5,92,07,428/- upholding the inclusion of ITA 102/2015 Page 2 of 42 two comparable, i.e., e-Clerx Services Limited and Vishal Information Technologies Limited, now called as Coral Hub Ltd.? 2. Did the ITAT fall into error in not appreciating the terms of Rule l0B (2) of the Rules in respect of the analysis of functionally comparable companies? of Rule l0B (2) of the Rules in respect of the analysis of functionally comparable companies? 4.The factual context in which the aforesaid questions of law arise are briefly stated as under:- 4.1 The Assessee is a wholly owned subsidiary of vCustomer, USA, (an Associated Enterprise - hereafter ‘AE’). The Assessee is engaged in providing voice-based customer care to the AE’s clients. The Assessee renders Call Center services, which fall within the broad description of Information Technology Enables Services (hereafter ‘ITeS’). The Assessee has two units registered under the Software Technology Park Scheme of the Government of India, which are located at New Delhi and Pune. The Assessee is remunerated for the voice call services on cost plus basis. The 4.The factual context in which the aforesaid questions of law arise are briefly stated as under:- 4.1 The Assessee is a wholly owned subsidiary of vCustomer, USA, (an Associated Enterprise - hereafter ‘AE’). The Assessee is engaged in providing voice-based customer care to the AE’s clients. The Assessee renders Call Center services, which fall within the broad description of Information Technology Enables Services (hereafter ‘ITeS’). The Assessee has two units registered under the Software Technology Park Scheme of the Government of India, which are located at New Delhi and Pune. The Assessee is remunerated for the voice call services on cost plus basis. The Assessee explained that the AE undertakes all activities such as marketing and enters into contracts with its customers seeking voice call services. The AE bears all the business risks and the Assessee only acts as an offshore service provider to the customers of the AE. In consideration for the ITA 102/2015 Page 3 of 42 services, the AE remunerates the Assessee by payment of all costs incurred by the Assessee plus a mark up of fifteen percent of the costs. 4.2 During the previous year, relevant to the AY 2008-09, the Assessee received an amount of Rs.91,73,94,525/- for voice-based call center services. The Assessee sought to justify the consideration received for the international transactions entered into with the AE to be at ALP. The Assessee submitted a Transfer Pricing Report adopting operating profit margin as the Profit Level Indicator (hereafter ‘PLI’) for the transfer pricing studies. The Assessee applied the Transactional Net Margin Method (hereafter ‘TNMM’), which was considered to be the most appropriate method for the purposes of benchmarking the international transaction. The Assessee’s operating profit margin (i.e. operating profit/total cost) was computed at 14.83% and the Assessee claimed that the same was comparable with other companies rendering voice call services. For the purposes of the transfer pricing study, the Assessee chose eight comparable entities and the arithmetic average of the operating profit margins of the said comparables was computed 15.74%. According to the Assessee, its PLI was within the acceptable range as indicated under the second proviso to Section ITA 102/2015 Page 4 of 42 92C. The Assessee further claimed that the PLI was liable to be adjusted on account of (i) working capital provided to the Assessee by the AE and (ii) the risks of the business borne by the AE. 5.The AO referred the matter to the TPO. The TPO, by an order dated 19[th] October, 2011, passed under section 92CA(3) of the Act, computed the TP Adjustment at Rs. 11,00,35,400/- (Rupees Eleven Crore Thirty Five Thousand and Four Hundred). The TPO accepted the method adopted by the Assessee (i.e. TNMM), but rejected the benchmarking report. The TPO also rejected the Assessee’s claim for any adjustment on account of workingcapital provided to the Assessee and/or risks borne by the AE. The TPO proceeded to identify a different set of comparable companies for the purposes of determining the ALP. The companies selected by the TPO which were considered to be comparables included eClerx and Vishal (subsequently known as Coral Hub Ltd.). The TPO computed the average operating profit margin of the comparable companies at 28.96% on the basis of the average operating profit margin of eleven companies selected by the TPO as comparables for the purposes of benchmarking the international transactions. On the aforesaid basis, the TPO computed the TP Adjustment ITA 102/2015 Page 5 of 42 ITA 102/2015 Page 5 of 42 at Rs. 11,00,35,400/-. The AO incorporated the aforesaid adjustment in the draft assessment order passed under Section 144C(1) of the Act on 20[th]December, 2011. The Assessee objected to the draft assessment order dated 20[th] December, 2011 before the DRP. The Assessee impugned the draft assessment order on several grounds including selection of certain companies as comparables and exclusion of other companies considered as appropriate comparables by the Assessee. 6.The DRP accepted the Assessee’s contention with respect to certain companies, which were considered as comparables by the TPO and directed that the said companies be excluded for the purposes of determining the (i.e. average operating profit margin). However, the Assessee’s contentions with regard to the exclusion of Vishal and eClerx were rejected by the DRP. The DRP held that these companies were also providing Information Technology Enabled Services (ITeS) and, thus, could be used as comparables. Insofar as eClerx is concerned, the DRP held that although there were functional dissimilarities, the same were not significant enough to warrant a rejection of the said company as a comparable. With respect to Vishal, the DRP held that the difference in business model of Vishal would not materially affect ITA 102/2015 Page 6 of 42 the profit margin and thus, there was no infirmity with the TPO’s decision to include the said company as a comparable in its report. 7.The TPO recomputed the TP Adjustment in terms of the directions issued by the DRP and computed the TP Adjustment at Rs. 5,92,07,428/-. The AO also made certain additions on account of excess deduction claimed under Section 10A of the Act and disallowance under Section 14A of the Act. 8.The Assessee appealed against the final assessment order dated 9[th]October, 2012, inter alia, on the ground that eClerx and Vishal could not be considered as comparable entities for the purpose of calculating the benchmark operating profit margin. The Assessee claimed that the said companies were engaged in the business of Knowledge Process Outsourcing (hereafter ‘KPO’) and, thus, could not be included as comparables for the purposes of benchmarking studies. According to the Assessee, although KPO services were ITeS but the nature of the said services was materially different from the services rendered by the Assessee. It was asserted that eClerx is engaged in financial services in the nature of account ITA 102/2015 Page 7 of 42 reconciliation, trade order management services and has been rated as a leading KPO by Nelso Hall. It was contended that similarly Vishal was engaged in the services of data analytics and providing data processing solutions to some of the largest brands in the world. Vishal too had been rated as a leading KPO by Nelso Hall. In addition, it was pointed out that whilst the employee costs incurred by Vishal was relatively low and constituted only 4.39% of its total cost during the relevant year, the hire charges, vendor payments constituted almost 87% of the total costs. According to the Assessee, this evidenced that Vishal’s business model was different and Vishal had outsourced significant part of its operations. reconciliation, trade order management services and has been rated as a leading KPO by Nelso Hall. It was contended that similarly Vishal was engaged in the services of data analytics and providing data processing solutions to some of the largest brands in the world. Vishal too had been rated as a leading KPO by Nelso Hall. In addition, it was pointed out that whilst the employee costs incurred by Vishal was relatively low and constituted only 4.39% of its total cost during the relevant year, the hire charges, vendor payments constituted almost 87% of the total costs. According to the Assessee, this evidenced that Vishal’s business model was different and Vishal had outsourced significant part of its operations. 9.The Tribunal rejected the Assessee’s contention and held that both eClerx and Vishal were engaged in providing ITeS and once a service fell within that category then no sub-classification of the segment was permissible. The Tribunal held that KPO is a term given to the branch of BPO Services where apart from processing of data, knowledge is also applied. The Assessee’s objection that the said two companies had abnormally high profits and thus ought to be excluded as comparables was also rejected. ITA 102/2015 Page 8 of 42 10.The learned counsel for the Assessee submitted that eClerx and Vishal were KPO service providers and could not be considered as comparables for the purposes of benchmarking the Assessee’s international transactions with the AE. The learned counsel referred to the decision of the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. v. ACIT, ITA 7466/Mum/2012, dated 7[th] March, 2014 and submitted that the issue of whether Vishal and eClerx could be used as comparables was decided in favour of the Assessee. 11.We have heard the counsel for the parties. 12.At the outset, it is necessary to bear in mind that the object and purpose of introducing provisions relating to transfer pricing adjustment in the Act. By virtue of Finance Act, 2001, Section 92 of the Act was substituted by Sections 92 to 92F of the Act with effect from 1[st] April, 2002. Section 92 of the Act, as was in force prior to 1[st] April, 2002, enabled the AO to bring the correct profits to tax in relation to certain cross-border transactions. However, with a large number of multi-national companies establishing operations in India, either through their subsidiaries or through other related ventures, a need was felt to provide a statutory framework to ITA 102/2015 Page 9 of 42 ensure that there is no avoidance of tax by transfer of income from India to other tax jurisdictions. Circular no. 14 of 2001 issued by the CBDT indicates that the provisions of Section 92 to 92F of the Act were introduced “With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India”. 13.The heading of Chapter X also clearly indicates that it contains “special provisions relating to avoidance oftax”. The object of Chapter X of the Act is not to tax any notional income but to ensure that the real income is brought to tax under the Act. This has also been explained by a Division Bench of this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. and Ors. v. Commissioner of Income Tax-III and Ors. 374 ITR 118 in the following words:- other tax jurisdictions. Circular no. 14 of 2001 issued by the CBDT indicates that the provisions of Section 92 to 92F of the Act were introduced “With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India”. 13.The heading of Chapter X also clearly indicates that it contains “special provisions relating to avoidance oftax”. The object of Chapter X of the Act is not to tax any notional income but to ensure that the real income is brought to tax under the Act. This has also been explained by a Division Bench of this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. and Ors. v. Commissioner of Income Tax-III and Ors. 374 ITR 118 in the following words:- “77. As a concept and principle Chapter X does not artificially broaden, expand or deviate from the concept of "real income". "Real income", as held by the Supreme Court in Poona Electricity Supply Company Limited versus CIT, : [1965] 57 ITR 521 (SC), means profits arrived at on commercial principles, subject to the provisions of the Act. Profits and gains should be true and correct profits and gains, neither under nor over stated. Arm's length price seeks to correct distortion and shifting of profits to tax the actual income earned by a resident/domestic AE. The profit which would have accrued had arm's length conditions prevailed is brought to tax. Misreporting, if any, on account of non-arm's ITA 102/2015 Page 10 of 42 length conditions resulting in lower profits, is corrected.” 14. The substratal rationale of the transfer pricing regulations is to ensure that the true income of an Assessee is brought to tax under the Act and there is no avoidance of tax by transfer of income from India to any other tax jurisdiction by virtue of the influence exercised by the associated enterprises. The aim of the provisions of Chapter X of the Act is to compute the income in relation to a controlled transaction between an Assessee and its associated enterprise having regard to ALP, in order to nullify the effect of transfer of income to a jurisdiction outside India, if any, in respect of the controlled transactions. 15.The exercise of determining the ALP in respect of international transactions between the related enterprises is aimed to determine the price, which would have been charged for products and services, as nearly as possible, in case such international transactions were not controlled by virtue of them being executed between related parties. The object of the exercise is, thus, to remove the effect of any influence on the prices or costs that may have been exerted on account of the international transactions being entered into between related parties. It is, at once, clear that for the exercise of ITA 102/2015 Page 11 of 42 determining ALP to be reliable, it is necessary that the controlled transactions be compared with uncontrolled transactions which are similar in all material aspects. 16.We may now refer to the relevant provisions of Chapter X of the Act keeping in view the aforesaid purpose and object of introducing the said provisions in the Act. 17.Section 92 of the Act provides that the income arising from an international transaction would be computed having regard to the ALP. The said section further provides for cost and expenses to be allocated and apportioned between two or more associated enterprises with regard to ALP. 18.Section 92C of the Act provides for provisions relating to computation of ALP. Sub-section (1) of Section 92C of the Act provides for the methods of computing the ALP and sub-section (2) of Section 92C of the Act mandates that the most appropriate method that has been referred to in 16.We may now refer to the relevant provisions of Chapter X of the Act keeping in view the aforesaid purpose and object of introducing the said provisions in the Act. 17.Section 92 of the Act provides that the income arising from an international transaction would be computed having regard to the ALP. The said section further provides for cost and expenses to be allocated and apportioned between two or more associated enterprises with regard to ALP. 18.Section 92C of the Act provides for provisions relating to computation of ALP. Sub-section (1) of Section 92C of the Act provides for the methods of computing the ALP and sub-section (2) of Section 92C of the Act mandates that the most appropriate method that has been referred to in Section 92C(1) be applied for determination of ALP. Sub-section (1) and (2) of Section 92(C) of the Act reads as under:- ITA 102/2015 Page 12 of 42 “92C. (1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant —factors as the Board may prescribe, namely : (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three per cent of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price : Provided also that where more than one price is determined by the most appropriate method, the arm's length price in relation to an international transaction or specified domestic ITA 102/2015 Page 13 of 42 transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply. —Explanation.For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009.” 19.It is also necessary to refer to Rule 10B of the Income Tax Rules, 1962 which provides for determination of ALP under Section 92C of the Act. Sub-rule(1) of Rule 10B contains provisions in relation to various methods of calculation of ALP as provided under Section 92C of the Act and reads as under:- “10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most —the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most —appropriate method, in the following manner, namely : (a) comparable uncontrolled price method, by which, 1962 which provides for determination of ALP under Section 92C of the Act. Sub-rule(1) of Rule 10B contains provisions in relation to various methods of calculation of ALP as provided under Section 92C of the Act and reads as under:- “10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most —the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most —appropriate method, in the following manner, namely : (a) comparable uncontrolled price method, by which, (i)the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii)such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises ITA 102/2015 Page 14 of 42 entering into such transactions, which could materially affect the price in the open market; (iii)the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction; taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction; —(b) resale price method, by which, (i)the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii)such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii)the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv)the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; (iv)the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; ITA 102/2015 Page 15 of 42 (v)the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; (c) cost plus method, by which, (i)the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii)the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii)the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv)the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); the adjusted profit mark-up arrived at under sub-clause (iii); (v)the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; price in relation to the supply of the property or provision of services by the enterprise; (d) profit split method, which may be applicable mainly in ITA 102/2015 Page 16 of 42 international transactions or specified domestic transactions involving transfer of unique intangibles or in multiple international transactions or specified domestic transactionswhich are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's —length price of any one transaction, by which (v)the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; price in relation to the supply of the property or provision of services by the enterprise; (d) profit split method, which may be applicable mainly in ITA 102/2015 Page 16 of 42 international transactions or specified domestic transactions involving transfer of unique intangibles or in multiple international transactions or specified domestic transactionswhich are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's —length price of any one transaction, by which (i)the combined net profit of the associated enterprises arising from the international transaction or the specified domestic transaction in which they are engaged, is determined; (ii)the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); (iv)the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction: Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction or specified domestic transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the ITA 102/2015 Page 17 of 42 enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction or the specified domestic transaction ; (e) transactional net margin method, by which, (i)the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii)the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv)the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the referred to in sub-clause (i) is established to be the ITA 102/2015 Page 18 of 42 same as the net profit margin referred to in sub-clause (iii); (v)the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction; into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction; (f) any other method as provided in rule 10AB.” For the purposes of the present case, clause (e) of sub-rule (1) of Rule 10B is relevant as it pertains to determination of ALP by TNMM. 20.In order for the benchmarking studies to be reliable for the purposes of determining the ALP, it would be essential that the entities selected as comparables are functionally similar and are subject to the similar business environment and risks as the tested party. In order to impute an ALP to a controlled transaction, it would be essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in all material aspects that have any bearing on the value or the profitability, as the case may be, of the transaction. Any factor, which has an influence on the PLI, would be material and it would be necessary to ensure that the comparables are also equally subjected to the influence of such factors as the tested party. This would, obviously, include business environment; the ITA 102/2015 Page 19 of 42 nature and functions performed by the tested party and the comparable entities; the value addition in respect of products and services provided by parties; the business model; and the assets and resources employed. It cannot be disputed that the functions performed by an entity would have a material bearing on the value and profitability of the entity. It is, therefore, obvious that the comparables selected and the tested party must be functionally similar for ascertaining a reliable ALP by TNMM. Rule 10B(2) of the Income Tax Rules, 1962 also clearly indicates that the comparability of controlled transactions would be judged with reference to the factors as indicated therein. Clause (a) and (b) of Rule 10B(2) expressly indicate that the specific characteristics of the services provided and the functions performed would be factors for considering the comparability of uncontrolled transactions with controlled transactions. 21.Rule 10B(2) reads as under:- be disputed that the functions performed by an entity would have a material bearing on the value and profitability of the entity. It is, therefore, obvious that the comparables selected and the tested party must be functionally similar for ascertaining a reliable ALP by TNMM. Rule 10B(2) of the Income Tax Rules, 1962 also clearly indicates that the comparability of controlled transactions would be judged with reference to the factors as indicated therein. Clause (a) and (b) of Rule 10B(2) expressly indicate that the specific characteristics of the services provided and the functions performed would be factors for considering the comparability of uncontrolled transactions with controlled transactions. 21.Rule 10B(2) reads as under:- “(2) For the purposes of sub-rule (1), the comparability of an international transaction or a specified domestic transaction with an uncontrolled transaction shall be judged with reference —to the following, namely: (a) the specific characteristics of the property transferred or services provided in either transaction; or services provided in either transaction; (b) the functions performed, taking into account assets ITA 102/2015 Page 20 of 42 employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.”respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.” 22.In the facts of the present case, it is not disputed that Vishal and eClerx are entities engaged in Knowledge Process Outsourcing Services (KPO Services). Thus, the principal question to be addressed is whether a KPO Service provider could be considered as a comparable for benchmarking international transactions entered into by an entity rendering ––voice call services such as the Assessee with its associated enterprise by using TNMM and taking operating profit margin as the PLI . 23.In this case, the Tribunal noted that eClerx was engaged in data processing and analytics services and held that the activities of the Assessee ITA 102/2015 Page 21 of 42 were functionally similar to those of eClerx. The Tribunal concluded that voice call services and KPO services were essentially ITeS and, therefore, entities rendering the aforesaid services could be considered as comparables for the purpose of benchmarking international transactions by using TNMM. The Tribunal held that further sub-division of ITeS was not permissible. The Tribunal followed its earlier decision in Willis Processing Services (I) (P.) Ltd. v. Dy. CIT 30 ITR (Trib)129 (Mumbai) 2014. 23.In this case, the Tribunal noted that eClerx was engaged in data processing and analytics services and held that the activities of the Assessee ITA 102/2015 Page 21 of 42 were functionally similar to those of eClerx. The Tribunal concluded that voice call services and KPO services were essentially ITeS and, therefore, entities rendering the aforesaid services could be considered as comparables for the purpose of benchmarking international transactions by using TNMM. The Tribunal held that further sub-division of ITeS was not permissible. The Tribunal followed its earlier decision in Willis Processing Services (I) (P.) Ltd. v. Dy. CIT 30 ITR (Trib)129 (Mumbai) 2014. 24.It is not disputed that voice call services are considered to be the lower-end of ITeS. KPO on the other hand are ITeS where the service providers have to employ advanced level of skills and knowledge. Notification No. SO2810(E) dated 18[th] September 2013 issued by the CBDT notifying Safe Harbour Rules also indicates the above. Rule 10TA(g) of the said Rules defines KPO Services as under:- “ (g) “knowledge process outsourcing services” means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, ‐namely: (i) geographic information system; (ii) human resources services; ITA 102/2015 Page 22 of 42 (iii) engineering and design services; (iv) animation or content development and management; (v) business analytics; (vi) financial analytics; or (vii) market research, but does not include any research and development services whether or not in the nature of contract research and development services;” 25.Whilst Voice Call Center represents the lower-end of ITeS, KPO represents services involving a higher level of skills and knowledge. India has vast human resources and a large number of highly-skilled technical professionals. The expression “KPO” indicates the involvement of domain knowledge in providing ITeS. Typically, KPO includes involvement of advance skills; the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management etc. On the other hand, Voice Call Centers are normally involved in customer support and processing of routine data. In the case of Maersk Global Centers (India) Pvt. Ltd. v. ACIT (supra) a Special Bench of the Tribunal had referred to a report prepared by National Skill Development Corporation (NSDC) on Human Resource and Skill Requirements in IT and ITES Sector (2022) and noted that the KPO sector ITA 102/2015 Page 23 of 42 has been described as “a value play”. The said report also indicates that KPO services are likely to span activities such as “patent advisory, high-end research and analytics, online market research and